Six reasons why I don’t like IS-LM analysis

by  Tyler Cowen in

1. It suggests that you can shift one curve without the other moving as well.  In other words, it assumes that excess demands in the goods market are independent from excess demands in the money market.

2. The IS curve — which involves investment demand — uses the real rate of interest, r.  The LM curve — which involves money demand — uses the nominal rate of interest, i.  These two curves are then put on the same graph.  I have been told many times this can be done without contradiction; at best this is true only in the shortest of runs, when prices are not changing.

3. Everything in the model is flows, but stocks matter too.  No person in the model considers his or her intertemporal budget position.  You don’t have to believe in Barro’s Ricardian debt-equivalence theorem to be worried by this.

4. Coordination problems — which should be at the center of macro — are obscured by the aggregate apparatus.

5. The IS curve, drawn from investment demand, uses the long-term rate of interest.  The LM curve, drawn from money demand, uses short-term rates of interest.  Yet the relative movements of short and long rates remain a significant puzzle and do not follow the predicted relationship.

6. You see the curves — which remind you of supply and demand curves — and you wish to start manipulating them in the same manner.  See #1.

My (significant) concession: The model does fairly well predicting many economic phenomena in the short run.  But you could do better reading Arthur Marget on sophisticated versions of the quantity theory of money.  I hope to explore this point in more detail soon.

The future of the book trade?

by  Tyler Cowen in

With its snazzy new "Great Ideas" series released this month, Penguin Books hopes to provide an economical remedy for time-pressed readers in search of intellectual sustenance.

Each of the paperbacks costs $8.95 and offers readers a sampling of the world’s great non-fiction. For example, the Gibbon book is a slim 92-page selection called The Christians and the Fall of Rome. It presents Gibbon as sort of an intellectual tapas to be savored in one sitting.

Here is the full story.  Like it or not, I see the non-fiction sector as heading toward shorter and shorter books.  Can you do one hundred pages on monetary policy?  Get this:

Because "we want readers to be able to get close to the text," the books do not have introductions or prefaces, Penguin publisher Kathryn Court says. "It’s daunting. There are so many books and so little time."

Practice exam questions for macroeconomics

by  Tyler Cowen in

I hope my macro class has a good handle on these:

1. Which aspect of the macroeconomy does real business cycle theory find most difficult to explain?  Why?  What is the most convincing attempt to "save" RBC in the area you outline?  Does it work?

2. Let us say that the seasonal business cycles literature taught us something about traditional business cycles.  What might the policy implications be?  You could spin out several different scenarios, but focus on the most plausible one.

3. Assume that the expectations theory of the term structure of interest rates were correct.  Would this strengthen the case for monetary or for fiscal policy, and why?

4. Write your own exam question and answer it.  You will be graded on the quality of the question as well as your answer.  The submission of "Write your own exam question and answer it" would give you, for a philosophy class, an "A+", but for macroeconomics, a "C minus".

Department of Yikes

by  Tyler Cowen in

Two teams of federal and university scientists announced today that they had resurrected the 1918 influenza virus, the cause of one of history’s most deadly epidemics, and had found that unlike the viruses that caused more recent flu pandemics of 1957 and 1968, the 1918 virus was actually a bird flu that jumped directly to humans.

The work, being published in the journals Nature and Science, involved getting the complete genetic sequence of the 1918 virus, using techniques of molecular biology to synthesize it, and then using it to infect mice and human lung cells in a specially equipped, secure lab at the Centers for Disease Control and Prevention in Atlanta.

The findings, the scientists say, reveal a small number of genetic changes that may explain why the virus was so lethal. The work also confirms the legitimacy of worries about the bird flu viruses that are now emerging in Asia.

The new studies find that today’s bird flu viruses share some of the crucial genetic changes that occurred in the 1918 flu. The scientists suspect that with the 1918 flu, changes in just 25 to 30 out of about 4,400 amino acids in the viral proteins turned the virus into a killer. The bird flus, known as H5N1 viruses, have a few, but not all of those changes.

Here is the full story, which contains many other points of interest, including whether the sequencing should have been done in the first place.  In case you forgot, 1918 was the flu pandemic which killed 50 to 100 million people, and don’t think we are so much better protected in 2005.  Today I started writing my piece on what we should do about avian flu.

When do creators do their best work?

by  Tyler Cowen in

Randall Jarrell similarly observed that "[Wallace] Stevens did what no other American poet has ever done, what few poets have ever done: wrote some of his best and newest and strangest poems during the last year or two of a very long life."

In contrast:

[Jean-Luc] Godard has directed scores of movies in a career that continues today in its fifth decade, but there is a strong critical consensus that his most important single work is his first full-length movie, Breathless, which he made in 1960 at the age of 30.

Those two passages are from David W. Galenson’s forthcoming Old Masters and Young Geniuses: The Two Life Cycles of Artistic Creativity.  Here is a related working paper.  Here are many other interesting papers.

My question: Which economists have done extremely important work after the age of 50?  Have done their best work after 50?  After 40?  Comments are open, I welcome your suggestions but it is not easy…

Hissssssss

by  Alex Tabarrok in

Lots of evidence that the housing market is slowing; prices are not rising as quickly as in the past, inventory is building and perhaps most tellingly insiders are selling shares of home building firms at record pace.

Some analysts say that the share sales by home builders are reminiscent
of the heavy dumping of stock by technology company executives just
before the technology bubble burst in 2000. For that reason, the
staggering level of insider sales has analysts and investors wondering
if home builders see something menacing on the horizon, like a cooling
of the real estate market.

