Tag: paul krugman

Everywhere But In The Statistics

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That is, of course, part of a very famous quote by Robert Solow:

You can see the computer age everywhere but in the productivity statistics

http://www.standupeconomist.com/pdf/misc/solow-computer-productivity.pdf

And in a recent newsletter, Paul Krugman agrees:

…have the past few decades generally vindicated visionaries who asserted that information technology would change everything? Or have they vindicated techno-skeptics like the economist Robert Gordon, who argued in a 2016 book that the innovations of the late 20th and early 21st century were far less fundamental than those between 1870 and 1940?
Well, by the numbers, the skeptics have won the argument, hands down.

https://www.nytimes.com/2023/04/04/opinion/internet-economy.html

Paul Krugman goes on to show this chart:

https://www.nytimes.com/2023/04/04/opinion/internet-economy.html

I’ll tell you how to read this chart, but back up for a moment and learn about total factor productivity first:

Total Factor Productivity (TFP) is a measure of how much output an economy can produce using the same amount of inputs, like labor and capital.
In simpler terms, TFP is like a measure of how smartly an economy is using its resources to make things. It tells us how efficiently a country is using its workers, machines, and materials to create products and services.
TFP is important because it can help explain why some countries are richer than others. When a country can produce more with the same amount of inputs, it can grow faster and become richer over time.
Measuring TFP is tricky because it’s hard to tell how much of a country’s output is due to factors like capital and labor, and how much is due to other things like technology and innovation. To measure TFP, economists use complex models that take into account all the different factors that could be affecting a country’s productivity.
In the context of development economics and growth theory, TFP matters because it can help explain why some countries are able to grow faster and become richer than others. Countries that are able to improve their TFP can create more goods and services with the same amount of resources, which can lead to faster economic growth and higher living standards for their citizens.
To improve TFP, countries can invest in education and research, create better infrastructure, and implement policies that encourage innovation and entrepreneurship. By doing so, they can create a more productive and efficient economy that can grow and thrive over time.

chat.openai.com

So here’s the question to ask: did the advent of the internet allow us, as an economy, to get smarter at using our resources to make things? Paul Krugman’s chart answer this question by showing how TFP growth changed over the next twenty five years from each given date on the x-axis. So if in 1948, TFP growth was just below 2, what that means is that TFP growth over the period 1948-1973 was just below 2. So did TFP growth go up in a twenty-five year period following 1996? The chart clearly says no, it didn’t, and Paul Krugman says “Ha!“:

See the great productivity boom that followed the rise of the internet? Neither do I.

https://www.nytimes.com/2023/04/04/opinion/internet-economy.html

Here’s the paragraph that really stuck out for me, though, from Paul Krugman’s column:

For the fact is that while moving information around is important, we’re still living in a material world: Most of what we consume is physical stuff or in-person services, which haven’t been drastically affected by the internet.

https://www.nytimes.com/2023/04/04/opinion/internet-economy.html

Huh. Let’s try to think this through:

  1. Use your own example, as I am about to do below.
  2. Do you use online services, even when it comes to consuming physical stuff or in-person services? In my case, Amazon is where I buy most of my physical stuff from, or from Amazon’s competitors. But they all have an online presence, and that is my preferred mode of shopping.
  3. I much prefer to have my food delivered home via Zomato or its competitors. My consumption of music is via online streaming services, my consumption of video is via YouTube or via OTT, I don’t even have a cable connection at home. My consumption (and creation) of the written word is almost entirely online (blogs, Kindle, Twitter, newsletters in my inbox). A fair few chunk of my classes at various colleges are online every now and then.
  4. Calling a plumber home, or an electrician, is via Urban Company, or one of its competitors. Booking flight/train tickets, booking movie tickets, paying my daughter’s school fees, transacting with my bank – I can go on, but it’s mostly online.
  5. Software has eaten, I would say, most of my world.
  6. But I should ask if I am falling prey to confirmation bias. What is decidedly offline, for me, as a consumer?
  7. I should also be asking if I am truly representative of the average Punekar, let alone the average Maharashtrian, let alone the average Indian, and still lesser an average citizen of the world.

I would say this much: I’m fairly confident that the Internet has enabled more consumption of goods and services than was the case twenty-five years ago. As a sixteen year old in 1998, I can guarantee you that reading what Paul Krugman wrote a couple of days ago would have been a very hard thing to do! And I feel fairly safe in saying that at varying margins, this is true for a lot of people in Pune, in Maharashtra, in India, and indeed in the whole world. Those margins will likely be influenced by per capita income in each country, by whether you stay in a more (or less) urbanized part of the world, and by a whole host of other factors. But as a species, a lot of our consumption of even physical goods or in-person services has been impacted by the advent of the internet.

I’m very curious to hear from you, especially if you disagree. Please tell me what I’m missing out on!

But that makes Paul Krugman’s chart even more puzzling! I’m tempted to disagree with him based on what I’ve written above, but I’m not sure how to disagree with the chart.
What about you?

Measuring GDP is hard.

