Category: Economics

Countercyclical assets at Wal-Mart

by  Tyler Cowen in

Sometimes people enjoy the mere act of the purchase and the feeling of luxury or capture involved:

As people seek cheap ways to entertain, lower-end patio sets and
barbecue grills are selling well. Sprague admits she's puzzled by some
of the store's hot recession sellers, like $5 white toilet seats. "It
seems bizarre," she says, "but I can't keep them in stock." Her best
guess: unemployment and cocooning are leading people to put more wear
on their home bathrooms, and they're choosing her $5 seats over pricier
ones at Home Depot.

Here is the story and I thank TheBrowser for the pointer.  Dare I ask why anyone would want a white toilet seat?

How our macro book differs

by  Tyler Cowen in

Alex already has suggested some points related to economic growth; I'll add to that:

1. We make macroeconomics as intuitive as microeconomics.  Our macro is based on the idea of incentives, consistently applied.

2. We cover the current financial crisis.

3. We show a simple — yes truly simple — way of teaching the Solow Growth model.  I call it Really Simple Solow.  But if that's not simple enough for you, you can skip it and just call it Long-Run Aggregate Supply.

4. We offer equal and balanced coverage of neo Keynesian and real business cycle models.  Most other texts emphasize one or the other.

5. We offer an intuitive way of teaching real business cycle theory.  No intertemporal optimization representative agent models.  Can you explain to your grandmother why swine flu has been bad for the Mexican economy?  If so, you also think that real business cycle theory can be taught simply and intuitively.

6. Our version of the AD-AS model actually makes sense.  We don't mash together real and nominal interest rates into the same diagram, we don't treat the Taylor rule as an assumption for deriving an AD curve, and we do the analysis consistently in terms of dynamic rates of change.  (On the latter point for instance it is the rate of inflation which influences economic behavior, not the absolute level of prices per se, yet so often "p" rather than "pdot" goes on the vertical axis.) 

The AD-AS analysis covers both neo Keynesian and RBC models and can be done with three simple curves in one simple graph.  There is only one (consistent) model which needs to be taught for presenting the major macro ideas.

Alex and I vowed we would not stop working on this book until macro ceased to be the "ugly sister" of the micro/macro pair.  Modern Principles: Macroeconomics is the result of that Auseinandersetzung.

We are heartened by the response to our previous posts on the book.  Again, please do contact us if you are interested in a review copy for teaching purposes.  Here is the book's home page.

Modern Principles: Macroeconomics, Economic Growth

by  Alex Tabarrok in
In the United States, diarrhea is a pain, an annoyance, and of
course an embarrassment. In much of the developing world, diarrhea
is a killer, especially of children. Every year 1.8 million
children die from diarrhea. Ending the premature deaths of these
children does not require any scientific breakthroughs, nor does it
require new drugs or fancy medical devices. Preventing these deaths requires
only one thing: economic growth.

That’s the opening paragraph of The Wealth of Nations and Economic Growth, Chapter 6 in Modern Principles: Macroeconomics.  Does the opening make you a little bit squeamish?  We hope so–we wanted an opening that would jar students out of complacency and remind them how vital economic growth is to human life.  

Due to its importance, we have more material on growth and development than any other principles text.  In Chapter 6 we lay out the key facts and the basic framework for understanding economic growth.  I think we do an especially good job explaining that the proximate causes of growth, increases in capital, labor, and technology must themselves be explained.  Why do people save?  Why do people invest?  Why do people research and develop new ideas?  It’s these questions which connect macroeconomics to microeconomics and point to the fundamental importance of incentives and institutions.  These questions also foreshadow future chapters on savings, investment, financial intermediation and the economics of ideas. 

For a limited time, you can read Chapter 6 at the link above (and do enjoy the pretty color pictures before you print!).  Tyler and I will be writing more about Modern Principles: Macroeconomics this week; you can also find more information at www.SeeTheInvisibleHand.com.

