Scott Sumner on IS-LM

by  Tyler Cowen in

I favor an ad hoc approach to models–use the simplest model that gets at the issues you are interested in.  Start with a simple economy with money and goods, no bonds.  The supply and demand for money determines the price level and/or NGDP.  That’s most of human history.  Add wage price stickiness and you get demand-side business cycles.  Add interest rates and you get . . . well it’s not clear what you get.  Interest rates almost certainly have an influence on the demand for money.  Do they play a major role in the transmission mechanism between money and aggregate demand?  Hard to say.  Short term Treasury yields probably don’t have much impact.  Other asset prices might, but then there is generally no zero bound for other asset prices.  On the other hand monetary policy often operates through purchase of short term T-securities.  Bottom line, it’s complicated.

There are many excellent parts, read the whole thing, I won’t excerpt the best part.  And also there is this:

Friedman thought it was more useful to take a partial equilibrium approach to macro.  By doing so he was able to avoid the mistakes of those who looked at the Depression from an IS-LM perspective.  He was interested in how monetary policy determined NGDP, and then used a separate Phillips Curve approach with a natural rate to explain output fluctuations, to partition NGDP into RGDP and P.  He viewed interest rate movements as a sort of epiphenomenon.  Monetary policy affected rates in a complex way, which made interest rates an unreliable indicator of the stance of monetary policy.

Silvestre Pantaleón trailer inglés

by  Tyler Cowen in

That is a forthcoming Jonathan Amith documentary on Nahua culture in the Rio Balsas region of Mexico.  The trailer video is here; it is set in San Agustin Oapan, where I did the field work for my book Markets and Cultural Voices.  Recently I saw the film at National Geographic and loved it, admittedly it is not for all tastes.  I’ll let you all know when a DVD becomes available.

A brief description of the film is here.

The baby sitting co-op story, examined in light of the original source

by  Tyler Cowen in

From Matthew Klein, here is a lengthy post about the real story behind the baby-sitting co-op example which has become so popular; think of it as analogous to Coase’s take on the lighthouse in economics.  It is not easy to excerpt, so I recommend that you read the whole thing.  “Money” does still matter, but it shows how many unconsidered aspects of the story there have been, ranging from why the shortage of exchange media developed in the first place (“contractionary fiscal policy”) to why the experts’ inflationary “solution” didn’t work out very well.  For one thing, the system ended up with too much scrip:

The price of baby sitting is constitutionally pegged at one unit of scrip for every one-half hour of baby sitting. Hence, this system of price controls means the inflationary pressure does not drive up the scrip-price of baby sitting, inflation is suppressed, and shortages are found.

[…]

Now there is great difficulty rounding up sitters for all those who want to go out. This is a classic sort of inflationary pressure—too much money (scrip) chasing too few goods (sitters).

Here is a link to the original document on the history of the co-op.

Personalized Medicine

by  Alex Tabarrok in

Patient X was rushed to the hospital for emergency surgery. As she entered the hospital she said to the anesthesiologist, “You may not want to use suxamethonium on me.”

“Have you had a previous reaction?” inquired the anesthesiologist.

“No.”

“Ah, a family member must have had a reaction.”

“No.”

“Why then are you concerned about this drug?”

“I’ve had a good portion of my genome sequenced,” the patient replied, “and I found that I have a genetic variation in the enzyme that breaks down suxamethonium and am part of the 5% of patients who respond unusually to this drug. I thought you should be aware of this information.”

The flabbergasted anesthesiologist wondered how long it would be before more of her patients came prepared with their own genetic code.

I made up the details of the conversation above, but otherwise the story is true. The patient was a customer of 23andme, a service that for around $200 will give you information on about half a million sites on your genome, how you differ from other people at those sites, and which of your variations are associated with various diseases, behaviors and capabilities.

The costs of sequencing are falling so rapidly it will soon make sense for everyone to carry their entire genetic code with them on a USB drive (23andme only identifies part of the code). In 2001 it cost Craig Venter $100,000,000 to sequence the first human genome (his own.) Today, it costs just $16,000; in a few years, it will cost less than $1,000–a 100,000-factor decrease in costs in less than two decades!

That’s me from a piece called The FDA and Personalized Medicine written to help launch a new blog from the Manhattan Institute, Medical Progress Today. I go on to argue that if we are to take advantage of the new possibilities for personalization “we must move the FDA away from pre-market gatekeeping and towards post-market surveillance and information provision.”

David Henderson, Rita Numerof and Paul Howard all comment.

Putting the IS-LM debate in context

by  Tyler Cowen in

Here is a response from Paul Krugman on the topic.  Stephen Williamson’s post is too polemic for my tastes, but I find he nonetheless places this debate in useful perspective:

Generations of textbook writers found IS-LM a very convenient model to use in getting basic Keynesian ideas across to undergraduate students. However, frontier macroeconomic researchers did not take IS-LM seriously after the early 1970s. By about 1980, IS-LM had essentially disappeared from the top economics journals and from the top PhD programs in economics. But one could still find some version of IS-LM in undergraduate textbooks.

