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- Price Stickiness and Macroeconomics
by David Glasner in Uneasy Money, 2015-04-17 18:43:16 UTC
Noah Smith has a classically snide rejoinder to Stephen Williamson’s outrage at Noah’s Bloomberg paean to price stickiness and to the classic Ball and Maniw article on the subject, an article that provoked an embarrassingly outraged response from Robert Lucas when published over 20 years ago. I don’t know if Lucas ever got over it, but evidently Williamson hasn’t.
Now to be fair, Lucas’s outrage, though misplaced, was understandable, at least if one understands that Lucas was so offended by the ironic tone in which Ball and Mankiw cast themselves as defenders of traditional macroeconomics â [...]
- Note on Laffer curves
by chris in Stumbling and Mumbling, 2015-04-17 13:05:06 UTC
Tim and Richard have been having an argument about Laffer curves. Here, in no particular order, are my notes on the matter.
1. There are (at least) two Laffer curves - one that relates top tax rates to GDP, and on that relates them to tax revenues. The two probably do not coincide. For example, if a top earner responds to higher taxes by continuing to work but by dodging tax, GDP is unaffected but revenues fall. For this reason, the revenue-maximizing top rate is probably lower than the GDP-maximizing rate. To this extent, Richard is right to stress the importance of tax dodging. As Alan Manni [...]
- Make work and the WPA.
by Ralph Musgrave in Ralphonomics, 2015-04-17 07:59:00 UTC
An idea which has been around for a VERY LONG TIME, is that it is in theory possible to abolish unemployment by simply having government pay the unemployed to do SOMETHING instead of nothing (well, “nothing” plus a bit of job searching). Those refusing this sort of work, could be regarded as having turned down work, and could thus perhaps no longer be classified as unemployed. Hey Presto: unemployment vanishes. Well in theory it does! That sort of idea was implemented big time in the 1930s, for example there was the “Work Project Administration” in the US which built vast numbers of ro [...]
- Forecasting vs explaining
by chris in Stumbling and Mumbling, 2015-04-16 14:14:16 UTC
There's a big difference between forecasting and explaining. This is one point which I fear is being under-emphasized in the culture war about the state of macroeconomics .
Critics often infer that the discipline failed because it didn't foresee the crisis.
It's certainly the case that few people saw the crisis coming. For example, only one forecaster of those surveyed by the Treasury in March 2008 foresaw a fall in GDP in 2009 - and he had also, wrongly, forecast weak growth in 2005 and 2006. UK economists weren't alone here: US forecasters also failed to see the recession coming, as did th [...]
- Gender pay gap narrows when fringe benefits are included
by Natalie Scholl in AEIdeas, 2015-04-15 13:49:55 UTC
On the inaptly-named “Equal Pay Day,” the White House Council of Economic Advisors claims that the “gender pay gap” between men and women widens when we count total compensation including benefits instead of just salaries. The CEA states: The pay gap goes beyond wages and is even greater when we look at workers’ full compensation packages. Women are less likely to have an offer of health insurance from their employer, have retirement savings plans, or have access to paid leave, and perhaps as a result, they are more likely to take leave without pay. This is consistent with the White [...]
- The problem with promises
by chris in Stumbling and Mumbling, 2015-04-14 13:16:07 UTC
"He who fights with monsters should be careful lest he thereby become a monster." Labour's manifesto reminded me of these famous words of Friedrich Nietzsche.
It begins thus:
A Labour government will cut the deficit every year. The first line of Labour’s first Budget will be: “This Budget cuts the deficit every year.”
This is, of course, silly. It amounts to a promise to tighten fiscal policy even if the economy weakens. The statement could be rewritten: "if a recession occurs, we'll make it worse."
Granted, few people expect a recession in the next five years. But this means little. R [...]
