Results for “solow” 86 found
Aaron Hedlund on Piketty
He writes me in an email:
I feel comfortable saying that his extensive documentation of inequality– it’s trends, composition, etc.– is a big contribution that should drive future research.
…the thesis that r > g is the explanation for inequality or an ominous predictor of future inequality is, to be blunt, ridiculous.
1) Consider the most basic economic growth model: the Solow model where households arbitrarily follow a constant savings rate rule. In that model, the long-run growth rate equals the rate of technological progress, and the rate of return to capital is constant and completely independent of that growth rate. Therefore, you could have r > g, r = g, or r < g, simply because there is NO relationship. In that model, the capital/output ratio is stable in the long-run, again regardless of what r is relative to g.
We could beef the model up a bit by allowing households to actively choose how much to save (rather than impose a constant savings rate rule on them). In that model, the economy will also get to a point with stable long-term growth where the growth rate is determined purely by technological progress. In that model under log utility, 1 + r = (1 + g)*(1 + rate of time preference). As long as people are at all impatient, the implication is r > g. Therefore, the economy will have r > g, stable growth, and a stable K/Y ratio.
The flaw with both of these models, of course, is that they are representative household models where there is no inequality. Therefore, we can go a step further and add uninsurable risk to the model (whether that be health risk, earnings risk, or any other important source of economic risk). In *these* models, households also engage in precautionary savings, so in equilibrium r is lower than it is in the rep agent models. In fact, the greater amount of risk, the more wealth inequality and the SMALLER the gap between r and g.
2) Another huge fallacy is to translate “r > g” as “the return to capital is greater than the rate of return to labor.” The notion “rate of return” indicates an intertemporal dimension: for example, if I invest $1, how much do I get back in return a year later? The growth rate of the economy is not the return to labor. In fact, the “return” to labor is static: I give up x units of time in exchange for y dollars.
The RELEVANT comparison would be to compare the rate of return on capital to the rate of return on investing in human capital (ie you go to college and then reap labor market rewards in the future). The rate of return on human capital is most definitely not just “g.” In fact, the college premium is at an all-time high, which suggests that the rate of return on human capital is quite high and very possibly higher than the rate of return on physical capital.
3) The r > g –> inequality thesis is also based on ignoring the fact that r and g are both determined in equilibrium. Here’s what I mean: it is bad economics to say “Look, r > g, therefore IF people behave in such and such manner, their wealth will grow at a higher rate than g indefinitely.” The reason it is bad economics is because you can’t take the “r > g” as given and THEN impose whatever behavioral assumptions you want. The fact is, people’s behavior affects r and g. In the heterogeneous models I mentioned above, r > g, inequality is STABLE, and the behavior of households is determined by their desire to maximize utility. If I were to go to the model and arbitrarily force the households to behave differently, then the equilibrium r would change.
Here is Hedlund’s home page.
Assorted links
1. Do customer ratings of restaurants award authenticity for its own sake? And negative reviews as a way of coping with service-related trauma.
4. How economically geared up is Russia for war?
5. UK housing prices are looking scary.
6. Do not ban chocolate milk. And claims about cat cognition (speculative).
7. Robert Solow’s guide to Piketty. And Kling on Solow on Piketty is completely correct.
“If Obamacare reduces labor supply, will it raise wages?”
That is Greg Mankiw’s post title, Greg writes:
In a couple of recent articles written by smart economists, I have read the following claim: CBO says the incentives in the Affordable Care Act will reduce labor supply. If it does, then real wages will increase.
That sounds like reasonable, textbook economics. But I don’t think it is true. The problem is that the logic is entirely partial equilibrium. It is holding everything else constant. But that is surely not right in the long run. Lower wages mean lower income, which means lower saving, which means lower investment, which means a lower capital stock, which means lower productivity, which means lower labor demand.
Perhaps the easiest way to think about this issue is in the context of a Solow growth model. In the Solow model, the steady-state real wage is a function of technology, the saving rate, and the population growth rate. If labor supply per person suddenly falls by, say, 2 percent and stays there, the real wage will rise initially, but it will eventually return to its former level. Steady-state income per person falls by the full 2 percent.
One effect that might occur is a change in the composition of labor income. If the Act reduces labor supply primarily among the low-skilled, while not having that effect among the highly-skilled, then we might get a change in the relative wages of skilled and unskilled. But an overall increase in real wages seems unlikely.
In an increasing returns to scale model, of course, this problem becomes worse.