Paul Krugman’s post ends with a few cool references, and since it’s behind a paywall, I’m listing them over here:

First, a nice YouTube video on washing machines and the internet:

Second, a simple explainer on TFP.

Third, a lovely book by Robert Gordon which you absolutely must read.

Final point: how to get better at measuring GDP is (and will likely continue to be for a very long time) a fascinating problem, and I will definitely write more about it in future posts. But in the meantime, if you have any recommendations about what to read/listen/view, please do share!

Team So What Exactly is Going on Then, Huh?

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Paul Krugman responds (and also visit his Twitter profile to take a look at other threads by him on the issue).

But above all: if you think macro is tough, the good news is that you’re in excellent company!

Can Micro be Weird?

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Donald Bodreaux has an excellent, truly thought-provoking write-up on the imposition of price floors.

…governments also sometimes attempt to push prices upward. When the intervention is designed to increase prices by outlawing the charging of monetary prices below some minimum, the intervention is called a price floor.

https://www.aier.org/article/on-the-negative-consequences-of-price-floors/

I usually explain price floors to my students by speaking about attendance requirements in colleges and universities. Think of it, I urge them (only somewhat in jest), as a price that you guys have to pay me. Even if you happen to not like my classes, and think me to be the most boring guy ever – and therefore don’t wish to pay me by spending your time – no can do. You must pay me with your time.

That’s a price floor.

So what might be the unseen consequences of a price floor?

Here’s where Donald Bodreaux’s 1 column gets truly interesting (apologies for the lengthy extract):

Suppose that the government imposes a true price floor in the market for pickles. The government declares illegal all purchases and sales of pickles at prices below, say, $10 per pound (which price, let’s assume, is above the market price that would prevail absent the price floor).
The first and most obvious effect of this price floor is that the quantity of pickles that consumers are willing to buy will fall; the quantity that consumers demand will be driven lower than it would be without the price floor. If pickle producers are economically naïve, this price floor will create a physical surplus of pickles as producers, attracted by the higher price, increase their production of pickles. But even the most naïve pickle producers will soon learn that consumers are willing to buy at the high price-floor not only fewer pickles than producers are willing to produce and sell at that high floored price, but even fewer than consumers were willing to buy at prices lower than the floored price.
Discovering themselves unable to sell all of the output they are willing to sell at the price floor, pickle producers reduce their production. They produce no greater amount of pickles than consumers are willing to buy at the high price floor. So while price ceilings always create shortages, price floors don’t always create physical surpluses.
Nevertheless, because price floors do always reduce the quantities that buyers wish to buy while increasing sellers’ willingness to produce and sell, price floors create a second negative consequence – namely, the need for some means to determine which sellers will be among the lucky ones to sell at the higher price and which sellers will not be able to take advantage of the higher price by actually selling units of output at that price.
This determination might be done by luck or random chance. Perhaps only those sellers who encounter consumers early will be able to sell, while sellers who get to market too late find no more buyers.
But luck or random chance is unlikely to operate for long. Eager to sell at the high price floor, sellers will compete for buyers in ways other than cutting prices. A third negative consequence of a price floor is, thus, that the quality of the price-floored good rises. Pickle producers might attach to each jar they sell “free” coupons for discounts on crackers or deli meats or beer. These producers might work harder to make their pickles even tastier. Such non-price competition for consumer patronage is an inevitable result of price floors.
Unlike with the quality reductions caused by price ceilings, the impetus to quality improvements caused by price floors perhaps seems to be a positive consequence rather than, as I’ve described it, a negative one. But negative it is when compared to what the situation would be absent the price floor.
It’s true that, given that consumers aren’t allowed to buy pickles at any price below $10 per pound, they like their pickles being even tastier or sold with discount coupons. But what consumers would like even more is to pay a lower price for a lower-quality product. Were there no price floor in place, consumers would reveal through their spending that the higher quality isn’t worth the higher price. Yet because lower prices are unlawful – that is, because consumers must pay the higher price if they want pickles – consumers settle for the second-best outcome of paying this higher price for a higher-quality product.
Price floors, in short, compel consumers to buy too few units but too much quality.

https://www.aier.org/article/on-the-negative-consequences-of-price-floors/ (Emphasis added)

And that’s why the title of this blogpost is what it is: can micro be weird?

Demand will go down with a higher price, sure, and suppliers will eventually reduce their supply given low demand. So far, so standard.

But remember that suppliers compete with each other, not with folks on the demand side – and so if you and I and five of our friends are pickle manufacturers facing high prices and low demand, we have to “do battle” with each other to sell our produce.

Facing low sales, will a producer’s natural response be an upping of quality? Discounts, freebies, and maybe the attempt to convince buyers that my product is of higher quality (marketing, branding) – but an actual increase in quality? But hey, that’s why studying micro can be fun – because it is weird!

This is covered in Paul Krugman’s textbook on micro too, where he cites the example of airlines upping the quality of service when faced with price floors set by international treaties. And, the textbook goes on to say, when prices were allowed to come down, so did quality.