Revisiting Irish growth

by  Tyler Cowen in

David Archer, a loyal MR reader, writes to me:

From time to time, you solicit requests for blog topics, and here is my request: revisit the "Irish miracle," a topic you have written about in the past.  …Ireland's G.D.P. will fall more than 10 percent from its peak. In August 2006, you speculated that in addition to favorable demographic factors, Ireland's growth could probably be explained by: FDI, education, and a favorable tax regime as bigger factors. What do we understand about Ireland's growth now that we may not have understood 12 or 36 months ago?

That is a very good question; here are a few points:

1. A small country, especially one with a lot of FDI, can rise or fall more quickly than our usual economic intuitions otherwise might indicate.

2. The U.S. is a big (and growing, relative to the UK) part of Irish FDI.  New York-based financial institutions (and don't forget Deutsche Bank and Credit Suisse do a lot of their business in New York) are more central to the Irish economy, or for that matter to the Canadian economy, than is often realized.

3. The key cause of the crisis was creeping overconfidence and complacency (I was pleased to hear Paul Krugman use refer to complacency in a recent talk of his on the crisis) and this was nearly global, Ireland included.  Irish investors assumed that things were very likely to keep on getting better.  Read Keynes's chapter 12!

4. Scott Sumner's to-the-point analysis blames the many manifestations of banking crises, internationally, on falling AD curves.  My version of this story is less AD centered, and more about the revision of expectations (see for instance commentary from Bryan Caplan), and the revelation that past plans were overconfident and based on false complacency, but Sumner nonetheless makes some good points.

Addendum: Here is a good article on the spread of the downturn to India.

China Facts of the Day

by  Alex Tabarrok in

In a county in Hubei Province every
office of administration, school and hospital is being required to consume a certain
quantity of cigarettes produced by local firms.  The local government has assigned a quota to each of these organizations and they send out inspectors to look at the cigarette stubs. If the staff
are consuming brands that are not produced by local firms, they
will be punished!

The link (in Chinese) is here.

In other news, the divorce rate is up in Yunnan province due to a house dismantling project. One couple can get one apartment as
compensation for their dismantled house but if they get
divorced, they can get two.  The local cadres
were the first ones to got divorced.

The link (in Chinese) is here.

Thanks to Helen Yang for both of these pointers and translation!

Interview with Robert Barro, on the New Deal and Great Depression

by  Tyler Cowen in

From The Browser, here is one bit:

It’s clear that a lot of the policies that were put into place were
negative, but as to sorting out how important they were, that’s a much
more challenging question.  And I think Roosevelt at the time
recognized ex-post that some of the things he tried were failures and
then his attitude was “OK, it’s a failure I’ll stop doing it.” Which is
actually pretty positive. For example, some of the things he did was
try to organize labor unions and also businesses essentially promoting
monopoly – I don’t think that was a plus.  He was trying really hard to
keep wages and prices from falling with direct influence and that was a
negative. The effect of the expenditure programs is less clear. In the
mid-1930s with the New Deal there was an unusual amount of
infrastructure-type of expenditures. But it’s not actually big enough
to sort out in a statistical sense — to figure out how much it
mattered in terms of the recovery after the trough in 1932-33. I don’t
think we know that that was a mistake, but it’s not clear that it was
all that important.

Barro also offers a reading list on the topic.

Restricted purchases as signaling, a proposal from Geoffrey Miller

by  Tyler Cowen in

Geoffrey Miller, in his new book Spent, suggests an intriguing but I think absurd idea:

For example, companies could sell certain products only to consumers who have a certain minimum or maximum score on one or more of the certain Central Six [personality] traits.  Hummer dealers could advertise that the "Party Animal Red Pearl" paint color is available only to customers who score in the top 5 percent for extraversion.  Customers who want to display their unusually high extraversion through that bright red color would have to electronically validate their extraversion score at the dealership before they could sign the purchase agreement.  In this way, Hummer could guarantee that Party Animal Red Pearl becomes a reliable signal of friendliness, self-confidence, and ambition.  Or Lexus could sell the "Mensa Quartz Medallic" color of the LS 460 only to customers whose validated intelligence scores are high enough for them to join Mensa International (IQ 130+ or the top one in fifty).  The more exclusive "Prometheus Glacier Pearl" color could indicate an IQ above 160 (the top one in thirty thousand) — the qualification for joining the Prometheus Society.

