Results for “solow” 90 found
The Myth of Chinese Meritocracy
No doubt you have heard how the leadership of China is meritocratic and composed of technocrats with PhDs. Minxin Pei suggests that there is less than meets the eye.
…Contrary to the prevailing perception in the West (especially among business leaders), the current Chinese government is riddled with clever apparatchiks like Bo who have acquired their positions through cheating, corruption, patronage, and manipulation.
One of the most obvious signs of systemic cheating is that many Chinese officials use fake or dubiously acquired academic credentials to burnish their resumes. Because educational attainment is considered a measure of merit, officials scramble to obtain advanced degrees in order to gain an advantage in the competition for power.
The overwhelming majority of these officials end up receiving doctorates (a master’s degree won’t do anymore in this political arms race) granted through part-time programs or in the Communist Party’s training schools. Of the 250 members of provincial Communist Party standing committees, an elite group including party chiefs and governors, 60 claim to have earned PhDs.
Tellingly, only ten of them completed their doctoral studies before becoming government officials.
Simply put, Chinese institutions are not as good as those in say Mexico. Thus, China will not overtake Mexico in terms of GDP per capita any time soon, hence Chinese growth rates will fall. All we are seeing today is the logic of the Solow model in action.
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.
Assorted links
What might be Robert Barro’s argument?
Paul Krugman, Brad DeLong, Justin Wolfers and others are not sure what is Robert Barro’s argument or model in his recent Op-Ed. I am puzzled by these responses, because, while I do not pretend to speak for Barro, I see at least one simple answer to these puzzlements.
Consider the following model. Sometimes growth slows down and afterwards it speeds up again. Temporary losses tend to be undone in future periods. For one thing the Solow model implies catch-up growth, furthermore cyclical losses may exhibit mean-reversion. There is in the meantime some depreciation of labor skills, from unemployment, but long-run output and welfare really does for the most part depend on the forces which govern economic growth. (Increases in the variance of consumption are not enough to overturn that emphasis.) That implies lower government spending in most areas of the economy, and it also implies lower taxation of capital, as supported by many empirical papers on growth including some by Barro himself.
That view may not be true (in my TGS book you will find some dissent from it but from another direction), but it’s hardly bizarre or economically illiterate. If some writers aren’t totally explicit, it could be they don’t have enough words and feel that a large enough part of their audience takes the emphasis on growth and its preconditions for granted.
We are once again witnessing the renaissance of old Keynesian economics as a theory of the long run not just the short run. The “New Old Keynesians” are of course entitled to their opinions, but given their minority status, it is strange when they find others difficult to comprehend.
Assorted links
1. Emergency markets in everything.
2. The dolphin Solow residual.
3. How much is life expectancy expected to rise?
4. From the Levy and Peart Summer Institute, history of economic thought videos and papers.
How well is fiscal austerity working in the UK?
With the Wednesday release of a mediocre gdp report, we are hearing that the United Kingdom austerity program is proving a macroeconomic failure.
Let’s look at the timing of the cuts:
So far, about GBP9 billion of the government’s fiscal tightening has occurred. However, around GBP41 billion of tax increases and spending cuts will begin to take affect from the start of the new fiscal year on April 5.
Some of the particular cuts were announced in October and at that time Ken Rogoff doubted whether half of them would end up taking place. So the cuts are in their infancy and arguably their credibility is still somewhat in doubt or at the very least has been.
A lot of the weak gdp report is blamed on construction, with some excuses drawn from snowstorms. There does exist an extreme rational expectations view, in which the last-quarter weakness of construction was based on the expectation that government spending cuts would start arriving later in April and thus new houses should not be built. Alternatively, it could be that after the greatest real estate bubble in history, the UK market is overbuilt. Weak UK growth dates to some time back.
Also recall that in many open economy Keynesian models, fiscal policy AD effects are to some extent — or completely — offset by exchange rate movements (pdf). And the fiscal multiplier is basically zero when the central bank targets inflation. Furthermore it is not obvious that the UK has been in a liquidity trap. When it comes to drawing Keynesian conclusions about practical fiscal policy, the theory here is a house of cards.
