Results for “zero marginal product”
119 found

Can Currency Competition Work?

There is a new model and NBER paper to come from Jesus Fernandez-Villaverde and Daniel Sanches (pdf, ungated), here is the abstract:

Can competition among privately issued fiat currencies such as Bitcoin or Ethereum work? Only sometimes. To show this, we build a model of competition among privately issued at currencies. We modify the current workhorse of monetary economics, the Lagos-Wright environment, by including entrepreneurs who can issue their own fiat currencies in order to maximize their utility. Otherwise, the model is standard. We show that there exists an equilibrium in which price stability is consistent with competing private monies, but also that there exists a continuum of equilibrium trajectories with the property that the value of private currencies monotonically converges to zero. These latter equilibria disappear, however, when we introduce productive capital. We also investigate the properties of hybrid monetary arrangements with private and government monies, of automata issuing money, and the role of network effects.

I would stress a few points.  First, the world is going to have some form of currency competition whether one likes it or not.  That is already the case today, so these are very real questions, not just thought games for libertarians.

Second, the Bitcoin and broader cryptocurrency experience indicate that the marginal cost of issuing a new private currency is well above zero, contra some of the literature from the 1970s, which viewed the enterprise in terms of printing money and paying only for the additional paper.  Bitcoin can be interpreted as a commodity currency of sorts, where the relevant expenditures are on codebreaking and electricity, rather than digging up gold from the ground.  Once it is focal enough, it might be able to provide some version of rough price stability in terms of its unit.

Third, if your government is halfway legitimate and not broke, its currency is likely to be a dominant winner in these forms of currency competition, especially to the extent that currency is supported by the fiscal authority.  In this sense it is almost impossible to get away from a legitimate or even semi-legitimate government-issued currency.

What was 19th and early 20th century TFP? Which was America’s most inventive decade?

There is a new paper (pdf) on this question by Bakker, Krafts, and Woltjer, here is the abstract:

We present new estimates of TFP growth at the sectoral level and an amount of sectoral contributions to overall productivity growth.  We improve on Kendrick (1961) in several ways including expanding the coverage of sectors, extending estimates to 1941, and better accounting for labor quality.  The results have important implications including that the pattern of productivity growth was generally ‘yeasty’ rather than ‘mushroomy’, that the 1930s did not experience the fastest TFP growth of the 20th century, and that the role of electricity as a general purpose technology does not explain the ‘yeastiness’ of manufacturing in the 1920s.

They instead suggest that TFP growth is rising throughout the 1920s through the 1960s, a view which I cannot quite agree with.  I view the 1960s as a time when previous ideas spread widely, rather than the key years of invention.

My strictly intuitive, historical guess is that TFP growth peaked in the 1890-1930 period, give or take.

More generally, the TFP concept is most useful, and most exact, when TFP growth is low rather than high.  The bigger TFP growth might be, the more you have to worry about unmeasured changes in labor quality, and also worry about what is “technical progress embodied in capital goods” as opposed to “sheer accumulation.”  When there is less progress, these measurement issues are smaller too.

I am most skeptical of TFP estimates for China, even if you believe the underlying statistics.  Compared to “the global frontier,” TFP growth for China has been pretty close to zero, for centuries.  Compared to “the frontier within China”…er…Chinese TFP growth and “embodied accumulation of foreign ideas through savings and investment” become pretty much the same thing.  The distinction theory was trying to create then has been abolished.

So I’m not convinced by the results of this paper, but they are a useful corrective to excess certainty about Alexander Field and the previous view that the peak of American TFP was the 1930s.

In any case, thumbs up to any paper which uses the word “yeasty.”

Do Tinder and related services increase assortative mating?

Under one model, Tinder teaches you the joys of tussling with those from “the other side of the tracks,” and pulls you away from marrying a fellow Ph.d. — “once you’ve tried Mack, you’ll never go back.”

My intuition differs.  You use Tinder in bars, venues, and neighborhoods you have chosen.  So you end up tussling with, or mating with, or just chatting with, the more attractive members of your own preferred socioeconomic group.  If your group wasn’t on average so sexy to begin with, well at least at the top end it just got a big upgrade in terms of your actual access to attractiveness.  So on net the high socioeconomic groups become sexier, at least for those “at the top” with the most choice.

(I am assuming by the way that male photos can to some extent signal status, income, and education, and not just looks; furthermore the male follow-up can demonstrate this readily.  And many “connection” services post this information in one form or another as part of the profile.  If need be, in general equilibrium bars can adjust their exclusiveness levels to match better to a world-with-Tinder, so that bar patrons are not lured into socioeconomically mistaken “honey pot” marriages.)

Most of all, Tinder gets you out more.  You sample more people, even if you don’t end up meeting them through the Tinder app itself.  Going to a bar or public space is a better way to spend time than before, and that draws others out too.  That’s right, “thick market externalities.”  The resulting extra meetings  tend to favor assortative mating, just compare such plenitude to a corner solution where you meet only one potential spouse your entire life, namely the proverbial girl next door.

Put it this way: George Clooney or a Silicon Valley billionaire can do better — especially better, compared to others — choosing from 500 people than from five.  He (she) has a very good chance of getting his (her) absolute top favorite pick, or close to it.  The local milkman also does better from a larger sample size, if only because of match and compatibility issues, but can’t expect to move up so much and of course the pool as a whole can’t “move up” at all.  (If you wish, break this down into a positive-sum compatibility component and a competitive zero-sum component; unlike Clooney the milkman may not gain on the latter.)

Finally, Tinder may make it easier for married people to find casual sex, again if they have the right qualifications.  Therefore those marrieds may, earlier on, decide to choose a spouse on the grounds of IQ and education, again boosting assortative mating in terms of those features.

In sum, I expect Tinder to boost assortative mating, at least at the top end of the distribution in terms of IQ and education.

And please note, I suspect this increase in assortative mating is a good thing.  The abilities of top achievers have a disproportionate impact on the quality of our lives, due to innovation being a public good.

