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…the Curious Task podcast episode you recorded with Matt the other day is out now. Here are some links you could share if you would like:

Podbean: https://thecurioustask.podbean.com/e/ep-213-tyler-cowen-who-is-the-greatest-economist-of-all-time/

Apple Podcasts: https://podcasts.apple.com/ca/podcast/ep-213-tyler-cowen-who-is-the-greatest-economist-of-all-time/id1474563073?i=1000641959359

Spotify: https://open.spotify.com/episode/5kayibK4XZEnhykHunpk8U?si=qf9D6U_VSe2TYgxPtaZs3w

Matt Bufton of the (Canadian) Institute for Liberal Studies is interviewing.  I was surprised not to be asked who is Canadian GOAT, maybe Robert Mundell is the obvious pick, followed by Harry Johnson and Harold Innis?

Yusuf Mercan, Benjamin Schoefer, and Petr Sedláček, newly published in American Economic Journal: Macroeconomics.  I best liked this excerpt from p.2, noting that “DMP” refers to the Nobel-winning Diamond-Mortensen-Pissarides search model of unemployment:

This congestion mechanism improves the business cycle performance of the DMP model considerably. It raises the volatility of labor market tightness tenfold, to empirically realistic levels. It produces a realistic Beveridge curve despite countercyclical separations. On its own, it accounts for around 30–40 percent of US unemployment fluctuations and much of its persistence. In addition, the model accounts for a range of other business cycle patterns linked to unemployment: the excess procyclicality of wages of newly hired workers compared to average wages, the countercyclical labor wedge, large countercyclical earnings losses from displacement and from labor market entry, and the long-run insensitivity of unemployment to policies such as unemployment insurance.

And by their congestion mechanism the authors mean this:

…a constant returns to scale aggregate production function that exhibits diminishing returns to new hires, a feature we call congestion in hiring.

I find that assumption plausible.  It remains the case that the DMP model is grossly underrepresented in on-line writings on economics, on Twitter, and in the blogosphere.  It won three Nobel Prizes, yet it also suggests that the “simple” manipulation of spending or nominal values does not automatically restore higher levels of employment.

Here are less gated versions of the paper.

By me, from Bloomberg:

The main culprit could be the fertility crisis. In Latin America, for instance, fertility rates are coming in much lower than had been expected. Uruguay, Costa Rica, Chile, Jamaica and Cuba all have fertility rates of about 1.3. In one decade, Mexico had a 24% drop in births. Brazil, by far the region’s most populous nation, has a fertility rate of about 1.65, and those are likely to fall further. The UN had predicted Brazil’s population to be 216 million this year, but it turns out to be only 203 million. Over time, most Latin American countries can expect shrinking populations.

And:

The upshot, to put it in macroeconomic lingo, is that most underdeveloped countries will be seeing simultaneous contractions in aggregate demand and aggregate supply. That is bad news for economic growth. A national economy can deal with a smaller population, but a continuously shrinking population is very difficult.

More concretely, there will be no demographic dividend to help drive economic growth. Instead, caring for the elderly will become a major economic activity. The taxes and transfers necessary to support retirements will be an additional burden on already weak economies, which in turn may help to keep fertility rates low. Children will not become easier to afford. There could be a low-fertility trap, or even a vicious downward circle. As the young spend more time caring for their aging parents, that too may lower the number of children women wish to have.

Countries with falling populations will produce fewer inventors and entrepreneurs. Smaller domestic markets will make it harder to crack export markets. Toyota succeeded, for instance, because it first did well in Japan (a relatively populous country), and then refined the quality of its products and competed overseas. When the home market is smaller, economies of scale are more difficult and it is harder for companies to gain purchase.

Populations in these once-emerging economies may be hit harder than birth rates will indicate. After all, North America, Western Europe, Japan and South Korea have falling birth rates, too. Many of these countries will find it economically necessary to take in more immigrants, if only to pay for their retirement systems or to work as caregivers. That could be a further drain on populations in the less wealthy countries. Japan is already preparing its immigration plans.

Worth a ponder, and a worry.  The upshot may be this:

It won’t be all bad: Poorer countries, like wealthier ones, will benefit from biomedical advances. And as societies age, their crime rates may fall. Yet while life in many of these countries may feel more secure, they won’t be able to follow the dynamic paths of Japan and South Korea, or even those of Greece or Portugal. Memories of radical economic growth may begin to fade, which may make it harder to reboot growth.

I thank Robin Hanson for a pointer to this topic.

I usually don’t like arguments like the one that follows, as purely short-run second best considerations tend to rub me the wrong way.  Nonetheless I had never thought of it before, so I am happy to present it for our collective enlightenment:

Mortgage interest deductions and other homeownership subsidies are widely believed to be harmful because they redistribute resources from lower-income renters to higher-income homeowners. We argue that renters actually benefit from these policies in general equilibrium for two reasons. First, the rental supply curve is relatively inelastic, which means that rents fall when these policies reduce rental demand. Second, many renters spend most of their income on housing, and these renters gain substantially from rent decreases. We calibrate a quantitative model to match empirical evidence on these factors and show they are strong enough that subsidizing homeownership actually increases welfare.

That is from a newly published article by Shahar Rotberg and Joseph B. Steinberg.  Via the excellent Kevin Lewis.