- Sticky Prices, Financial Frictions, and the Ben Bernanke Puzzle
by Stephen Williamson in Stephen Williamson: New Monetarist Economics, 2015-04-14 02:05:00 UTC
Noah Smith's Bloomberg post on the wonders of sticky price models caught my eye the other day. I'm going to use that as background for addressing issues on financial stability and monetary policy raised by Ben Bernanke. First, Noah is more than a little confused about the genesis of sticky-price New Keynesian (NK) models. In particular, he thinks that Ball and Mankiw's "Sticky Price Manifesto" was a watershed in the NK revolution. Far from it. Keynesian economics went in several different directions after the theoretical and empirical revolution in macroeconomics. There was the coordination fa [...]
- Crime and punishment the British way: how the expenses scandal affected the 2010 general election
by Joel Suss in British Politics and Policy at LSE, 2015-04-13 15:00:08 UTC
A study by Valentino Larcinese examines the channels through which voters keep politicians accountable. Using the expenses scandal as a source of data, he finds that it was scandal-related press coverage which affected negatively the 2010 performance of standing MPs. Punishment in the ballot box, however, was relatively small and generally not sufficient to remove MPs involved in the scandal from their seat. One of the reasons why in general elections the punishment of corrupt politicians can be modest is because ideology matters and many voters may still prefer a corrupt politician to an [...]
- The mythic quest for early warnings
by Steve Cecchetti and Kim Schoenholtz in Money, Banking and Financial Markets, 2015-04-13 12:40:01 UTC
Economists and policymakers are on a quest. They are looking for the elixir that will protect their economies from financial crises. Their strategy is to find an indicator that provides an early warning of collapse, and then respond with preventative measures. We think the approach of waiting for warnings is seriously flawed. The necessary information may never be in our grasp. And even if it were, our ability to respond rapidly and effectively is far from clear. Rather than treating the symptoms of illness after they start to develop, we believe the better strategy is early immunization: the [...]
- Do more roads really mean less congestion for commuters?
by Michiel Bliemer, Professor in Transport and Logistics Network Modelling at University of Sydney in The Conversation, 2015-04-12 20:33:10 UTC
Tunnel vision: the claim that more roads equals less congestion fails to see the wider picture. AAP Image/Dean Lewins Congestion is a major source of frustration for road users and has worsened over time in most cities. Different solutions have been proposed, such as introducing congestion charging (a favourite of transport economists) or investing in public transport. One solution that is most often put forward is to build more roads, but does this approach work?
A recent study in the United States identified Los Angeles, Honolulu and San Francisco as the top three most gridlocked cities in [...]
- Dynamic Directed Search
by Christian Zimmermann in NEP-DGE blog, 2015-04-12 16:14:09 UTC
By Gabriele Camera and Jaehong Kim
The directed search model (Peters, 1984) is static; its dynamic extensions typically restrict strategies, often assuming price or match commitments. We lift such restrictions to study equilibrium when search can be directed over time, without constraints and at no cost. In equilibrium trade frictions arise endogenously, and price commitments, if they do exist, are self-enforcing. In contrast to the typical model, there exists a continuum of equilibria that exhibit trade frictions. These equilibria support an [...]
- The origins of dishonesty
by noname in ZeeConomics, 2015-04-12 15:36:38 UTC
Dishonesty perpetuates everyday life, especially in the form of small cheating that happens on a massive scale. Think of using public transportation without paying, cheating on taxes or stealing from the workplace. Cheating can cause larger scale problems as it can undermine trust, which is well-known to be associated with e.g. economic growth.
But cheating is heavily context-dependent. People are more likely to cheat in certain situations than in others. The question that then arises is in what contexts cheating is more common, what settings lead to more dishonesty.
Houser et al. (2015) addr [...]
- Fast Track to Lost Jobs and Lower Wages
by Robert E. Scott in Huffington Post Business, 2015-04-12 10:47:44 UTC
This week, Senator Hatch will reportedly introduce "fast track" (trade promotion authority) legislation in the Senate, to help President Obama complete the proposed Trans-Pacific Partnership (TPP) , a trade and investment deal with eleven other countries in Asia and the Americas. "Fast Track" authority would allow the President to submit trade agreements to Congress without giving members of Congress the opportunity to amend the deal. Experience has shown that these trade and investment deals typically result in job losses and downward pressure on the wages of most American workers. The last t [...]
