Category: Economics

Edmund Phelps.  Here is the announcement from Sweden. 

Here is his autobiography.  He was born in Chicago in 1933 and now teaches at Columbia.  Here is his CV, and here is another version.  Here are recent papers.  His Wikipedia entry is a short stub, but watch it grow.

Here is his summary of his research.  Here is another good summary of his work.  This summary, from Sweden, is the best and most comprehensive, albeit more technical.

His main contribution is a better understanding of the Phillips curve and the dynamics of short-run unemployment and the concept of the natural rate of unemployment.  He gave the Phillips curve microfoundations and developed the "expectations-augmented Phillips curve."  As the name suggests, the level of inflationary expectations matter for how money will influence output.

Here is his memoir on developing the idea of the natural rate of unemployment.  His most influential 1960s work suggested that economies possess a natural rate of unemployment, monetary policy can reduce unemployment only temporarily (NB: in his view this is a conclusion, and should not be an axiom in economic models), monetary policy can reduce unemployment temporarily, and Keynesian economics should not treat the rate of unemployment as arbitrarily at the whim of monetary and fiscal policy.  He was also concerned with how the natural rate of employment can change over time; here is his 1997 paper on that topic.

The evolution of Phelps’s thought on how money can matter is complex.  His later work stresses monetary non-neutrality, mostly through non-rational expectations and non-synchronized wage and price setting.  His work in the 1980s focused on what the concept of rational expectations means in such complex environments.   

Do not assume that early Phelps and late Phelps are saying the same things or arguing against the same opponents.  Sometimes it is argued that he redefined macroeconomics twice.  After criticizing Keynesianism, he later turned against the "rational expectations"  point of view.  He is a complex thinker, although it can be hard to divine his "bottom line."  He fails to fit inside the "macroeconomics boxes" that have developed since the early 1980s, namely real business cycle theory vs. neo-Keynesianism.

Phelps’s work was considered revolutionary in the 1960s, though the subsequent work and influence of Milton Friedman have brought related ideas into the mainstream some time ago.

He also has done work on economic justice and how a Rawlsian maximin analysis might modify the idea of a zero rate of marginal taxation on top earners, as had been suggested by James Mirrlees.  Phelps believes that considerations of justice and distribution are important, and neglected, in economic thinking.  Once he had a piece in the Journal of Philosophy on ideas of justice in public finance.

He also wrote some well-known papers on what intergenerational justice means, the optimal accumulation of capital, and whether those allocations will prove sustainable and consistent over time.  He asks what kind of principles should govern how much capital we should leave for the next generation.  His 1961 work on capital theory formulated the notion of a "golden rule" of capital accumulation.  It asked what savings rate would maximize per capita income on an ongoing basis.  The concepts behind this work remain important for work on capital accumulation and also the sustainability of natural resource use and environmental policy.  Phelps also generated the counterintuitive result that the savings rate can be too high, and that all generations could be better off with a lower savings rate.  He does not, however, seem to think that this latter idea is policy-relevant.  The best summary of this work on capital theory is here, scroll through a bit.

Lately he has been working on the possibility of subsidies for hiring low-wage labor and Eastern European transitions.  Here is his book on wage subsidies.  Here is a more popular Phelps piece on wage subsidies.  He has also done work on the structural dynamics of economies and the underlying factors behind economic innovation.  Here is an early Phelps paper on technological diffusion; surprisingly it is his most frequently cited work according to scholar.google.com.  He looked to education and population size as key factors driving the rate of economic growth; this piece is a precursor of later work on endogenous growth theory.

Phelps also wrote a 1972 paper on statistical discrimination, one of the earliest formal economic treatments of that topic.

Here is Phelps on Project Syndicate, the link offers numerous essays on current events.  The European malaise stems from lack of dynamism.  He opposed the Bush tax cuts.  Here is Phelps on the rise of the West and the need for humane capitalism.  He has a broadly classical liberal slant but has adopted the modern liberal idea that distribution requires government intervention into labor markets and other parts of a modern economy.  He has a strong concern with the moral foundations of a free society.

Here are his cites on scholar.google.com.  4600 is a relatively low number for a Nobel Laureate.  Vernon Smith for instance has over 40,000.  In part this relatively small number reflects the older nature of Phelps’s major contributions, and that often his ideas have been absorbed but without citation.  Furthermore Phelps does not always write within the context of the most contemporary debates.

Over the last twenty years Phelps has spent a great deal of time in Europe.  In general his European influence and reputation is stronger than in the United States.

My take: It is hard to argue with this pick.  It is a good selection.  His 1960s macro work was true, important, and extremely influential.  The capital theory work endures and provides a foundation for subsequent theory.  The overall scope is impressive, and Phelps’s concerns never strayed far from the real world.

But Phelps is not an economist who has influenced my own thinking much if at all.  His major contributions were absorbed, and were standard fare, by the time I was a young’un.  For instance I drunk the same macro milk through the writings of Milton Friedman.  I find him to be a murky writer, and often he is frustrating to read and hard to pin down.  His advocates would characterize him as a "rich" thinker.

