Month: August 2010

A simple parable of price stickiness and international externalities

by  Tyler Cowen in

Olivier Blanchard and Nobuhiro Kiyotaki published a famous "Keynesian" paper in 1987 and it remains a well-cited piece in macroeconomics.  One central result is that prices and wages can get stuck too high, above market-clearing.  Market participants who produce more and lower prices and wages confer a strong large and positive externality on other individuals (or regions) in the market.  Of course in the absence of such adjustments, activist monetary policy is recommended, but the point about externalities remains.

Yet often, today, we are told that the individuals (or regions) which produce (i.e., export) more are imposing negative externalities on other individuals or regions.

Of course the Blanchard and Kiyotaki model had its limitations.  It did not, for instance, incorporate open economy considerations.  It could be that the star producers impose an unfavorably high exchange rate on the broader region and hurt the ability of the broader region to export to the larger world economy.

When the open economy considerations are relatively strong, that coincides with…the conditions under which a coordinated fiscal policy will prove counterproductive, for reasons shown by the Mundell-Fleming model.  In other words, if you think the strong Eurozone countries are hurting the Eurozone weakies, you also should be skeptical about coordinated European fiscal policy.  This paper surveys some key issues.

In many open economy versions of the B-K model, or variants, looser monetary policy simply exports the problems of the region to other parts of the world.  So why advocate such policies, especially if you are an outsider?  Maybe the EU determines its own economic destiny (fine by me) but then we're back to German production and prosperity helping Spain rather than hurting it, for the reasons given by B-K.

In this well-regarded model, the international spillover effects from the monetary expansion can be either positive or negative.  But it takes work to get those effects into the positive category.

Here is a survey of some literature which extends the sticky price model to open economy and policy coordination settings.

It is commonly suggested that German exports damage (or help) Spain without considering the broader implications of that proposition.

Overall, the results may depend on whether wage rigidity is real or nominal in each currency, the degree of capital mobility, the currency of invoicing in which sticky prices are set, and how much market participants look forward and consider stocks in addition to flows.  This paper surveys some issues.  There are many permutations, to the point where they are perhaps no longer very useful.

I wish to emphasize the broader point that not all combinations of views here are mutually consistent.

Will the Chilean miners still be paid their wages?

by  Tyler Cowen in

The union is making its demands right now (Sp.) and the final outcome is not clear.  The union is demanding that the government accept responsibility for paying the miners, as apparently they no longer consider the company a reliable creditor.  They then want the government to try to recover the funds from the company.  So far the government is strongly resisting this suggestion.  Another account of the dispute is here.

Update: So far it seems that corporate payment of wages will continue through August but after that is uncertain.

Markets in everything

by  Tyler Cowen in

Music lovers can now be immortalised when they die by having their ashes baked into vinyl records to leave behind for loved ones.

A UK company called And Vinyly is offering people the chance to press their ashes in a vinyl recording of their own voice, their favourite tunes or their last will and testament. Minimalist audiophiles might want to go for the simple option of having no tunes or voiceover, and simply pressing the ashes into the vinyl to result in pops and crackles.

The full link is here and I thank VaughanBell and also Allison Kasic for the pointer.  Occasionally I've wondered whether my funeral ought not to consist of playing a recording of Brahms's Ein Deutsches Requiem (loudly) and then asking everyone to leave.  This innovation puts a new slant on that idea.

Lomborg vs. Lomborg

by  Tyler Cowen in

The world's most high-profile climate change sceptic is to declare that global warming is "undoubtedly one of the chief concerns facing the world today" and "a challenge humanity must confront", in an apparent U-turn that will give a huge boost to the embattled environmental lobby.

…But in a new book to be published next month, Lomborg will call for tens of billions of dollars a year to be invested in tackling climate change. "Investing $100bn annually would mean that we could essentially resolve the climate change problem by the end of this century," the book concludes.

…In an interview with the Guardian, he said he would finance this investment through a tax on carbon emissions that would also raise $50bn to mitigate the effects of climate change, for example by building better sea defences, and $100bn for global healthcare.

The full story is here.

Barro v. Barro

by  Alex Tabarrok in

Robert Barro today in the WSJ, The Folly of Subsidizing Unemployment, estimates that UI extensions have increased the unemployment rate by 2.7 percentage points.

To get a rough quantitative estimate of the implications for the
unemployment rate, suppose that the expansion of unemployment-insurance
coverage to 99 weeks had not occurred and–I assume–the share of
long-term unemployment had equaled the peak value of 24.5% observed in
July 1983. Then, if the number of unemployed 26 weeks or less in June
2010 had still equaled the observed value of 7.9 million, the total
number of unemployed would have been 10.4 million rather than 14.6
million. If the labor force still equaled the observed value (153.7
million), the unemployment rate would have been 6.8% rather than 9.5%.

It's not clear to me why we should assume that the share of long-term unemployment in this recession should equal that in 1983.

Barro also argues:

We have shifted toward a welfare program that resembles those in many Western European countries.

In contrast Josh Barro, son of Robert, in How much do UI Extensions Matter for Unemployment, concluded that 0.4% was probably on the high side:

…Two Fed studies suggest that [extensions of UI] may have contributed 0.4 to 1.7 percentage points to current unemployment. But a closer look at this research makes me skeptical that the effects have been so large.