- Will the AIIB one day matter?
by Michael Pettis in China Financial Markets, 2015-04-11 13:33:11 UTC
When Isaac, an editor at Foreign Policy , sent me an email two weeks ago asking if I could write a piece on the new Asian Infrastructure Investment Bank (AIIB), I quickly wrote back promising 1,200 words within a few days. I thought it would be pretty easy to come up with the points I wanted to make, and all I would need was one uninterrupted day to pull them together into a coherent article.
As I see it, the creation of the AIIB is not nearly as important as everyone seems to think, and if Beijingâs decision to create the AIIB, and Washingtonâs decision to oppose it, was part of the strug [...]
- A positive Conservative agenda
by chris in Stumbling and Mumbling, 2015-04-10 12:59:41 UTC
The anti-Miliband campaign seems to have backfired : it's created an image of someone who is both weak and ruthless and a nerd and a shagger - which betokens a certain confusion.
Some on the left, though, believe the Tories have had no option but to use such negative campaigning. Phil says :
When your coming manifesto promises little more than demented and unnecessary cuts, a possible EU exit, and precious little else the Tories have already lost the politics.
This poses the question: what might a more positive Tory platform look like? If I were Cameron, I'd stress three elements.
First, I'd [...]
- Dropping soft drinks from kids' menus is good, but doesn't make a healthy meal
by T Bettina Cornwell, Professor of Marketing at University of Oregon in The Conversation, 2015-04-10 09:47:40 UTC
Drink up. Drinking straws via www.shutterstock.com. In March Burger King quietly removed soft drinks from its kids' menu and as a beverage option for the Burger King Kids meal. They aren’t the first fast food chain to do this – Wendy’s and McDonald’s have instituted similar changes as well.
Soft drinks can still be ordered, but the posted options for kids at Burger King are now low-fat milk, low-fat chocolate milk and apple juice.
We have known for a very long time that soft drinks are not nourishing , and that they contain lots of sugar. So not serving them to three- to seven-year-o [...]
- A quantitative analysis of the U.S. housing and mortgage markets and the foreclosure crisis
by Christian Zimmermann in NEP-DGE blog, 2015-04-09 18:25:22 UTC
By Satyajit Chatterjeeand Burcu Eyigungor
We present a model of long-duration collateralized debt with risk of default. Applied to the housing market, it can match the homeownership rate, the average foreclosure rate, and the lower tail of the distribution of home-equity ratios across homeowners prior to the recent crisis. We stress the role of favorable tax treatment of housing in matching these facts. We then use the model to account for the foreclosure crisis in terms of three shocks: overbuilding, financial frictions, and foreclosure dela [...]
- Happiness policy, & growth
by chris in Stumbling and Mumbling, 2015-04-09 12:05:23 UTC
There's a lot that we've not seen so far in this election campaign. One of the many absences has been any discussion of happiness policy. This is odd, given that back in 2006 Mr Cameron said :
Improving our society's sense of well-being is, I believe, the central political challenge of our times.
You might that the financial crisis overturned this belief. Perhaps it shouldn't have, because well-being might be one solution to slow growth. Some new research claims :
Average local happiness is positively correlated with both R&D intensity and firm investment after controlling for firm and loca [...]
- Liquidity as static
by JP Koning in Moneyness, 2015-04-09 02:37:00 UTC
In his first blog skirmish , Ben Bernanke took on Larry Summers' secular stagnation thesis, generating a slew of commentary by other bloggers. If the economy is in stagnation, the econ-blogosphere surely isn't. I thought that Stephen Williamson had a good meta-criticism of the entire debate. Both Bernanke and Summers present the incredibly low yields on Treasury inflation protected securities (TIPS) as evidence of paltry real returns on capital. But as Williamson points out, their chosen signal is beset by static. Government debt instruments like TIPS are useful as media of exchange, specifica [...]
- The Future of Economic History?
by Matthew Kahn in Environmental and Urban Economics, 2015-04-08 14:45:00 UTC
The Economist Magazine makes the case "macro case" that economic history is a highly relevant field. �It hints that if the world economy follows a stationary time series process then we need to look back for hundreds of years to collect enough booms and crises to improve our understanding of business cycles and governments' attempts to reduce their amplitudes. � It suggests that such stars as Piketty, Reinhart and Rogoff represent the best of what economic history can hope to achieve. Macro history doesn't interest me. I'm interested in Robert Fogel's "micro history". � In 1987, I earned a deg [...]