So, long story short, yes, micro can be weird – but that’s what makes studying economics fun!

  1. quick question for grammar Nazi’s – should it be Bodreaux’s or Bodreaux’[↩]

So You Think You Know Economics

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I hope you do, and I think I do – know economics, that is.

But I’ve always thought about economics (how to get the most out of life), here on earth. I haven’t thought about what economics might be like on other planets, on space stations, or on whatever else lies ahead of us in terms of both space and time (pun kind of intended).

Paul Krugman had a fun paper about this written more than forty(!) years ago. The paper is freely available, and you can download it over here, but there is also a Wikipedia article about it, if you would prefer to begin there.

As the Wikipedia article says, the summary of the paper was this:

How should interest rates on goods in transit be computed when the goods travel at close to the speed of light? This is a problem because the time taken in transit will appear less to an observer traveling with the goods than to a stationary observer.

https://en.wikipedia.org/wiki/The_Theory_of_Interstellar_Trade

The next line in the Wikipedia article is genuinely funny, and that in typical Krugman style:

This paper, then, is a serious analysis of a ridiculous subject, which is of course the opposite of what is usual in economics.

https://en.wikipedia.org/wiki/The_Theory_of_Interstellar_Trade

But a much more recent post by Robin Hanson invites us to do a serious analysis of a no-longer-ridiculous subject: how should one think about social analysis of a future that is much more about space travel.

We understand space tech pretty well, and people have been speculating about it for quite a long time. So I’m disappointed to not yet see better social analysis of space futures.
In this post I will therefore try to outline the kind of work that I think should be done, and that seems quite feasible.

https://www.overcomingbias.com/2022/07/space-econ-howto.html

I teach Principles of Economics for a living, but have only very rarely (well ok, almost never) thought about Principles of Economics as it relates to space travel. As Tyler Cowen might say, most of the basic principles will remain the same, and demand curves will slope downwards, but what will actually change?

This is surprisingly hard to think about, because I tend to just assume that economics is always earth bound. And it takes me time to wrap my head around the fact that I’m thinking about economics in a very different context. Robin Hanson helps us overcome this initial hurdle:

Here is the basic approach:
1. Describe how a space society differs from others using economics-adjacent concepts. E.g., “Space econ is more X-like”.
2. For each X, describe in general how X-like economies differ from others, using both historical patterns and basic econ theory.
3. Merge the implications of X-analysis from the different X into a single composite picture of space.

https://www.overcomingbias.com/2022/07/space-econ-howto.html

His first example about X is that of lower density. Or, in plainer English, space is just going to be really far away from everything else. I mean, really far away. What does that mean for an economy, when it is just ridiculously far away from everything else?

Let’s think through this a bit. Can, say, thinking about Neom be similar to thinking about this problem? Or Naypyidaw? Or are we talking about a completely different problem, because of the vast difference in terms of distance? And if you say it is a completely different problem, why do you say so?

Are we talking about travel costs being significantly different? What about the cost of communication (both within that base, and back to Earth)? Which resources become more valuable because this base is s far away, and which resources are valuables “just” because they are scarce on that base? Will, as Robin Hanson points out, lower density mean lower product variety, and what will that imply for this economy? How should one think about Dixit-Stiglitz in this context?

Read the whole thing, of course, but Robin Hanson points out a variety of ways in which space economics is going to be different. I’ll highlight just a few below:

  1. It’s going to be very far way, as we just discussed
  2. It’s going to be much harsher (read science fiction!)
  3. It’s going to be wildly different in terms of resource economics
  4. What about population growth?

As I said, I struggle to think about this just because my mental framework thinks about economics in a very Earthian (yes, this is now a word) context. And that precisely why I enjoyed reading this blogpost so much, because it gives me a very pleasant headache about stuff I thought I knew.

And I hope you’ll spend some time with this very pleasant headache too! 🙂

Update: Shubhneet Arora sends along this recent Krugman column/newsletter, very relevant to this blogpost. Thanks Shubhneet!

More Than An Inconvenient Iota of Truth

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Regular people everywhere are being deprived of purchasing power — and tricked by chauvinists and opportunists into believing that their interests are fundamentally at odds. A global conflict between economic classes within countries is being misinterpreted as a series of conflicts between countries with competing interests.

https://noahpinion.substack.com/p/book-review-trade-wars-are-class?s=r

An extract twice removed, as it were, for Noah Smith extracted this bit in his excellent review of a book called Trade Wars are Class Wars, by Michael Pettis and Matthew C. Klein. I have not read it yet, but it has shot to the top of my reading list.

Any student who has attended a class in which I have taught aspects of international trade will tell you that I bore them to death with one particular theme: that the textbook study of international trade doesn’t adequately cover (in my opinion) the study of inequality.

Now that might sound weird if you are a student new to the study of international trade. What on earth, you might think, does inequality have to do with international trade?