What this Prize means: The big questions still matter.  Unemployment, economic growth, labor markets, capital accumulation, fairness, discrimination, and justice across the generations are indeed worthy of economic attention.  Phelps contributed to all of those areas.   Normative questions matter.  Relevance and breadth triumph over narrow technical skill.

Addendum: The U.S. has now won six Nobel Prizes in a row, but I bet we don’t get the Peace Prize this year.

Corruption aside, which is certainly not the case in Sweden, a Nobel committee can:

a) promote a political agenda,

b) further its own reputation, the reputation of the associated prizes, and the reputation of the science under consideration, or

c) criticism minimization, which is close to b) but looks at the left-hand tail of the opinion distribution rather than the mean.

I favor a mix of b) and c), at least for the economics prize; for more detail see my book What Price Fame?

Factor c) decreases the chance of Paul Krugman and also, I am sorry to say, Gordon Tullock, who is more than willing to say what he thinks.  b) decreases the chance of Oliver Hart and many other theorists.  Wilson and Milgrom, whose work has been used to design auctions, stand a better chance.  The work of Hart and Tirole is of very high quality but I am not sure it would add luster to the prize.  How many people can understand it, and has it influenced policy?  And has the work of Paul Romer, and associated ideas of increasing returns, stood the test of time?  If we remove Africa from the data set, the world appears to exhibit growth convergence over time.

I’ve already picked Fama and Thaler as my prediction for this year.  I also think Oliver Williamson is more likely to get it than most top economists think.  Bhagwati fits the bill, but it brings up the awkward question of whether he should be bundled with Krugman (trade theory) or Tullock (rent-seeking).  Keep in mind that the Nobel Committee members are not Harvard-MIT insiders, and they have more of an outsider’s perspective on what is likely to endure.

Greg Mankiw considers what a prize committee should maximize.  Does the prize encourage swinging for "home runs" when more people should be hitting for "singles"?  I don’t think Nobel Prize prospects spur many great contributions to economics in the first place; the best scientists have strong internal and external motivations in any case.  Nobel Prizes do motivate lobbying trips to Sweden; one Harvard economist in particular is well-known for these "vacations." 

I see the welfare-maximizing use of the Nobel Prize as generating more publicity for economics, attracting more people to study the science, and giving the science greater credibility in the eyes of politicians, the public, and media.  That means the committee should give prizes to economists who are articulate, intelligible, scholarly, and work on topics of real world interest.  So far they have done a great job; let’s hope for another first-rate pick.

If the expected utility calculations don’t convince you, maybe this will:

Neither Circuit City nor Best Buy discloses how much of its bottom line comes from extended warranty sales.  But analysts have estimated that at least 50 percent and in some lean years 100 percent of profits at the electronics retailers come from extended warranty sales.

Here is the full story.  The paper (but not on-line) edition notes that a desktop computer has a 37% chance of needing a repair in the first three years; if you are going to buy one warranty, maybe that should be it.  But you are still best advised to buy insurance only when a) the potential loss is very large, or b) your wife insists.

Gabaix and Laibson have a very good paper on myopia, consumer ignorance, and shrouding.

…we show that the two major developments experienced by the US labor market – rising inequality and narrowing of the male-female wage gap – can be explained by a common source: the increase in price of cognitive skills and the decrease in price of motor skills.  We obtain the implicit price of a multidimensional vector of skills by combining a hedonic price framework with data on the skill requirements of jobs from the Dictionary of Occupational Titles and workers’ wages from the CPS.

We find that in the 1968-1990 period the returns to cognitive skills increase four-fold and the returns to motor skills decline by 30%.  Given that the top of the wage distribution of college and high school graduates is relatively well endowed with cognitive skills, these changes in skill prices explain up to 40% of the rise in inequality among college graduates and about 20% among high school graduates.   In a similar way, because women were in occupations intensive in cognitive skills while men were in motor-intensive occupations, these skill-price changes explain over 80% of the observed narrowing of the male-female wage gap.

Here is a link to the paper.

David Neumark has a good review of the minimum wage literature for a popular but intelligent audience.

…the Scandinavian welfare states have an above average growth record during the period 1970-2000: Sweden has to some extent lagged behind, but Finland and especially Norway have grown steadily.

Andreas Bergh offers two answers:  First, if we look at measures of economic freedom, especially those measures which track freedom independent from the size of government expenditures, the Scandinavian countries have become much freer.  (Note that the Netherlands, which until very recently was outperforming the other European welfare states, experienced the greatest gains in this category.) 

Second, the Scandinavian economies have become much more globalized.  The old story was that globalization rendered welfare state expenditures unsupportable; it is more likely that the opposite is true, at least provided trade is open, credibility is high, and business regulation is light.

I wish this paper were 100 rather than 20 pages, but I believe the author is on to something very important.