Assorted links
1. Quora forum on unusual names and surnames. I recently spent time with a very interesting man, a philosopher in fact, named Johnny Anomaly. And a Quora thread on the future of education.
2. Chinese fiscal policy, Buddha style. And tractor square dancing. And more Johnny-come-latelys come to Borgen.
4. Causal effect or difference in type?
5. And questions that are rarely asked (can I tickle myself if I swap bodies with another person?).
6. Solow and Mankiw go back and forth about inequality.
7. The Medical Actor (markets in everything).
Chinese translation of *Modern Principles*
There is now a Chinese translation out of Modern Principles, our Principles text.
Information (in Chinese) on the macro text is here. Information about the micro text is here. You will note that China is a key example in our discussion of catch-up Solow growth, a topic neglected by many other leading Principles textbooks.
For basic information on the English language version of the book, see here.
The Ideological Migration of the Economics Laureates
That work fills up the latest issue of Econ Journal Watch.
This issue of Econ Journal Watch (download, .pdf) is given over to a special project that considers such changes as may have occurred among the 71 individuals who, through 2012, won the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel.
Ideological profiles of all 71 laureates make up the bulk of the issue. The 71 profiles are bundled in a single large document that is equipped with handy links for internal navigation.
Ideological change is interpreted in terms of either growing more classical liberal or growing less classical liberal. Daniel Klein leads the project. In his overview essay he explains the investigation, its many limitations, and the findings.
…David Colander served as overseeing referee, and he reports on the project.
Twelve of the laureates replied to a questionnaire requesting that they discuss their ideological outlooks at different times in their lives. The twelve who replied are Kenneth Arrow, Ronald Coase, Peter Diamond, Eric Maskin, James Mirrlees, Roger Myerson, Edward Prescott, Thomas Schelling, William Sharpe, Vernon Smith, Robert Solow, and Michael Spence. Their responses are included in their profiles, and they are also collected in a standalone appendix.
This is path-breaking work in intellectual history, the best contribution to the history of modern economics in recent memory, fascinating as intellectual biography and autobiography, and it should be snapped up immediately by some enterprising publisher.
Why is there no Milton Friedman today?
You will find this question discussed in a symposium at Econ Journal Watch, co-sponsored by the Mercatus Center. Contributors include Richard Epstein, David R. Henderson, Richard Posner, Daniel Houser, James K. Galbraith, Sam Peltzman, and Robert Solow, among other notables. My own contribution you will find here, I start with these points:
If I approach this question from a more general angle of cultural history, I find the diminution of superstars in particular areas not very surprising. As early as the 18th century, David Hume (1742, 135-137) and other writers in the Scottish tradition suggested that, in a given field, the presence of superstars eventually would diminish (Cowen 1998, 75-76). New creators would do tweaks at the margin, but once the fundamental contributions have been made superstars decline in their relative luster.
In the world of popular music I find that no creators in the last twenty-five years have attained the iconic status of the Beatles, the Rolling Stones, Bob Dylan, or Michael Jackson. At the same time, it is quite plausible to believe there are as many or more good songs on the radio today as back then. American artists seem to have peaked in enduring iconic value with Andy Warhol and Jasper Johns and Roy Lichtenstein, mostly dating from the 1960s. In technical economics, I see a peak with Paul Samuelson and Kenneth Arrow and some of the core developments in game theory. Since then there are fewer iconic figures being generated in this area of research, even though there are plenty of accomplished papers being published.
The claim is not that progress stops, but rather its most visible and most iconic manifestations in particular individuals seem to have peak periods followed by declines in any such manifestation.
Most Popular MR Posts from 2012
Here are some of the most popular MR posts as measured by page views from 2012:
1. Introducing Marginal Revolution University – we asked you to spread the word about MRUniversity and you did making this the most viewed page this year. Thanks!
2. Krugman’s Response to Alex and the original Krugman v. Krugman.
3. Racism by Political Party. This one showed up on television.
4. Robert Solow on Hayek and Friedman and MPS. Tyler should let loose more often.
5. Firefighters Don’t Fight Fires. A graph is worth a thousand words.
6. A Bet is a Tax on Bullshit. I don’t think the scheme I outlined is quite right but I worked for a long time on the final paragraph and I was pleased that it was widely quoted.
7. Why economic mobility measures are overrated. Lots of meat in this post and in Tyler’s related posts What does the inequality-immobility link mean? and Krugman on income mobility and my Stasis, Churn and Growth.