Well, here’s the thesis put forward in the book, via Noah:

Trade Wars are Class Wars offers a provocative thesis — that what looks like economic competition between nations is actually just a manifestation of economic competition between classes within those nations.

https://noahpinion.substack.com/p/book-review-trade-wars-are-class?s=r

Again, I haven’t read the book, but this is slightly confusing to me. I have always thought of the causality running the other way around: increased competition between nations has exacerbated economic competition (and therefore inequality) within nations. It would seem that the authors think of it differently. Excellent, more things to ponder upon!

Why do I think that international trade is one causal factor where inequality is concerned? Let’s begin with an excellent article published by The Economist a few years ago:

In rich countries, skilled workers are abundant by international standards and unskilled workers are scarce. As globalisation has advanced, college-educated workers have enjoyed faster wage gains than their less educated countrymen, many of whom have suffered stagnant real earnings. On the face of it, this wage pattern is consistent with the Stolper-Samuelson theorem. Globalisation has hurt the scarce “factor” (unskilled labour) and helped the abundant one.

https://www.economist.com/schools-brief/2016/08/06/an-inconvenient-iota-of-truth

Please, pretty please with a cherry on top, read the whole thing, especially if you have studied the Stolper Samuelson theorem. This article remains the best explainer that I have come across.

But what is being said here should be at least somewhat surprising to a student just beginning to study international trade. Trade, it would seem, may well be welfare enhancing, but it does not affect everybody a) equally and b) not necessarily positively! But, you might think as an Indian student, this might imply that unskilled labor in India might benefit from international trade.

Remember, one thing a good student of economics always bears in mind is a specific question: relative to what? That is, unskilled labor in India might well benefit from international trade, but relative to what? And the answer turns out to be, well, an unexpected one:

But look closer and puzzles remain. The theorem is unable to explain why skilled workers have prospered even in developing countries, where they are not abundant.

https://www.economist.com/schools-brief/2016/08/06/an-inconvenient-iota-of-truth

What might explain this?

Enter Professors Maskin and Kremer:

Nineteenth-century economist David Ricardo’s theory of comparative advantage predicts that China’s poorest workers should benefit most from the growth in trade. Before globalization, that country had a huge supply of unskilled workers and relatively few high-skill workers, who were thus in high demand; the situation was just the opposite in the United States. When two such countries begin to trade, the theory states, the less-developed nation has the advantage in producing relatively low-tech products—so demand and income for under-educated workers should shoot up, while their high-skill countrymen suffer. Thus, the theory predicts, globalization should lower inequality in the developing world.
Instead, as Gates professor of developing societies Michael Kremer explains, in much of the developing world, “The empirical evidence is not really consistent with the idea that trade is reducing inequality.” He and Adams University Professor Eric Maskin, a 2007 Nobel laureate in economics, have therefore proposed a new model to help explain the discrepancy between traditional theory and current reality. The key, they say, lies in a more nuanced understanding of how global production cycles sort workers into different jobs.

https://www.harvardmagazine.com/2015/03/how-globalization-begets-inequality

Here’s one way to understand their model. Note, before you proceed to read, that this is my explanation of their model, and I have simplified it a bit. I’ll add more nuance in as we go along:

Think of two countries, and two types of workers in both countries. Let’s say country 1 has Type A and Type B workers, and Country 2 has Type A1 and Type B2 workers. A and A1 are skilled workers, and B and B2 are unskilled workers. Maskin and Kremer make the point that international trade and the advent of modern globalization has resulted in skilled workers across countries “matching” with each other. As a result, their incomes go up, relative to unskilled workers in their own countries. So while the Stolper Samuelson theorem may be unable to explain why skilled workers have prospered even in developing countries, we now have a plausible answer to the question.

As an illustrative example, consider the fact that I joined a multinational firm called Genpact straight out of college.

And of course, one can think of many countries, not just two, and one can imagine a spectrum of skill sets across workers, rather than a binary framing. The point still holds!

And to complicate the matter further still, there may well be explicit/implicit choices made by policymakers in their own countries.

Back in the good old days, FT Alphaville used to be a free blog. And about seven years ago or so, it carried an excellent, excellent post written by Isabella Kaminska. The title of the (two-part) post was “What Are Chinese Capital Controls, Really?”. The post is a must-read for any student of international trade, but this excerpt is especially relevant for us today:

What those who accused China of using its exchange rate to gain advantage probably misunderstood was that it wasn’t the currency which was being undervalued, it was the people.
…
…
There are several other reasons why China should leave its currency unchanged. Contrary to widespread perception, China does not compete on the basis of an undervalued currency. It competes mainly in terms of labour costs, technology, quality control, infrastructure and an unwavering commitment to reform.

https://www.ft.com/content/d11a4c5e-d5fb-32f4-a606-e64d1483cea1 (Emphasis Added)

“It competes mainly in terms of labor costs” is a dry, academic way to put it. Elsewhere in this post, Isabella puts it much more plainly, when she says that it sucked to be a Chinese worker. And it did! Not just because of low labor costs, but because of a whole host of other reasons that should excite students of macroeconomics. Read the whole thing to get a richer understanding of how China has gone about doing what it has. As I always say to folks in my classes who wish we “grew like China”: be careful what you wish for!

