Category Archives: Tyler Cowen is my Favorite Blogger

Political Donations vs. Industry Affliation

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Business Insider reports,

Lobbyists are, perhaps unsurprisingly considering their role in the political system, similarly split

Actually, you need to read the article. Pointer from Tyler Cowen. Some remarks.

1. Although both liberals and conservatives receive large donations from lobbyists, the donations of people in the media skew very heavily liberal. I am not sure that this is easy to explain. I would think that the market would produce a bulge in the media at both extremes, not at one.

2. I am not surprised that the auto, banking, pharmaceutical, and real estate industries donate heavily to both liberals and conservatives. When you have a close relationship with government, you need to hedge your bets.

Larry Summers on Upward-Sloping AD

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He writes,

Notice that as Keynes, Tobin and subsequently Brad Delong and I have emphasized, wage and price flexibility may well exacerbate the problem. The more flexible wages and prices are, the more they will be expected to fall during an output slowdown leading to an increase in real interest rates. Indeed there is the possibility of destabilizing deflation with falling prices leading to higher real interest rates leading to greater output shortfalls leading to more rapidly falling prices and onwards in a vicious cycle.

Read the whole thing. There were many sentences I wanted to excerpt. Pointer from Mark Thoma.

In AS-AD, if your Y-axis is inflation rather than the price level, then AD slopes upward. That is, the more inflation you have, the lower the real interest rate, and the higher is AD. If AD gets steeper than AS, then have a nice day. Because if that happens, then a “favorable” supply shift leads to lower employment and output. One way to interpret secstag is as a claim that we have been experiencing an AD curve that is upward-sloping and steeper than AS.

Keep in mind that Summers and other mainstream macro economists talk about potential GDP as if it were some tangible quantity, rather than a made-up number. In mainstream macro, we all work in a GDP factory, and the factory has a capacity that we call potential GDP.

The PSST story rejects that. It says that we produce many different types of output, and we only have the potential to produce the output for which we have discovered patterns of sustainable specialization and trade. If we could discover other patterns of sustainable specialization and trade, we could produce a different mix of output, and perhaps this would raise the level of GDP. But raising GDP by discovering patterns of specialization and trade is akin to raising GDP by discovering a practical cold fusion technology. Complaining about the economy operating below potential is like complaining that we do not have cold fusion.

Related: Tyler Cowen on the difficulty of disentangling AD from AS. Plus Scott Sumner commenting on Tyler Cowen.

People, Countries, and Debt

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James Kynge writes about China,

Total debts owed by the government, companies and households have ballooned to 240 per cent of gross domestic product, virtually double the level at the time of the global financial crisis.

This ratio, it is true, remains modest next to some in the west; US debts stand at 322 per cent of GDP, Ireland’s at more than 400 per cent, while Greece and Spain are at about 300 per cent each.

Pointer from Tyler Cowen.

To me, it seems careless to add up the liabilities of government, companies, and households. I object to taking the sum of these numbers and saying “China owes ___.” The debt is not owed by an entity called the country of China. It is owed by disparate entities within the country of China. And much of it is owed to disparate entities within China.

Speaking of which, it also seems careless to ignore assets. Suppose somebody has a $300,000 mortgage and a $30,000 income. You might say, “wow, their debt is 1000 percent of their income!” But that is not so alarming if they have $1 million in assets (maybe the house itself is worth $1 million).

I’m not trying to dismiss the issue. Just the other night, one of my favorite economists pointed out that if the debt burden on the Chinese government starts to pinch, then it might have to stop buying (or even start selling) American government bonds. That could fuel a rise in interest rates, and then the debt burden of the American government would spike up. If that happens, have a nice day. But a high ratio of total liabilities of all of the entities within in a country to its GDP is at best a very imprecise indicator of financial distress.

A Thought From Marc Andreessen

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He says,

what if we had Math 101 online, and what if it was well regarded and you got fully accredited and certified? What if we knew that we were going to have a million students per semester? And what if we knew that they were going to be paying $100 per student, right? What if we knew that we’d have $100 million of revenue from that course per semester? What production budget would we be willing to field in order to have that course?

Pointer from Tyler Cowen.

I might push back and say that the same course is unlikely to work well for all one million students. As I have said before, the key is not so much in presenting content. It’s giving students feedback in a way that maximizes their rate of progress.

“Scott Alexander” on Political Tribalism

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He writes,

How did both major political tribes decide, within a month of the virus becoming widely known in the States, not only exactly what their position should be but what insults they should call the other tribe for not agreeing with their position?

Pointer from Tyler Cowen.

Of course, my answer to his question is in The Three Languages of Politics. What Alexander calls the “red tribe” narrative does indeed have a civilization-barbarism feel, and what he calls the h”blue tribe” narrative has an “oppressor-oppressed” feel.