8. Debtor’s Prison for Failure to Pay for Your Own Trial. An issue that should be more widely reported.
9. How savage has European austerity (spending cuts) been? Not that savage.
10. The Google Trolley Problem. A famous philosophical puzzle now must be answered in practice.
Among other meaty posts which were highly linked too were Tyler’s posts Why Old Keynesianism is looking worse these days; A simple theory for why so many smart young people go into finance, law and consulting and favorite non-fiction books of 2012. Also on the list were my posts Noble Matching and one of my favorites, Patent Theory on the Back of a Napkin.
A good year as we move towards MR’s tenth.
Does corruption harm economic growth?
Chris Blattman says maybe not. Excerpt:
The reasons that corruption should hurt growth are so persuasive that economists have been pretty surprised not to find much evidence. One team reviewed 41 different cross-country studies of corruption and development. Two-thirds of the studies don’t even find a negative correlation. Cross-country studies have mostly bad data and empirics, so we should not rest here. But Jacob Svensson has a nice overview of the broader evidence and draws the same conclusion: there’s not much to show that corruption reduces growth on net.
I worry more about corruption than those remarks would indicate, though I agree with Chris that the issue isn’t nearly as important as stopping a civil war.
First, I see a strong correlation between high levels of per capita income and low corruption. (I don’t worry about the lack of correlation with growth rates because, for one thing, poor countries, even many corrupt ones, may grow more rapidly for reasons related to the Solow model.) The causality here is hard to sort out, but there is plenty of micro evidence that corruption harms prosperity; it’s not just an aesthetic taste of wealthy people to limit corruption, the way they might buy nice interior drapes.
Furthermore, the correct corruption/poverty model may have multiple equilibria, depending on expectations. In that setting, making your country “look clean” may improve outcomes by shifting the economy up to better equilibria, even if lower corruption isn’t a direct cause of greater prosperity. There is worse advice than “Act like a rich country, and in the meantime you may become one,” at least provided you do not take this as liberty to spend above your means or to slack off with the work hours.
Second, even high levels of wealth will in some regards bring more corruption, especially as a country moves out of “fourth world” status or other forms of extreme poverty. Corruption very often rises with complexity and so along some margins it is correlated with wealth levels too. Similarly, we find that economic growth tends to bring more sexual harassment in the workplace, if only because more women are working outside the home. Yet it is still correct to think of the harassment as a very real negative, as is corruption.
In any case, this week’s new videos are up at MRU and they cover the topic of corruption, go over and take a look. Here is one video on the causal question about corruption and growth. Here is our video on the causes and predictors of corruption, historically speaking. Here is our video on how corruption can trap economies.
Cyclically adjusted measures of the stance of fiscal policy
These cyclically adjusted measures are useful information and should not be discarded, but I don’t wish to use them as the sole or main or dominant source of information about the stance of fiscal policy. Here are a few reasons why:
1. The cyclically adjusted measure relies on a measure of potential output. That is not a big problem when potential output is clear, but in a lot of today’s cases the very debate is over the size of the output gap.
Let’s take the current UK. If the output problems all resulted from supply and productivity failures (not the case, just a hypothetical), the numbers would indicate that the current fiscal policy stance is quite expansionary with high budget deficits.
Alternatively, if you take a more Keynesian view, the potential output gap is much larger and, cyclically adjusted, the stance of fiscal policy looks much more contractionary by the cyclically adjusted measure.
Very often the key question is something like the following: how much are the current UK problems demand-side and how much supply-side? I see economists addressing this question by invoking cyclically-adjusted measures of the stance of fiscal policy.
This is has a significant element of circularity. If you assumed a big output gap to begin with, the demand-side crunch is measured as very large. If you assumed a very small output gap to begin with, the measure gives you a very small demand-side crunch in this case.
Maybe you have seven other reasons for believing it was a large demand-side crunch, but that doesn’t make this a good measure. Your results depend very much on the assumption — about potential output and thus demand — which you put into it.
Furthermore this point is far from transparent yet I don’t exactly see proponents of the cyclically adjusted measure tripping over themselves to remind us of it.
(As an aside, the IMF, before this issue became so politicized, expressed precisely this reservation about cyclically adjusted measures and in fact did not appear to favor them as a general approach, while admitting they do provide some interesting information.)