You might also want to take a look at David Autor’s work on The China Shock. A good place to begin would be Russ Roberts’ podcast with David Autor, and for those who are interested, there’s a follow-up symposium about this episode as well. The point I’m making is that where trade between China and the USA is concerned, it would seem that inequality has gone up in both countries, but for different reasons.

This applies to international trade in general, of course – I’ve used China and US as examples because we are more familiar with them.

So, to return to the original question: are trade wars class wars? And more importantly, are class wars causing trade wars, or is it the other way around?

And so here we get to the book’s primary thesis. The authors only return to it in the conclusion, having reached it by a circuitous route that took them through history, data, theory, and more history.
The conclusion they ultimately draw is more nuanced than the one initially promised (and that’s a good thing, since nuance is good). In Klein and Pettis’ telling, global imbalances feed inequality in the U.S., but the fundamental cause isn’t inequality.

https://noahpinion.substack.com/p/book-review-trade-wars-are-class?s=r

Yup, that I completely agree with, and “get”. But it doesn’t solve the original problem of course, it only helps us understand that it exists: trade does seem to exacerbate inequality.

How we should think of this problem, how we might resolve it, and with what consequences, is likely to be fertile ground for economic research in the years to come. If you are a student wondering about how to go about picking a topic to work on, well, please do consider this one! And a good place to begin would be Noah’s post, (and the book itself sounds like a must read too).

Bonus material alert: I simply had to share this extract from Noah’s blog, written by Paul Krugman. If you have recently studied macro, you can thank me later for bringing this to your attention:

[E]conomic explanations…have to [describe] how the actions of individuals…add up to interesting behavior at the aggregate level.
And the key point is that individuals in general neither know nor care about aggregate accounting identities…. [I]f you want to claim that a rise in savings translates directly into a fall in the trade deficit, without any depreciation of the currency, you have to tell me how that rise in savings induces domestic consumers to buy fewer foreign goods, or foreign consumers to buy more domestic goods. Don’t tell me about how the identity must hold, tell me about the mechanism that induces the individual decisions that make it hold…. [O]nce you do that, you realize that something else has to be happening — a slump in the economy, a depreciation of the real exchange rate, it depends on the circumstances, but it can’t be immaculate, with nothing moving to enforce the identity….
Accounting identities… inform your stories about how people behave, [they do] not act as a substitute for behavioral analysis.

https://krugman.blogs.nytimes.com/2012/01/16/mistaken-identities-wonkish/?pagewanted=all

On Noahlism

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About the title of today’s blogpost: I couldn’t resist, I’m sorry. The post is about something Noah Smith calls the “The Two Paper Rule”, about which much more below – but the title is courtesy Paul Krugman. About which, also, more below.

Noah wrote this post a while ago, in May 2017. His original post is about a Very Simple Idea that hopefully solves a Very Real Problem. Here’s the Very Real Problem:

I don’t know why academic literatures are so often referred to as “vast” (the phrase goes back well over a century), but it seems like no matter what topic you talk about, someone is always popping up to inform you that there is a “vast literature” on the topic already. This often serves to shut down debate, because it amounts to a demand that before you talk about something, you need to go read voluminous amounts of what others have already written about it. Since vast literatures take many, many hours to read, this represents a significant demand of time and effort. If the vast literature comprises 40 papers, each of which takes an hour to read, that’s one week of full-time work equivalent that people are demanding as a cost of entry just to participate in a debate! So the question is: Is it worth it?

https://noahpinion.substack.com/p/the-two-paper-rule?s=r

Anybody who has suffered through a PhD knows the problem all too well. These days, anybody who has been asked to do a literature review for any paper knows the problem all too well. There is just too much to read.

And folks who want to make sure that uppity folks don’t get, well, too uppity always have a fail-safe defense at the ready: “Have you read all the relevant literature?”. There’s so much stuff that is being published about everything imaginable, that you’re never going to be able to get through even a fraction of it. Why, there’s even a law about it! And there’s a law about the law, which only goes to prove the point further, I suppose.

And here’s Noah’s Very Simple Idea to solve this Very Real Problem:

My solution to this problem is what I call the Two Paper Rule. If you want me to read the vast literature, cite me two papers that are exemplars and paragons of that literature. Foundational papers, key recent innovations – whatever you like (but no review papers or summaries). Just two. I will read them.
If these two papers are full of mistakes and bad reasoning, I will feel free to skip the rest of the vast literature. Because if that’s the best you can do, I’ve seen enough.
If these two papers contain little or no original work, and merely link to other papers, I will also feel free to skip the rest of the vast literature. Because you could have just referred me to the papers cited, instead of making me go through an extra layer, I will assume your vast literature is likely to be a mud moat.
And if you can’t cite two papers that serve as paragons or exemplars of the vast literature, it means that the knowledge contained in that vast literature must be very diffuse and sparse. Which means it has a high likelihood of being a mud moat.

https://noahpinion.substack.com/p/the-two-paper-rule?s=r

I love this idea, and for the following reasons. One, I have an immediate repartee whenever I’m attacked with the “But have you read the literature?” question. And it’s not just a repartee, but a genuine request that serves two purposes. The person asking the question had better be able to come up with at least two papers on the spot. There is otherwise not much point in they having asked the question! Second, assuming the person does come up with two papers I haven’t read, there’s more to read and more to learn.