In any case, file under speculative.

match

Addendum: An interesting twist on the model is to assume that men have some willingness to marry down in terms of education, in return for beauty or other forms of household production, but women do not.  An increase in the total sampling of potential partners therefore boosts the marriage prospects of very beautiful women, at the expense of less beautiful women of a given level of educational attainment.  In percentage terms, very beautiful women of decent but not extraordinary educational achievement gain the most.  Men who are indifferent to such forms of female beauty end up with the smartest children.

Second addendum: Yesterday brought an ongoing twitter exchange on these issues, you might start with tweets by @ninjaeconomics and @modestproposal.

What’s the natural rate of interest?

Peter Olson and David Wessel write:

The natural rate of interest, also called the long-run equilibrium interest rate or neutral real rate, is the rate that would keep the economy operating at full employment and stable inflation.

You’ll find comparable statements from Paul Krugman, and here is the underlying Laubach and Williams paper, and more recently and ungated here (pdf).  Here are a variety of Brookings presentations.

Personally, I get nervous when I read about natural rates of interest, although I accept the core conclusion that currently low interest rates are not mainly the result of Fed policy.  I also find all this talk of natural rates of interest…historically strange.  A few points:

1. David Davidson and Knut Wicksell debated the natural rate of interest concept very early in the twentieth century, in Swedish I might add (see Carl Uhr’s books on Davidson and Wicksell).  Most people believe Davidson won those debates and even Wicksell seemed to concede.  Whether a given rate of interest both maintains full employment and stable inflation depends on the rate of productivity growth, for one thing.  It can be that no single rate of interest can perform both functions.

2. Keynes devoted a great deal of effort to knocking down the natural rate of interest concept (pdf), which he viewed as unforgivably Austrian.  He made the simple point — endorsed by modern Keynesians in other contexts — that the intersection with liquidity preferences at the margin shapes rates of interest, and thus there could be multiple natural rates of interest.  He also argued that in many settings there was no rate of interest whatsoever that would maintain capitalist stability.

3. In postwar economics, the Keynesians worked to keep natural rates of interest concepts out of mainstream macroeconomics.  I read Tobin as very much along the lines of Keynes.  Here is material on Hicks, Hansen, and Modigliani (pdf).

4. As Scott Sumner has pointed out, the older natural rate of interest used to truly be about price stability.  Nowadays that has morphed into “two percent inflation a year.”  Yes a definition can be changed, but still I find that intellectual maneuver strange and it implicitly suggests there may be multiple natural rates of interest; neither “zero” nor “two” is a special number.  There is also a blurring between the rate of inflation, the increase in the rate of inflation, the expected rate of price inflation, and so on.

5. Milton Friedman warned (pdf) not to assign too much importance to interest rates when thinking about monetary transmission.  On pp.10-11 he expresses his reservations about the natural rate of interest concept, which he calls the “natural” rate of interest with quotation marks:

What if the monetary authority chose the “natural” rate — either of interest or unemployment — as its target?  One problem is that it cannot know what the “natural” rate is.  Unfortunately, we have as yet devised no methods to estimate accurately and readily the natural rate of either interest or unemployment.  And the “natural” rate will itself change from time to time.  But the basic problem is that even if the monetary authority knew the “natural” rate, and attempted to peg the market rate at that level, it would not be led to a determinate policy. The “market” rate will vary from the natural rate for all sorts of reasons other than monetary policy.  If the monetary authority responds to these variations, it will set in train longer term effects that will make any monetary growth path it follows ultimately consistent with the rule of policy. The actual course of monetary growth will be analogous to a random walk, buffeted this way and that by the forces that produce temporary departures of the market rate from the natural rate.

There is still wisdom in those words.  You will note that in contrast Michael Woodford has worked to make interest rates more central to the discussion (pdf), and he is one reason why the natural rate of interest concept has made a comeback.

6. When Sraffa debated Hayek and argued the natural rate of interest was not such a meaningful concept, it seems Sraffa won.  Empirically, this Hamilton, Hatzius, Harrison, and West paper shows the natural rate can indeed be all over the place.  Here’s Carola Binder: “The more commonly reported 90% or 95% confidence interval would of course be even wider, and would certainly include both 0% and 6% in 2000.”

7. I sometimes read these days that the “natural [real] rate of interest” consistent with full employment is negative.  To me that makes no sense in a world with positive economic growth and a positive marginal productivity of capital.  It might make sense in 1942 Stalingrad, where the rate of growth was mostly negative.

Of course economic theory can change, and if the idea of a natural rate of interest makes a deserved comeback we should not oppose that development per se.  But I don’t see that these earlier conceptual objections have been rebutted, rather there is simply now a Kalman filter procedure for coming up with a number, combined with the triumph of empiricism, and in some quarters the desire to rebut the more extreme critics of the Fed.

I view the Laubach and Williams work as a highly useful “check” on the estimates of future rates of interest as contained in market prices.  (The market in fact does not seem to be crazy, relative to the model.)  But what macro properties will that likely future low interest rate world have, natural or otherwise?  There we do not know, and you will note that forecasts of inflation dynamics have not exactly been stellar, nor were most 2006 forecasts of future employment prescient.

I doubt these procedures are coming up with a “the natural rate of interest” in a meaningful form.  Or alternatively, look to Woodfordesque definitions, something like “what the rate of interest would be if prices were flexible.”  That too is a kind of (modal) forecast of interest rates, let’s not use the historical connotations of the natural rate of interest concept to smuggle in forecasts of prices and employment as well.

In any case, this is an interesting case study of how weak or previously rebutted ideas can work their way back into economics.  I don’t object to what most of the people working on this right now actually are trying to say.  Yet I see the use of the term acquiring a life of its own, and as it is morphing into common usage some appropriately modest claims are taking on an awful lot of baggage from the historical connotations of the term.  We’ve had the term “interest rate forecasting” for a while now, so let’s bring that one back into prominence.  It’s much clearer about what we are actually justified in trying to do.