A Bush plan for avian flu

by  Tyler Cowen in

President Bush said today that he was working to prepare the United States for a possibly deadly outbreak of avian flu. He said he had weighed whether to quarantine parts of the country and also whether to employ the military for the difficult task of enforcing such a quarantine.

"It’s one thing to shut down your airplanes, it’s another thing to prevent people from coming in to get exposed to the avian flu," he said. Doing so, Mr. Bush said, might even involve using "a military that’s able to plan and move."

The president had already raised, in the wake of Hurricanes Katrina and Rita, the delicate question of giving the military a larger role in responding to domestic disasters. His comment today appeared to presage a concerted push to change laws that limit military activities in domestic affairs.

Mr. Bush said he knew that some governors, all of them commanders of their states’ National Guards, resented being told by Washington how to use their Guard forces.

"But Congress needs to take a look at circumstances that may need to vest the capacity of the president to move beyond that debate," Mr. Bush said. One such circumstance, he suggested, would be an avian flu outbreak. He said a president needed every available tool "to be able to deal with something this significant."

Here is the full story.  Here is the text of his remarks, with commentary from Glenn Reynolds.

I am hoping to write a longer piece on what we should do, but frankly Bush’s idea had not crossed my mind.  For a start, quarantines don’t usually work, especially in a large, diverse, and mobile country.  The Army would if anything spread the flu.  A list of better ideas would include well-functioning public health care systems at the micro-level, early warning protocols, and good decentralized, robust plans for communication and possibly vaccine or drug distribution.  Might the postal service be more important than the Army here?  How about the police department, and the training of people in the local emergency room?

Stockpiling Tamiflu is worthwhile in expected value terms, but many strains of avian flu are developing resistance; we should not put all our eggs in this basket.  We also should stockpile high-quality masks and antibiotics for secondary infections (often more dangerous than the flu itself), and more importantly have a good plan for distribution and dealing with extraordinary excess demand and possibly panic.  Let’s not ignore obvious questions like: "if the emergency room is jammed with contagious flu patients, where will other (non-flu) emergencies go?" 

A good plan should also make us less vulnerable to terrorist attacks, storms, and other large-scale disasters.  Robustness and some degree of redundancy are key.  You can’t centrally plan every facet of disaster response in advance; you need good institutions which are capable of improvising on the fly.  In the meantime, let’s have betting markets in whether a pandemic is headed our way; that would provide useful information.

Addendum: It is Bird Flu Awareness Week in the blogosphere, Silviu has the appropriate links.

How Columbia built up its economics department

by  Tyler Cowen in

Here is the story. One excerpt:

“Especially in a place like New York, there is a big temptation to go for assembling people who will be on Charlie Rose, get written up in The New Yorker,” says David Card, who’s credited with helping rejuvenate Berkeley’s economics department. “But that has nothing to do with younger people doing research”–the true measure of a top program.

Here is their home page and list of new arriving faculty.  Thanks to Craig Newmark for the pointer.

Underappreciated economists, a continuing series: Daniel Chen

by  Tyler Cowen in

Here is an incredibly interesting reading list, on the political economy of belief, courtesy of the young Daniel Chen.  Even better, here is one of his recent papers, check out the abstract:

Religious intensity as social insurance may explain why fiscal and social conservatives and fiscal and social liberals come hand-in-hand. We find evidence that religious groups with greater within-group charitable giving are more against the welfare state and more socially conservative. Libertarians (fiscal conservatives–social liberals) are more abundant than the religious left (fiscal liberals–social conservatives). The alliance reverses for members of a state church: social conservatives become fiscal liberals. Increases in church-state separation precede increases in the relationship between fiscal and social conservatism. The framework provides a novel explanation for religious history: as credit markets develop, elites gain access to alternative social insurance and legislate increasing church-state separation to create a constituency for lower taxes. This holds if religious voters exceed non-religious voters, otherwise, elites prefer less church-state separation in order to curb the secular left. This generates multiple equilibria where some countries sustain high church-state separation, high religiosity, and low welfare state, and vice versa. We use this framework to explain the changing nature of religious movements, from Social Gospel to the religious right, and why church-state separation arose in the US but not in many European countries.

Maybe this is not fully sound, but it is one of the most interesting papers I have read in years.  I have high hopes for the guy.

The FDA Tragedy

by  Alex Tabarrok in

Writing in the WSJ (Oct. 3), whose editors ought to know better, Cynthia Crossen says:

Only 70 years ago, American companies could legally sell poison in a
medicine bottle.

Obviously, no drug maker would knowingly kill its customers — the
free market would punish that kind of bad business. But a company
that inadvertently sold a drug resulting in multiple deaths faced no
legal penalties.

In 1937, however, the consequences of Americans’ unfettered right to
buy and sell medicine became disastrously clear. An antibacterial
syrup called Elixir Sulfanilamide killed at least 75 people, some of
them young children who had been suffering from nothing more serious
than a sore throat.

What a load of rot.  Here is a letter I sent to the WSJ:

Where did
Crossen get the bizarre idea that poisoining was not illegal 70 years ago?  It’s true that there was no federal law
against drug fraud but there was no federal law against rape either –
this did not mean that only 70 years ago rape was legal.  In fact, 
Massengil, the company that sold Elixir Sulfanilamide, was successfully
sued and punished under the common law of tort.

Dramatic, easy to see, tragedies like those caused by Elixir
Sulfanilamide and Thalidomide encouraged the naive to demand an
expansion of the FDA’s powers.  The less easily seen tragedy has been drug delay, fewer new drugs, and higher prices.  Careful observers
– see FDAReview.org for some evidence – estimate that the costs of the latter tragedy
far exceed the former.  The FDA has put the nail in the coffin of more
than just the "pain and beauty boys."