But second, as a student, what a wonderful way to start building up a repository of papers about a series of subjects! Always ask your profs, no matter the subject, about the two papers worth reading about today’s topic, and keep a running list. (Hint: this is a great way to spend a summer!)

Third, and I’m personally very curious about the results in this case, what about asking young profs and old profs this very question about the same subject? If the answers differ, this is a field worth examining rather more deeply, for it obviously has evolved fairly rapidly. I did my PhD in business cycles, and trust me, the answers would never have been the same – by age, adherence to a particular school of macroeconomics thought, or even by nationality.

Paul Krugman loved the idea (Noah links to Krugman’s blog towards the end of Noah’s blog post, but the link seems to be down. The excerpt below is from Google’s cache):

What about trade? Autor/Dorn/Hanson on the China shock may not be the last word, but surely a revelatory approach. In a strange way, I’d put Subramanian and Kessler in the same category: realizing that this globalization is different from anything that came before is a big deal.
I guess that in a way I’m pushing back against Noah’s nihilism (noahlism?) even while endorsing his method. I think there has been a lot of good economics done, even if there are also vast literatures not worth your time.

Click here to access the link, too long to post in its entirety

… and you now know, of course, where the title of today’s post comes from! What I think Krugman is getting at when he refers to his pushing back against Noah’s idea is that perhaps just two papers is too restrictive. And if that be the case, Tyler Cowen agrees:

The difference between total value and marginal value may be relevant. You might conclude a field literature has low total value, but the marginal value of learning more about that area still could be quite high. That is in part because muddy fields and results don’t spread so readily, and so dipping into the muck can yield some revelations. That is another reason why I would not offer the “two paper standard” as practical advice.

https://marginalrevolution.com/marginalrevolution/2017/05/vast-empirical-literature.html

I have quoted only one of Tyler’s points (he’s got nine others), but in general, I don’t think we should be taking the two part of the two paper rule as being sacrosanct. In some cases you may need to read five, in some rarer cases ten. So long as the number is reasonable (and the standard will change), we can still live with the spirit of the two paper rule.

But if you are a student in college, the two paper rule is a good way to build up a repository of about fifty odd papers that you Really Should Have Read. Twenty five courses (roughly speaking), two papers each.

Well, get started! 🙂

In Memoriam: Robert Mundell

Ashish2 Comments

Robert Mundell passed away earlier this week. Most macroeconomics students will know of the Mundell-Fleming model, of course, while a lesser number may have heard of his work on optimum currency areas.

Here is a relatively old article about him from the New York Times:

”In the very short run, I’m a Keynesian,” he said. ”In the intermediate run, I’m a supply-sider, and in the long run I’m a monetarist.”

https://www.nytimes.com/1986/01/12/business/eccentric-economist-robert-a-mundell-supply-side-s-intellectual-guru.html

And here is a summary by The Economist on the impossible trilemma:

HILLEL THE ELDER, a first-century religious leader, was asked to summarise the Torah while standing on one leg. “That which is hateful to you, do not do to your fellow. That is the whole Torah; the rest is commentary,” he replied. Michael Klein, of Tufts University, has written that the insights of [[international macroeconomics]] (the study of trade, the balance-of-payments, exchange rates and so on) might be similarly distilled: “Governments face the policy trilemma; the rest is commentary.”

https://www.economist.com/schools-brief/2016/08/27/two-out-of-three-aint-bad)

Here is Paul Krugman, first rhapsodizing about the Optimum Currency Area1:

First up, Mundell, whose classic 1961 paper argued that a single currency was more likely to be workable if the regions sharing that currency were characterized by high mutual labor mobility. (He actually said factor mobility, but labor is almost surely the one that matters). How so?

https://krugman.blogs.nytimes.com/2012/06/24/revenge-of-the-optimum-currency-area/

.. and then rhapsodizing about Robert Mundell and his early theoretical work:

Those of us who work on international monetary theory have been wondering for a decade when Robert Mundell would get his richly deserved Nobel Memorial Prize in Economic Sciences. Mundell’s work is so central to that field, so “seminal”–an overused term that really applies here–that on many disputed issues his ideas are the basis for both sides of the debate. But a layperson might be confused about exactly what Mundell and his prize are really about.

https://slate.com/business/1999/10/o-canada.html

This is the NYT obituary:

In his 2006 interview, he said that winning the Nobel “was particularly pleasing to me as my work has been quite controversial and no doubt stepped on a lot of intellectual toes.”
He added: “Even more than that, when I say something, people listen. Maybe they shouldn’t, but they do.”

https://www.nytimes.com/2021/04/05/business/economy/robert-mundell-dead.html

And finally, the Washington Post’s obit:

Dr. Mundell gave one of the more unusual — and crowd-pleasing — acceptance speeches in the history of the Nobel Prize. He ended his remarks by singing a few bars of the hit Frank Sinatra song “My Way,” an allusion to the independent-minded approach that he brought to his life and work.

https://www.washingtonpost.com/local/obituaries/robert-mundell-dead/2021/04/06/36793d92-96d4-11eb-b28d-bfa7bb5cb2a5_story.html

RIP.