I worry about the carry trade

Remember, in a global economy with multiple currencies, or an economy with lots of price variation, the notion of a single “real interest rate” is tricky.  The standard Fisherian story implies real interest rate near-neutrality across a wide set of expected monetary policy decisions.  Say expected inflation goes up, the nominal interest rate goes up, and the real rate stays constant, except for a small liquidity effect.

But that story will not apply across the board.  If, for instance, you live and consume in Jakarta, and you do not hold a PPP theory of the exchange rate, as indeed you should not, well, borrowing in dollars just got more expensive in real terms (with complicated qualifiers depending on forward rates which in reality don’t predict future currency movements so well).  Or if the Fed lowers nominal rates, your real borrowing rate goes down, maybe by more or less the same percentage amount as the nominal rate went down for the Americans.

And if those Indonesians are optimistic about the performance of their own currency vis-a-vis the U.S. dollar, crikey! — their current real interest rates from dollar borrowing appear to be very low indeed.  And if we are considering the individuals who hold disproportionate shares of non-USD currencies, almost by definition they are overly optimistic about the non-USD currencies.

And there are yet further complications which the nice weather today prevents me from outlining (what if those Indonesians are the marginal investors and they push around the market price for the Americans?)

All of which makes the Fed’s job much tougher.  Here is the latest from Bloomberg:

Since the 2008 financial crisis, companies across emerging markets have been borrowing dollars and converting them into local currencies as part of a massive carry trade. This practice has helped U.S. dollar shadow banking go global as the effects of near-zero U.S. interest rates seep into all corners of the world economy.

That’s the main finding of a new report released Thursday by the Bank for International Settlements, an institution in Basel, Switzerland, known as the central bank for central banks.

The paper, co-authored by Valentina Bruno, a finance professor at American University, and BIS Economic Adviser and Head of Research Hyun Song Shin, serves as a follow-up to a report released by the bank in January that found firms outside the U.S. have borrowed $9 trillion in U.S. dollars, up from $6 trillion before the global financial crisis.

To be sure, we do not know how harmful these practices might be, or not.  Here is FT coverage of the same:

By doing so companies become shadow banks, financial intermediaries moving dollars into local economies. Note, manufacturers do not have to explicitly act like hedge fund managers. Simply depositing funds with a local bank will help it to extend credit to other customers, while buying local commercial paper provides funds to domestic businesses.

The realisation prompts further questions. If it becomes more expensive to borrow in dollars, because say China fears prompt less dollar lending, will the corporate carry trade stop? Will it matter if it does?

I simply wish to reiterate that, no matter how many times commentators cite the low rate of price inflation, there are risks on both sides of the Fed’s forthcoming monetary policy decision.

Here is my much earlier post on monetary policy and the carry trade.  Beware the too-rapid acceptance of the strict Fisherian equation!  Once again, we do not live in a representative agent world and furthermore the multiplicity of agents speak a variety of languages and use a variety of currencies.

My International Trade reading list for Fall 2015

This is quite long, so it goes under the fold…class starts tomorrow night!


Books: Jacob Viner, Studies in the Theory of International Trade (on-line, optional).

All videos can be found on MRUniversity.com, if not in the international trade section than in the development economics class or a few on Mexico in the Mexico class.  In general I recommend viewing the videos before tackling the readings.

I. Comparative advantage and free trade

Bernhofen, Daniel and John C. Brown. 2005. “An Empirical Assessment of the Comparative Advantage Gains from Trade: Evidence from Japan.” American Economic Review.

Autor, David H. David Dorn and Gordon H. Hanson. Untangling Trade and Technology: Evidence from Local Labour Markets. The Economic journal, 2015, 125 (584), p. 621 – 646.

Acemoglu, Daron, David Autor, David Dorn, and Gordon H. Hanson. 2014. “Import Competition and the Great US Employment Sag of the 2000s.” NBER Working Paper.

Feenstra, Robert C. 2008. “Offshoring in the Global Economy.” Ohlin Lecture Series, Lecture 1 only, through p.66 only.

Grossman, Gene M. and Esteban Rossi-Hansberg. 2006. “The Rise of Offshoring: It’s Not Wine for Cloth Anymore.” Federal Reserve Bank of Kansas City.

Donaldson, David. 2011. “Trade and Labor Markets.” powerpoint.

Khandelwal, Amit. 2009. “The Long and Short (of) Quality Ladders.” Review of Economic Studies.

Baldwin, Richard. 2011. “How Trade and Industrial Organization After Globalization’s 2nd Unblundling: How Building and Joining a Supply Chain are Different and Why it Matters.” NBER Working Paper. Also this is a chapter in the NBER book Globalization in an Age of Crisis: Multilateral Economic Cooperation in the Twenty-First Century (2014), Robert C. Feenstra and Alan M. Taylor, editors, pp. 165–212.

Goldberg, Pinelopi Koujianou and Nina Pavcnik. 2007. “Distributional Effects of Globalization in Developing Countries.” Journal of Economic Literature.

Tyler Cowen, “Why the theory of comparative advantage is overrated,” Marginal Revolution blog post, https://marginalrevolution.com/marginalrevolution/2013/09/why-the-theory-of-comparative-advantage-is-overrated.html

Videos: The two videos on Comparative Advantage, Sources of Comparative Advantage, Development and Trade, empirical evidence, Evidence on Comparative Advantage from Japan, Factor price equalization, Specific Factors Models, Economics of Offshoring, The Rybczynski Theorem, Trade, Investment, and Migration as Substitutes, Unbundling the Supply Chain.

II.Tariffs

Paul Krugman. “The One-Minute Trade Policy Theorist.” (powerpoint)

The Economic Benefits of U.S. trade, Office of the President of the United States, May 2015.

Broda, Christian, Nuno Limao, and David Weinstein. 2008. “Optimal Tariffs and Market Power: The Evidence.” American Economic Review.

Arkolakis, Costas, Arnaud Costinot and Andres Rodriguez-Clare. 2012. “New Trade Models, Same Old Gains?” American Economic Review.

Melitz, Marc J. “The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity,” Econometrica 2003.

