Basil Halperin on sticky wage vs. sticky price models

Here is a long post, full of insight and citations, basically arguing that sticky wage models are better for macro than sticky price models.  Sticky wage models had been deemphasized because real wages seemed to be acyclical, but sticky prices can’t quite do the work either.  The post is hard to summarize, but my reading of it is a little different than what the author intends.  My takeaway is “Sticky wages for new hires are the key, and we didn’t have real evidence/modeling for that until 2020, so isn’t this all still up in the air?”  I am a big fan of the Hazell and Taska piece, which I consider to be one of the best economics contributions of the last decade, but still…I don’t exactly view it as confirmed and all nailed down.  I do believe in nominal stickiness of (many not all) wages, but I still don’t think we have a coherent model matching up the theory and the empirics for how nominal stickiness drives business cycles.  I thus despair when I see so many dogmatic pronouncements about labor markets.

For the pointer I thank João Eira.

North vs. South India?

The data set used by Paul and Sridhar starts with the year 1960, when per capita income in Tamil Nadu was 51 per cent higher than UP’s. In the early 1980s, this difference had narrowed to 39 per cent. However, over the following decades the gap began to rapidly grow, and in 2005 an average resident of Tamil Nadu earned 128 per cent more than an average resident of Uttar Pradesh. (Statistics available online suggest that by 2021 the gap has increased to almost 300 per cent.)

Taking the South as a whole and the North as a whole, the book found that while the two regions differed only by 39 per cent in terms of per capita income in 1960-61, forty years later the gap had widened to 101 per cent. Now, in 2021, the gap has widened much further. Currently, the average annual per capita income of the four northern states profiled by Paul and Sridhar is about US $4,000, and of the four southern states, in excess of US $10,000, or roughly 250 per cent higher.

The data analysed by Paul and Sridhar show that there are two areas in which the South has done much better than the North. First, with regard to human development indicators such as female literacy rate, infant mortality and life expectancy. Second, in areas critical to economic development such as technical education, electricity generation, and quality and extent of roads. The first set of factors prepares healthier and better educated citizens to participate in the modern economy, while the second set enables much higher rates of productivity and efficiency in manufacturing and services.

Paul and Sridhar also found that the South fares substantially better than the North on governance indicators.

Here is the full piece by Ramachandra Guha, interesting throughout, with a pointer to Alice Evans, via Paul Novosad.

Saturday assorted links

It’s Time to Open the Canada-US Border

When infection rates in two areas are similar the argument for closing borders is weak. Canadian and US infection rates are now similar and both countries are highly vaccinated by world standards. The arguments for not opening are mostly psychological, a fear of foreigners. As a result, we have both Canadians fearful of opening to Americans and Americans fearful of opening to Canadians which doesn’t make sense. At least one must be wrong! Moreover, if we require even a weak proof of vaccination to cross borders then the average Canadian coming to America will be safer than the average American and the average American traveling to Canada will be safer than the average Canadian.

It’s time to open the border.

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The Edward Nelson books on Milton Friedman

Two volumes, such a wonderful book, for sure one of the best of the year.  Not quite a biography, more a study of Friedman’s career, but his career was his life so this is a wonderful biography too.  Here is one excerpt:

Friedman was a student of business cycles who was prone to say that he did not believe there was a business cycle.  He was a trenchant critic of reserve requirements as a monetary policy tools and a strong advocate of financial deregulation, yet he had many favorable things to say about moving to a regime of 100 percent reserve requirements.  he stressed the looseness of the relationship between money and the economy, yet critics saw his policy prescriptions as predicated on a tight relationship.  He criticized in detail the way the Federal Reserve allowed the money stock to adjust to the state of the economy, yet he was often characterized as treating empirical money-stock behavior as exogenous.  He made fundamental contributions to the development of Phillips-curve theory, yet he was averse to conducting discussion of inflation prospects using Phillips-curve analysis.  He spent much of his first two decades as a researcher working on labor unions and the use of market power in setting prices, yet for the subsequent five decades he found himself accused by critics of predicating his economic analysis on an atomistic labor market, a one-good model, or perfectly competitive firms.

Here is Scott Sumner on the book.  Highly recommended, here is the Amazon link, and volume II.

John Stuart Mill on the English

From causes which might be traced in the history and development of English society and government, the general habit and practice of the English mind is compromise.  No idea is carried out to more than a small portion of its legitimate consequences.  Neither by the generality of our speculative thinkers, nor in the practice of the nation, are the principles which are professed ever thoroughly acted upon; something always stops the application half way.  This national habit has consequences of very various character, of which the following is one.  It is natural to minds governed by habit (which is the character of the English more than of any other civilized people) that their tastes and inclinations become accommodated to their habitual practice; and as in England no principle is ever fully carried out, discordance between principles and practice has come to be regarded, not only as the natural, but as the desirable state.  This is no an epigram, or a paradox, but a sober description of the tone of sentiment commonly found in Englishman.  They never feel themselves safe unless they are living under the shadow of some convention fiction — some agreement to say one thing and mean another.

