Category: History
Merry Christmas!
From the comments, on seasonal business cycles
ohwilleke reports:
While “Christmas” is new, the notion of a consumption splurge after the fall harvest, followed by a lean late winter-early spring season (Lent/Ramadan) before the spring harvest is deeply rooted in pre-modern agricultural reality. When you have an abundance of perishable goods it makes sense to consume them before they go bad, and then to string out the more limited supply of durable foodstuffs when fresh foodstuffs are scarce. In the same way, summer vacation is rooted in the need to free up children for agricultural labor at times of peak demand. As noted above, spring weddings supply a consumption boost after the Spring Harvest and also are timed to minimize the likelihood of critical parts of a first pregnancy taking place during the lean late winter-early spring (although these days it has more to do with the end of the school year).
Only with cheap and fast trans-hemispheric shipping (together with a lack of significant piracy for most of that trade), and advances in food preservation and refrigeration in the last half century or so, have those agricultural considerations become irrelevant (although, of course, excess and lean times should fall at different parts of the year in the Southern hemisphere and in places like Southern India, the Sahel, and the tropics of Asia, African and South America that have different seasons).
Japan and China use end of year bonuses (often as 6-12% of annual compensation) as a significant part of annual compensation as a way to share rather than leveraging macroeconomic risk for firms and the economy as a whole. In good years, when there is more supply, lots of people get big bonuses; in bad years, scarcity is widespread. The main virtue of this approach is that it makes firms more robust and puts them under less pressure to engage in cyclic layoffs but making labor costs look more like equity and less like debt. This too was well suited to an agricultural tradition rooted in sharecropping or the equivalent that was once widespread in all feudal economies as well as in neo-feudal economies in places like the American South. This isn’t a strategy limited to the orient. It is also the quintessential Wall Street economy model utilized by major financial firms like investment banks and the large law firms that serve them.
The pressure from the “real economy” – both the goods and services supply side and the labor demand side – to have punctuated consumption is much weaker now than it once was, particularly in economies or sectors of economies without the strong annual bonus tradition. The largest sectors of the modern economy that are both strongly cyclic in terms of business cycles and very seasonal within each year, are construction and real estate – and these cycles also drive a fair amount of durable goods consumption. Both construction and real estate are weakest in the winter. Agriculture’s share of the economy is now much more stable from a consumer’s perspective and much smaller as a percentage of the total economy. Real estate handles cyclic shifts by being largely commission based. Construction relies on highly fragmented project specific team building through networks of general contractors and subcontractors rather than integrated firms (a pattern also common in the film industry and theater industry).
Bottom line: The finance oriented macroeconomic models obsessed with interest rates, inflation, GDP growth rates, unemployment rates and size of the public finance sector are ill suited to analyzing optimal seasonal business cycle patterns. A more fruitful analysis looks at the roots of current seasonal patterns in economic history and at the way that the “real economy” has changed with technology to see if those patterns still make sense, perhaps for new reasons.
You will find ohwilleke’s blog here.
The loyal Kalashnikov
Later in life, he disapproved of anyone who he thought had hastened the Soviet Union’s downfall, or who had been unable to control the political and economic turbulence that followed. In memoirs and interviews, he was harshly critical of Mikhail S. Gorbachev and Boris N. Yeltsin.
To the end he remained loyal to what he called Socialist ideals and the leaders who gave them shape, and seemed untroubled by the hardships endured by his family during the early years of Soviet rule. His family’s land and home had been seized during collectivization, and when he was a child the family was deported into the Siberian wilderness. His father died during their first Siberian winter, and one of his brothers labored for seven years as a prisoner digging the White Sea canal.
Still, General Kalashnikov spoke of his great respect for Lenin and Stalin alike. “I never knew him personally,” he said of Stalin, “and I regret this.”
There is more here. I think of him as one of the last tinkerer-inventors from the mechanical tradition, which stretched through the twentieth century but is becoming increasingly obsolete. Precisely because he was from this tradition, his famed rifle was relatively easy to fix, clean, and maintain, easy to equip with interchangeable spare parts, and thus it was easy to use for killing people in poorer countries with lower levels of the division of labor. There is a good Wikipedia page on the rifle here. He will go down in history as a good example of what was wrong with much of the twentieth century
A Few Favorite Books from 2013
Tom Jackson asked me for a couple of best books for his year end column. I don’t read as many books as Tyler so consider these some favorite social science books that I read in 2013.
