A simple model of a reluctant Fed

by  Tyler Cowen in

Imagine there is incipient downward pressure on real wages, just as real wages have fallen in Japan and male real wages have been flat or falling in the United States, both across longer-run periods of time.  Yet for the usual reasons of morale and uncertainty, employers do not wish to cut real (or nominal) wages.  An extra three to four percent price inflation would cut real wages by three to four percent for a large segment of the employed.  It would accelerate a trend which is already underway, and will eventually happen anyway, yet it will telescope a lot of that trend into pre-2012.

There are more employed than unemployed, by a considerable margin, plus many of the unemployed do not vote or do not vote strategically.  The inflation may be a Pareto improvement, desired by benevolent central bankers, but why should an office-holding politician desire this outcome?  Which politician wishes to accelerate a decline in real wages?

Most generally, I suspect that electoral opposition to inflation will rise to the extent median wage stagnation is a problem.

*Adapt*, by Tim Harford

by  Tyler Cowen

I was excited to read Tim’s book because I have been thinking about similar issues.  He explores the fact that the division of labor, and division of knowledge, keeps on progressing, and that such progress brings surprising and sometimes frustrating results.  He starts with a vivid anecdote about how hard it is for a single person to invent a toaster:

The toasting problem isn’t difficult: don’t burn the toast; don’t electrocute the user; don’t start a fire.  The bread itself is hardly an active protagonist.  It doesn’t deliberately try to outwit you, as a team of investment bankers might; it doesn’t try to murder you, terrorise your country, and discredit everything you stand for…The toasting problem is laughably simple compared to the problem of transforming a poor country such as Bangladesh into the kind of economy where toasters are manufactured with ease and every household can afford one, along with the bread to put into it.

Tim remains a wonderful expositor and popular economics writer but this is also a book of ideas, and it is ahead of what most other people are thinking.  One implication is that greater specialization makes innovation much harder — hardly anyone has a good grasp of the whole — and Tim cites the work of Benjamin Jones.  Another implication is that we must rely more on particular kinds of experimentation to make progress on hard problems.  This is all taking Michael Polanyi and Hayek and Whitehead and Ortega y Gasset and turning the heat up a notch; we are increasingly alienated from a knowledge of the whole and yes that matters.

Ultimately Tim shies away from making this a book of breakdowns, but I would have enjoyed seeing him postulate a Don van Vliet Trout Mask Replica equilibrium and then trying to put the pieces back together again.  Is there some non-linear point at which some institutions can no longer be reassembled in working form?  There is plenty of material on this question, but perhaps not quite a full confrontation with pessimistic scenarios.  That will have to wait for the sequel.

The bottom line: I was never reading this because it will be popular and I wanted to review it, I was always reading it to ponder the ideas.  You can buy the book here.

Mexico facts of the day

by  Tyler Cowen

From the Mexican census, via Andrew Sullivan:

In 1990, one in five dwellings had a bare-earth floor. Now only 6% do. … More interesting still is what Mexicans put in those homes. More houses have televisions (93%) than fridges (82%) or showers (65%). In a hot country with dreadful television this is curious.

I don’t find this puzzling at all.  A lot of Mexico has elevated altitude and many of the homes are open air.  Mexican TV is more fun than taking a shower, too.

Natural Gas

by  Alex Tabarrok in

The graph is from Peter Tertzakian who notes:

To put this in perspective, 1,000 Tcf of natural gas contains the equivalent energy to 166 billion barrels of oil – a staggering amount considering that the discovery of 10 billion barrels of conventional oil these days is a rare occurrence, worthy of many headlines…

Estimates of recoverable shale gas have doubled in just the past year and shale gas is only part of the supply with the total being 2,552 trillion cubic feet (Tcf) of potential natural gas resources in the U.S. alone. Per unit of electricity, burning natural gas results in significantly fewer carbon dioxide emissions than coal. It is possible, however, that fracking may leak more methane to the atmosphere so the net climate benefit is unclear, at least given current methods of development.

Hat tip: Paul Kedrosky.

MaLa Tang

by  Tyler Cowen in

It is on 3434 Washington Boulevard, in Arlington, adjoining the George Mason University School of Law buildings (with Mercatus and School of Public Policy and ICAR), home page here.  It is real Sichuan hot pot, excellent flavors all around, reminiscent of Uncle Liu’s Hot Pot (same owner), superb cold dishes and appetizers, and the best MaPo Tofu in the entire area.  They’ve made the decor chic, the wait staff “normal,” and you can just walk up to a counter and get ready-to-eat Sichuan street food to your heart’s content on a moment’s notice.  I predict this will serve  as a major breakthrough for real Sichuan food in northern Virginia and also in the United States.  Here is one good review.

File under “Now Open for Business.”

How well is fiscal austerity working in the UK?

by  Tyler Cowen in

With the Wednesday release of a mediocre gdp report, we are hearing that the United Kingdom austerity program is proving a macroeconomic failure.

Let’s look at the timing of the cuts:

So far, about GBP9 billion of the government’s fiscal tightening has occurred. However, around GBP41 billion of tax increases and spending cuts will begin to take affect from the start of the new fiscal year on April 5.

Some of the particular cuts were announced in October and at that time Ken Rogoff doubted whether half of them would end up taking place.  So the cuts are in their infancy and arguably their credibility is still somewhat in doubt or at the very least has been.

