The Solow Model
The Solow Model is a workhorse model of economic growth. Many subsequent papers in growth theory and in business cycle theory build on this model. A model of growth helps us to structure our thinking. Why is it, for example, that China is growing faster than the United States despite having much poorer institutions such as the rule of law? Surprisingly, even a simple version of the Solow model offers some useful predictions and ways to interpret aspects of the the growth data. At MRUniversity this week we have four videos on the Solow model. These videos are a bit more technical than many of our previous videos and we think they will be useful in many other classes such as macroeconomics, especially if you are using a truly excellent textbook. The videos will also be useful for anyone who wants to read more of the literature on growth theory or the empirics of growth (such as can be found, for example, in Barro and Sala-i-Martin’s Economic Growth or David Weil’s textbook Economic Growth). Even if you don’t want to study the theory in more depth, we think these videos will be useful for understanding development and how economists use theory and data to understand the sources of growth (and its absence).
Report from Singapore
The government has been working with food stall owners to cut the amount of oil and salt used in cooking and persuade them to use brown rice, considered healthier than polished white rice.
Here is more.
“Blind Retrospection Electoral Responses To Drought, Flu, and Shark Attacks”
That is the title of a 2004 paper by Christopher Achen and Larry Bartels (pdf), perhaps it will prove relevant this week or next:
Students of democratic politics have long believed that voters punish incumbents for hard times. Governments bear the responsibility for the economy in the modern era, so that replacing incompetent managers with capable alternatives appears to be a well-informed, rational act. However, this vision of a sophisticated retrospective electorate does not bear close examination. We find that voters regularly punish governments for acts of God, including droughts, floods, and shark attacks. As long as responsibility for the event itself (or more commonly, for its amelioration) can somehow be attributed to the government in a story persuasive within the folk culture, the electorate will take out its frustrations on the incumbents and vote for out-parties. Thus, voters in pain are not necessarily irrational, but they are ignorant about both science and politics, and that makes them gullible when ambitious demagogues seek to profit from their misery. Neither conventional understandings of democratic responsiveness nor rational choice interpretations of retrospective voting survive under this interpretation of voting behavior.
Here is my related Slate piece with Angus. For the pointer I thank Angus.
In case you haven’t been paying attention
And now the world’s largest general scientific society is weighing in on the debate.
The American Association for the Advancement of Science says labeling would “mislead and falsely alarm consumers.” The AAAS – best known for publishing Science magazine – says genetically modified foods are fundamentally no different from conventionally bred foods. In fact, the organization says they are tested more extensively than most new crop varieties.
And:
Opponents of genetically modified foods have a variety of concerns. Some have a gut feeling that these crops are unwholesome. Others worry that the technology is driven simply by corporate profits for seed companies as well as herbicide producers. Indeed, industry has poured nearly $41 million into advertising to defeat the ballot measure, with “No on 37” TV and radio ads warning that the labels could lead to higher prices at the store, according to The Wall Street Journal. ..
Sometimes worries about genetically modified foods are expressed as concern over food safety, but the AAAS says that concern isn’t supported by the science.
“Civilization rests on people’s ability to modify plants to make them more suitable as food, feed and fiber plants and all of these modifications are genetic,” the AAAS statement says.
Here is more, with hat tip to Michael. Isn’t it time for some of the respected left-wing economists to weigh in on this one?
Arrived in my pile
Mary Morgan, The World in the Model: How Economists Work and Think. And here is chapter one on-line (pdf).
Why Milk?
Throughout evolutionary history, most adult homo sapiens could not drink milk. Even today, most adults cannot drink milk. Adults who cannot drink milk don’t seem to lose very much, particularly as they can still eat yogurt and cheese. And yet the gene that allowed some adults to drink milk spread incredibly rapidly suggesting massive advantages to milk drinkers. Why? No one knows for sure but it seems to coincide with civilization. Slate has more:
[A]round 10,000 B.C….a genetic mutation appeared, somewhere near modern-day Turkey, that jammed the lactase-production gene permanently in the “on” position. The original mutant was probably a male who passed the gene on to his children. People carrying the mutation could drink milk their entire lives. Genomic analyses have shown that within a few thousand years, at a rate that evolutionary biologists had thought impossibly rapid, this mutation spread throughout Eurasia, to Great Britain, Scandinavia, the Mediterranean, India and all points in between, stopping only at the Himalayas. Independently, other mutations for lactose tolerance arose in Africa and the Middle East, though not in the Americas, Australia, or the Far East.