In The Undercover Economist Strikes Back, Tim Harford brings his genius for storytelling and the explanation of complex ideas to macroeconomics. Most of the popular economics books, like The Armchair Economist, Freakonomics, Predictably Irrational and Harford’s earlier book The Undercover Economist, focus on microeconomics; markets, incentives, consumer and firm choices and so forth. Strikes Back is that much rarer beast, a popular guide to understanding inflation, unemployment, growth and economic crises and it succeeds brilliantly. Mixing in wonderful stories of economists with exciting lives (yes, there have been a few!) with very clear explanations of theories and policies makes Strike Back both entertaining and enlightening.
Stuart Banner’s American Property is a book about property law, which sounds like an awfully dull topic. In the hands of Banner, however, it is a 
fascinating history of what we can own, how we can own it and why we can own it. Answers to these questions have changed as judges and lawmakers have grappled with new technologies and ways of life. Who owns fame? Was there a right to own one’s own image? Benjamin Franklin, whose face was used to hawk many products, would have scoffed at the idea but after the invention of photography and the onset of what would later be called the paparazzi thoughts began to change. In the early 1990s, Vanna White was awarded $403,000 because a robot pictured in a Samsung advertisement turning letters was reminiscent of her image on the Wheel of Fortune. American Property is a great read by a deep scholar who writes with flair and without jargon.
On June 3, 1980, shortly after the Soviet Union’s invasion of Afghanistan, the U.S. president’s national security adviser was woken at 2:30 am and told that Soviet submarines had launched 220 missiles at the United States. Shortly thereafter he was called again and told that 2,200 land missiles had also been 
launched. Bomber crews ran to their planes and started their engines, missile crews opened their safes, the Pacific airborne command post took off to coordinate a counter-attack. Only when radar failed to reveal an imminent attack was it realized that this was a false alarm. Astoundingly, the message NORAD used to test their systems was a warning of a missile attack with only the numbers of missiles set to zero. A faulty computer chip had inserted 2’s instead of zeroes. We were nearly brought to Armageddon by a glitch. If that were the only revelation in Eric Schlosser’s frightening Command and Control it would be of vital importance but in fact that story of near disaster occupies just one page of this 632 page book. The truth is that there have been hundreds of near disasters and nuclear war glitches. Indeed, there have been so many covered-up accidents that it’s clear that the US government has come much closer to detonating a nuclear weapon and killing US civilians than the Russians ever did. Thankfully, we have reduced our stockpile of nuclear weapons in recent years but, as in so many other areas, we are also more subject to computers and their vulnerabilities as we make decisions at a faster, sometimes superhuman, pace. Command and control, Schlosser warns us, is an illusion. We are one black swan from a great disaster and if this is true about the US handling of nuclear weapons how much more fearful should we be of the nuclear weapons held by North Korea, Pakistan or India?
Is American politics ruled by gridlock?
My latest New York Times column is here, and here is one excerpt:
Consider the financial crisis of 2008 and 2009. Coordinated actions by the Federal Reserve, the Treasury and Congress geared up rapidly, were decisive by global standards and received a fair amount of bipartisan support. In contrast, the euro zone is still discussing how to manage its bailouts or whether to start a program of quantitative easing, which the Federal Reserve will begin to wind down in January. And Japan, after letting problems with bad banks fester for decades, is only now using monetary policy to fight deflationary pressures.
After that initial decisiveness in the financial crisis, America did indeed slow down in policy innovation. Bailouts and our activist central bank have become extremely contentious factors in the nation’s politics, and there has been bitter fighting over how to set into motion the Dodd-Frank financial reform law.
Lunging and lurching forward with big changes, then enduring periods of backlash, consolidation and frustration, is often a better description of our political system than is “gridlock,” which is too unidimensional a concept to capture the reality.
At other times, because political flexibility is a fundamental part of the American system, it doesn’t feel as though we are defeating gridlock as much as bypassing it. Fracking — hydraulic fracturing — is reshaping the American energy sector, in part because of previous federal support for research and development, and in part because of regulatory tolerance: Many of the relevant changes took place through agencies like the Energy Department. In contrast, much of Europe is refusing to proceed with fracking at all. The American breakthrough has generated economic headlines, but rarely is it cited as an example of political success.
