Category: Economics
El Salvador and the elasticity of supply
Many of you have written in and asked what I think of president Bukele throwing all those gang members (and possibly others) in jail without much due process. I do hope to learn more about this, including possibly with a trip to El Salvador later this year. In the meantime, I say let’s put aside the moralizing — in either direction — and try to think of this in terms of what is the appropriate economic model.
In one view, supply is highly elastic, so if government tries to restrict the supply of a good or service, production responds accordingly. For instance, many gun buyback programs fail for this reason. Guns come out of the woodwork, but they are not really the guns you want to be bought up. In the longer run, perhaps more guns are imported into the country, whether to be sold to the government or the replace the sold guns.
So if the government of El Salvador throws 60,000 gang members into jail, is this supply elastic? Do replacements step forward, like villains in a Batman movie and its sequels? Or is the distribution bimodal, I for instance would not become an El Salvadoran gang member for any amount of money. I genuinely do not know the answer to this question.
Furthermore, what would the new supply look like? Presumably the new gang members would have to be “more invisible,” otherwise they would get tossed in jail too. So the new gang members could not sport tattoos and the like, and they would find it harder to coordinate with each other.
If you think this year is definitely the year to visit El Salvador, perhaps you fear some medium-term elasticity of supply. After all, we do know that El Salvador is currently one of the safest countries in Latin America, for how long I cannot say.
What variable might we try to measure or estimate to address this question?
On Twitter, Chris Blattman suggested that the imprisonments will not work, as organized crime will reemerge in El Salvador. He mentioned further that organized crime would reemerge in a more centralized and politicized fashion. I do not disagree (am genuinely agnostic), but what exactly is the underlying model? That the government can crack down on little guys but not big players? And also that a new big player can emerge with so many of the little guys in jail?
Is the best case scenario for the Bukele policy one of “El Salvador as transmission belt to the U.S.”? And so if the critical mass of Salvadoran intermediaries disappears, the bad guy drug lords find other routes and carriers in other countries, and El Salvador sets off along its new, merrier, path-dependent way?
How might we test prospectively whether that is likely to be true?
“What Harvard can learn from Olive Garden?”
That is the title of my latest Bloomberg column, here is one bit from it:
One lesson is that it’s harder to convince poorer individuals to mingle with wealthier individuals in settings where the culture is shaped to align with a higher socioeconomic status. Churches, for instance, are usually free and open to all — but the poor do not seem so keen on attending religious services in wealthier neighborhoods. Maybe that’s because they don’t view the wealthier church as a “better service” (however that might be defined) but rather as an environment where they do not feel entirely comfortable or welcome.
In other words: Wealthier institutions or establishments attract a mixed customer or user base only when they give up cultural control. Taller stained-glass windows and more comfortable pews can do only so much to attract lower-income churchgoers. (An aside: One nice feature of marketing “culture” — for lack of a better word — on the internet is that it can be broadly appealing. Classical music on YouTube, for example, is not only free but also free of snob appeal.)
The business model of America’s nonprofit sector depends on producing status and reputation, both for itself and its affiliates. Many nonprofits work at creating environments of a very particular sort, both to raise money and to boost their influence. To elites, those environments are innocuous, even inspiring. But those same elites are starting to realize that what is inviting to one person is off-putting to another.
Here is a related (and very good) column from Catherine Rampell.
Why are Gender Pay Gaps so Large in Japan and South Korea?
From Alice Evans:
Singapore, Hong Kong and Taiwan are closing gender gaps in pay, seniority and parliamentary representation. Japan and South Korea, meanwhile, have the largest gender pay gaps in the OECD. Management remains 85% male. Female graduates are treated like secretaries, expected to pour the tea and run errands.
In Japan, a female graduate earns the same as a man who has only completed school. For Korean women aged 25-39, gender gaps in wages are indistinguishable between those with children and those without. In Europe, by contrast, there is a major penalty for motherhood.
Japanese businesses have lobbied again legislative change, even refusing sexual harassment training. Courts routinely deny systematic discrimination. Employers cannot even be sued for sexual harassment. Employees can only ask the Ministry of Labour for mediation. Accusations of abuse are mostly ignored.
At least part of the explanation stems from the lifetime full employment norms of Japan and South Korea, not present in Taiwan or Singapore, where those wage gaps are lower.
To summarise, Japan and South Korea have enshrined a system of lifetime employment and seniority pay for both blue collar and white collar workers. Firms are extremely sexist: men are treated as future managers, women are their subordinates. These inequalities are largest amongst low status regular workers. Fed up and frustrated, wives quit regular work to spend more time with their children and undertake non-regular, low paid work.