Kehoe, Timothy J. and Kim J. Ruhl. 2006. “How Important Is the New Goods Margin in International Trade?” NBER Working Paper, and now just published, Journal of Political Economy 2013.

Bernhofen, Daniel M., Zouheir El-Sahli, and Richard Kneller. 2012. “Estimating the Effects of the Container Revolution on World Trade.” University of Nottingham Discussion Paper Series.

Nunn, Nathan and Daniel Trefler. 2010. “The Structure of Tariffs and Long-Term Growth.” American Economic Review.

Dave Donaldson, “Trade and Growth (Empirics)”, MIT Lectures notes.

Videos: Tariffs v. Quotas, International Trade Disciplines Monopolies, Monopolistic Competition and International Trade, Effective rate of protection, Theory of Optimal Tariffs, Trade and Variety, Does “fair trade” help?, Malawi restrict trade in corn, Market reforms in Bangladesh, John Stuart Mill Terms of trade, The Shipping Container.

III. Heckscher-Ohlin and factor abundance theories of trade

Helpman, Elhanan. 1999. “The Structure of Foreign Trade.” Journal of Economic Perspectives.

Debaere, Peter. 2003. “Factor Abundance and Trade.” Journal of Political Economy.

Deardorff, Alan V. 1979. “Weak Links in the Chain of Comparative Advantage.” Journal of International Economics.

Trefler, Daniel. 1993. “International Factor Price Differences: Leontief Was Right!” Journal of Political Economy.

Davis, Donald R. and David E. Weinstein. 2001. “What Role for International Trade.” NBER Working Paper.

Davis, Donald R. 1995. “Intra-Industry Trade: A Heckscher-Ohlin-Ricardo Approach.” Journal of International Economics.

Trefler, Daniel. 1995. “The Case of the Missing Trade and Other Mysteries.” American Economic Review.

Costino, Arnaud and Jonathan Vogel. “Beyond Ricardo: Assignment Models in International Trade,” NBER Working Paper, October 2014.

Videos: What is at Stake in Trade Theories?, The Heckscher-Ohlin Theorem, Evidence on the Heckscher-Ohlin Theorem.

IV. Increasing Returns

Donaldson, David. “Increasing Returns to Scale and Monopolistic Trade.” Powerpoint, on-line, http://economics.mit.edu/files/7444

Helpman, Elhanan. 1987. “Imperfect Competition and International Trade: Evidence from Fourteen Industrial Countries.” Journal of the Japanese and International Economics.

Davis, Donald R. and David E. Weinstein. 2003. “Market Access, Economic Geography, and Comparative Advantage: An Empirical Test.” Journal of International Economics.

Antweiler, Werner ; Trefler, Daniel.  Increasing Returns and All That: A View from Trade, American Economic Review, 1 March 2002, Vol.92(1), pp.93-119.

Debaere, Peter. 2005. “Monopolistic Competition and Trade, Revisited: Testing the Model Without Testing for Gravity.” Journal of International Economics.

Yi, Kei-Mu. 2003. “Can Vertical Specialization Explain the Growth of World Trade?” Journal of Political Economy.

Harrigan, James. 2001. “Specialization and the Volume of Trade: Do the Data Obey the Laws?” NBER Working Paper.

Bernard, Andrew B. ; Jensen, J. Bradford ; Redding, Stephen J. ;Schott, Peter K. “Firms in International Trade,” Journal of Economic Perspectives, 1 July 2007, Vol.21(3), pp.105-130.

Helpman, Elhanan.  Foreign Trade and Investment: Firm‐level Perspectives,” Economica, 2014, Vol.81(321), pp.1-14.

Tybout, James R. 2001. “Plant- and Firm-Level Evidence on “New” Trade Theories.” NBER Working Paper.

Bernard, Andrew B. and J. Bradford Jensen. 2004. “Why Some Firms Export.” Review of Economics and Statistics.

Baldwin, Richard ; Harrigan, James.  Zeros, Quality, and Space: Trade Theory and Trade Evidence,” American Economic Journal: Microeconomics, 1 May 2011, Vol.3(2), pp.60-88.

Armenter, Roc and Koren, Miklos. “A Balls-and-Bins Model of Trade.” American Economic Review, 2014, https://www.aeaweb.org/articles.php?doi=10.1257/aer.104.7.2127.

Videos: Trade and External Economies of Scale, Monopolistic Competition and International Trade, Trade and Increasing Returns: Evidence, Paul Romer, Robert Torrens on strategic trade policy, The Economics of Bollywood.

V. Is there a trade and industrialization slowdown?

Hausmann, Ricardo, Jason Hwang, and Dani Rodrik. “What You Export Matters.” Journal of Economic Growth, 12, 1, March 2007, 1-25.

Rodrik, Dani. “The Future of Economic Convergence.” Harvard Kennedy School, August 2011, RWP11-033.

Rodrik, Dani. “Unconditional Convergence in Manufacturing.” Quarterly Journal of Economics, 2012.

Rodrik, Dani. “The Perils of Premature Deindustrialization.” Project Syndicate, 11 October 2013.

Rodrik, Dani. “Are Services the New Manufactures?” Project Syndicate, October 13, 2014.

Davies, Gavyn. “Why world trade growth has lost its mojo.” The Financial Times, January 9, 2015.

VI. Gravity models

Anderson, James and Eric van Wincoop.  2004. “Trade Costs” Journal of Economic Literature.

Head, Keith. 2011. “Gravity for Beginners.” Presented at US-Canada Border Conference.

Donaldson, David. 2011. “Gravity Models.” No Journal—powerpoint.

Hummels, David. 2007. “Transportation Costs and International Trade in the Second Era of Globalization.” Journal of Economic Perspectives.

Anderson, James and Eric van Wincoop. 2003. “Gravity with Gravitas: A Solution to the Border Puzzle.” American Economic Review.

Eaton, Jonathan and Samuel Kortum. 2002. “Technology, Geography, and Trade.” Econometrica.

Chaney, Thomas. “The Network Structure of International Trade,” American Economic Review 2014.