In an evolutionary eye-blink, 80 percent of Europeans became milk-drinkers; in some populations, the proportion is close to 100 percent. (Though globally, lactose intolerance is the norm; around two-thirds of humans cannot drink milk in adulthood.) The speed of this transformation is one of the weirder mysteries in the story of human evolution, more so because it’s not clear why anybody needed the mutation to begin with.
…A “high selection differential” is something of a Darwinian euphemism. It means that those who couldn’t drink milk were apt to die before they could reproduce. At best they were having fewer, sicklier children. That kind of life-or-death selection differential seems necessary to explain the speed with which the mutation swept across Eurasia and spread even faster in Africa. The unfit must have been taking their lactose-intolerant genomes to the grave.
…The rise of civilization coincided with a strange twist in our evolutionary history. We became, in the coinage of one paleoanthropologist, “mampires” who feed on the fluids of other animals. Western civilization, which is twinned with agriculture, seems to have required milk to begin functioning. No one can say why.
Hat tip: John Chilton.
Would abolishing cash help cure AD problems?
Miles asks about this on Twitter. Earlier in the year, Matt wrote:
Stop for a moment and ask yourself why the interest rate can’t be reduced much below 1 percent. The trouble is cash. At any given time, relatively little paper currency circulates in the United States. Instead, most of the American money supply consists of bank accounts and other electronic stores of value. People prefer to keep money in bank accounts because it’s convenient and because you get interest on it. If the rates were driven below zero—in effect a tax on holding cash in the bank—people would just withdraw money and store it in shoeboxes instead. But what if you couldn’t withdraw cash? What if all transactions were electronic, so the only way to avoid keeping money in a negative-rate account was to go out and buy something with the money? Well, then, we would have solved our depression problem. Too much unemployment? Lower interest rates below zero, Americans will start spending and investing again, the economic will grow, and unemployment will go back down to its “natural rate.”
Ryan Avent comments. A few points from me:
1. Even pure cash can be taxed, if we are willing to go the goofy route. A stochastic declaration of “counterfeit,” based on serial numbers and scans, is one way to go.
2. Technologically speaking, it is possible to run virtually all transactions without cash, or it will be quite soon. That said, for this to work as stated, you would need to run all transactions without cash or the option of cash. How many millions of Americans do not even have bank accounts much less smart phones? This is more likely to work in Singapore or Denmark, at least for the foreseeable future.
3. You could have currency or some currency equivalent continue to exist in the black market economy, with penalties for ordinary citizens caught holding currency. (Which would probably not be popular on Fox News, and furthermore in Tennessee imagine all that talk of Book of Revelation, “Mark of the Beast,” etc.) Even so, you still end up with a currency-bonds margin and most likely with lower nominal interest rates in that equilibrium; if the law taxes currency holdings there is less need for equilibrium to require a high nominal interest rate. I am not sure why this should be so desirable for monetary policy.
Furthermore, under some views, this proposal would in essence put monetary policy in the hands of the drug trade. Cracking down on drug lords, or easing up on them, would become major monetary policy instruments, at least if you take the Fama-Sumner view that currency has special potency over the price level.
4. I do not myself believe that currency per se has such extreme power over aggregate demand, at least not in such a credit-intensive economy as ours. That means this proposal doesn’t get at the heart of the AD problem, which is closely linked to credit creation. But if you disagree with me on this one, you end up back at #3.
5. What do we really know about money demand anyway? Cooley and Leroy (1981) is still worth reading. Under one plausible view, you get sustainable increases in velocity, aggregate demand and investment when people feel safer and wealthier, not when you tax them more. It’s fine to say “we don’t know,” but I get nervous when macro stabilization policy is relying so directly and so relentlessly on money demand effects.
