With streams and rivers drying up because of over-usage, Rob Harmon has implemented a market mechanism to bring back the water. Farmers and beer companies find their fates intertwined in the intriguing century-old tale of Prickly Pear Creek.
Inevitably, students’ ears will perk up at the mention of beer and brewers…
Check out the video below for a great application of the importance of markets aligning self-interest with social interest.
1. I'm not asking for a specific weak dollar policy (we've already done enough on that front!). The point is that if the market brings a falling dollar, this outcome can be part of the equilibrating process.
2. You don't have to approve of all the policies, or private sector practices (e.g., a low savings rate) that produced the weak dollar. A weak dollar is still a healthy response, given those constraints.
3. Never forget the difference between real and nominal exchange rates. That answers the conundrum about wishing for a dollar of near-zero value.
4. A falling dollar will (often, not always) increase employment in the export sector. Supply-side, production-based multipliers are the best kind to have and they can outweigh the economic costs of higher import prices. When the dollar falls, a big chunk of that shift is born by foreign exporters like a tax rather than being passed along to U.S. consumers. The net effect is that Mercedes-Benz subsidizes job creation in the United States. And sometimes a falling currency is in fact an efficient form of lump sum taxation in this regard.
5. Free traders are usually economic cosmopolitans, which is good. A weak currency in one country means a strong currency in another and the distribution effect, at least at the first-order level of analysis, is a wash. So cosmopolitanites shouldn't object to weak currencies per se. From a global point of view, a lot of currency movements are close to a net wash in efficiency terms, although they may be good for at least one of the countries in the equation. As a rough rule, weak currencies do the most good where resources are unemployed and there is a realistic elasticity of exports, though it is more complicated than that.
6. A weak dollar poses the biggest problems for the EU and other foreign regions. Still you can see those as real problems and think a falling dollar is OK for the U.S., taken alone.
7. Again: blah-blah-blah caveats about the difference between a currency falling as a pure thought experiment and a currency falling as associated with some particular cause. Blah, blah, blah, etc. Blah.
Matt and Ryan Avent comment, and Matt Steinglass, I'll put some points under the fold...
1. Sectoral shock theories of unemployment have a long lineage, including search theory, David Lilien (1982), Fischer Black, work by Steve Davis and John Haltiwanger, Mortensen and Pissarides, plus some recent writing by Michael Mandel and much earlier Franklin Fisher's work on disequilibrium adjustment. Avent and Yglesias suggest that Kling is making up his own macro but the innovation is simply to call the adjustment process "recalculation," to give it a more Austrian gloss. Mortensen and Pissarides are sometimes mentioned in the context of future Nobel Prize winners.
Or try Brainard and Cutler (nowadays both Obama-linked), who note sectoral shifts are especially likely to account for unemployment episodes of long duration. Here is a list of some of the relevant real shocks.
2. Ryan's summary of the argument involves several strawmen. Various polemic phrases are used throughout his post, including "makes no sense" and "nuts." When you read language like that, it often indicates the writer has not worked hard enough to imagine a sensible version of the idea he is criticizing.
3. Here are a few claims I do believe and in most cases I am on the record:
a. The AD shock today is very real, albeit overemphasized by many relative to sectoral shocks.
b. There is an optimum delay on the recalculation process. An economy can't always do all the recalculation all at once and that is one way of thinking about why some bailouts have been necessary, plus automatic stabilizers.
c. Reemployment does not in general proceed in accordance with an optimum, especially during major shocks. This follows from many (not all) of the models cited above.
d. The new, on-its-way optimum may well involve new government expenditures in various areas on a permanent basis; pick port security if you want one non-controversial example.
You can believe all those propositions, as I do, and still think that the recalculation argument means that, in absolute terms, significant parts of the current stimulus won't be very effective. As James Hamilton has pointed out, a big chunk of the problem is something other than insufficient aggregate demand and so more stimulus doesn't translate necessarily into better outcomes. In other words, we're spending lots of money for smaller "bang" than was advertised.
You might disagree with those conclusions, combined with propositions a-d, but they're not "nuts." There's a disconnect between the emotional content of the polemic Avent wants to level and the information content in his post.
3. Matt suggests that some of the critiques do not apply to most of the stimulus. He notes that aid to the states is a big chunk of the stimulus, as is tax cuts and increased transfer payments. On the transfer payments, see my point 2d; you may or may not like them but most analysts conclude, following the Bush experience, that such programs aren't very good stimulus. So the recalculation idea doesn't much apply there but the stimulus idea doesn't much apply either.