2. There is a big difference between two cases: “the government drove an AD collapse by massive net spending cuts” and “big problems happened and government didn’t fill the gap nearly enough.” These cases have different economic and political causes, may involve different remedies, and very likely will yield different multipliers, both for initial effects and when it comes to potential remedies. I want my metrics for the stance of fiscal policy, and my commentators on fiscal policy, to disaggregate them, rather than to blur them together. Cyclically adjusted measures blur them together. There simply is not one big multiplier for “austerity” as a general concept.
3.The cyclically adjusted measures are an abstraction, and furthermore an abstraction based on estimating a modal quantity, namely potential output.
To give an analogy, I get uneasy when I read sentences such as “inequality caused X.” “Inequality” didn’t cause anything. Inequality is a statistical residue of some other actual processes. It is better to say what caused X (say “the rage and poverty of inner city residents”) and, if relevant, connect this to inequality as well. Except that the cyclically adjusted deficit is an even more problematic causal concept than “inequality” because it relies on measurement of a modal, namely potential output.
The word “austerity” is a political concept and it does not belong in rigorous economics. Let’s just say what happened. Note the simple causal language in my point #2.
4. The mainstream literature on fiscal policy, starting at least with Blinder and Solow (1973), slots “G” and “Gdot” into the model as the measure of fiscal policy. Paul Krugman pieces do this too, as do hundreds of other economists. Models are there to give us some discipline, so let’s use that discipline. Why is it that so few of these classic models used the cyclically adjusted deficit measure to express the stance of fiscal policy? Because many of those economists know that, in the causal sense, that is a whacky measure and best used with caution. It simply is not “the standard measure of the stance of fiscal policy.”
5. These days there is a sudden near-moratorium on citing open economy models of fiscal policy in smallish open economies with floating exchange rates (it may not matter nearly as much as you think for AD). This should be incorporated into the discussion more, yet oddly it suffers from relative neglect. Note also that a) the UK hasn’t the whole time been at the zero bound, and b) you still can depreciate your currency at the zero bound.
6. Let me sum up where we (at least many of us) agree. British policy should have been much more countercyclical than it was and indeed I have thought this from the beginning. But I still see many commentators, writing on British fiscal policy, giving us an exaggerated sense of its potency, an exaggerated sense of the causes of the British downturn in the AD/fiscal policy direction, and cloaking all of this under non-transparent terminology, while keeping the various important qualifications rather silent.
I have further points to make about UK austerity in particular, and the Wren-Lewis blog post, but I’ll save those up for another day. On some details of the UK economy, Matt’s simple treatment makes a lot of sense and he is also (correctly) a major proponent of the relevance of AD analysis.
New Videos at MRU
Lots of new material at MRU this week. In earlier videos we look at the relatively direct effect of geography on development, e.g. factors such as malaria and access to the coast. In videos released today we look at how geography can influence growth indirectly through the choice of institutions. We also provide background material on measuring GDP and PPP, using the Rule of 70, and we prepare the way for next week’s more technical videos on the Solow model with a brief, non-technical review of the Solow model.
Marginal Revolution University has been Banned in Minnesota!
Minnesota has banned MRUniversity and other online education services from providing content to Minnesota residents. This seems like a joke but it is not from The Onion. Coursera, one of the larger players in this field, has rewritten its terms of service to prohibit Minnesota residents from taking its courses:
Coursera has been informed by the Minnesota Office of Higher Education that under Minnesota Statutes (136A.61 to 136A.71), a university cannot offer online courses to Minnesota residents unless the university has received authorization from the State of Minnesota to do so. If you are a resident of Minnesota, you agree that either (1) you will not take courses on Coursera, or (2) for each class that you take, the majority of work you do for the class will be done from outside the State of Minnesota.
Tyler and I wish to be perfectly clear: unlike Coursera, we will not shut down MRU to the residents of Minnesota. We are prepared to defend our rights under the First Amendment to teach the good people of Minnesota all about the Solow Model, water policy in Africa, and the economics of garlic–even if we have to do so from a Minnesota jail!
MRU’s First Course: Development Economics
The first course from Marginal Revolution University is Development Economics and it will be taught by Tyler Cowen and myself. Development Economics will cover the sources of economic growth including geography, education, finance, and institutions. We will cover theories like the Solow and O-ring models and we will cover the empirical data on development and trade, foreign aid, industrial policy, and corruption. Development Economics will include not just theory but a wealth of historical and factual information on specific countries and topics, everything from watermelon scale economies and the clove monopoly to water privatization in Buenos Aires and cholera in Haiti. A special section in this round will examine India. There are no prerequisites for this course but neither is it dumbed down. We think there will be material in Development Economics that will be of interest to high school students in the United States and Bangladesh and also to PhDs in economics, even to those who specialize in this field.
