Category Archives: Tyler Cowen is my Favorite Blogger

Yankee Scandinavian Dandy

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Nima Sanandaji writes,

The descendants of Scandinavian migrants on the other side of the Atlantic live in a very different policy environment compared with the residents of the Scandinavian countries. The former live in an environment with less welfare, lower taxes and (in general) freer markets. Interestingly, the social and economic success of the descendants of Scandinavian migrants in the US is on a par with or even better than their cousins in Scandinavia

Pointer from Tyler Cowen. This is political incorrectness, squared. It argues that the Scandinavian welfare state is not the success that its reputation advertises. And it implicitly assumes that some groups enjoy genetic and/or cultural advantages relative to others.

My guess is that few progressives would accept the factual claims and analysis of the author. But if they did, and they wanted to maintain the oppressor-oppressed axis, might they argue that moving to America enables Scandinavians to profit more from being an oppressor class than they are able to profit from remaining in Scandinavia?

The Trade Slowdown

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Bernard Hoekman writes,

Slow trade growth has led to worries that the world economy has run into a ‘peak trade’ constraint, i.e. the ratio of global trade to GDP has reached a limit (Economist 2014). Global trade increased 27-fold between 1950 and 2008, three times more than the growth in global GDP. As a result, according to the World Bank’s World Development Indicators database, the trade-to-GDP ratio for the world as a whole rose from roughly 25% in the 1960s to 60% today. The slow (absence of) growth in trade since 2009 has meant no change in this ratio since 2008. If the recent decline in trade is sustained, this 60% may turn out to be a peak for the world as a whole.

Pointer from Tyler Cowen.

To be clear, “trade” is not slowing down. All economic activity is trade. The ratio of “trade to GDP” is the ratio of trade across borders to total trade, which includes trade that takes place inside national borders. Some thoughts:

1. As the share of GDP devoted to the New Commanding Heights (education and health care) increases, we might see a slowdown in cross-border trade. Note, however, that cross-border trade could pick up if distance learning and distance health care catch on.

2. As incomes rise in China and India, the “Samuelson effect” starts to kick in. That is, the comparative advantage of cross-border trade is reduced. That is, you do more production in China when American wages are 10 times Chinese wages than when they are only 4 times Chinese wages (using made-up numbers here).

3. As the cost of robots comes down, they displace workers in all countries, and this also reduces the comparative advantage of cross-border trade.

Vickies, Thetes, and Artisans

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Allison Schrager writes,

Harvard economist Lawrence Katz thinks that when the economy shifts, those who lose out experience “retroactive unemployment” in pursuit of jobs that no longer exist; however, he anticipates a bright future for men in the new economy. As an expert in the ways technology affects the middle class, Katz predicts the rise of the “new artisan” as a substantial trend in middle-class employment.

His theory holds that technology will commoditize and cheapen products in all industries but that artisanal workers will offer a superior interpersonal experience coupled with unique goods and services, commanding premium prices in turn. Men, he notes, are especially well suited to such roles.

Pointer from Tyler Cowen. This sounds like something straight out of Neal Stephenson’s The Diamond Age, except that Katz’s vision strikes me as more fictional.

Ideology and Keynesian Economics

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Scott Sumner posts on the controversy, which was recently re-ignited by what I thought was a reasonable post by Russ Roberts. My thoughts.

1. There is a correlation between belief in Keynesian economics and preference for a larger government. Economists who advocate for higher government spending to fight recessions also tend to argue at other times either to increase or not reduce every non-military component of government spending.

2. Nonetheless, those economists who believe in Keynesian economics and generally support higher government spending usually will insist that they are not ideological. In their view, they are merely scientists, who are free from confirmation bias.

3. Any online discussion that employs the term “Keynesian economics,” “macroeconomic facts,” or “Paul Krugman” will, with probability one, be un-constructive and uncharitable.

I am becoming increasingly convinced that the Internet is making us stupid politically. On the Internet, there is an impulse to react immediately to political comments, which means engaging your emotions rather than any self-critical reasoning. There is an impulse to be uncharitable to those with whom you disagree. Some of my responses:

1. I try to schedule blog posts at least a day in advance. My goal is to react less to the “threat” posed by political disagreement.

2. I look for opportunities to challenge the views of other libertarians, although not as often as Tyler does.

3. Recently, I made a determination to avoid commenting on political issues on Facebook. In fact, I would love an app that filters out all political posts on Facebook. I prefer even the pointless cute animal posts. But I mostly just like pictures and personal status updates of friends’ weddings, travel, anniversaries, etc. At some point I may have to sort through and unfriend the folks who only post on politics.

More Essential Hayek

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Again, the book will be released next week.

Another point Boudreaux makes is that in a specialized economy, our production activities are much narrower than our consumption activities. This makes rent-seeking more prevalent on the production side.