Addendum: Here are other versions of the link to the Bergh paper, if the given link is still down.

The Economics prize will be announced October 9.  Here are speculations from last year.  Here are further plausible picks.  Gordon Tullock deserves it.  I predict Eugene Fama and Richard Thaler as deserving co-winners for their work in empirical finance.  Fama will win it for first proving (1972) and then disproving (1992) CAPM, the Capital Asset Pricing Model.  Thaler will win it for developing behavioral finance and a better account of how irrationalities manifest themselves in asset markets.  Kenneth French, a co-author of Fama’s, might be a third pick.  My greatest fear is that they pick Lars Svensson (I believe he is Norwegian, but still that is not a bad name for winning a Swedish prize), and somebody asks me to explain his work.

I believe I have never once predicted this prize correctly.  Last year I said Thomas Schelling, the co-winner with Bob Aumann, deserved the prize but might not ever get it.  What do you all think?

Addendum: Chris Masse points me to bookie odds on the Peace Prize.

We compile the list of articles published in major refereed economics
journals during the last 35 years that have received more than 500
citations.  We document major shifts in the mode of contribution and in
the importance of different sub-fields: Theory loses out to empirical
work, and micro and macro give way to growth and development in the
1990s.  While we do not witness any decline in the primacy of production
in the United States over the period, the concentration of institutions
within the U.S. hosting and training authors of the highly-cited
articles has declined substantially.

That is from Kim, Morse, and Zingales; here is the paper.

Kremer
and Watt argue that as more immigrant women serve in household
positions, more high-skilled native women are therefore available to
join the labor market, driving down relative wages among high-skilled
workers and reducing the disparity in wages between low- and
high-skilled workers.

Here is the paper, and that is via Greg Mankiw.  I’ll say it again: it is not frequently enough recognized that the gender of immigrants is a major policy issue.  Female immigrants bring fewer problems than do male immigrants, and they encourage the male immigrants to behave better, but of course they also, in the longer run, mean a greater demographic shift in favor of the immigrants and their culture.

Here is Ken Rogoff on the IMF, via Asymmetrical Information.

Many critics argue that Bretton Woods has gone away and the world has no current financial crises.  What is the IMF to do?  Plus the IMF’s management of crises can be counterproductive and create moral hazard.

The primary question is what kind of recurring but temporarily patched together multilateral crisis management arrangements would replace the IMF.  The IMF would seem to be an especially good deal for the United States.  Despite being the world’s largest debtor nation, in the absence of an IMF, we would be looked upon as a global lender of last resort. 

The presence of an IMF allows us to trade with other nations, and sometimes bully them around.  But when their financial claims come we can calmly tell them to go take a place in line; furthermore other countries will help pick up the tab or help make "conditionality" look less imperialistic.  Given that the US has a role as global policeman in any case, the IMF shifts the "terms of trade" of that role in our favor.  Do note that many IMF critics would prefer to revise this entire arrangement, but simply abolishing the IMF, taken alone, would not bring large gains even under a libertarian view of the world.

A question: given that much of the funds are raised on
private capital markets, how much does the IMF cost (in the crude sense
of the gross subsidy) each year?

By the way, I’ll go out on a limb and predict the next financial crisis will come in an Eastern European nation which wanted to join the Eurozone but couldn’t quite make it.  Once this failure is realized capital will flow out rapidly.

On the IMF, here is commentary from The Economist.

Addendum: Here is an IMF piece on Robert Mundell, via Greg Mankiw.

The highly-intelligent-but-requiring-a-good-dose-of-Don-Boudreaux Ezra Klein writes:

My guess is that Wal-Mart’s size and might is having much more profound effects on our economy through the demands and strains it places on suppliers than through their lowish wages and benefits for direct employees (although those labor standards give them a competitive advantage over chains with higher standards, and so we race to the bottom…).  So much as I want the latter to go up and unionization to rush across the land, I’m more worried that Wal-Mart’s size and status as the indispensable outlet for products, when coupled with their virtually maniacal (though fully understandable) demands for lower pricing, are pushing down wages and work conditions all throughout [sic] the land and, for that matter, the world.  Suppliers simply can’t pay better and push the marginal cost to consumers — Wal-Mart will drop them faster than you can say "Always low prices."

If our economy had more pockets of sluggish monopoly power, those highly stable and visible firms might be more unionized.  But unionization is not desirable per se.  Keep in mind, a well-functioning antitrust law raises real wages rather than lowering them.  Wal-Mart, by squeezing suppliers and lowering prices, does the same.  Wal-Mart suppliers are still selling at "price above the appropriate measure of marginal cost," albeit by less than before.  Asking for higher prices and higher monopoly profits — not as a spur to innovation, but in the hope that monopolizing suppliers will share those profits with their laborers — is a bad way to elevate the American standard of living.

I worry more when Wal-Mart acts to keep prices up. 

It is suddenly on the web, and here is the RSS feed.  Who knows, Trudie may even weigh in on a few of these now…