Video: The Gravity Equation and the Costs of Trade.

VII. Trade in economic history

Harrison, Ann and Andres Rodriguez-Clare. 2010. “Trade, Foreign Investment, and Industrial Policy for Developing Countries.” Handbook of Development Economics, Volume 5, Ch 63, also the same is Ann Harrison and Andres Rodriguez-Clare. 2009. “Trade, Foreign Investment, and Industrial Policy for Developing Countries.” NBER Working Paper.

Irwin, Douglas. 2002. “Interpreting the Tariff-Growth Correlation of the Late Nineteenth Century.” American Economic Review.

Irwin, Douglas. 2002. “Did Import Substitution Promote Growth in the Late Nineteenth Century?” NBER Working Paper.

John Nye, “The Myth of Free Trade Britain and Fortress France,” Journal of Economic History, 1991.

Irwin, Douglas. 1997. “From Smoot-Hawley to Reciprocal Agreements: Changing the Course of U.S. Trade Policy in the 1930s.” NBER Working Paper.

Irwin, Douglas. 1998. “The Smoot-Hawley Tariff: A Quantitative Assessment.” The Review of Economic Statistics.

Crowley, Meredith A. and Xi Luo. 2011. “Understanding the Great Trade Collapse of 2008-09 and the Subsequent Trade Recovery.” Journal of Economic Perspectives.

Francois, Joseph and Julia Woerz. 2009. “The Big Drop: Trade and the Great Recession.” No Journal, article online.

Videos: Corn Law debates, Friedrich List, Robert Torrens on sliding tariffs, The Deindustrialization of India, Tariffs and Growth in the late 19thCentury, South Korea and Industrial Policy, The Smoot-Hawley Tariff, Why Did Trade Plummet in the Great Recession?

VIII. FDI and multinationals

Blonigen, Bruce.  A Review of the Empirical Literature on FDI Determinants, Atlantic Economic Journal, 2005, 33, 4, pp.383-403

Ramondo, Natalia and Andres Rodriguez-Clare. 2013. “Trade, Multinational Production, and the Gains from Openness.” Journal of Political Economy, 2013, vol. 121, no. 2.

Antras, Pol and Stephen R. Yeaple. 2013. “Multinational Firms and the Structure of International Trade.” NBER Working Paper, it is also Pol Antras and Stephen Yeaple, “Multinational Firms and the Structure of International Trade,” 2013, Handbook of International Economics,Volume 4, http://dx.doi.org/10.1016/B978-0-444-54314-1.00002-1

Cole, Harold L., Jeremy Greenwood, and Juan M. Sanchez. “Why Doesn’t Technology Flow From Rich to Poor Countries?” National Bureau of Economic Research Working Paper, 20856, January 2015.

Videos: Basics of multinational corporations, Intra-firm Trade, Intra-industry Trade, Gains from Multinationals, Who Gains from FDI?, Productivity in firms, Foreign investment in India, Competition from foreign retailers, What is a Maquiladora? Introduction to NAFTA, NAFTA and Mexican Agriculture, The Effect of NAFTA on the Mexican Economy.

IX. The politics of trade

Grossman, Gene M. and Elhanan Helpman. 1994. “Protection for Sale.” American Economic Review.

Goldberg, Pinelopi Koujianou and Giovanni Maggi. 1999. “Protection for Sale: An Empirical Investigation.” American Economic Review.

Mayda, Anna Maria and Dani Rodrik. 2005. “What are Some People (and Countries) More Protectionist than Others?” European Economic Review.

Grossman, Gene M. and Elhanan Helpman. 1995. “The Politics of Free-Trade Agreements.” American Economic Review.

Harrison, Ann and Jason Scorse. 2010. “Multinational and Anti-Sweatshop Activism.” American Economic Review.

 Videos: The Political Economy of Tariffs, Does Trade Help the Environment?, Regulation as a Major Trade Barrier, Who Supports Free Trade?, The Cultural Diversity Critique of Markets.

Extra readings and videos will be added, as global events indicate.

Don’t Fear the CRISPR

I’m honored to be here guest-blogging for the week. Thanks, Alex, for the warm welcome.

I want to start with a topic recently in the news, and that I’ve written about in both fiction and non-fiction.

In April, Chinese scientists announced that they’d used the CRISPR gene editing technique to modify non-viable human embryos. The experiment focused on modifying the gene that causes the quite serious hereditary blood disease Beta-thalassemia.

You can read the paper here. Carl Zimmer has an excellent write-up here. Tyler has blogged about it here. And Alex here.

Marginal Revolution aside, the response to this experiment has been largely negative. Science and Nature, the two most prestigious scientific journals in the world, reportedly rejected the paper on ethical grounds. Francis Collins, director of the NIH, announced that NIH will not fund any CRISPR experiments that involve human embryos.

NIH will not fund any use of gene-editing technologies in human embryos. The concept of altering the human germline in embryos for clinical purposes has been debated over many years from many different perspectives, and has been viewed almost universally as a line that should not be crossed.

This is a mistake, for several reasons.

  1. The technology isn’t as mature as reported. Most responses to it are over-reactions.
  2. Parents are likely to use genetic technologies in the best interests of their children.
  3. Using gene editing to create ‘superhumans’ will be tremendously harder, riskier, and less likely to be embraced by parents than using it to prevent disease.
  4. A ban on research funding or clinical application will only worsen safety, inequality, and other concerns expressed about the research.

Today I’ll talk about the maturity of the technology. Tomorrow I’ll be back to discuss the other points. (You can read that now in Part 2: Don’t Fear Genetically Engineered Babies.)

CRISPR Babies Aren’t Near

Despite the public reaction (and the very real progress with CRISPR in other domains) we are not near a world of CRISPR gene-edited children.

First, the technique was focused on very early stage embryos made up of just a few cells. Genetically engineering an embryo at that very early stage is the only realistic way to ensure that the genetic changes reach all or most cells in the body. That limits the possible parents to those willing to go through in-vitro fertilization (IVF). It takes an average of roughly 3 IVF cycles, with numerous hormone injections and a painful egg extraction at each cycle, to produce a live birth. In some cases, it takes as many as 6 cycles. Even after 6 cycles, perhaps a third of women going through IVF will not have become pregnant (see table 3, here). IVF itself is a non-trivial deterrent to genetically engineering children.