But why those proposals are so absurd — that is harder to answer.  What are your thoughts?  Can it be that people ought not to be seen as signaling too purposively?  Maybe, but if so, that would seem to rule out so much — too much — of the marketplace signaling which we in fact observe.

Does the U.S. need an auto industry?

by  Tyler Cowen in

Here is the symposium, I was in a Bryan Caplan and Don Boudreaux sort of mood when I emailed in my answer:

I’m an economist not a business forecaster, so I don’t have any particular predictions about Chrysler and G.M. We do know that Ford is likely to survive.

More important, there are some very efficient Toyota plants in the United States. That too is part of our domestic automobile industry and those plants employ a large number of American workers.

You might think that Toyota is different because it is a Japanese company rather than an American one. But in fact Toyota is a publicly traded company, as are most of the other major automobile makers. That means any American can, any time he or she wants, buy some Toyota shares and make Toyota more of an “American company” and less of a “Japanese company.”

Have you gone out and bought those shares? Maybe not. Maybe that means you don’t really care about whether Toyota is a Japanese or an American company. If you have bought Toyota shares, maybe it is simply because you thought that the company was a good investment. That’s O.K., there is nothing wrong with those attitudes. In fact those attitudes are a sign of your rationality.

Our automobile industry could be much more “American” if we really cared to make it so. But we don’t. Our behavior as investors and consumers is usually more rational than the claims we offer up in politics and in public discourse.

Keynes’s *General Theory*, chapter 12

by  Tyler Cowen in

In practice we have tacitly agreed, as a rule, to fall back on what is, in truth, a convention. The
essence of this convention — though it does not, of course, work out
quite so simply — lies in assuming that the existing state of affairs
will continue indefinitely, except in so far as we have specific
reasons to expect a change. This does not mean that we really believe
that the existing state of affairs will continue indefinitely. We know
from extensive experience that this is most unlikely. The actual
results of an investment over a long term of years very seldom agree
with the initial expectation. Nor can we rationalise our behaviour by
arguing that to a man in a state of ignorance errors in either
direction are equally probable, so that there remains a mean actuarial
expectation based on equi-probabilities. For it can easily be shown
that the assumption of arithmetically equal probabilities based on a
state of ignorance leads to absurdities. We are assuming, in effect,
that the existing market valuation, however arrived at, is uniquely correct in
relation to our existing knowledge of the facts which will influence
the yield of the investment, and that it will only change in proportion
to changes in this knowledge; though, philosophically speaking it
cannot be uniquely correct, since our existing knowledge does not
provide a sufficient basis for a calculated mathematical expectation.
In point of fact, all sorts of considerations enter into the market
valuation which are in no way relevant to the prospective yield.

Nevertheless the above conventional method of calculation will be
compatible with a considerable measure of continuity and stability in
our affairs, so long as we can rely on the maintenance of the convention.

For if there exist organised investment markets and if we can rely
on the maintenance of the convention, an investor can legitimately
encourage himself with the idea that the only risk he runs is that of a
genuine change in the news over the near future, as to the
likelihood of which he can attempt to form his own judgment, and which
is unlikely to be very large. For, assuming that the convention holds
good, it is only these changes which can affect the value of his
investment, and he need not lose his sleep merely because he has not
any notion what his investment will be worth ten years hence. Thus
investment becomes reasonably “safe” for the individual investor over
short periods, and hence over a succession of short periods however
many, if he can fairly rely on there being no breakdown in the
convention and on his therefore having an opportunity to revise his
judgment and change his investment, before there has been time for much
to happen. Investments which are “fixed” for the community are thus
made “liquid” for the individual.

It has been, I am sure, on the basis of some such procedure as this
that our leading investment markets have been developed. But it is not
surprising that a convention, in an absolute view of things so
arbitrary, should have its weak points. It is its precariousness which
creates no small part of our contemporary problem of securing
sufficient investment.

The insights here have yet to be fully mined.