Do read the whole column. Two other examples are the building of the surveillance state and the shift toward ever-tougher forms of intellectual property protection, and the spread of that philosophy to other nations through the form of treaties. Sometimes we could use more gridlock, although I recognize that many people prefer to rail against it.
If you would like to read a defense of the gridlock view, here is Ornstein and Mann, noting that they confuse polarization with gridlock and don’t consider most of the examples and comparisons I raise. Their argument is closer to “we shouldn’t feel very good about how things have been running,” which I have no problem accepting. Here is Summers, responding to their critique., though he is more optimistic about the consequences of periodic non-gridlock than I am. Here is the original Summers Op-Ed. Many other contributions to the political science literature either predate the recent wave of rather considerable policy reform, focus on Congress, or focus on whether polarization is preventing us from addressing income inequality. I don’t intend those points as criticisms, simply a note that many of those pieces and books do not bear so directly on my thesis.
Philip Tetlock’s Good Judgment Project
Philip emails me:
Your recent book was very persuasive–and I see an interesting connection between your thesis and the “super-forecasters” we have been trying to select and then cultivate in the IARPA geopolitical forecasting tournament.
One niche we humans can carve out for ourselves is, under certain fleeting conditions, out-smarting algorithms (one of the extreme challenges we have been giving our supers is out-predicting various wisdom-of-crowd indicators).You have brought us many forecasters over the years (including some “supers”) so I thought your readers might find the attached article on the research program in The Economist of interest.Our recruitment address is: www.goodjudgmentproject.com
The website writes:
The Good Judgment Project is a four-year research study organized as part of a government-sponsored forecasting tournament. Thousands of people around the world predict global events. Their collective forecasts are surprisingly accurate.
You can sign up and do it. Here is a related article from The Economist. Here is a good Monkey Cage summary of what they are doing.
Economic convergence between black immigrants and black natives
Alison Jane Rauh, a job candidate from the University of Chicago, has a new (job market) paper on this topic. The abstract is full of information:
The number of black immigrants living in the US has increased 13-fold from 1970 to 2010, increasing their share of the black population from 1% to 10%. Black immigrants’ labor market outcomes surpass those of native blacks. This paper determines in how far the relative success of black immigrants is passed on to the second generation. While blacks of the second generation have equal or higher education and earnings levels than the first generation, the return on their unobservable characteristics is converging to that of native blacks. Race premia are put into a broader context by comparing them to Hispanics, Asians, and whites. Blacks are the only group that experiences a decrease in residual earnings when moving from the first to the second generation. Black immigrants do not only converge to native blacks across generations but also within a generation. For Asians and Hispanics, residual earnings decrease monotonically with age of immigration. For blacks, the residual earnings-age of immigration profile is upward sloping for those immigrating before the age of 15. Convergence across generations is mostly driven by low-educated second generation blacks that drop out the labor force in greater numbers than low-educated first generation immigrants do. Similarly, convergence within a generation is mostly driven by low-educated blacks who immigrate when they are young dropping out of the labor force in greater numbers than those who immigrate when they are older. A social interactions model with an assimilation parameter that varies by age of immigration helps explain this phenomenon. When making their labor force participation decision, immigrant men of all races, but not women, generally place more weight on the characteristics of natives the earlier they immigrate.
I take this to be a “peer effects are really really important” paper, namely that many of the virtues of immigrant culture are swallowed as the second generation assimilates. I should note that the contents of this paper are interesting throughout, for instance: “Conditional and unconditional annual earnings of native black women are at 91% and 78% of white women, which points to a much more equal distribution than that of men (64% and 78%).”
Here is the abstract of another paper (pdf) by Alison, entitled “Successful Black Immigrants Narrow Black-White Achievement Gaps”:
The number of black immigrants in the US quadrupled from 1980 to 2010, increasing their share of the black population from 4% to 10%. During that time period the black-white wage and employment gap widened substantially. This paper explores the extent native blacks differ from immigrant blacks. Additionally it determines in how far increased selective immigration masks an even greater deterioration in the economic condition of native blacks. In 2011, excluding black immigrants increases the white-black wage gap by 4% for men and 9% for women. It increases the employment gap by 13% and 19% for men and women respectively.