Second, the Chinese experiment resulted in more dead embryos than successfully gene edited embryos. Of 86 original embryos, only 71 survived the process. 54 of those were tested to see if the gene had successfully inserted. Press reports have mentioned that 28 of those 54 tested embryos showed signs of CRISPR/Cas9 activity.

Yet only 4 embryos showed the intended genetic change. And even those 4 showed the new gene in only some of their cells, becoming ‘mosaics’ of multiple different genomes.

From the paper:

~80% of the embryos remained viable 48 h after injection (Fig. 2A), in agreement with low toxicity of Cas9 injection in mouse embryos  […]

ssDNA-mediated editing occurred only in 4 embryos… and the edited embryos were mosaic, similar to findings in other model systems.

So the risk of destroying an embryo (~20%) was substantially higher than the likelihood of successfully inserting a gene into the embryo (~5%) and much higher than the chance of inserting the gene into all of the embryo’s cells (0%).

There were also off-target mutations. Doug Mortlock believes the off-target mutation rate was actually much lower than the scientists believed, but in general CRISPR has a significantly non-zero chance of inducing an unintended genetic change.

CRISPR is a remarkable breakthrough in gene editing, with applications to agriculture, gene therapy, pharmaceutical production, basic science, and more. But in many of those scenarios, error can be tolerated. Cells with off-target mutations can be weeded out to find the few perfectly edited ones. Getting one complete success out of tens, hundreds, or even thousands of modified cells can suffice, when that one cell can then be replicated to create a new cell line or seed line.

In human fertility, where embryos are created in single digit quantities rather than hundreds or thousands – and where we hope at least one of those embryos comes to term as a child – our tolerance for error is dramatically lower. The efficiency, survivability, and precision of CRISPR all need to rise substantially before many parents are likely to consider using it for an unborn embryo, even to prevent disease.

That is, indeed, the conclusion of the Chinese researchers, who wrote, “Our study underscores the challenges facing clinical applications of CRISPR/Cas9.”

More in part two of this post on the ethics of allowing genetic editing of the unborn, and why a ban in this area is counterproductive.

Is happiness inequality up or down?

Steven Quartz writes:

…our current Gilded Age has been greeted with relative complacency. Despite soaring inequality, worsened by the Great Recession, and recent grumbling about the 1 percent, Americans remain fairly happy. All of the wage gains since the downturn ended in 2009 have essentially gone to the top 1 percent, yet the proportion of Americans who say they are “thriving” has actually increased. So-called happiness inequality — the proportion of Americans who are either especially miserable or especially joyful — hit a 40-year low in 2010 by some measures. Men have historically been less happy than women, but that gap has disappeared. Whites have historically been happier than nonwhites, but that gap has narrowed, too.

In fact, American happiness has not only stayed steady, but converged, since wages began stagnating in the mid-1970s. This is puzzling. It does not conform with economic theories that compare happiness to envy, and emphasize the impact of relative income for happiness — how we compare with the Joneses.

Here is part of the answer, consistent with what I argued in my book What Price Fame?:

…social status, which was once hierarchical and zero-sum, has become more fragmented, pluralistic and subjective. The relationship between relative income and relative status, which used to be straightforward, has gotten much more complex.

…A new generation of ethnographers has discovered an explosion of consumer lifestyles and product diversification in recent decades. From evangelical Christian Harley-Davidson owners, who huddle together around a motorcycle’s radio listening to a service on Sunday mornings, to lifestyles organized around musical tastes, from the solidarity of punk rockers to yoga gatherings, from meditation retreats to book clubs, we use products to create and experience community. These communities often represent a consumer micro-culture, a “brand community,” or tribe, with its own values and norms about status.

The article is very interesting throughout, hat tip goes to Claire Morgan.

Note that the closing bit of this piece is…this: “Money may not buy happiness in the long run, but consumer choice has gone a long way in keeping most Americans reasonably content, even if they shouldn’t be.”

Obama’s free community college plan

David Leonhardt writes:

The plan — which would require congressional approval — would apply to students attending a two-year college, including part time, so long as the college offered credits that could transfer to a four-year college or provided training that led to jobs.

David’s article is excellent and has much useful information:

As Reihan Salam of National Review notes, community college tuition is already low. In fact, it’s zero, on average, for lower-income families, after taking financial aid into account. Vox’s Libby Nelson wrote, “Community college tuition for poorer students is often entirely covered by the need-based Pell Grant.”

One potential implication is that by making community college universally free, the government is mostly reducing the cost for higher-income families.

Calculating the completion rate at community colleges is difficult, this estimate does some work to get it up to 38 percent.  What would the completion rate be for the marginal students encouraged under the Obama plan?  We don’t know, but I’ll guess at 20-30%, no more.  That’s the real problem.

Furthermore some of the value of education is signaling to the labor market that you are able to finish college.  I do think the learning component of education is generally more important, but for “marginally not attending community college individuals” — who are often regarded with suspicion by employers — I would not be surprised if the signaling component were one third or more of the value of a degree.  To that extent, pushing more marginals into the degree funnel lowers the value of the degree for the others who were getting it already by lowering the average productivity of the pool of finishers.  That would lower the efficiency gains from the program and also partially offset some of the intended distributional consequences.

Mike Konczal likes the idea, and believes it may lower higher education prices more generally.  Libby Nelson at Vox considers it to be a middle class benefit.  Neil McCluskey at Cato is negative.  Carrie Sheffield is critical.  Here is a look at potential winners and losers in the higher education sector.  The plan could lead to federal money replacing state money, rather than leveraging it.

Citing the growing economy and improving labor market, Andrew Flowers noted:

college enrollment is declining for recent high school graduates (those 16 to 24 years old). And it’s falling fastest for community colleges.