The UK economy suffers from a more serious technological stagnation than does the United States, in this case more forward looking than backward looking. Their pharmaceutical innovation seems to be drying up, they are overspecialized in finance, the “residential tax haven” status of the country may not yield continuing growth at high rates, tourism is OK but not enough, and their manufacturing base eroded some time ago, with nothing like a German-style comeback. The teacup sector aside, why should anyone be optimistic about that economy?
Two other considerations:
1. The case for the cuts is not that they will spur growth, but rather forestall a future disaster. That’s hard to test. A second part of the case is that not many political windows for the cuts will be available; that’s hard to test too. On that basis, it’s fine to call the case for the cuts underestablished, but that’s distinct from claiming that poor gdp performance shows the cuts to be a mistake.
2. Let’s say the cuts lower government consumption and raise private consumption, and that government consumption is wasteful but private consumption isn’t (and long-run growth is given by the Solow-like expansion of the international technological frontier.) That’s a good case for making the cuts, but they still won’t show up as higher gdp. The government consumption is valued into gdp figures at cost, so even cuts proponents with a good case don’t have to be predicting higher gdp.
I doubt if the UK fiscal austerity program will much boost their growth rate, which is likely low in any case and for non-Keynesian reasons. Simply citing a low UK growth rate is not a test of their fiscal policy, for a number of reasons detailed above.
The history of U.S. productivity, in a nutshell
There have been some recent confusions in the comments about the historical record on productivity. The excellent Alexander J. Field sets it straight, after noting that TFP (Total Factor Productivity) growth in the interwar years was remarkably strong:
…TFP persisted at high although more modest rates during the golden age (1948-73). But then it ground to an almost complete halt between 1973 and 1995. Output per hour continued to rise, albeit much more slowly, but this was almost entirely attributable to physical capital deepening. Data are now available for the entire century, and it is no longer possible to interpret the high rate of TFP advance during the interwar years that prompted the Abramowitz/Solow generalization [TC: the generalization was about knowledge-based progress] as a defining characteristic of the century as a whole.
In this context, think of TFP as the growth due to new ideas, rather than just throwing capital or labor at a problem or production process. Here is a related Field paper. It's also wrong to think of the post-WWII period as the peak of progress, rather as Field shows high TFP growth starts post Civil War and the time after WWII is somewhat slower than many previous decades. The early 19th century, by the way, was not so splendid for TFP.
The critical responses to The Great Stagnation prefer to attack median income measures and in general they are reluctant to talk about total factor productivity. Yet we are pointed very much toward the same conclusion. My first post on TGS also considered these issues and you will find some relevant Charles Jones papers here.
Which economic ideas are hard to popularize?
Ryan, a loyal MR reader, asks:
1. What are the most important economic ideas that are not popularized, i.e. not accessible to laypeople in books and articles by credible authors? …Are there any theories that have gained traction over competing theories based primarily on their ability to be more easily conveyed to a layperson audience as opposed to their providing a better solution to a particular problem?
As for non-popularized theories, I have a few nominations. First, the sensitivity of many economic results to assumptions about Bertrand, Cournot-Nash, and other solution concepts is not easily popularized. Second (until the Cowen-Tabarrok macro text), the Solow growth model was not easily popularized. The difference between a "once-and-for-all" change and a "change in the rate of growth" is not well understood, probably not at any level, yet it is important. Tax incidence theory is not easily popularized, although an incorrect version of it — "they'll pass it all along to consumers" — circulates.
Most behavioral economics can be easily explained in popular terms and that partially accounts for its broad influence. Most people are also capable of grasping a crude version of Keynesian economics, albeit without the subtleties of Keynes ("we should spend more" resonates). The insights of supply-side economics and monetarism have been popularized without much difficulty.
Most of all, it is hard to popularize "maybe" claims, agnoticism, uncertainties, confidence intervals, and contingencies. The marketing process encourages excess certainty.
In terms of good but hard to popularize economic theories, what else can you think of?