Here is the author’s home page. I hope she gets a very good job.
Does a warm climate discourage economic output?
Geoffrey Heal and Jisung Park have a new paper “Feeling the Heat: Temperature, Physiology & the Wealth of Nations,” here is the abstract:
Does temperature affect economic performance? Has temperature always affected social welfare through its impact on physical and cognitive function? While many studies have explored the indirect links between climate and welfare (e.g. agricultural yield, violent conflict, or sea-level rise), few address the possibility of direct impacts operating through human physiology. This paper presents a model of labor supply under thermal stress, building on a longstanding physiological literature linking thermal stress to health and task performance. A key prediction is that effective labor supply – defined as a composite of labor hours, task performance, and effort – is decreasing in temperature deviations from the biological optimum. We use country-level panel data on population-weighted average temperature and income (1950-2005), to illustrate the potential magnitude of the effect. Using a fixed effects estimation strategy, we find that hotter-than-average years are associated with lower output per capita for already hot countries and higher output per capita for cold countries: approximately 3%-4% in both directions. We then use household data on air conditioning and heating expenditures from the US to provide further evidence in support of a physiologically based causal mechanism. This more direct causal link between climate and social welfare has important implications for both the economics of climate change and comparative development.
The NBER version is here, I do not otherwise see ungated access.
*The Bombing War: Europe 1939-1945*
That is the excellent new book by Richard Overy, a leading historian of the Second World War. From this book I learned that:
1. The first bombing attack on Freiburg im Breisgau killed 57 people, and it was conducted by German bombers, who thought the city was the French town of Dijon.
2. In early 1945, the main hostility of the German population was directed toward the Italians, from switching sides in 1943, and not toward the bombing Allied nations.
3. More tons of bombs were dropped on Rome than on all British cities combined.
4. Per square mile, the most bombed place on earth was…Malta.
Here is one very positive review of the book. In the United States the book comes out February 2014 under a different title. You also can buy the British edition for U.S. Kindle now.
Stanley Fischer and the Palestinians
Palestinian Monetary Authority Chief Jihad Al Wazir suggested Mr. Fischer was skilled at navigating political sensitivities to focus on economic challenges.
“During Stan’s tenure [at the Bank of Israel], the relations remained on a professional level,” Mr. Al Wazir said from Ramallah. “It was devoid of politics. There was an understanding of the issues.”
…Mr. Al Wazir said Mr. Fischer helped ease strain in the Palestinian banking system during recurring liquidity crises because of shortfalls in foreign aid and occasional freezes in Israeli transfers of tax revenue collected on the behalf of Palestinians. He helped to get shipments of cash into the Gaza Strip’s blockaded economy.
That is from this story. Here is much more on Fischer and the Palestinians. Here are Fischer’s parting comments upon leaving his job in Israel.
Stanley Fischer on the Israeli economy
The word is that Stanley Fischer will be nominated to be #2 at the Fed, good news in my view. Here is Ari Shavit recounting his meeting with Stanley Fischer:
…he [Fischer] utters the relevant figures in slow, measured, Anglo-Saxon Hebrew. In the years 2004 to 2008, Israel’s average annual growth rate was 5.2 percent. While the world was in crisis in 2010-11, Israel’s average annual growth rate was 4.7 percent.
…Fischer tells me there are four reasons for this success: reducing government spending dramatically (from 51 percent of GDP in 2002 to 42 percent in 2011); reducing the national debt significantly (from 100 percent of GDP in 2002 to 75 percent in 2011); maintaining a conservative and responsible financial system; and fostering the conditions required for Israeli high-tech to continue to flourish.
There is then a discussion of how Israeli R&D and starts-ups are so strong and how dynamic the tech sector is. Fischer then turns to the problems:
“We have four problems,” he says. “Our education system has deteriorated, and it endangers our ability to sustain technological excellence. The employment rate among ultra-Orthodox men is only 45 percent. Most Arab women do not work. Fewer than twenty business groups control much of the local market and thus restrict competition. Right now the high-tech miracle helps to conceal these four problems that are weighing down the wider economy. But in the long term, these problems endanger Israel’s ability to remain prosperous and successful.”
That is from Ari Shavit’s excellent new book My Promised Land: The Triumph and Tragedy of Israel, reviewed here.