Overall my take is that the significant gains are to be had at the family level and at the primary education level, and that the price of community college is not a major bottleneck under the status quo.

From the comments, on secular stagnation

B.B. writes:

In “National Income and the Price Level,” Martin Bailey discussed the issues of the liquidity trap and secular stagnation.

He observed that at a zero real interest rate, it would be profitable to level the Rocky Mountains and fill in the Gulf of Mexico. The land created would have a rate of return over zero. Also, replacing all steel with stainless steel would pay off.

The examples get to the problem. If someone wanted to level a mountain and fill in the Gulf, it would take a decade to get EPA approval, if it ever came. At negative real interest rates, there are plenty of profitable investments. Maybe in the medical sector, or energy, or finance, or banking, or education, or transportation….where government approval can block the investment for a decade. Secular stagnation is feasible in a world of heavy regulations and taxes, regardless of technological opportunities or the productivity of capital. Keystone Pipeline, anyone?

In a regulated state, easy Fed policy might boost the stock market and lower bond yields without boosting investment much at all. Sound familiar?

Does the Egertsson and Mehrotra model of secular stagnation work?

Their new paper is here, ungated here (pdf), here is the key passage:

We have shown that in the model with capital, the presence of productive assets carrying a positive marginal product does not eliminate the possibility of a secular stagnation. The key assumption is that capital has a strictly positive rate of depreciation. In the absence of depreciation, capital can serve as a perfect storage technology which places a zero bound on the real interest rate. It is straightforward to introduce other type of assets, such as land used for production, and maintain a secular stagnation equilibrium. For these extensions, however, it is important to ensure that the asset cannot operate as a perfect storage technology as this may put a zero bound on the real interest rate.

Let me recapitulate the basic problem.  Secular stagnation models are supposed to exhibit persistent negative real rates of return, but how is this compatible with economic growth and positive investment?  Just hold onto stuff if need be and of course the goverment can help you do this with safe assets, if need be.  The earlier models had no capital, which ruled out this possibility.  The new model assumes storage costs for capital are fairly high, or alternatively the depreciation rate for capital is high.  Since you can’t sit on your wealth, you might as well invest it at negative real rates of return.

But at the margin, storage costs for goods (and some capital) are not that high.  My cupboard is full of beans and cumin seed, but I eat the stuff only slowly.  In the meantime it is hardly a burden, nor is it risky since I know it will be tasty once I make the right brew.  Art has negative storage costs (for the marginal buyer it is fun to look at), although its risk admittedly makes this a more complicated example.  Advances in logistics, and the success of Amazon, show that storage costs are getting lower all the time.

Secular stagnation might be a good model for Liberia and Venezuela and Mad Max, but not for the United States today or other growing economies with forward momentum.  But a credible stagnation model for America needs to recognize that rates of return will be lower than usual but not negative in real terms.  And there won’t be a long-run shortfall of demand because eventually market prices will adjust so that demand meets the supply we have.  That is a supply-side stagnation model of the sort promoted by myself, Robert Gordon, Peter Thiel, Michael Mandel, and others.  In the secular stagnation model as it is now being discussed by Keynesian macroeconomists, you end up twisting yourself in knots to force that real rate of return into permanently negative territory.  Of course if you allow the real rate of return to be positive albeit low, the economy is not stuck in a perpetual liquidity trap as people move out of cash into investment assets.  The demand-side stagnation mechanisms fade away into irrelevance once prices have some time to adjust.

Izabella Kaminska comments here.  Josh Hendrickson has a very good blog post on the model here.  I’ve already cited Stephen Williamson here, he notes the model is really about a credit friction and would be remedied with a greater supply of safe assets for savings, an easy enough problem to solve, for instance try the Bush tax cuts.  Here is Ryan Decker on the model, and here is Ryan arguing that investment is aggregate demand also and many of us seem to have forgotten that, a very good post.

This is an important and interesting paper, but only because it shows the model doesn’t really hold and requires such contortions.  The discussion of policy results is premature and way off the mark.  The authors should have included sentences like “storage costs aren’t very high, and the economy as a whole does not exhibit negative real rates of return, so these policy conclusions are not actual recommendations.”

Do I wish to revise my time management tips?

I wrote this in 2004 on MR:

Here are my suggestions:

1. There is always time to do more, most people, even the productive, have a day that is at least forty percent slack.

2. Do the most important things first in the day and don’t let anybody stop you.  Estimate “most important” using a zero discount rate.  Don’t make exceptions.  The hours from 7 to 12 are your time to build for the future before the world descends on you.

3. Some tasks (drawing up outlines?) expand or contract to fill the time you give them.  Shove all these into times when you are pressed to do something else very soon.

4. Each day stop writing just a bit before you have said everything you want to.  Better to approach your next writing day “hungry” than to feel “written out.”  Your biggest enemy is a day spent not writing, not a day spent writing too little.

5. Blogging builds up good work habits; the deadline is always “now.”

Rahul R. asks me if I would like to revise the list.  I’ll add these:

6. Don’t drink alcohol.  Don’t take drugs.

7. At any point in your life, do not be watching more than one television show on a regular basis.

8. Don’t feel you have to finish a book or movie if you don’t want to.  I cover that point at length in my book Discover Your Inner Economist.

I think I would take back my old #5, since I observe some bloggers who have gone years, ten years in fact, without being so productive.

Ebola and the FDA

The Telegraph reports:

The two American doctors who have caught Ebola have been treated with a new “secret serum” which could potentially save their lives.

…A source close to the Atlanta hospital, where Dr Brantly is being treated, told CNN: “Within an hour of receiving the medication, Brantly’s condition was nearly reversed. His breathing improved; the rash over his trunk faded away.”

One of his doctors reportedly described the events as “miraculous.”

…Dr Writebol was also administrated with the drug, which was transported to Liberia in a special sub-zero container. She showed a less remarkable recovery, but is hoped to travel to the US on Tuesday to continue her treatment.

According to CNN, the drug was developed by the biotech firm Mapp Biopharmaceutical, based in California. The patients were told that this treatment had never been tried before in a human being but had shown promise in small experiments with monkeys.