That is only part of the argument, here is the entire piece.
Did the U.S. Really Grow Out of Its World War II Debt?
The fall in the U.S. public debt/GDP ratio from 106% in 1946 to 23% in 1974 is often attributed to high rates of economic growth. This paper examines the roles of three other factors: primary budget surpluses, surprise inflation, and pegged interest rates before the Fed-Treasury Accord of 1951. Our central result is a simulation of the path that the debt/GDP ratio would have followed with primary budget balance and without the distortions in real interest rates caused by surprise inflation and the pre-Accord peg. In this counterfactual, debt/GDP declines only to 74% in 1974, not 23% as in actual history. Moreover, the ratio starts rising again in 1980 and in 2022 it is 84%. These findings imply that, over the last 76 years, only a small amount of debt reduction has been achieved through growth rates that exceed undistorted interest rates.
That is from a new NBER working paper by Julien Acalin and Laurence M. Ball.
MRU video on opportunity cost
Please note that this video is part of our free Intro to Economics unit plan.
The Ramaswamy plan for a commodity-backed dollar
I am not convinced by it, here is one excerpt from my latest Bloomberg column:
Ramaswamy has called for the US Federal Reserve to stabilize the dollar in relation to the price of commodities, rather than to the consumer price index. That formula is unlikely to bring monetary stability (or tame business cycles) in part because commodity prices themselves are notoriously unstable.
Consider the five years leading up to 1994, when consumer prices increased more than 19% but most commodity prices fell. Or the years from 2004 to 2008, when commodity prices rose by about three times but US price inflation rates were roughly constant, in the range of 2%. In other time periods, the relationship between commodity prices and consumer inflation is murky…
I am reminded of economist Robert Hall’s 1982 “ANCAP” proposal to stabilize the dollar with a commodity basket. Hall argued that a bundle of ammonium nitrate, copper, aluminum and plywood (thus ANCAP) had proved stable in terms of the dollar in times past. He was right about that. But the rise of China and other nations brought an unprecedented commodity price boom. Had the US tried to stabilize the value of the dollar in terms of those commodities, the Fed would have had to apply significant deflationary pressure to stabilize the relevant commodity price index. Actual monetary policy would have been a disaster.
There is much more at the link.
Twenty Years of Marginal Revolution!
Who would have guessed that after twenty years Tyler and I would still be writing Marginal Revolution! Thanks especially to Tyler, we have had multiple new posts every single day for twenty years! Incredible.
We had some idea when starting Marginal Revolution that it would provide the foundation for our eventual textbook, Modern Principles of Economics, but we didn’t imagine that it would also become the foundation for our online platform for economics education, Marginal Revolution University and Conversations with Tyler, Emergent Ventures and various other projects of Tyler and myself.
We never imagined that Marginal Revolution would one day be archived by the Library of Congress or become one of the world’s nexus points for debating and understanding events like the Financial Crisis and the Covid Pandemic. It was a shock when the first undergrad told us that they had been reading MR since the age of 12. Today, there are multiple PhD economists who grew up reading Marginal Revolution.
In this conversation, with David Perell, we reflect on 20 years and talk about our process of writing and working together. Tyler is very funny. Tyrone makes an appearance or two, albeit never announced. (Apple podcast, Spotify).
We also thank our many readers and the commentators. You all make MR better (ok, most of you make MR better).
We are still excited to write about economics every day and we don’t think we have peaked! Let’s see what happens over the next 20 years. Thank you all.
Macro illusions — which ones are you suffering under?
Before Milton Friedman, a significant percentage of top macroeconomists in the United States were convinced the money supply does not matter very much.
Friedman, working with David Meiselman and Anna Schwartz, produced a lot of good evidence that the money supply matters a great deal. Many people were convinced, even if they did not become hard-core monetarists.
Monetarist ideas start fading as early as 1982, when money supply control techniques did not work out so wonderfully. Litterman and Weiss (1983) raised doubts about whether money matters at all.
During the 1990s, many people thought we were in a productivity boom.
During the 2011-2013 period, many people became convinced that we had been in a productivity slowdown.
During the Clinton years, it was believed that investment crowding out was a big problem, and that Clinton fiscal reforms had limited that problem. Later it was believed that crowding out is not much of a problem at all, as deficits rose and real interest rates remained low.