  1. This essay, along with the tables, used to be freely available on the NBER website. No longer, and I don’t know why. My apologies[↩]

Notes on “Why Tech Didn’t Save Us From Covid-19”

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The MIT Technology Review recently published an interesting, thought-provoking article with the title in quotes above. It was also a little bit one-sided, but we’ll get to that later.

  • The title itself brought to mind Peter Thiel’s quote about being promised flying cars, and being given 140 characters instead. You may want to make a snarky joke about whether 280 characters counts as progress or not, but the point is well taken. And indeed, reinforced by this quote from David Rotman’s article:
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    “In an age of artificial intelligence, genomic medicine, and self-driving cars, our most effective response to the outbreak has been mass quarantines, a public health technique borrowed from the Middle Ages.”
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  • The article then goes on to highlight at least three separate aspects of why tech has failed us: lesser government support for technology and innovation (particularly in the USA), a sclerotic bureaucracy, and policy-making that is not a) proactive enough b) good at managing risks effectively c) far too focused on short-term issues d) aware of the pitfalls of focusing solely on efficiency.
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    Let’s begin with the last of these points:
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  • ““The pandemic has shone a bright light on just how much US manufacturing capabilities have moved offshore,” says Erica Fuchs, a manufacturing expert at Carnegie Mellon University.”
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    I teach courses in international economics at the Gokhale Institute, and one of the fundamental insights that I think students need to walk away with is the concept of a non-zero sum game. Trade makes both parties better off, and therefore more trade is good, is literally the basic starting block of a course on trade. For an excellent summary of this idea, read this article by Paul Krugman, or watch this TED talk by Matt Ridley.
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    But two basic concepts from economics have come to haunt this rather neat idea. One is scale, and the other is the need to diversify. Both are very closely related.
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  • If, conventional theoretical thinking goes, a firm is able to scale up effectively, it will be able to produce more for cheaper. Yes, it is more complicated than that, but that’s the gist of the benefits of scale. Now, think of all countries as firms, and China is the obvious example of a country that scaled more rapidly than other countries, and was able to produce stuff cheaper than almost anywhere else. And that’s how China became the “manufacturing centre of the world”. The more you import from China, the more they scale (and effectively!). The more they scale, they cheaper they can make stuff. The cheaper stuff gets, the more you have an incentive to import from China. And once the loop is up and running, it becomes difficult to stop.
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  • And that’s a simple explanation for how the world ended up putting all of its eggs in one basket. We failed to diversify, because we focused on efficiency, without worrying about risk. What happens if an increasingly efficient global trading order suddenly breaks down? The price of efficiency is two fold: a) a lack of diversification b) not enough risk mitigation measures that allow one to fall back on domestic production. Which is where most of the world finds itself today. Readjusting global supply chains away from China is necessary, but it will not be easy. Especially because most countries will not want to pursue twin objectives: a) diversification away from China into other potential export powerhouses b) some production to be kept at home, especially in crucial sectors such as healthcare.
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    Scale, and a lack of diversification. There’s a lesson in there for us at the individual level as well, of course. A single minded pursuit of some goal (say money, or career growth) at the cost of other things isn’t necessarily a good idea.
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  • “Why couldn’t the US’s dominant tech industry and large biomedical sector provide these things? It’s tempting to simply blame the Trump administration’s inaction.”
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    The truth is always more complicated than you think, and beware simple explanations, but that being said, you might want to read The Fifth Risk. Here’s a slightly tangential review from The Guardian if you are feeling lazy, and a quote from that article follows:
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    “But we’re actually much more likely to die driving to the shops. The fifth risk is something impossible to conceive of in advance, or to prepare for directly. What matters is having a well-organised government in place to respond to these contingencies when they hit – exactly what the Trump administration has failed to do.”
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    No government, or Big Ol’ Central Planner is perfect, of course (and there’s a very readable book about that topic, or here’s a fascinating review of the same book), but Michael Lewis makes the claim that the Trump administration is rather less than perfect even by our less than exacting standards.
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  • “Any country’s capacity to invent and then deploy the technologies it needs is shaped by public funding and government policies. In the US, public investment in manufacturing, new materials, and vaccines and diagnostics has not been a priority, and there is almost no system of government direction, financial backing, or technical support for many critically important new technologies. Without it, the country was caught flat-footed.”
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    The book to read about this topic, if you ask me, is The Entrepreneurial State, by Mariana Mazzucato. Here’s the Wikipedia link about the book. Governments need to play, she says (and I suspect the author of this article would agree), a more active role in fostering the tech ecosystem in a country. Shades of Studwell, perhaps, but I have a counterargument here:
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  • “Incompetence and a sclerotic bureaucracy” is a phrase David Rotman uses early in the article when speaking about the Center for Disease Control in the USA. I find myself in complete agreement with the adjectives used. Why presume, then, that other government departments are likely any better? The truth, as always, lies somewhere in the middle. You can certainly make the case a la Michael Lewis, that the Trump administration took us to one end of the spectrum – but you should beware equally the other end of it!
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  • “Economists like to measure the impact of innovation in terms of productivity growth, particularly “total factor productivity”—the ability to get more output from the same inputs (such as labor and capital). Productivity growth is what makes advanced nations richer and more prosperous over the long run. For the US as well as most other rich countries, this measure of innovation has been dismal for nearly two decades.”
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    Well, yes, sure. And there is more than a grain of truth to the charge laid above, and not just for America. But keep in mind that measuring TFP is really and truly hard, and I am nowhere close to being convinced that we do a good job of it, even for a country like the USA, forget India. I am writing this post while sitting in my bed, using a laptop that allows me to keep multiple tabs (well over 50 right now) open in a modern browser, while being seamlessly connected to an overwhelming variety of news sources. All this while I listen to a Spotify playlist, and sip on excellent coffee that is made using home delivered Arabic beans. I’ll stop channeling my inner Keynes now, but most of this was not possible, especially at these prices, two decades ago.
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    Progress may not be fast enough for our tastes, sure – but it has been taking place. If you would like to read a book with a take contrarian to mine, try this on for size: The Rise and Fall of American Growth, by Robert Gordon.
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  • “The problem with letting private investment alone drive innovation is that the money is skewed toward the most lucrative markets.”
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    Churchill’s quote about democracy comes to mind!
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  • “In a widely circulated blog post, internet pioneer and Silicon Valley icon Marc Andreessen decried the US’s inability to “build” and produce needed supplies like masks, claiming that “we chose not to have the mechanisms, the factories, the systems to make these things.” The accusation resonated with many: the US, where manufacturing has deteriorated, seemed unable to churn out things like masks and ventilators, while countries with strong and innovative manufacturing sectors, such as China, Japan, Taiwan, and Germany, have fared far better.”
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    Here’s is Andreessen’s post, and also, this is your periodic reminder to read How Asia Works. China, Japan, Taiwan and Germany being up there isn’t a coincidence.
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  • ““The great lesson from the pandemic,” says Suzanne Berger, a political scientist at MIT and an expert on advanced manufacturing, is “how we traded resilience for low-cost and just-in-time production.””
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    Options are easy to teach, but difficult to grasp, and even more difficult to implement. See put, long.
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  • “…they are calling for an immediate ramp-up of public investment in technology, but also for a bigger government role in guiding the direction of technologists’ work. The key will be to spend at least some of the cash in the gigantic US fiscal stimulus bills not just on juicing the economy but on reviving innovation in neglected sectors like advanced manufacturing and boosting the development of promising areas like AI. “We’re going to be spending a great deal of money, so can we use this in a productive way? Without diminishing the enormous suffering that has happened, can we use this as a wake-up call?” asks Harvard’s Henderson.”
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    More participation from the government than is currently happening, but throw also into the mix a more venture-capital-ish approach, and don’t forget prizes! In fact, I found myself wishing midway through the article that the author had explored other options, rather than the government-or-markets binary.
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  • I hope I haven’t comes across as overly critical of the article, and my apologies if I have. That has certainly not been my objective. We rely far too much on the private sector now, that is true – and government can and should play a bigger role than is the case currently. But an extreme position, in either direction, always worries me a little!