That is from Mill’s Vindication of the French Revolution of February 1848.

The political economy of green energy

That is the topic of my latest Bloomberg column, here is one excerpt:

Japan seems to be approaching its energy infrastructure with politics at the forefront. It is making a big bet on hydrogen power, which is technologically iffy and expensive, currently about eight times more so than natural gas. Yet Japanese leaders are aware that Japan does not have its own solar power industry at scale, making the country dependent on China for solar panels. Hydrogen can also be used by existing (though modified) power plants, which both reduces cost and eliminates the need for new infrastructure. And if this all works, Japan could become known as the world leader in hydrogen power.

Greenpeace has criticized the Japanese approach, saying that its ammonia-reliant formula for hydrogen power is costly and will itself create greenhouse-gas emissions. That critique may well be right, but it’s also possible that Japan is thinking through the political questions at a deeper level.

The most relevant question about green energy isn’t necessarily about technology or cost. It may be about politics: “How many special-interest groups support this idea?” If there isn’t a decent answer, then maybe the idea doesn’t stand a decent chance.

There is much more at the link, including a consideration of other alternative energy sources.

Mexico stimulus facts of the day

“The combination of continued reopening with strong remittances and a US-led global recovery has allowed Mexico to close the gap with other Latin American economies, outperforming all of them in the first half of 2021,” said Marcos Casarín, chief economist for the region at Oxford Economics. The consultancy’s recovery tracker shows Mexico is returning to pre-pandemic levels of activity more quickly than any other Latin American country. “Mexico will grow 6.0 per cent this year and it could be higher,” said former finance minister and academic Carlos Urzúa, citing the spillover effects of US fiscal stimulus and increased remittances from Mexicans working across the border. These could reach $55bn this year and are “much more important than oil”, he added.

Here is more from the FT.

*Unsettled*, by Steven E. Koonin

A few of you have asked me to review this book, sometimes presented as a clinching case for climate contrarianism.  I thought it was fine, but not a great revelation, and ultimately disappointing on one very major point of contention.  On the latter angle, on p.2 Koonin writes:

The net economic impact of human-induced climate change will be minimal through at least the end of this century.

That is presented as a big deal, and yes it would be.  But “minimal”?  The economist wishes to ask “how much.”  The more concrete discussion comes on pp.178-179, which looks at twenty studies (all or most of them bad), and reports they estimate that by 2100 global gdp is three percent less due to climate change, or perhaps the damages are smaller yet.  Those estimates are then graphed, and there is a bit of numerical analysis of what that means for growth rates working backwards.  There is not much more than that on the question, and no attempt to provide an independent estimate of the economic costs of global warming, or to tell us which might be the best study or what it might be missing.  Koonin seems more interested in discrediting the hypocritical or innumerate climate change researchers than finding out the best answer to the question of cost.

To be sure, this is all a useful corrective to those who think global warming will destroy the earth or create major existential risk.  I am happy to praise the book for that and for all of its other corrections of hysteria.

But I just don’t find the Koonin discussion of economic costs to be useful.  The best estimate I know estimates global welfare costs of six percent, with some poorer countries suffering losses of up to fifteen percent, and some of the colder regions gaining.  There is high uncertainty about average effects, so you also can debate what kind of risk premium can be considered.  (I have myself written about how climate change may induce stupid policy responses, thus perhaps boosting the costs further yet.)  You may or may not agree with those numbers, but the above-linked paper provides plenty of structure for considering the problem further, such as modeling migration and adjustment effects across different parts of the world.  The Koonin brief meta-survey does not, it simply tells you that the junky papers don’t have the numbers to justify the panic.

So in what sense is the Koonin book useful for furthering my understanding of my number one question of concern?  Of course not every book has to be written for me, but at the end of the day it didn’t cause me to update my views much at all.

Claims about Iceland

We find that people diagnosed outside of quarantine are 89% more infectious than those diagnosed while in quarantine, and infectiousness decreases as a function of the time spent in quarantine. Furthermore, we find that people of working age, 16-66 years old, are 47% more infectious than those outside that age range. Lastly, the transmission tree enables us to model the effect that given population prevalence of vaccination would have had on the third wave had they been administered before that time using several different strategies. We find that vaccinating in order of ascending age or uniformly at random would have prevented more infections per vaccination than vaccinating in order of descending age [emphasis added].

That is from a new paper by lots of people with Icelandic names, via Eric Topol.  This is not yet confirmed or general, but it does resurrect the idea of vaccinating many younger people first, due to their (possibly) greater ability to spread the virus.  Note also the data here are taken from Iceland’s third wave, which might further limit the generality of the result.

Wednesday assorted links