Development Economics covers all the major topics of a sit-down class but because we have built it to be on online course from the ground up–no videos of us talking to a classroom–it will take less than half of the time of a sit-down class, plus no need to search for parking!
Our motto at MRU is “Learn, Teach, Share” so we will be inviting the world not just to learn but also to teach and share their knowledge. GMU is a very entrepreneurial university and we think we can be a world leader in online education.
Please do go to MRU and submit your email to be notified about our start date and registration which will allow you to contribute in our forums and online events. Development Economics is free to the world.
Stay tuned for more!
Raghu Rajan polarizes with his essay
Greg Mankiw calls it wise, John Cochrane likes it, David Brooks likes it, and I liked it, but other people are upset or less impressed. Karl Smith flips out. Adam Ozimek points out one misunderstanding of the piece, not the only one I might add. The essay itself is here.
Ezra Klein argues that Rajan should not have presented long-term vs. short-term thinking as either/or (for more on the “false choices” view, read here). To be sure, some policies such as immigration reform help both the short and long-term problems. Still, any given dollar must be spent somehow and “the stimulus model” and “the long-term investment model” are indeed competing visions for the allocation of resources. Think of it as having to choose a rate of discount for evaluating expenditures. I say choose the low discount rate, which of course still may justify those forms of stimulus with long-term payoffs. Ezra also notes that long-term investments may require short-term sweeteners to pass, but I see that as an illustration of Rajan’s point, namely that we are not very interested in the long run for its own sake.
Once the problem is presented in sufficiently precise microeconomic language, we can see where the real choice has to be made, namely at the level of the discount rate.
Rajan wants to spend money as an investment model would suggest. There is an “investment drought,” including from our government, and the growth-inducing parts of discretionary spending are coming under increasing pressure. AD stimulus is/would be less effective with each passing day. Raghu’s case on this point is strong, maybe you don’t agree but I don’t see that the critics have grasped it with sufficient depth.
In the past, in other contexts, Karl Smith and Matt Yglesias have defended “muddle through” and short-term thinking in policy. I see the public choice literature — both theoretically and empirically — as suggesting political discount rates to be far too high. Climate change is Exhibit A, but other examples are numerous.
Krugman is upset at Rajan, but where to begin? He misunderstands Rajan on structural unemployment, for a start see Adam’s post of correction listed above. (In general Krugman has written and rewritten more or less the same post against structural unemployment at least a dozen times without responding to, or even presenting, a strong version of the argument. It’s an intellectual Turing test fail, and maybe I’ll cover this some other time.)
From Krugman, there is more:
Most important, as Karl Smith says, is the fact that Rajan’s injunction that we focus on long-run growth isn’t responsible — it’s deeply feckless. The truth is that we don’t know much about promoting long-run growth, whereas we know a lot about promoting short-run recovery — which is a very different problem. In practice, stroking your chin and talking about the long run is mainly an excuse for doing nothing.
I would find it more useful if Krugman simply stated his preferred discount rate, and whether he wishes to count highly uncertain results for nothing (I don’t think so).
In any case, Krugman gets it backwards. Any Martian visiting the economics blogosphere, or for that matter Krugman’s blog, could tell you that most of micro is a more or less manageable topic, whereas macro induces economists to start thinking of each other as idiots and fools.
More substantively, we know a fair amount about promoting growth, for instance read Alex’s The Innovation Renaissance, much of which has been endorsed by left-wing thinkers too. Read the new Acemoglu and Robinson book. Even Robin Wells thinks we know how to promote long-run growth.
One might try to draw a distinction between “once and for all” changes in output and permanent boosts to the rate of economic growth, a’la Solow. In this context, that won’t wash, even if it is otherwise a defensible distinction (debatable). If we could get many “one time” gains today, for five or ten years running, that would be excellent and would boost growth and create jobs, whether or not we would be boosting the rate of innovation twenty years out. Krugman in other contexts argues for such gains all the time and with great vehemence and certainty, not with the faux temporary agnosticism exhibited above.
Finally, Rajan is a case for testing Krugman’s oft-stated view that we should listen most seriously to those who have made good predictions in the past. Rajan was probably the best, more accurate, most serious, most detailed, and most non-Chicken Little predictor of the financial crisis. You might think that means he gets listened to today, or given the benefit of the doubt on interpretation, but apparently not.