This point is easily missed. For example, Stephen G. Cecchetti and Kermit L. Schoenholtz write about the mortgage interest deduction as if its political strength comes entirely from home owners. (Pointer from Mark Thoma.) In fact, I would argue that it is the NAR, NAHB, and the MBA that make it inviolable.

We know that food stamps are popular with the farm lobby. And perhaps Medicaid does not benefit recipients as much as it does providers of medical services.

The Null Hypothesis Holds at the Macro Level

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Ricardo Hausmann writes,

In 1960, countries with an education level of 8.3 years of schooling were 5.5 times richer than those with 2.8 year of schooling. By contrast, countries that had increased their education from 2.8 years of schooling in 1960 to 8.3 years of schooling in 2010 were only 167% richer. Moreover, much of this increase cannot possibly be attributed to education, as workers in 2010 had the advantage of technologies that were 50 years more advanced than those in 1960. Clearly, something other than education is needed to generate prosperity.

Pointer from Tyler Cowen.

Note that this is not necessarily support for the null hypothesis. It could be that the “something other” is quality of education rather than quantity.

Tyler Cowen on China’s Plans for New Silk Road

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He writes,

China’s economic growth has been dominated by the coasts, and the Great Canal, for approximately one thousand years; today Xi’an is a backwater for instance, although in the Tang dynasty it was possibly the most advanced city in the world. Can this now-deeply entrenched pattern — water transport beats land transport — be reversed by a lot of government spending?

The advantages of water transport are difficult to over-estimate. Consider that well after the Golden Spike completed the transcontinental railroad, the Panama Canal was still a big deal.

Paging James Bennett and Michael Lotus

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Ola Ollson and Christopher Paik write,

We outline an agricultural origins-model of cultural divergence where we claim that the advent of farming in a core region was characterized by collectivist values and eventually triggered the out-migration of individualistic farmers towards more and more peripheral areas. This migration pattern caused the initial cultural divergence, which remained persistent over generations. The key mechanism is demonstrated in an extended Malthusian growth model that explicitly models cultural dynamics and a migration choice for individualistic farmers. Using detailed data on the date of adoption of Neolithic agriculture among Western regions and countries, the empirical findings show that the regions which adopted agriculture early also value obedience more and feel less in control of their lives. They have also had very little experience of democracy during the last century. The findings add to the literature by suggesting the possibility of extremely long lasting norms and beliefs infuencing today’s socioeconomic outcomes.

Pointer from Tyler Cowen.

Normal is an Economist’s Illusion

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Tyler Cowen writes,

Once unsustainable economic structures begin to fail, it takes a significant improvement to make them viable again. Yet because of the difficulty of making major changes under our current political alignment, most new government policies today are no more than changes at the margin. Perhaps the most basic problem is that it is difficult to be sure when a reset is underway, and it is harder yet to raise public alarm about changes that seem to be gradual and slow.

If you have not done so already, read the whole thing.

On China, he writes,

Today’s China is sui generis. The country has grown so quickly that every decade or so there is a very new China. And so we cannot easily look to the past as a guide. In economic terms, China seven years ago is equally removed from China today as the United States about thirty-five years ago is removed from the United States today

I do not know China, but I imagine that this is an understatement.

Normal is over, and it has been over for a long time, particularly if you think of “normal” as workers being temporarily laid off and then getting re-hired to those same jobs when things are back to “normal.” It’s been at least 35 years since we have seen workers recalled from layoffs in any significant numbers.

Going further, I would suggest that the whole idea of “normal growth” is probably an attempt to impose an orderly pattern on processes that are not truly orderly. Economists do this all the time. They “seasonally adjust” data. They “de-trend” data. They draw lines connecting peaks in GDP and thus conjure “potential GDP” and “trend productivity growth” and make up stories about these artificial constructs.

Some of the elements of what Tyler calls an economic “reset” have been playing out for decades. The decline of manufacturing employment as a share of total employment began over 50 years ago. I continue to suggest keeping an eye on four forces, all of which were in place long before the financial crisis of 2008: the New Commanding Heights; bifurcated marriage patterns; factor-price equalization; and Moore’s Law.

What if Inflation is Lower than Reported?

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Martin Feldstein makes the case. John Cochrane draws out one implication.

It would mean that we really have 0% nominal interest rates, 1.5% deflation rather than 1.5% inflation; +1.5% real rates rather than -1.5% real rates.

I find it much more satisfying to believe that the real interest rate is positive than to buy into secular (demand) stagnation. But some caveats:

1. Tyler Cowen’s third law.

2. I think that talking about “the” rate of inflation is difficult when relative prices are changing by much more than the average of all prices. Prices in the New Commanding Heights sectors of education and health care still seem to be rising faster than other prices. Products that incorporate computer chips still seem to be getting better and/or cheaper. Housing costs are going up in some locations, not in others. Etc.