How is IS-LM used today? You do not see it in published macroeconomic research, as a framework for discussion among policymakers, or in PhD programs in economics. It is certainly not necessary to use it in teaching Keynesian economics to undergraduates. In the third edition of my intermediate macro textbook, you will not find an IS-LM model. I have found what I think are more straightforward and instructive ways to get Keynesian economics across, and to get it across in line with what modern Keynesian researchers actually do. For example, I do a version of a Keynesian coordination failure model that looks like what Roger Farmer did in the early 1990s, and an undergraduate version of a Woodford sticky-price model.

Williamson is correct.  There is more at the link, including some of the more polemic parts of the post.  An anonymous commentator adds:

The New Keynesian intermediate texts like Chad Jones have dispensed with IS/LM and replaced with the 3-equation IS-PC-MR (monetary rule) model.

Addendum: By the time the 1980s had rolled around, even Sir John Hicks had pretty much repudiated the IS-LM model, some partial detail is here.  Here is Brad DeLong on IS-LM in 2005; whatever the model is making predictions about, it is not the contemporary economy.

Alebron asks

by  Tyler Cowen in

He is a loyal MR reader:

The combination of powerful smartphones and social internet sites has given rise to an interesting phenomenon at concerts: people spend a massive chunk of the time at concerts documenting their concert-going. Is technology like this making meta-experience more important to people than experience? Is an experience that you can’t document/signal less valuable? Is this a new phenomenon?

Arguably the meta-experience was always more important, we just produce the meta-experience more efficiently these days.  The very best cultural experiences are thus more leveraged in the direction of potent final output, and thus they sell for higher prices.  On top of that is a sector of really cheap stuff, mostly illusory in nature.  Imagine someone who reads ESPN.com every day and fancies himself a follower of the NBA, without hardly seeing a game or spending money on the sport.  There is a polarization of cultural prices and experiences, and hollowing out of the middle.  If your output isn’t spectacular or culturally central, it will be hard to cover your fixed costs and you will have to go niche and super-cheap.

That’s what I think we are seeing.  Overall it is good for consumers, bad for Platonists.

On the theory of unemployment

by  Tyler Cowen in

This is from the NYT, about a farmer who tried to hire American workers rather than illegal immigrants:

Six hours was enough, between the 6 a.m. start time and noon lunch break, for the first wave of local workers to quit. Some simply never came back and gave no reason. Twenty-five of them said specifically, according to farm records, that the work was too hard. On the Harold farm, pickers walk the rows alongside a huge harvest vehicle called a mule train, plucking ears of corn and handing them up to workers on the mule who box them and lift the crates, each weighing 45 to 50 pounds.

The article is interesting throughout.  See also Alex’s earlier post, for some added interpretation.

The You Have Two Cows Challenge

by  Alex Tabarrok in

No doubt you are familiar with the two cows guide to political philosophy.

  • Socialism: You have tTwo-Cowswo cows. The government takes one and gives it to your neighbor.
  • Communism: You have two cows. You give them to the Government, and the Government then sells you some milk.
  • Capitalism: You have two cows. You sell one and buy a bull.

So under what type of ism do you have two cows but the government says that you can’t drink their milk? Whatever we call such an ism it may help to know that it is the one we live under. In a recent case in Wisconsin, as summarized by the judge (earlier case here):

Plaintiffs argue that they have a fundamental right to possess, use and enjoy their property and therefore have a fundamental right to own a cow, or a heard [sic] of cows, and to use their(s) in a manner that does not cause harm to third parties. They argue that they have a fundamental right to privacy to consume the food of their choice for themselves and their families and therefore a fundamental right to consume unpasteurized milk from their cows.

In response, Judge Fiedler wrote:

No, Plaintiffs do not have a fundamental right to own and use a dairy cow or a dairy herd;

No, Plaintiffs do not have a fundamental right to consume the milk from their own cow;

No, Plaintiffs do not have a fundamental right to produce and consume the foods of their choice…

So MR readers, here is the challenge: You have two cows. The government says that you cannot drink their milk. What ___ism?

My suggestions?

Paternalism is the obvious choice but I am going to go with Animal Farmism.

Confronting the cost of health care

by  Tyler Cowen in

Megan McArdle writes:

There are entitities in the private sector like unions who do, in fact, directly confront the tradeoff between benefits and pay.  Many unions run their own health plans; most of them negotiate a pay package in which the tradeoff between more pay or more benefits is extremely specific.  What these entities seem to show is that even people who are very well aware of how much things cost, choose bundling and price insulation over transparency and efficiency.  As far as I know, they rarely choose cost control in any way that significantly inhibits participant autonomy, or increases price exposure.

There is more here.