6. I don’t see how this proposal could work unless it is applied globally, which seems implausible. If your dollars are being taxed some extra amount, just put them in a foreign bank to earn zero or do some kind of funny quasi-repurchase agreement, with a foreign bank, to avoid having formal ownership of the dollars on the days of the tax.
On net, it is an interesting idea, but I wouldn’t actually do it.
Addendum: Scott Sumner comments (I don’t myself think the monetary base is so special, and if pre-2008 wasn’t a problem, that is why).
Further assorted links
*Searching for Sugar Man*
There is plenty of social science in this unexpected indie hit, which depicts the musical career of Sixto Rodriguez. Rodriguez had two very good albums in the early 1970s but faded into obscurity after failing to gain commercial traction. Unbeknown to the artist, he had become an enduring national celebrity in South Africa. His fans there had no idea he had been working in Detroit as a construction demolitionist (this is before the modern internet, although eventually the internet helped his daughter discover his fame in South Africa, through a fan’s web site). Here is Cass Sunstein on the movie and its portrayal of social and cultural dynamics.
The music is quite appealing — imagine a mix of Donovan, Motown, and low-tech psychedelia, the latter a’la Love. If you are looking to hear or download one song, I recommend the iconic “I Wonder.”
To my ear it sounds naive but charming, but to the South Africans it was revelatory and cool. Furthermore here was a non-Black coming out of Motown (Mexican ancestry but born in the United States), yet with much of the anti-establishment feel of a black artist of the time. The movie never touches on this racial angle as possibly relevant to his popularity; did the South Africans require a non-black version of a black idol? And what does he now symbolize, given that white rule has ended? When they show Rodriguez’s post-apartheid concerts in South Africa, there is not a black face to be seen, as if he has become a nostalgia act in a slightly unsettling manner with the anti-establishment gloss now drained away.
The full story has not yet been told, not even on the American side. From watching the movie, the viewer receives the feeling that Rodriguez fell into a hole circa 1973. The reality is that he was touring Australia as late as 1981 (more here) and even put out a live album from that country in the same year. Music aficionados will know all about the close cultural connections between Australia and South Africa at that time; did Rodriguez really have no idea of his South African following? And what kind of connections was he keeping with the commercial world of music?
I would gladly read a book about how failing artists string out their careers by playing in niche markets or writing for them. For instance Harry Nilsson released some of his late albums in the UK, Australia, and Japan only. Erwin Nyiregyhzai kept giving periodic piano recitals in Japan, well after his prodigy years were over and he supposedly was “lost” and thus before his “rediscovery.” What is a rediscovery anyway?
Here is Rodriguez’s eBook guide to happiness. For pointers I thank Cass Sunstein and also Angus.
Assorted links
Why are growth declines sharp and sudden?
…these econometric studies imply that the decline in growth rates should be gradual, since convergence to high incomes is gradual. Actual experience, however, rarely displays such a smooth adjustment. More commonly there is a sharp drop to a new, lower growth rate, as noted above. In Japan the drop was probably precipitated by the OPEC oil price increases, given Japan’s heavy dependence on imported energy, and by the concurrent worldwide stagflation, particularly in Japan’s major export markets. In Korea, enormous chaebol-initiated investment projects artificially supported growth for a time but also laid the foundations for the financial crisis that precipitated the sharp decline in growth.
This is one of the most neglected questions in macroeconomics and the theory of economic growth, and these days our understanding of the world, and our fiscal future, may well turn on this matter. We still don’t have a good sense of why growth fall-offs are so sharp and why they seem so hard to reverse.
In any case that excerpt is from Barry Eichengreen, Dwight H. Perkins, and Khanho Shin, From Miracle to Maturity: The Growth of the Korean Economy.
More generally, I loved reading this book, perhaps all the more because I had just returned from Korea when it arrived. It is clearly written and full of useful information on virtually every page. In my opinion every economist should study the Korean growth miracle, as a) it is in some ways mankind’s most impressive and least precedent-backed growth miracle, and b) it overturns or at least challenges many preconceptions about economic growth. It is perhaps the case where government policy has been most effective in spurring economic growth. This is now one of the go-to books on that topic.