Anyway, read the whole piece. Another excerpt:

Daily Kos or someone has a little label saying “supports liberal ideas”, but actually their incentive is to make liberals want to click on their pages and ads. If the quickest way to do that is by writing story after satisfying story of how dumb Republicans are, and what wonderful taste they have for being members of the Blue Tribe instead of evil mutants, then they’ll do that even if the effect on the entire system is to make Republicans hate them and by extension everything they stand for.

Note that on the issue of a quarantine of countries where Ebola has broken out, the three-axes model might predict that if Ebola had broken out among Jews in Israel instead of in West Africa, there might well have been a reversal in which tribe favored quarantine. The “conservative germophobia” theory would predict otherwise.

Patent Pools

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Josh Lerner and Jean Tirole (the latter was just awarded a Nobel Prize) write,

Innovations in hardware, software or biotechnology often build on a number of other innovations owned by a diverse set of owners.

Pointer from Joshua Gans. For more on Tirole, see Tyler Cowen and subsequent posts by Alex and Tyler.

Two (or more) firms may hold complementary patents. That is, the value of using firm A’s patented innovation is higher to a licensee who can also use firm B’s patented innovation. Lerner and Tirole ask when a social planner would want these firms to pool their patents, that is to license them together. If you do not care to follow their mathematical analysis, you can skip to the end where they summarize their conclusions.

The situation is a form of the dual-monopoly problem. As I once explained,

suppose that a single company has a monopoly in both peanut butter and jelly. When it sets the price of jelly, it knows that the more jelly it sells the more peanut butter it will sell. Therefore, at the margin, it will tend to want to set a lower price for jelly than if it were just looking at jelly as a stand-alone product.

If you then break up the PB and J monopoly into two separate companies, the incentives of the two separate monopolies will change. The peanut butter company is not going to worry about the fact that higher peanut butter prices will reduce jelly consumption, and the jelly company is not going to worry about the fact that higher jelly prices will reduce peanut butter consumption. The net result of the breakup is that prices to consumers will rise.

This theory goes all the way back to Cournot.

It seems to me that we observe patent pools more often internally than externally. Think of Apple Computer as one gigantic internal patent pool. Or a large pharmaceutical company. It might be easier for one firm to internalize complementary patents than for several firms to get together and pool them.

Undebunkable

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Jesse Rothstein writes,

Like all quasi-experiments, this one relies on an assumption that the treatment – here, teacher switching – is as good as random. I find that it is not: Teacher switching is correlated with changes in students’ prior-year scores

Pointer from Tyler Cowen.

Thus, Rothstein hopes to debunk a famous paper by Raj Chetty and others which claimed to shows that great teachers add a lot of value. My guess is that Rothstein will fail. It reminds me of when Bill Wascher and others debunked the Krueger-Card paper claiming to show that higher minimum wage laws do not reduce employment. Once a result is put into the literature by a high-status economist and the result supports progressive policy preferences, it becomes undebunkable.

And you’re right, I’m not being charitable to those who disagree.

The Null Hypothesis Strikes Again

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Timothy Taylor looks at an OECD report on the effect of making a student repeat a grade. He quotes this sentence:

In practice, however, grade repetition has not shown clear benefits for the students who were held back or for school systems as a whole.

One interpretation of this is that the marginal benefit of an additional year of schooling is zero. However, that interpretation is not something that anyone wants to discuss.

And I could put the same headline on Tyler Cowen’s post about a study in France.

DeLong-term Productivity Trend

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Brad writes,

My problem is that I believe in the slow diffusion of technology, the importance of incremental improvements, the usefulness of the incentives provided by the fact that it is easy to make a lot of money by figuring out a cheaper way to produce and supply things that people are willing to pay a lot of money for, and the law of large numbers. These make me think that–modulus the business cycle and measurement error–total factor productivity should be smooth in the level and smooth in the growth rate as well: whatever processes were going on last year that led to invention, innovation, deployment, and thus higher productivity in a potential-output sense ought to be almost as strong or only a little stronger this year.

The entire post is interesting. I think that the view that there are no sudden economic regime changes is difficult to shake. Probably my best argument against a post-2003 productivity slowdown is that we are seeing the continued expansion of education and health care, two sectors where there is essentially no reasonable way to measure productivity to begin with. Also, quality-adjustment in the goods sector is getting harder to measure, because goods tend to overlap with services (is Amazon Kindle really mostly a good, as opposed to a service)>

Pointer from Tyler Cowen.

Tyler Cowen vs. Ezekiel Emanuel

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Tyler writes,

And to sound petty for a moment, I don’t want to pass away during the opening moments of a Carlsen-Caruana match, or before an NBA season has finished (well, it depends on the season), or before the final volumes of Knausgaard are translated into English. And this is a never-ending supply. The world is a fascinating place and I fully expect to appreciate it at the age of eighty, albeit with some faculties less sharp. What if the Fermi Paradox is resolved, or a good theory of quantum gravity developed? What else might be worth waiting for?

Off hand, I would say

1. Grandchildren
2. Medical progress to reverse degenerative illness