…The incentive effects of UI extension must also be weighed against
the stimulative effects of paying UI benefits. For some reason it’s
become almost taboo to note this on the Right, but UI recipients tend
to be highly inclined to spend funds they receive immediately, meaning
that more UI payments are likely to increase aggregate demand. UI
extension also helps to avoid events like foreclosure, eviction and
bankruptcy, which in addition to being personal disasters are also
destructive of economic value.

As a result, I am inclined to favor further extension of UI
benefits while the job market remains so weak. I am not concerned that
this leads us down a slippery slope to permanent, indefinite
unemployment benefits (which historically have been one of the drivers
of high structural employment in continental Europe) as the United
States has gone through many cycles of extending unemployment benefits
in recession and then paring them back when the economy improves, under
both Republican and Democratic leadership.

I call this one on both counts for Josh.   

Sentences to ponder

by  Tyler Cowen in

Campaigns are built to fool us into thinking that we're voting for individuals. We learn about the candidate's family, her job, her background — even her dog. But we're primarily voting for parties. The parties have just learned we're more likely to vote for them if they disguise themselves as individuals. And American politics would work better if we understood that.

That's from Ezra Klein.

*Madoff Victims in Their Own Words*

by  Tyler Cowen in

That is the subtitle, the title is The Club No One Wanted to Join and the editor is Erin Arvedlund and the compiler is Alexandra Roth.  Here are a few excerpts:

You are an evil predator…The Bible says that as Christ hung on the cross He cried out to God, "Father forgive them, for they know not what they do."  I do not forgive you.  You and your family knew exactly what you were doing.  You will face God soon, and he will hold you accountable for your sins.

And another:

I no longer hate you.  You are no longer the Monster that terrifies my dreams and fills my nightmares, because now I have courage and strength, and I have taken back control of my life.

This ordeal has allowed me to grow.  It has allowed me to be a better friend, a better daughter, a better sister, and better me.

And for that I say, thank you!

And another:

P.S. I have been spelling your name in low caps for a while now, simply because you are a low life.

And:

I never met you, yet you had more influence and control over my life than I ever did.

Are TV ads more effective if we pay less attention to them?

by  Tyler Cowen in

I consider this a speculative result but it is interesting nonetheless:

"There has been a lot of research which shows that creative TV ads are more effective than those which simply deliver information, and it has always been assumed that it is because viewers pay more attention to them.

"But in a relaxed situation like TV watching, attention tends to be used mainly as a defence mechanism. If an ad bombards us with new information, our natural response is to pay attention so we can counter-argue what it is telling us. On the other hand, if we feel we like and enjoy an ad, we tend to be more trustful of it and therefore we don't feel we need to pay too much attention to it.

"The sting in the tail is that by paying less attention, we are less able to counter-argue what the ad is communicating. In effect we let our guard down and leave ourselves more open to the advertiser's message.

"This has serious implications for certain categories of ads, particularly ads for products that can be harmful to our health, and products aimed at children.

"The findings suggest that if you don't want an ad to affect you in this way, you should watch it more closely."

How to interpret Germany, again

by  Tyler Cowen in

Here is one recent Paul Krugman post on Germany, here is another.  Excerpt from the first:

Via Mark Thoma, Dean Baker points out that real government consumption of goods and services – that’s government buying things, as opposed to cutting taxes or handing out checks – has risen more in “austerity” Germany than in the United States.

In the second post:

Germany’s austerity policies have not yet begun – up to this point they’ve actually been quite Keynesian.

I would frame this debate with a few points:

1. Kindred put it well: "No one is saying Germany is an economic miracle. Some people, like Tyler Cowen, are saying that Germany's experience doesn't track very well with standard economic models and this fact needs to be acknowledged by those who loudly proffer policy advice…No one (that I've seen) is saying that Germany's turn-around is due to austerity."  The good analyses of Germany credit the real economy and restructuring — the supply side — with credible fiscal policy as only one part of a broader story, while recognizing Germany already had higher government spending, high previous use of debt, and better automatic stabilizers. 

2. The German recovery has been export-driven, which also suggests the role of domestic fiscal policy is secondary.  

3. If Germany is so Keynesian, why did Krugman write in June: "And it’s also important to send a message to the Germans: we are not going to let them export the consequences of their obsession with austerity.  Nicely, nicely isn’t working. Time to get tough." 

It's fair enough for Krugman to simply admit he was wrong.  But then he should…admit he was wrong (and also ponder what such an admission means for "get tough" trade policies).  Maybe Krugman has a story about how he was talking only about their pending austerity, and approving of their current policies but simply failing to mention that at the time, but it's hard to get that impression from reading his corpus of 2010 writings on Germany. 

4. Talk of exports as zero-sum has been dwindling.  German imports have risen to new highs and it is also apparent that the Germany economy is a positive-sum locomotive for most other countries.  And a lot of the German exports contribute to the productive capacity of other nations.

5. For well over a year, and also in earlier research, Krugman has repeatedly argued that AD-expanding policies work only if they are accompanied by a credible commitment to continue them in the future.  Germany has exactly the opposite of such a commitment, indeed they have a fairly credible commitment to near-balance the budget by 2016.  By Krugman's logic a) the German use of stimulus shouldn't work, and b) we shouldn't measure the German AD stance by checking current policies only and therefore we should not judge their overall fiscal policy as very expansionary.  His current remarks on Germany leave aside this intertemporal perspective.

6. Across countries, the size of ramp-up stimulus doesn't seem to matter for recovery.