A lot of the weak gdp report is blamed on construction, with some excuses drawn from snowstorms.  There does exist an extreme rational expectations view, in which the last-quarter weakness of construction was based on the expectation that government spending cuts would start arriving later in April and thus new houses should not be built.  Alternatively, it could be that after the greatest real estate bubble in history, the UK market is overbuilt.  Weak UK growth dates to some time back.

Also recall that in many open economy Keynesian models, fiscal policy AD effects are to some extent — or completely — offset by exchange rate movements (pdf).  And the fiscal multiplier is basically zero when the central bank targets inflation.  Furthermore it is not obvious that the UK has been in a liquidity trap.   When it comes to drawing Keynesian conclusions about practical fiscal policy, the theory here is a house of cards.

The UK economy suffers from a more serious technological stagnation than does the United States, in this case more forward looking than backward looking.  Their pharmaceutical innovation seems to be drying up, they are overspecialized in finance, the “residential tax haven” status of the country may not yield continuing growth at high rates, tourism is OK but not enough, and their manufacturing base eroded some time ago, with nothing like a German-style comeback.  The teacup sector aside, why should anyone be optimistic about that economy?

Two other considerations:

1. The case for the cuts is not that they will spur growth, but rather forestall a future disaster.  That’s hard to test.  A second part of the case is that not many political windows for the cuts will be available; that’s hard to test too.  On that basis, it’s fine to call the case for the cuts underestablished, but that’s distinct from claiming that poor gdp performance shows the cuts to be a mistake.

2. Let’s say the cuts lower government consumption and raise private consumption, and that government consumption is wasteful but private consumption isn’t (and long-run growth is given by the Solow-like expansion of the international technological frontier.)  That’s a good case for making the cuts, but they still won’t show up as higher gdp.  The government consumption is valued into gdp figures at cost, so even cuts proponents with a good case don’t have to be predicting higher gdp.

I doubt if the UK fiscal austerity program will much boost their growth rate, which is likely low in any case and for non-Keynesian reasons.  Simply citing a low UK growth rate is not a test of their fiscal policy, for a number of reasons detailed above.

Words of wisdom

by  Tyler Cowen in

From Ross Douthat (1/20):

The only counter-argument here is the claim that the cost-cutting powers the White House wants to grant to IPAB (Medicare’s Independent Payment Advisory Board, that is) actually represents a courageous attempt to dramatically cut spending via the sustained rationing of care…The problem is that this isn’t how the President has sold the board to the public: Instead, he’s promised that it will only reduce “unnecessary spending,” which is basically the equivalent of a Republican promising to keep the entitlement system solvent by reducing Medicare fraud. (There is unnecessary spending in Medicare, certainly, but asking a 15-person board to distinguish the necessary from the unnecessary is a lot harder than many liberals seem to think.) There’s no Congressional Budget Office projection in which IPAB seriously closes the deficit, and no detail, from the White House or anyone, on what a successfully-IPABified Medicare would mean for seniors’ out-of-pocket costs. 

Chopin’s piano sonata #2, a continuing series

by  Tyler Cowen in

…plans at the University of Denver to permanently move four-fifths of the Penrose Library’s holdings to an off-campus storage facility and renovate the building into an “Academic Commons,” with more seating, group space, and technological capacity, could make the university a flashpoint in the debate about whether the traditional function of storing books needs to happen on campus.

Here is more.

Should NFL players become like economics professors?

by  Tyler Cowen in

With the lockout ending today, free agency would seem to be in place:

In the union lawyers’ world, every player would enter the league as an unrestricted free agent, an independent contractor free to sell his services to any team. Every player would again become an unrestricted free agent each time his contract expired. And each team would be free to spend as much or as little as it wanted on player payroll or on an individual player’s compensation.

The NFL Commissioner presents multiple reasons why this is a bad idea, most of which are obviously hypocritical (some players might get paid less!, and yet the players mostly favor the new system).  The serious argument I can see is that of competitive balance, but a) do fans really enjoy competitive balance or do they prefer national stage mega-rivalries of titans?, and b) there are ways to restore competitive balance other than using monopsonistic collusion in the labor market.  Here is a serious economic analysis by John Vrooman (pdf), and it suggests persuasively that sharing venue revenue can remedy the revenue imbalance problem and restore balance to the extent that is required.

Here is James Surowiecki on this topic, he is not pro-owner.  I’ve yet to see any good reason to object to the new status quo, namely universal free agency in the NFL.

I have not, however, followed this issue closely.  Working on the Modern Principles text with Alex has, among other things, taken away from my consumption of sports.

Motivation and IQ, incentives matter

by  Tyler Cowen in

There is an excellent new paper by Angela Lee Duckworth, et.al., and here is the punchline:

…material incentives in random-assignment studies increased IQ scores by an average of 0.64 SD, suggesting that test motivation can deviate substantially from maximal under low-stakes research conditions.  The effect of incentives was moderated by IQ score: Incentives increased IQ scores by 0.96 SD among individuals with below-average IQs at baseline and by only 0.26 SD among individuals with above-average IQs at baseline.

Here is one popular summary of the results.  I interpret the finding to suggest some mix of a) conscientiousness is more important than we think (when we think we are measuring the importance of IQ), and b) there are some smart people, smarter than we often think they are, and they pick and choose their spots.

For the pointer I thank Michelle Dawson.