Throughout the 1990s, the evidence showed that the Fed can influence real interest rates only small amounts and with difficulty. Circa 2023, it is believed that the Fed has a great deal of influence over real interest rates.
Leading up to 2008, the idea of “the Great Moderation” was popular.
Post-2008, Minsky-like and bubble ideas became extremely popular. The notion of a Great Moderation was dead.
Post 2009, it was believed that “liquidity trap economics” were highly relevant.
Post 2009, it was argued that “structural imbalances” were very important, in part due to liquidity trap conditions. Today, Pettis and Krugman still promote the relevance of structural imbalances for the medium- and long-term, even though the liquidity trap conditions are long since gone.
“Secular stagnation” was a popular idea in macro until recently, but no longer, in part due to high inflation and in part due to the investment boom.
Very recently, the doctrine of immaculate disinflation is gaining in credibility, after a long period of disbelief in it.
To be clear, I am not saying all of these (or even most of these) are wrong. I am saying that various doctrines appeared to be “quite true” on a temporary basis, and yes I stress that word temporary. Then they are not true, or at least not obviously true any more.
So which are the macro delusions of our current time? I would nominate a clear winner for number one:
1. Enough government action on the demand side can fix macroeconomic problems and ensure full employment
Maybe sometimes that is true. But it is not always true, and I hope you all can be wiser than the people who got caught up in earlier macroeconomic illusions, or should I call them delusions?
Furthermore, all discussions of the Phillips curve — no matter what the point of view — should be conducted with this blog post in mind.
The Jones Act Enforcer
The Offshore Marine Service Association has a ship, the Jones Act Enforcer, whose only job is to spy on and harass European vessels that are installing wind farms off the coast of New England.
BostonGlobe: To get Vineyard Wind done, developers are turning to vehicles such as the Sea Installer, which arrived in Salem in early August. Owned by the Danish firm DEME Group, the vessel is one of the few on the planet capable of installing GE Haliade-X wind turbines that are the size of a skyscraper into the ocean floor.
Measuring more than 430 feet in length and 150 feet wide, Sea Installer is a “jack up” vessel that lifts itself out of the water on legs more than 300 feet long. Once elevated, the vessel becomes a platform where an immense crane, capable of lifting more than 1,600 tons, can install the tower sections, nacelle, and blades for each turbine.
The Jones Act Enforcer does not board the suspected ships. Instead, as it did this day with the Sea Installer, the crew photographs the vessels from about half a nautical mile away and, if they suspect violations, files complaints with US Customs and Border Protection and the Coast Guard. The outcomes of the complaints are confidential, Smith said.
…The law prohibits foreign ships from transporting goods between two points within the US. But the actions that ships can and can’t take on American waters gets very technical.
For example, the Jones Act Enforcer observed Go Liberty, an American ship, perched beneath the Sea Installer. Smith said the American vessel was most likely transporting materials to the site so the Sea Installer could place a monopile — the bright yellow steel piles that support the turbines — into the ocean.
However, if the Sea Installer received material from the Go Liberty and then physically moved to another monopile in a different location, that act could violate the Jones Act.
The Jones Act Enforcer also observed the Italian ship Giulio Verne, which was working to connect underseas cables to an electric substation that would power the wind turbines. In this case, Smith claimed the Italian ship was violating the law because it was moving the cables from one point (the sea bed) to another point (the substation).
The stupidity, it burns. But Biden supports the Jones Act.
Return to the Econ
Joshua Gans revisits life among the econ, 50 years after the classic investigation by Axel Leijonhufvud.
In Leijonhufvud’s time, economics was dominated by two super-castes which worshipped different totems.
Today, however, the super-castes are hardly to be seen and the old totems have been replaced by a singular new totem:
The technology powering the Econ runs on one precious resource, d’ta, and the work of obtaining that d’ta rests with the grads. Upon arrival in the dept, they are immediately sent into the D’ta Mines and tasked with collecting seemingly impossible quantities of the resource. They toil in dirty and unsanitary conditions. Ironically, their next task is to painstakingly clean and polish the d’ta they have extracted one at a time — sometimes millions of individual items — so they can then be sorted and made available for processing. With luck, the grads may be assigned processing tasks that take place in windowless rooms twenty-four hours a day operating a single machine. The hope is that they can then produce the new high achievement of the Econ, a tabl. It is hard to describe what a tabl is to outsiders, but it represents the outcome of finely processed d’ta. The more the tabl contains bright, bejewelling in the form of star-like symbols (*), the more valuable it is. Failure to create a sufficiently dazzled tabl means being sent back to the mines.