Polls of German economists
A very interesting poll from the German FT is here (in German). In addition to answering other questions, German economists speak to who are the important economists for the 21st century. I'll add together the first two categories ("very important" and "somewhat important") for a total percentage measure for reported importance. (Correction: there were 1158 respondents.) The standings look like this:
1. Keynes: 92.4 percent
2. Paul Samuelson: 87.8 percent
3. Joseph Stiglitz: 86.0 percent
4. Milton Friedman: 84.6 percent
5. George Akerlof: 83.9 percent
6. Robert Solow: 82.5 percent
7. Joseph Schumpeter: 82.2 percent
8. Paul Krugman: 81.8 percent
9. Friedrich von Hayek: 74.6 percent
10. Amartya Sen: 71.4 percent
11. Gary Becker: 70.1 percent
12. Daniel Kahneman: 58.1 percent
13. Walter Eucken: 53.0 percent
14. Robert Shiller: 53.0 percent
15. Hyman Minsky: 34.2 percent
16. Ludwig Erhard: 30.3 percent
Based on my observation, I believe the supporters of Hayek, Eucken (a classical liberal), and Erhard are relatively old and that this strand of thought is losing ground in German academia.
The party membership of these same economists is striking for its relative rejection of the two largest parties:
SPD (the second major party and somewhat to the left of CDU/CSU)
FDP (the market-oriented party)
No preference
I take this to reflect that German economists are more intellectual, and more philosophical, than their American peers and thus more likely to adhere to a consistent philosophy of some kind or another. They are less likely to affiliate with mainstream political thought.
You will find more questions and answers here. By a 2.5 to 1 margin (roughly), German economists think that the U.S. taxation system should be more progressive. By almost 2 to 1 they think economics has become too formal. There are very mixed answers on whether Germany needs to overhaul its export-oriented growth model, but few German economists favor a total overhaul.
Here are their answers on what makes for a good economist, again all in German. These I did not find so startling.
For the pointers to this treasure trove of data, I thank Mathias Burger.
When will we know if Irish pre-emptive fiscal austerity is a failure?
Brad DeLong asks:
When would it be time to judge the Irish experiment in preemptive fiscal austerity to be a failure, Tyler?
The immediate question is whether Ireland had a choice in the first place. When it comes to total external debt, private plus public, Ireland is in one of the most desperate situations. (Be careful, though, some published figures include financial institutions to which the Irish government has no real liability and thus overstate Irish external debt by quite a bit). Ireland doesn't have the same flexibility as do Germany and the United States, nothing close to that. Read this article for an estimate of the change in primary fiscal balance required for Ireland; it's scary and doesn't indicate a lot of flexibility, which supports the conventional wisdom on Ireland, from the OECD, the European Commission, from Ireland itself, and arguably you add the IMF to that list as well.
Furthermore, Ireland as a small, open economy experiences a relatively high degree of fiscal leakage.
By the way, you shouldn't simply assume that the initial fifteen plunge in gdp was due to fiscal caution; Ireland was after Iceland perhaps the most overextended country in the crisis.
Here's a Morgan Stanley analysis of Ireland, which basically suggests "it's complicated." It also suggests a reasonable chance the current strategy will work out OK. It is complicated, and the mere fact that spending is a component of national income accounts doesn't mean that more spending is always a good thing.
Ireland in fact has done a negative fiscal stimulus. Earlier, Ireland made the mistake of joining the Eurozone. See also this study of Ireland, 1987-89, an earlier decisive and successful fiscal adjustment, in the days of the Irish Punt. The Euro today makes matters harder for Ireland, yet that doesn't imply they have greater license to spend today, in fact it can imply the contrary.
Paul Krugman pointed out that the fiscally tighter Ireland did not have a better CDS price than the more wishy-washy Spain. Yet Ireland has a bigger external debt problem, may be less protected by "too big to fail," is a smaller nation, and has less control over its destiny; the (roughly) equal price may reflect what is a superior Irish effort. In any case, Spain is hardly a walking advertisement for not going the Irish route.
The Irish also hope that whatever output they "leave on the table" today, they can make up with Solow catch-up growth.
