A Macro Homework Question: Answer in the Style of…

by  Alex Tabarrok in

I just returned from a trip to South Korea. Today, to prepare for the next trip, I took my jacket to the dry cleaners. Turning the pockets out, I discovered a substantial number of South Korean won. The transaction costs of exchanging the won for dollars are now very high. I will keep the won as souvenirs.

Question: What are the consequences of my decision for the South Korean economy? Answer in the style of a well-known economist. What would Scott Sumner say? (almost too easy!) What about Keynes? Krugman? Cowen? Prescott?

South Korea - Currency

Real wage cuts in the UK recession (a questionnaire of sorts)

by  Tyler Cowen in

2008 and after: -8.5%

That measure of wage decline is from John van Reenen (pdf, useful powerpoints on UK productivity), citing Martin and Rowthorn (2012).

Now I am all for the UK trying ngdp targeting, or for that matter well-targeted fiscal policy, or both.  I never favored their *tax increases*, often misleadingly labeled “austerity” for political reasons.

I would, however, like to get a handle on Keynesian thinking here and thus the questionnaire aspect of this post.  In the traditional Keynesian story, stimulus lowers real wages through nominal reflation.  Is that the Keynesian view here?  If so, why do Keynesians believe that British real wages need to fall more than 8.5%  Why did they need to fall 8.5% to begin with?

I understand this view and accept it in part myself: “Real wages in the UK were way too high to begin with because the country was producing well above potential output.”  Yet Keynesians have been very unwilling to make that argument.

I also have seen Keynesian-style thinkers argue that inflation will make labor markets tighter and raise real wages.  This is either incoherent or at the very least underargued (there is a possible version of the view if you think prices are nominally sticky but wages are not).

In a multiple equilibria view, new information is revealed about the British economy from the financial crisis, and that economy collapses to a lower trust/productivity/risk-taking point, plus it loses some relative weight in its high productivity sectors, such as finance.  That too I understand and also partially accept, though again I don’t see current Keynesians pushing that line (though it need not run counter to Keynesianism, broadly construed).

I also understand what it would look like to mix Keynesianism with an extreme form of a stagnation theory, more extreme than I hold myself.  But again, I just don’t see that view out there.

So what is the current Keynesian view on why British real wages need to be falling so much?  I would like to better understand the alternatives to my views.

I appreciate your help in the comments.

Addendum: Scott Sumner offers very good commentary.

The marketing of Mo Yan

by  Tyler Cowen in

What is it like to win an (approved) Nobel Prize in China?:

On Tuesday, Fan Hui, a local official, paid a visit to Mr Mo’s father to ask him to renovate the family home.

“Your son is no longer your son, and the house is no longer your house,” urged Mr Fan, according to the Beijing News, explaining that the author was now the pride of China. “It does not really matter if you agree or not,” he added.

Mr Fan has earmarked the family home as the main attraction of the “Mo Yan Culture Experience Zone”, but also has plans to create a theme park based on Mr Mo’s 1987 work, Red Sorghum.

Unwanted and unprofitable, Sorghum is no longer planted in the area, but this not regarded as an obstacle…

“One visitor dug up a radish [from Mr Mo’s vegetable patch],” reported the Beijing News. “He slipped it into his coat and showed it to villagers afterwards, saying: ‘Mo’s radish! Mo’s radish!’ ”

“A visiting mother picked some yams and told her daughter: ‘I’ll boil them, so you can eat them and win the Nobel prize too!'” Mr Mo’s brother, Guan Moxin, was forced to intervene to stop the family’s corn harvest, which was left lying out in the sun to dry, being swept away by the village tidying committee.

Mr Mo himself has been non-commital amid the excitement. Asked by China Central Television whether he was happy, he responded: “I do not know”.

Asked by Xinhua, the state news agency, whether his win would ignite a passion for literature in China, he said: “I think it will last for a month at most, maybe less, then everything will return to normal”.

He said he planned to use his £750,000 of prize money to buy a “big house” in Beijing. But then he realised that property prices have soared so high he could only afford a two-bedroom apartment.

Here is more, interesting throughout, and here is a related story.  Hat tip goes to Literary Saloon.

In case there was any remaining doubt

by  Tyler Cowen in

The Supreme Court of Honduras ruled today that the Honduras legislation establishing charter or model cities was unconstitutional.  A ruling two weeks ago from the constitutional branch of the court established by a 4-1 vote that the law was unconstitutional. Because that decision was not unanimous, the entire Supreme Court had to consider and vote on the issue.

The full court voted 13-2 that decreto 283-2010 which reformed two constitutional articles to enable the model cities legislation violated the constitution.

There is a bit more here, including some information on one of the companies involved.

Does physical strength influence male political views?

by  Tyler Cowen in

From The Economist:

Dr Petersen and Dr Sznycer were investigating the idea that a person’s political opinions might be aligned with his physical characteristics. The opinion in question was whether resources should be redistributed from the rich to the poor. The physical characteristic was strength.

