Monthly Archives: August 2016

The Future of Mainstream Macro?

Posted on by

According to Olivier Blanchard,

I suspect that even DSGE modelers will agree that current DSGE models are flawed. But DSGE models can fulfill an important need in macroeconomics, that of offering a core structure around which to build and organize discussions. To do that, however, they have to build more on the rest of macroeconomics and agree to share the scene with other types of general equilibrium models.

Pointer from Mark Thoma.

Actually, he does not even mention what I believe is the main flaw with this approach to macroeconomics. As I point out in Specialization and Trade, that flaw is the failure to include specialization at all. Instead, there is one type of worker producing one type of good. This is obviously unwise once you consider it, but once you consider it you are no longer a respectable macroeconomist.

What I’m Reading

Posted on by

A review copy of Erwin Dekker’s The Viennese Students of Civilization. He places Mises and Hayek in the intellectual circles of Vienna between the two world wars, as they watch a once-great civilization collapse. Capitalism and democracy simply could not take root in that part of Europe. I will have more to say about the book once I have finished.

Meanwhile, support for capitalism and democracy among young people in the U.S. is not exactly robust. Timothy Taylor reports,

In both the US and in Europe, young adults have become less likely to say that it is “essential” to live in a democracy.

It is, as Winston Churchill said, the second worst form of government.

More Lifted from the Comments

Posted on by

Kevin Erdmann writes,

The way costs serve as a filter is by constricting supply. Those cities are well past the cost level that would trigger supply. So, a unit that would cost $300,000 is already worth $1 million. To build it, you basically have to negotiate your way through a series of fees and kickbacks so that local governments and interest groups claim the $700,000 difference. It’s like third world governance with a functional bureaucracy. You don’t necessarily bribe anyone, but the parks department gets $100,000 per unit because your building throws a shadow somewhere for 30 minutes, and that money funds a healthy pension.

“third world governance with a functional bureaucracy” describes a very effective kleptrocratic system.

Lifted from the Comments

Posted on by

Handle’s take on rights and consequentialism.

One Hayekian / meta-consequentialist justification for rigid, ‘deontological’-like rights is that without them there is no good way for individuals to plan while trusting in the long-term, reliable predictability of a set of basic rules that governs the way the state and ones compatriots will treat them, and this lack of confidence reduces incentives to engage in socially beneficial activity and increases inefficient expenditures of resources on hedging, security, evasion, and rent-seeking.

What appears to be a local, short term utilitarian transfer can also be at odds with the best way we have learned from experience of how to enable and incentivize long-term growth and human flourishing, given the intractable philosophical and practical complexity of making these kinds of welfare calculations and forecasts.

And the only way to make people really believe that these rules are stable enough and will be honored and maintained despite short term political temptations is to successfully propagate a belief that these rights are near-sacred and somehow transcend the domain of what is normally up for debate and reform.

Unfortunately the political incentive to attack such sacred principles in a democracy is irresistible, and so long as influential and prestigious elites are permitted the freedom to publicly critique those principles and lower their status, then the slide toward increasing state interference is inevitable.

Gary Johnson and a Liberal Tension

Posted on by

He said,

But if we allow for discrimination — if we pass a law that allows for discrimination on the basis of religion — literally, we’re gonna open up a can of worms when it come stop discrimination of all forms, starting with Muslims … who knows. You’re narrowly looking at a situation where if you broaden that, I just tell you — on the basis of religious freedom, being able to discriminate — something that is currently not allowed — discrimination will exist in places we never dreamed of.

If I understand him correctly, he would be ok with prosecuting a wedding cake-baker who refused to bake a cake for a gay wedding.

I am reminded of Jacob Levy’s thesis that rationalism and pluralism are in tension with one another. A pluralist would say that the cake-baker has a right to discriminate. The rationalist would say otherwise. For more on Levy’s thesis, see this discussion forum, listen to this podcast, or read his (very expensive) book.

I am currently reading Robert Nisbet’s The Quest for Community (for an obvious reason). Nisbet saw individualism and statism as going together, part of the process of “liberating” people from the oppression of traditional communal institutions. What Levy calls rationalist liberalism is consistent with that. Nisbet did not view this “liberation” as such a wonderful thing.

Brad DeLong’s History Lesson, and another Puzzle

Posted on by

Interesting throughout, and difficult to excerpt.