If you would like to read a brief on behalf of Irish stimulus, try this. The author admits that Ireland would have to significantly raise corporate taxes, a former linchpin of its growth (whether you think that efficiency-enhancing or international rent-seeking, it is still true). Is it worth it? How much would such a policy damage Irish growth and credibility?
Kevin O'Rourke also has good but scattered writings on the topic of Irish stimulus. His first preference is greater fiscal federalism within the EU. Last month he also wrote that, lacking such a reform, Ireland had no choice.
This June, Irish consumer confidence hit a three-year high. Here's one estimate that wages have been falling four to five percent a year, and will continue to fall, plus the Euro has been falling. You could argue there has already been an adjustment in the twenty-five percent range. None of that is proof of recovery, but there are some green shoots. Here is the very latest report, indicating that economic growth may be resuming; admittedly it's just a forecast from the government. Exports are showing growth and retail sales are rising slightly.
The Irish Times reports today: "For the first time in three years, there are now more reasons for hope than for despair. This week a raft of indicators, when taken together, give grounds to believe that the foundations of a jobs-generating recovery are falling into place."
Do interpret that with extreme caution. For various debates, follow The Irish Economy blog, including in the comments.
On these critical questions, in the pro-stimulus for Ireland posts, I don't see a level of detail which would rebut these quite mainstream, not-emanating-from-the-gamma-quadrant opinions — that the Irish did more or less the right thing in a very unpleasant situation.
The Irish experiment remains an open book. In the meantime, it's simply not true that the pre-emptive austerity advocates are committing some kind of economic malpractice. Three years out from now, let's compare Ireland to the other PIIGS.
My favorite things *Modern Principles* (Cowen and Tabarrok)
I'm writing to thank so many of you for your interest in Modern Principes: Microeconomics, Modern Principles: Macroeconomics, and the two-in-one edition. Alex and I have been pleased to see how many of you have adopted the book or shown interest in it; all the books are doing great and thanks to your interest. Translations to other languages are already in the works.
Here are a few of my favorite things Modern Principles:
1. It has the most thorough treatment of the interconnectedness of markets and the importance of the price system; most texts only pay lip service to this.
2. It is the most Hayekian of the texts on micro theory without in any way ignoring the importance of externalities, public goods and other challenges to markets.
3. It has an entire chapter on ethics and economics. We do present economics as a value-free science, yet we all know how much ethics shapes people's economics views. The book helps the student sort out common confusions and explains the ethical presuppositions behind many "economic" arguments.
4. It has an entire chapter on incentives and incentive design (e.g. piece rates, tournaments, pay for performance). Oddly, many micro books do not discuss this crucial topic.
5. International examples–from Algeria to Zimbabwe–are written into the core of the book and not just ghettoized in a single "international chapter."
6. It is obsessed with the idea of teaching students to think like economists.
7. It is grounded in the belief that reading an economics text should be fun, not a chore.
8. It has balanced coverage of neo-Keynesian and real business cycle approaches.
9. It covers Solow "catch-up" growth, and Paul Romer's increasing returns, much more thoroughly than do the other texts. The macro book (section) starts off with the idea of why growth matters and is central to macroeconomics.
10. The financial crisis was written into the core of the book, rather than being absent or treated as an add-on. This means for instance plenty of coverage of financial intermediation and asset price bubbles.
11. The book's blog, a teaching tool with lots of videos, powerpoints and other ideas for keeping teaching exciting, is lots of fun and updated regularly (FYI, this is a great resource for any instructor of economics.)
In addition, of course, there is a full range of supplements including lecture powerpoints, test banks, student's guide, Aplia support and coming in the fall EconPortal (even better than Aplia, IMHO).
The new issue of Econ Journal Watch
The link is here, the table of contents is described as follows:
Economic enlightenment is not correlated with going to college, at least among the 4835 Americans who completed a Zogby International online survey. Economic enlightenment is highest among those self-identifying “conservative” and “libertarian,” and descends through “moderate,” “liberal,” and “progressive.” Other variables include party affiliation, religious participation, union membership, NASCAR fandom, and Wal-Mart patronage. Zogby researcher Zeljka Buturovic and Daniel Klein report.