More on the Kurt Schuler Treasury Bretton Woods find
I am honored to have served as Kurt’s Ph.d advisor. He recently found the original Bretton Woods archival manuscripts, hidden away in Treasury, here is that story, written up by Annie Lowrey at The New York Times. Excerpt:
“Everyone thinks they know what happened at Bretton Woods, but what they know has been filtered by generations of historical accounts,” Barry Eichengreen, a professor or economics and political science at the University of California, Berkeley, said in a statement. “International monetary history will never be the same.”
The transcript provides “insight in how it was that they were able to maintain a pace of work which allowed them to reach two really big agreements, on the I.M.F. and the World Bank, within a space of three weeks,” Mr. Schuler said. “Keynes was something of a task master,” he added.
Perhaps the Eurozone — among others — could take a lesson from that.
Assorted links
1. Update on the Medicaid wars: Medicaid spending is slowing, and more here, much of it is from falling reimbursement rates.
2. Upgrading the lowly button.
3. Krugman’s Asimov introduction (pdf).
4. What moderation means, by David Brooks.
Tuition by Major
A task force convened by Florida Governor Rick Scott has recommended changes in tuition subsidies according to job market demand:
Tuition would be lower for students pursuing degrees most needed for Florida’s job market, including ones in science, technology, engineering and math, collectively known as the STEM fields.
The committee is recommending no tuition increases for them in the next three years.
But to pay for that, students in fields such as psychology, political science, anthropology, and performing arts could pay more because they have fewer job prospects in the state.
“The purpose would not be to exterminate programs or keep students from pursuing them. There will always be a need for them,” said Dale Brill, who chairs the task force. “But you better really want to do it, because you may have to pay more.”
The task force has the right idea but the right way to target subsidies is not to the job market per se (let alone Florida’s job market), wages already reflect job market needs. Subsidies instead should be targeted to fields where education has the greatest positive spillovers, benefits that spill over wages and flow to the public at large. Overall, this likely means subsidizing the STEM fields more than anthropology which is why the taskforce has the right idea. If the task force wants to explain the idea, however, they should make it clear that the goal is to focus subsidies on those fields where education most benefits the taxpayer.
Defensible conclusions from observing UK fiscal policy
Here are a few which are at least what I call “defensible”:
1. The UK economy was hit with serious problems, and fiscal (and monetary) policy did not respond strongly enough to keep the nation on track. (NB: If you are citing measures of a cyclically adjusted gap in UK fiscal policy, you probably are citing evidence in support of this proposition.)
2. There has been a shift in the composition of government spending, which has led in turn to sectoral shift problems for former UK government employees.
3. UK government spending is underinvesting in that nation’s future, most of all in education but other public goods too.
You may or may not agree with these views, but again they are defensible. You can point to both evidence and theory in their favor, noting that the skeptics may have other reasons for dissenting (but still they should accept the first-order evidence and theory).
Here is the view which is not so defensible:
4. A negative shock to UK government spending led to a negative AD shock and that drove the recent poor performance of the UK economy.
People, that one just ain’t true. I’m receiving a lot of comments and emails, all citing evidence which supports versions of 1-3, but interpreted incorrectly as support for #4.
There is a big difference between #1 and #4 for their concrete implications. For instance if you believe in #4, it seems that problem would be relatively easily fixed by more AD. If you believe in #1, you have to think long and hard about what those initial shocks were, and then ascertain how much the resulting fallout from those shocks could be fixed by AD measures. These become murky waters very quickly. For instance a mix of collapsing London finance, disappearing North Sea oil, and mysterious British productivity puzzles (one possible set of options in these murky waters) probably can be fixed only a bit by a more expansionary fiscal policy.
I’m on board with the government spending/sectoral shocks to government employment point, though of course it is only one part of the problem. I would note that everyone criticizes sectoral shocks theories until they wish to use them. I also would suggest that this point is well explained by the conservative critique of entitlement spending, namely that it swallows up too many parts of the budget and the broader economy.
People are trying to use the UK fiscal policy evidence to argue for the “simple” view when instead they should be pushing the “murky” view. And the murky view implies the whole mess just isn’t that easy to fix, or for that matter diagnose.