You would imagine, therefore, that once the iron-hulled ocean-going screw-propellered steamship and the submarine telegraph cable had made their appearance, factory work worldwide would have rapidly gone to where labor was cheap. Yet from 1850-1980 that was not the case. Factory work by and large stayed where labor was expensive. And those economies that did manage to figure out how to utilize British Industrial Revolution and Second Industrial Revolution technologies at near-frontier levels of efficiency rapidly joined the club of rich economies that was the Global North.

I actually disagree with DeLong’s answer to this puzzle, which is that the underdeveloped world failed to industrialize because the countries of the Global South lacked strong home markets. I take the view that differences in culture and institutions were the key factors. I believe that it is Gregory Clark who pointed out that when early cotton manufacturing entrepreneurs took factories to India, they found that the workers did not function effectively.

Expensive Cities and Labor Immobility

Posted on by

Peter Ganong and Daniel Shoag write,

Though lawyers still earn much more in the New York area in both nominal terms and net of housing costs, janitors now earn less in the New York area after housing costs than they do in the Deep South. This sharp difference arises because for lawyers in the New York area, housing costs are equal to 21 percent of their income, while housing costs are equal to 52 percent of income for New York area janitors. While it may still be “worth it” for skilled workers to move to productive places like New York, for unskilled workers New York’s high housing prices offset the nominal wage gains.

Once again, land-use regulation is accused of being a major culprit. And along those lines, discussing Tokyo, Alex Tabarrok writes,

Rising housing prices are not an inevitable consequence of growth and fixed land supply–high and rising housing prices are the result of policy choices to restrict land development.

However, note that in a post devoid of politics or vitriol, Paul Krugman writes,

In today’s world, core headquarters functions – the stuff done by top executives and highly paid experts – can be unbundled from the more mundane operations of a company. These high-end functions are also the ones that benefit most from the agglomeration economies of a big city; not to mention the amenities such a city offers to people whose salaries are enough to let them afford decent housing despite high prices.

Meanwhile, it’s no longer necessary to have all the back-office operations in the same place, requiring that a lot of less-well-paid workers deal with high rents even as they suffer on the long subway ride in from Queens.

Pointer from Mark Thoma.

The point is that with modern communications technology, the upper echelons no longer have to be close to all of their mid-level staff.

This particular form of unbundling may or may not be the major factor. However, I think that patterns of specialization have shifted in ways that allow the affluent to invade some major cities and drive out the less-affluent. My view is that, as with colleges, affluent residents are a powerful attraction to other affluent residents, so that you head toward an outcome in which there is competition for “admission” to the high-end cities. For a variety of reasons, including differences in tastes, many of the less-affluent do not enter this competition.

The New Voodoo

Posted on by

John Cochrane writes,

Economics is a work in progress. But it is certainly brand-new, made-up-on-the spot economics, designed to buttress policies decided on for other reasons.

He is describing the economic analysis that claims that policies to distort labor markets to try to increase wages will increase aggregate demand, so that instead of reducing employment these policies will raise employment.

I am reminded of the made-up-on-the spot economics of the Laffer Curve, which claimed that cutting taxes would reduce budget deficits. That became known as “voodoo economics.”

So where once we had supply-side voodoo economics, we now have demand-side voodoo economics. Just what we needed.

Dietrich Vollrath on Brad DeLong’s Manufacturing Puzzle

Posted on by

Vollrath writes,

everything makes sense if ϵI=0.77. That is, if the income elasticity of demand for manufactured goods is a little less than one. An elasticity less than one means that if your income goes up by 10%, your expenditure on manufactured goods rises by less than 10%. It goes up, but not by a similar percent. This income elasticity less than one acts a lot like the “demand shift” that DeLong dismisses in his first scenario. If you like, I’ve just given a very specific form to that demand shift.

Which is point (3) in my post on the puzzle.

Pointer from Mark Thoma.

Temporary Benefits of the Trump Candidacy

Posted on by

Today’s WaPo writes,

scholars of the presidency say that Barack Obama, George W. Bush and their predecessors have added so many powers to the White House toolbox that a President Trump could fulfill many of his promises legally — and virtually unchecked by a Congress that has proven incapable of mustering much pushback for decades.

It’s nice to see the Post say something positive about checks and balances. Of course, if Mrs. Clinton wins in November, I expect the paper will return to bemoaning Congressional obstructionism and gridlock.