When the White House changes party, do economists change their tune on budget deficits? Brett Barkley does a systematic investigation. Six economists are found to change their tune – Paul Krugman in a significant way, Alan Blinder in a moderate way, and Martin Feldstein, Murray Weidenbaum, Paul Samuelson, and Robert Solow in a minor way – while eleven are found to be fairly consistent.
44 economists answer the questionnaire about a market-failure rationale for pre-market approval of drugs and devices:The questionnaire posed reform questions and tested responses. The 44 interviews provide a rich set of discourse that help one decide: Is there a sensible market-failure rationale?Supporters of pre-market approval include Kenneth Arrow, John E. Brazier, William Comanor, Randall P. Ellis, John Hutton, Naoki Ikegami, Jonathan Karnon, Gérard de Pouvourville, F.M. Scherer, and 14 others.The supporters of liberalization are James F. Burgess, Jr., Noel Campbell, J. Jaime Caro, Thomas DeLeire, David Dranove, Dale Gieringer, Paul Grootendorst, David Henderson, Randall Holcombe, Charles Hooper, Sam Peltzman, Paul Rubin, Shirley Svorny, Robert Tollison, and Michael R. Ward.The Euro symposium response: Lars Jonung and Eoin Drea respond to commentators on their study of what US economists were saying about the prospect of the euro, and comment on recent events and debates.Econometric errors in an Applied Economics article. Dimitris Hatzinikolaou reports on the article and his efforts to get his critique heard.A 1903 letter against protectionism in Britain endorsed by 16 economists including Bastable, Bowley, Cannan, Edgeworth, Marshall, Pigou, Scott, and Smart.
The first one is sure to cause some controversy and I view it in part as an attempt to revise the portrait of the elites put forward by Bryan Caplan; I await his response. My own view is that "who in the general public understands economics best" is very sensitive to which questions we ask. Libertarian-leaning voters have a better understanding of government failure, but left-leaning voters are more likely to understand adverse selection or aggregate demand management. Which is a more important topic? That may depend on the researcher's own point of view. What's the closest we can come to a value-neutral test of whether elites or the "common man" understand economic reasoning better? In the meantime, Bram Cohen understands economics pretty well.
Assorted links
1. Paul Collier: Haiti needs sweatshops, a UN report.
2. Haitians and Hasidim share a town, Spring Valley, NY.
3. New paper on how music works on us (by the way, I'm not convinced).
5. Japanese publishers collude against Kindle.
7. What works in dating profile photos, a very interesting post.
*From Poverty to Prosperity* watch
That's the title of the new and self-recommending book by Arnold Kling and Nick Schulz. This work has text by the authors, interspersed with interviews with famous economists, including Robert Fogel, Robert Solow, Joel Mokyr, Doug North, Bill Easterly, Edmund Phelps, Amar Bhide, William Lewis, and Bill Baumol. Here is Paul Romer:
It's the kind of culture that can tolerate rap music and extreme sports that can also create space for guys like Page and Brin and Google. That's one of our hidden strengths.
You can buy the book here. The subtitle is Intangible Assets, Hidden Liabilities and the Lasting Triumph over Scarcity.
How short a time horizon is needed to motivate catch-up growth?
A few centuries ago, the ratio between the per capita income of the richest country and poorest country was maybe five to one. Today it is maybe one hundred to one.
The classic example of economic catch-up is given by East Asia in the mid-twentieth century, starting with Japan. In those days it was possible to obtain near-parity with the West in about thirty to thirty-five years. In other words, as a young man you could see near-parity before you retired and you could see near-parity for your grandchildren. You could see your children making it halfway there, even before they are entering the workforce.
What if, in the future, for the remaining poor countries, the West (and East Asia) is so rich that catch-up takes seventy years? One hundred years? Will any poor country be bothered? Won't it all seem too far off to be worth the trouble? (Catch-up growth takes lots of hard work and savings and sacrifices of previous social norms.) Or do you believe in a technology-transfer Solow model where the maximum possible rate of catch-up growth keeps on growing? One hundred years from now, will it be plausible to imagine catch-up growth of twenty or thirty percent a year?