…health workers said drugs that could fight Ebola are not particularly complicated but pharmaceutical firms see no economic reason to invest in making them because the virus’ few victims are poor Africans.

Of course, pharmaceutical firms are not going to invest millions in getting a drug through FDA trials for a disease that has only killed a few thousand people since being discovered in 1976. Nevertheless, some people find this simple logic difficult to accept.

 Prof John Ashton, Britain’s leading public health doctor, termed the “moral bankruptcy” of profit-driven drugs developers.

The logic of profit-driven drug developers is no different than the logic of profit driving automobile manufactures. It isn’t profitable to make cars for people who can’t afford them but the auto firms are rarely called morally bankrupt for not giving cars away to the poor. Moreover, it’s not at all obvious why the burden of producing unprofitable drugs should fall on the drug manufacturers. To the extent that there is an ethical case for developing drugs for the poor it’s a burden that falls on all of us.

As Eric Crampton notes there are at least two possible solutions. Either ensure at taxpayer expense a return on investment by subsidizing, offering prizes (as I suggested in Launching) or publicly investing in orphan drugs or

ease up the FDA trials for drugs in this kind of category. Does it really make sense to mandate placebo trials for drugs hitting diseases with 60% fatality rates? We are condemning people to a very high risk of death for the sake of ensuring that there aren’t drug side effects and that the drugs are more effective than placebos (pretty easy to tell quickly where the fatality rate is otherwise 60%!).

Is growing income inequality diminishing middlebrow culture?

A.O. Scott considers that question in The New York Times.   I am not sure I can sum up his view in a sentence, so I don’t know if this is criticizing him or partially agreeing with him.  In any case, I don’t see growing income inequality as the main driving force behind the decline of middlebrow American culture.  An individual’s level of education often predicts cultural consumption better than does his or her income, and education has not in general declined in this country.

Furthermore many forms of culture have grown much cheaper.  Once you are paying for cable, the marginal dollar cost of watching a show or a movie at home is zero.  Songs and music are much cheaper than twenty years ago, and eBooks make many (not all) books cheaper.  In other words, if stagnant income groups wanted middlebrow culture, they still could afford it.

Global markets are growing and those markets are often relatively middlebrow in their orientation, which should maintain the return to producing middlebrow culture.  And the United States continues to grow in population, even though the middle is shrinking in percentage terms.  The supply of creative activity is quite elastic, so it is hard to argue the wealthy have placed all relevant artists in their employ and thus choked or starved the middle.

It is much more expensive to organize a middlebrow art exhibit than fifteen years ago, and we see fewer good ones, but that is mainly because of 9/11 and insurance rates and related institutional issues, not income inequality.

My view is a lot of people never wanted middlebrow culture in the first place, at least not in every sphere of their cultural consumption.  The internet gave them more choice, they took it, and much of middlebrow culture lost its support base.  Consider one area where the internet still doesn’t play that much of a role and that is theatrical productions.  You can watch plenty of theatre on YouTube, but it’s not such a close substitute to seeing the show live.  And if you look at Broadway theatre, it seems more relentlessly and aggressively middlebrow than ever before.  Ugh, that is why I stopped going.  NFL football seems middlebrow to me and the audience base still is there, again because the internet has not come up with a close competitor.  If the sport has a problem it is the violence and injury, not that we’ve evolved into a mix of polo ponies and roller derby.

Depreciating Capital

Brad DeLong attacks Krusell and Smith for using in some of their thought experiments a depreciation rate of 10%, which is probably too high. Fair point but in my post I assumed a depreciation of just 5% and showed that Solow and Piketty give very different predictions about how the K/Y ratio will change with a change in g.

Furthermore, having read DeLong’s comment, I went to the BEA and compared gross and net domestic product which gives capital depreciation as a fraction of GDP of around 15% in recent decades. At a K/Y ratio of 4 that’s a depreciation rate of 3.75%. Similarly, Inklaar and Timmer in constructing capital stocks for the Penn World Tables estimate a depreciation rate for the U.S. of 4.1%. I reran my simple Excel chart with the lower number, 3.75%.

As you can see, the numbers are very similar to earlier and the key point is still that a decrease in g increases K/Y much more in the Piketty model than in the Solow model. Piketty2 Krusell responds to DeLong here making the additional point that their thought experiments show that Piketty’s assumption about savings is implausible at any depreciation rate (see also Hamilton on this point).

First: if the net rate of saving remains positive as the economy’s growth rate falls toward zero, as Piketty assumes in his second fundamental law of capitalism, the gross saving rate in the economy must approach 100%. This observation is a way of illustrating how unreasonable the behavioral assumptions underlying his theory of saving really are.

Second: according to standard, and much more reasonable, saving theory (based either on the standard textbook Solow growth model or on the permanent-income model), the net saving rate must fall with the rate of growth, and become zero when growth is zero.

…These points are key because Piketty’s predictions are all about what happens as growth falls during the 21st century, as he argues it will.

…both of these results hold no matter what the depreciation rate is (so long as it is positive).

The heart of Piketty’s theory is his expression for the capital share of income in the long run, α = r × s/g with the prediction that if g falls the capital share will rise tremendously. This is a good opportunity to summarize some of the recent points about the theory.

There are no contradictions but many a slip ‘twixt the cup and the lip. Namely, will g fall? If g does fall, will K/Y increase? If K/Y increases will capital’s share of income increase? My answers:

Will g fall? Uncertain. Piketty’s forecast is as good as anyone’s. My own view is that at the global level g has been increasing for several centuries and that this will continue, especially because in this century we will see a massive increase in the number of scientists and engineers as China and then India devote increased human capital to the research frontier.

If g does fall, will K/Y increase? Yes, but probably less than Piketty estimates and more in line with Solow.

If K/Y increases will capital’s share of income increase? Uncertain but more likely no than yes. It depends on the elasticity of substitution between K and L and as Rognlie and Summers argue, the elasticity that Piketty needs is higher than current estimates suggest is the case.