…Dr. Petersen and Dr Sznycer found that, regardless of country of origin or apparent ideology, strong men argued for their self interest: the poor for redistribution, the rich against it. No surprises there. Weaklings, however, were far less inclined to make the case that self-interest suggested they would. Among women, by contrast, strength had no correlation with opinion. Rich women wanted to stay rich; poor women to become so.

The paper is here.  Here is another paper by the authors (and two others), on attitudes toward welfare.  Sznycer has a useful page of research papers here.

How to improve state-level fiscal policy

by  Tyler Cowen in

Some states rely too much on income taxes for their revenue and others rely too much on sales taxes (see the paper’s map on p.26).  We could have better state-level automatic stabilizers.  Here is a paper from Nathan Seegert (pdf, currently on the job market from Michigan, by the way):

I find U.S. state tax revenue volatility increased by 500 percent in the 2000s relative to previous decades. State governments’ inability to smooth volatile revenue streams, due to self-imposed balanced budget restrictions, has caused this increased volatility to magnify U.S. state budget crises. The theoretical model demonstrates the cause of the increase in volatility is due to changes in tax rates, economic conditions, or tax base (e.g. what types of consumption are taxable). Despite ampli fied business cycles in the 2000s and important tax base changes such as the increase in e-commerce, I fi nd changes in tax rates explain 70 percent of the increase in tax revenue volatility in the 2000s. Motivated by this result I create a normative model of taxation and produce a condition for optimal taxation when tax-revenue volatility is considered (a volatility-adjusted Ramsey rule). I estimate the volatility-adjusted Ramsey rule and find thirty-six states in 2005 rely inefficiently on either the income or sales tax, up from twenty-six states in 1965. This increase in imbalance is due to an increased reliance on the income tax as fourteen states relied inefficiently on the income tax in 1965 compared to twenty-six states in 2005. This paper fi nds strong evidence the increase in tax-revenue volatility state governments recently experienced is due to changes in tax rates, causing states to expose their revenues to unnecessary levels of risk.

The idea of volatility-adjusted Ramsey rules is a good one.  Here is Nathan Seegert’s home page.

For the pointer I thank N.

*Boom and Bust Banking*

by  Tyler Cowen in

The editor is David Beckworth and the subtitle is The Causes and Cures of the Great Recession.  Contributors include Lawrence H. White, Scott Sumner, George Selgin, Jeff Rogers Hummel, Bill Woolsey, Nicholas Rowe, and Beckworth himself, with a strong representation from market monetarism.  My blurb reads: “David Beckworth rapidly has become one of the most influential writers in monetary economics and his wonderful book…offers some of the most important new ideas in the field.”

Esperanto vs. Volapük

by  Tyler Cowen

Get this:

Volapük didn’t die out completely. It has a bit of life today; there are a few online lessons and discussion boards. There is even a Volapük Wikipedia with over 100,000 articles. And its name lives on in the Danish expression det er det rene volapyk – “It’s pure Volapük,” or, in other words “It’s Greek to me.”

The article is here, the pointer is from Bookslut.

Can you raise your kid as a conservative or liberal?

by  Tyler Cowen in

Here is a new study (caveat emptor all the way):

This new study, by a team led by psychologist R. Chris Fraley of the University of Illinois at Urbana-Champaign, begins with new mothers describing their intentions and approach in 1991, and ends with a survey of their children 18 years later. In between, it features an assessment of the child’s temperament at age 4.

…“Parents who endorsed more authoritarian parenting attitudes when their children were one month old were more likely to have children who were conservative in their ideologies at age 18,” the researchers report. “Parents who endorsed more egalitarian parenting attitudes were more likely to have children who were liberal.”

Obviously genes are an alternative channel of influence.  And this is a stunner:

Also, the Illinois researchers did not gauge the parents’ political beliefs.

So I don’t believe the interpretations at all.  Still, it is interesting to see the extent of attitudinal persistence, and furthermore “…our results also showed that early childhood temperament predicted variation in conservative versus liberal ideologies.”  I suspect, however, that politics would turn out to be less susceptible to parental shaping than, say, religion or general temperamental approach to religion.

I consider this study radically incomplete, but still it is interesting to see the question tackled with a twenty-year time window and some ex ante planning.

For the pointer I thank www.artsjournal.com.

In which the Minnesotans call off the paddy wagon and leave us free

by  Tyler Cowen in

Pogemiller, according to the e-mail, said a 20-year-old statute requiring institutional registration clearly did not envision free online, not-for-credit offerings.

“When the legislature convenes in January, my intent is to work with the Governor and Legislature to appropriately update the statute to meet modern-day circumstances,” said Pogemiller. “Until that time, I see no reason for our office to require registration of free, not-for-credit offerings.”

Of course pursuing such an issue was not a political winner in the first place.

The link is here, and for the pointer I thank M.