On aid to the states, the recalculation problem applies very directly (Matt says it doesn't but I don't see where in his post he gives a reason for that view). You can think that some form of state-level aid is necessary, as I do, and still see the recalculation idea as explaining why a big state-level ouch is coming in about two years' time. When (if?) the stimulus is not renewed, a painful sectoral reallocation will have to take place and right now we are only postponing that pain. By the way, it would be nice if state governments played along by having a coherent long-run fiscal plan but right now at least half of them are not doing this, thereby worsening the forthcoming ouch. Wait until you see what happens with state universities in two years' time. Ouch, ouch, and triple ouch.
Overall the recalculation idea does apply to large chunks of the stimulus, albeit not all of it.
4. We should be especially skeptical of gdp measures when: a) governments care about those measures especially much, and b) we face trade-offs between temporary and permanent gains and we are choosing the temporary gains. Fiscal theories of cyclical movements, as outlined by Rogoff and the like, deserve to make a comeback and I predict they will. In fact you can add those theories to the list above at #1.
The bottom line is this: if you're trying to use the recalculation idea to explain why the fiscal stimulus should be zero, that in my view will fail. If you're using the recalculation idea to explain why the stimulus has a lower rate of return than many people think, it hasn't much been dented by the recent criticisms. After all, if the problem were just insufficient AD, a solution would be ready at hand. But it isn't and it's not just because Obama isn't "tough enough" to propose a bigger stimulus. It's a genuinely difficult problem to solve.
I may soon consider Scott Sumner's very good recent posts on real shocks and the business cycle.
Let's say a real estate agent is laid off and, at some point, needs to start working elsewhere in the economy.
One scenario is that the former agent searches for twelve months and finds a job in the health care sector. The economy loses twelve months' worth of output from that individual. (These numbers are chosen for illustrative simplicity and they are not estimates of actual variables.)
A second scenario is that the former agent is reemployed immediately, improving the energy efficiency of school buildings, and he is paid by stimulus funds.
Two years later, that stimulus money ends. The former real estate agent then searches for twelve months and finds a job in the health care sector.
The net effect is to sub in two years of insulating work for two more years working in the medical sector, or wherever that individual ends up in the later years of his career.
Both scenarios involve the cost of twelve months unemployment and the associated foregone outputs.
If you measure the progress of the stimulus early on, it will appear to yield higher employment and gdp growth prospects. Those benefits are to some extent an illusion because you are not picking up the possibility that labor market search is postponed but not avoided.
A plausible intermediate scenario is that an economic downturn is a mix of real and weak AD factors. So, after the fiscal stimulus, and after the insulation work is over, the former real estate agent can reemploy himself in six months rather than twelve. By this point in time AD is higher (perhaps) and labor market adjustment is easier. Still, the short-run measure of stimulus benefits will be about twice as high as the actual net benefit, all long-run adjustments considered. It will look, in the short run, as if twelve months unemployment have been avoided when in fact the savings are a net of only six months unemployment avoided (toss in discount adjustments plus consider the costs of taxation and debt).
Many people argue that "we're not yet out of the water" or that we are seeing a "jobless recovery." I agree on both counts. I would stress that those arguments do not unambiguously favor the case for more stimulus. On one hand, troubled times may suggest that we can't let the economic recalculation happen all at once. On the other hand, if the labor market is still sluggish when the stimulus ends, we are just postponing search and unemployment, not much reducing it.
Thanks to those who attended Wednesday’s webinar. The Power Points from yesterday’s presentation are here.
Here are the Dynamic Power Points for Modern Principles: Macroeconomics that accompany Chapter 10Unemployment and Labor Force Participation. Be sure to view in slideshow mode, particularly the animated unemployment graphs constructed on slides 22 and 23.
Here is a clever new idea from Henderson, Storeygard, and Weil:
GDP growth is often measured poorly for countries and rarely measured at all for cities. We propose a readily available proxy: satellite data on lights at night. Our statistical framework uses light growth to supplement existing income growth measures. The framework is applied to countries with the lowest quality income data, resulting in estimates of growth that differ substantially from established estimates. We then consider a longstanding debate: do increases in local agricultural productivity increase city incomes? For African cities, we find that exogenous agricultural productivity shocks (high rainfall years) have substantial effects on local urban economic activity.
They also noted how data from night lights can be focused to provide data on a local level. In Southern Madagascar large deposits of rubies and sapphires were discovered in late 1998 near the towns of Ilakaka and Sakaraha, leading to an economic boom. But the data from the satellites tell the story of where the benefits were felt most deeply. “Over the next five years there was a sharp growth in the number of pixels for which light is visible at all, and in the intensity of light per pixel,” the economists said. “The other town visible in the figure, Ihosy, shows no such growth. If anything, Ihosy’s light gets smaller and weaker, as it suffers in the competition across local cities for population.”