Which countries are the losers in the new mercantilism?
New tax credits for manufacturing batteries, solar-power equipment and other green technology are drawing a flood of capital to the U.S. The European Union is trying to respond with its own green-energy support package. Japan has announced plans for $150 billion of borrowing to finance a wave of investment in green technology. All of them are working to become less dependent on China, which has a big lead in areas including batteries and the minerals to make them.
Now, some smaller players are getting left behind. Many are nimble economies that were on the rise during decades of free trade, but are at a disadvantage in a new era of aggressive industrial policy. Industrialized nations such as the U.K. and Singapore lack the scale to compete against the biggest economic blocs in offering subsidies. Emerging markets such as Indonesia, which had hoped to use its natural resources to climb the economic ladder, are also threatened by the shift.
Here is more from Ballard, Douglas, and Emont at The Wall Street Journal.
Listen to Lech
WashPost: Of the giants who brought down the Iron Curtain — among them Ronald Reagan, Margaret Thatcher, John Paul II, Vaclav Havel — only Walesa is still with us. At 79, he still looks as vigorous as the young electrician who led a workers’ uprising against the “dictatorship of the proletariat”; forced Poland’s Marxist regime to recognize the first independent trade union in the communist world; was imprisoned under martial law only to later force his former jailers at the negotiating table to allow free elections; and who, as the first president of the newly free Poland, anchored his former Warsaw Pact country in the institutions of the West.
Sitting in his office at the European Solidarity Center, the museum built on the grounds of the old Lenin Shipyard where Solidarity was born, I asked about polls showing that half of young Americans have a positive view of socialism. What is his message for young people who have no living memory of communism? “Many young people are actually fooled to accept communism as an idea,” he said, speaking through an interpreter. “There are beautiful sentences talking about equality, about justice. … But as soon as you start putting that system into practice, all sorts of serious disasters come about. But young people quite often don’t know it. We have experience [with socialism], so we really know something about it. So, I strongly recommend rejecting it.”
Bob Ekelund has passed away
A very smart guy, here is a tribute from Don Boudreaux. He was widely published in many areas, including history of economic thought, most of all I liked his work in the economics of religion.
Sebastian Bensusan on Argentina dollarization
Great to see an article on dollarization! Two things that were not mentioned”
Argentina is already substantially dollarized. Absolutely nobody saves in pesos, so the amount of USD needed to “dollarize” the economy is much smaller than you’d think.
The difference between convertibilidad (90s) and dollarization is less stark than what you’d expect. If it happens:
1. Peronists will win elections again and will likely try to undo it (Zimbabwe undid it).
2. If dollars are in bank accounts, the government can simply steal everybody’s dollars. This is effectively what happened during el corralito. People had USD denominated accounts and those were forcibly converted to peso, and then devalued from 1:1 to 3:1, effectively evaporating 2/3s of everybody’s savings.3. So, the mechanics of a future dollarization matter greatly in making this following sentence from your article true:
But that was a mere promise, and the promise of convertibility was broken rather spectacularly
Because bank deposits are always promises and USD-denominated Argentinian bank accounts would also be promises that would eventually be broken.
Here are some ways to dollarize that would be future-proof:
1. Allow Argentinians to own and transact locally usinn American or foreign bank accounts that are outside of the government’s jurisdiction. This is effectively what parts of Venezuela’s economy have been doing via Zelle.
2. Crypto
Are these two practical? TBD!
Argentina should dollarize
Here is my Bloomberg column on that topic, here is the trickiest point:
Another concern, more significant, is that dollarization would be a huge upfront cost to the government of Argentina: Someone would have to actually come up with all the dollars to serve as currency. Keep in mind, however, that the economy of Argentina would also be acquiring a valuable asset — namely, dollars. The net cost should be zero; realistically, acquiring the dollars should prove a net positive. Argentina’s government needs to invest in the future of its citizens, and introducing a stable currency is one of the best ways to do so.
Dollarization might involve major fiscal adjustments, if only to accumulate the dollars to make it work, and that could bring chaos to Argentina politics. That is a real risk, but it has to be weighed against the political risks of continuing hyperinflation. At least dollarization offers some chance of eventual success.
I would add that the government of Argentina cannot and should not forsake all public sector investment. Think of dollarization as a relatively high return form of such investment. As for whether using the euro would be better, I think the ties of the Argentina elites to Miami banking are sufficiently strong that the dollar is clearly more focal, even though the EU trades with Argentina more than the U.S. does.