- Monetary policy transmission in China: A DSGE model with parallel shadow banking and interest rate control
by Christian Zimmermann in NEP-DGE blog, 2015-04-07 15:49:54 UTC
By Michael Funke, Petar Mihaylovski and Haibin Zhu
The paper sheds light on the interplay between monetary policy, the commercial banking sector and the shadow banking sector in mainland China by means of a nonlinear stochastic general equilibrium (DSGE) model with occasionally binding constraints. In particular, we analyze the impacts of interest rate liberalization on monetary policy transmission as well as the dynamics of the parallel shadow banking sector. Comparison of various interest rate liberalization scenarios reveals that moneta [...]
- Diamonds or fool's gold?
by chris in Stumbling and Mumbling, 2015-04-07 13:40:23 UTC
Are the rich diamonds or are they fool's gold? I ask because of something Tim says. He responds to George Monbiot's complaint that:
There is an inverse relationship between utility and reward. The most lucrative, prestigious jobs tend to cause the greatest harm. The most useful workers tend to be paid least and treated worst.
This, says Tim, is just an example of the old diamond-water paradox . Diamonds (usually) have a higher price than water because they have a higher marginal utility and are scarcer than water.
This, however, obscures a vital question: what exactly is the source of the h [...]
- A Simple Guide to "Secular Stagnation"
by Stephen G. Cecchetti in Huffington Post Business, 2015-04-07 09:22:44 UTC
Since its cyclical peak in 2007 - just prior to the financial crisis - the U.S. economy has grown by only 1.2% at an annual rate. This is down sharply from the 3.0% pace that had prevailed since 1990. The resulting cumulative shortfall now exceeds $2 trillion, or more than $6,500 per capita. Naturally, we all want to know why. And what, if anything, to do about it.
The textbook explanation is that the trend of potential output has slowed sharply. Potential output is a supply concept: In the long run, when all prices (including wages and interest rates) have adjusted, aggregate supply is dete [...]
- Past Media Coverage of Urban Infectious Disease Death Dynamics: Causes and Consequences
by Matthew Kahn in Environmental and Urban Economics, 2015-04-06 13:35:00 UTC
Infectious disease was a major threat to urban quality of life in the late 19th century. �Research from Germany, France, and from the United States has documented this claim. �In a new NBER �paper, � Dora Costa and I study how the local media reported about infectious disease outbreaks. �A recent literature has studied the causes and consequences of media coverage. � We contribute to this literature with a focus on urban quality of life dynamics in the presence of infectious disease risk. Consider two different cases: Case #1: �Objective infectious disease risk (typhoid) is declining in neighb [...]
- Zero matters
by Steve Cecchetti and Kim Schoenholtz in Money, Banking and Financial Markets, 2015-04-06 12:56:17 UTC
The invention of the number zero transformed mathematics and laid the foundations for modern science. Zero is the additive identity (any number plus zero equals itself). It separates the positive and negative numbers. For a celebration of zero, see� here .Zero matters in economics, too.� Zero growth separates cyclical expansions and contractions. We need zeroes to measure the trillions of dollars of GDP, and even more zeroes to measure hyperinflations �(during the record Hungarian inflation of 1945-46, the quantity of currency in circulation grew to a number with 27 zeroes).�Most importantly, [...]
- Fear of freedom
by chris in Stumbling and Mumbling, 2015-04-06 11:38:02 UTC
Today is pensions freedom day, which has led to fears that people will misuse their freedom and so pay too much tax , stoke up a buy-to-let bubble or just spend too much too soon and so end up in poverty.
This reminds us that freedom is a scary thing. Bryan Caplan highlights some words of Martin Luther:
I frankly confess that even if it were possible, I should not wish to have free choice given to me, or to have anything left in my own hands by which I might strive toward salvation. For, on the one hand, I should be unable to stand firm and keep hold of it amid so many adversities and perils [...]