Milton Friedman’s 1969 commentary on the West Bank
“Much to my surprise, there was almost no sign of a military presence…I had no feeling whatsoever of being in occupied territory…This wise policy [of the Israelis] involved almost literal laissez-faire in the economic sphere…To a casual observer, the area appears to be prospering.”
That is from Friedman’s “Invisible Occupation.” Newsweek column, May 5, 1969, reprinted in There’s No Such Thing as a Free Lunch: Essays on Public Policy. La Salle, Illinois: Open Court Press, 1975, pp.298-99.
That is cited in an old paper of mine on the economics of international conflict, with reference to the Middle East. See my related earlier post, “Why Don’t People Have More Sex?“
The potential for the anti-Nazi music detector in contemporary German culture
Saxony State Police in Germany have developed a smartphone application that can identify neo-Nazi lyrics and racist words in rock songs. Der Spiegel reported Tuesday that German interior ministers will meet this week to discuss whether to implement this new method of policing.
The government said that neo-Nazi music helps radical organizations recruit youth, and it is used as a type of gateway drug to bring in new conscripts. The application, nicknamed “Nazi Shazam,” can identify names of songs just by playing a small sample of a song. The application would allow the police to react instantly if far-right songs are played on radio stations, at concerts, in club nights or at demonstrations.
There is much more here, hat tip goes to MT. This is of course another method of surveillance and measurement of our tastes, and some version of this idea will be picked up by marketers, whether or not this particular example is adopted.
Nelson Mandela, 1918-2013
Invictus
By WILLIAM ERNEST HENLEY
Out of the night that covers me,
Black as the pit from pole to pole,I thank whatever gods may beFor my unconquerable soul.
In the fell clutch of circumstanceI have not winced nor cried aloud.Under the bludgeonings of chanceMy head is bloody, but unbowed.
Beyond this place of wrath and tearsLooms but the Horror of the shade,And yet the menace of the yearsFinds and shall find me unafraid.
It matters not how strait the gate,How charged with punishments the scroll,I am the master of my fate,I am the captain of my soul.
Brad Delong on stagnationist arguments
He has a very long and interesting post — over 9000 words — so do read the whole thing. Here is one excerpt:
…we have an argument that we were not as rich as we thought we were, an argument which indeed seems to me to be true, but that is not an argument that future growth will slow but rather that past growth was misperceived because of irrational exuberance. Only with “no new net job creation in the last decade…” is there even a datum that I see as about a “great stagnation”. But then Tyler branches off into failures of American governance, failures that seem to me to be no greater than the failures of American governance have always been. Yes, failing governance. Yes, overestimated wealth at the end of the 1990s and in the mid-2000s. Yes, a somewhat more sclerotic-appearing labor market as far as cyclical adjustment is concerned. Yes, a successful class war waged by the 1% on the rest of us–or, rather, if my household income in 2014 is what I think it will be, on the rest of you. Yes, a huge demand shortfall-driven business-cycle downturn.
Where in all of this is the promised “great stagnation”? I do not see it.
The latter part of his post, however, is more sympathetic to stagnationist arguments, so do read the whole thing.
I would offer a few points in response:
1. I am not the “pessimist” Brad thinks I am; I sometimes say I am a revenue pessimist, but a happiness optimist. In this regard Brad’s case for an ongoing growth in well-being is not opposed to all stagnationist ideas. But we are still short a few transformative technologies compared say to 1870-1960, and that matters for what kinds of changes we are going to get.
2. For all the usefulness of the AD-AS model for the short run, I don’t see AD and AS as so clearly separable over the medium term and certainly not over the long term. In this regard I think today’s Keynesians are often taking that model too literally. Had we done a better job of generating wealth, demand today and looking forward would be stronger.
3. I don’t see a belief in the efficacy of institutional changes as an alternative to stagnationist views. One can and probably should believe both a) big institutional changes could bring us significant growth benefits, and b) given some approximation of the current set of policies, we have been on a relatively unfruitful part of the technology yield curve. On top of that c) policies don’t always change so quickly and so “b)” remains an important consideration, and d) the “golden years” for growth themselves had some pretty terrible policies and institutions, not the least of which was an extreme legacy of racial, gender, and other kinds of (grossly inefficient) discrimination. Transformative technologies can overcome a lot of human stupidity, and it would be nice to have more of those.