Adam Smith, a loyal MR reader (yes that is his name), writes to me:
I had a very MResque thought today I wanted to share with you. Why are the typical lengths of albums across different music genres so different? In particular, I was thinking most of my rap albums are at least over the hour mark and many run all the way up to the 80-minute maximum. They're usually packed with intros, skits, and lots of 5 minute tracks that have extended intro and outro instrumental beat only sequences. My metal albums, on the other hand, have an average run length of no more than 40 mins. Most albums are between 8 and 10 tracks with little in the way of tangential material. These different run-times show up in other places too. For example, my older jazz albums (i.e. Kind of Blue, Time Out, Blue Train) typically run around 45 mins with a half dozen or so tracks yet my newer jazz albums like MMW's The Dropper run almost the whole 80 mins. Also, prog. rock bands tend to produce much longer albums than garage rock bands. Even adjusting for the fact that prog bands emphasize longer musical passages, they could compensate by just having fewer songs or garage rock bands could just have twice as many (like the White Stripes did on their first album).
Is there a relative price argument for these differences? Or even signaling? Perhaps there is a rat race among rappers to signal they're capable of coming up with enough material to fill out the maximum length, even if it includes lots of filler. Perhaps the recording costs are lower as instrumentation relies so heavily on sampling. Maybe metal runs into diminishing returns after 30 mins or so where the listener becomes numb to the intensity.
I'll offer a few points:
1. The average career of a rapper is short. A long CD increases the chance that something will "stick" and the rapper won't get too many other chances to try.
2. Some metal bands develop great loyalty among their followers and achieve durable franchises. That gives them a lower discount rate and they are more inclined to save up material for the future. Plus they are marketing an overall sound -- rather than clever particular innovations -- and if the first forty (five?) minutes don't convince you nothing will. Rap songs probably have a higher individual variance.
3. Many older albums are short for technological reasons, plus the albums were due in relatively rapid succession for contractual reasons. In the 1960s there was lots of technological advance in music, so if you sat on the sidelines for a few years you could become obsolete.
4. It is relatively easy for a contemporary jazz artist to tack on additional improvisations and he can choose standard compositions if necessary. Other forms of popular music cannot expand quantity so easily without hitting a wall in terms of quality. One prediction here is that "compositional jazz" albums should be shorter in average length than albums of jazz improvisation, contemporary that is.
5. If you wanted a somewhat strained explanation, you could argue that the longer CD is a more bundled product andit will make economic sense as a form of price discrimination, the more varied the valuations of the audience. This would require that rap CD buyers have a higher variance of marginal valuation.
That's his greatest contribution (see Alex on this same point, and Jeff Ely). Let's say you privatize a water system in Africa and write a 30-year contract with a private French company to run the thing. As the contract nears its end, and if renewal is not obvious, the company has an incentive to "asset strip," or at the very least not maintain the value of the pipes. Alternatively, the government might signal, in advance, that it has every intention of renewing the contract. The company then has the incentive to lower quality to consumers, since it expects renewal a and faces weaker competitive constraints.
In other words, franchise bidding, or "ex ante" competition for the market doesn't always resolve monopoly issues The key problem is the existence of a fixed investment in the pipes and that the value of the pipes depends on investments from both the government and the company. It can be hard to write a contract for a good solution, since any allocation of the residual rights creates some distortion or another. This has in fact been a very real problem with privatization around the world in many settings. Oliver Williamson outlined these arguments in his debate with Harold Demsetz over privatizing cable TV. Much of the literature on "mechanism design," such as David Baron's pieces, picks up on this problem and extends Williamson's work.
Williamson is a truly important economist. If you read him, especially in his later work, he also has lots of taxonomy and verbiage. The key is to cut through to the substance, which is plentiful.
In 2003, "President for Life" Saparmurat Niyazov decided that poor, landlocked Turkmenistan's medical costs were too high and that its healthcare system urgently needed reform. The country had already suffered from a shortage of doctors, and the only qualified ones were in cities, Niyazov said on a public radio address.
So, in a frankly insane healthcare reform effort, he restricted the public's access to care by replacing up to 15,000 doctors and nurses with unqualified military conscripts. The next year, he ordered hospitals and clinics outside of the capital, Ashgabat, to close -- even though the vast proportion of Turkmenistan's population lives in rural areas. The BBC quoted him as saying, "Why do we need such hospitals? If people are ill, they can come to Ashgabat." He also implemented fees and created an "unofficial" ban on the diagnosis of certain communicable diseases, like hepatitis.
As a result, an epidemic of the bubonic plague reportedly broke out (Turkmenistan's highly secretive government does not allow in organizations like the WHO) and existing rashes of AIDS, hepatitis, and tuberculosis worsened. At the time of Niyazov's death from a cardiac infarction in 2006, Turkmenistan had one of the lowest life expectancies in Asia -- less than 60 years.
The full story is here and it lists some other very bad health care reforms.
A number of progressive bloggers have been making the point that most Americans approve of the postal service, or that they personally have had good experiences there. They then seem to be concluding that the quasi-monopoly arrangement in that sector is likely efficient and the example of the post office should not be cited as evidence for government failure. I do not find these arguments persuasive. The following argument might work: "With competition in postal delivery, the natural market structure is duopoly (think UPS and FedEx), so price wouldn't fall much, coordination problems across dual networks would occur, and some rural users would be worse off. So the current quasi-monopoly works about as well as we can hope for." That is the argument which best defends the current structure of the post office as a privileged quasi-monopoly. The real costs of the quasi-monopoly are the innovations and cost reductions we might have had but didn't, whether those are large or small (or negative possibly). I doubt that the public is estimating that path when expressing their approval of the post office. For obvious reasons, an inefficient quasi-monopolist might run high costs and overinvest in public relations. Some of the world's worst post offices have pretty stamps and the guy behind the counter really does smile like grandpa. From the comments: "After you consider the miracle of 40-50 cent Kiwi, does $.44 for first class mail sound like a bargain?" The Kiwi fruit, of course, probably comes from Italy or New Zealand and it has to be grown and protected from bruising and shipped a long way. It's a tricky comparison, however, read the comments here.
I am an undergraduate economics student curious about which of the classical economists and books you find most valuable. Classical not just meaning Ricardian but in terms of significant non purely quantitative works that influenced economics as a whole. If one were to put together a reading list of twenty or so of the most influential or important books, what would you recommend? The Wealth of Nations and General Theory of Employment, Interest, and Money seem logical starting points, beyond them though it’s hard to wade through the range of choices (Ricardo or Hayek? Schumpeter or Jean Baptiste Say?)
For now I’ll stick with classical economics in the narrow sense, as it ends in 1871. If you can read only a few works, I recommend these:
1. Adam Smith, Wealth of Nations. Duh.
2. David Hume, Economic essays. He lacks some of Smith’s profundity as an economist, but he is more precise analytically and as always a beautiful writer.
3. David Ricardo, Principles of Political Economy, the first six chapters. Rigor arrives, though at the expense of truth. Still there is something to it. Supplement with Mark Blaug on Ricardo, if you want the model spelt out mathematically.
4. The early marginalists: I’ll recommend Samuel Bailey on value and Mountifort Longfield on price theory. Yet still it was a (temporary) dead end and you should read them with that puzzle in mind. At what level of technical sophistication do the contributions of marginalism suddenly seem impressive?
5. Thomas Robert Malthus, on population (don’t ask which edition) and Principles of Political Economy. He understood supply and demand, elasticity, a version of the Keynesian model, and environmental economics, and yet he is mainly criticized for being wrong about population. He is one of the strongest and most profound and most underrated economists of all time. Also read Keynes’s biographical essay on him.
6. Edinburgh Review. The econ blogosphere of its day. Read the economic essays published in that outlet, by Malthus and many others, especially on monetary theory. I don’t know any easy way to track this
stuff down, but if you do please tell us in the comments.
7. John Stuart Mill: Autobiography (yes, for economics) and his Some Essays on Unsettled Questions in Political Economy (Kindle edition is free). Mill has underrated depth as an economic thinker and he encompassed virtually all of the interesting trends of his time. That was both his greatest strength and his biggest weakness.
8. Marx: The 1844 manuscripts. More generally, read the Romantics as critics of classical political economy. Coleridge and Carlyle are good places to start.
What about the French?: I find Say boring, Bastiat fun, Cournot incredible but there is no reason to read the original. Try someone weird like Comte or LePlay to get a sense of what economic discourse actually was like back then.
In the first study of its kind, Chhatre and Arun Agrawal of the University of Michigan in Ann Arbor compared forest ownership with data on carbon sequestration, which is estimated from the size and number of trees in a forest. Hectare-for-hectare, they found that tropical forest under local management stored more carbon than government-owned forests. There are exceptions, says Chhatre, "but our findings show that we can increase carbon sequestration simply by transferring ownership of forests from governments to communities". One reason may be that locals protect forests best if they own them, because they have a long-term interest in ensuring the forests' survival. While governments, whatever their intentions, usually license destructive logging, or preside over a free-for-all in which everyone grabs what they can because nobody believes the forest will last (Proceedings of the National Academy of Sciences, DOI: 10.1073/pnas.0905308106). The authors suggest that locals would also make a better job of managing common pastures, coastal fisheries and water supplies. They argue that their findings contradict a long-standing environmental idea, called the "tragedy of the commons", which says that natural resources left to communal control get trashed. In fact, says Agrawal, "communities are perfectly capable of managing their resources sustainably".