So what does stimulus actually mean?

Ashish2 Comments

A reader sends in this question:

“What do governments actually mean when they say that we’re going to announce a 1 trillion dollar economic stimulus package? Does it mean that they’re going to spend that much money? Or they’re just going to give it to the industries? (if so what does that entail?)”

Keep the following in mind:

  • I’m going to assume that the person who asked the question hasn’t learnt macroeconomics in a formal setting just yet, and will therefore answer the question accordingly
  • I will describe a macroeconomic model using words, and keep it fairly simple
  • I will use examples from earlier crises
  • Let’s get started!

 

  • Think of the Indian economy as a patient, and think of monetary and fiscal policies as medicines that are going to be administered by doctors. The RBI governor is a doctor to this patient, as is the Finance Minister.
  • Any move pertaining to regulation of banks (allowing banks to ask for EMI’s later, reduction of interest rates, forbearance of loans) is medicine administered by the RBI.
  • Any move pertaining to reduction of taxes, introduction of subsidies, amnesty schemes for taxes due in the past, spending on specific projects (construction of roads bridges etc), changes to government employees salaries/pensions, payouts to firms or individuals (literally giving them money) is medicine administered by the finance minister.
  • Under normal circumstances, one doctor is plenty enough. In fact, macroeconomists often end up saying that if fiscal policy is going to provide the medicine, monetary policy should stand ready to counteract any excesses.

    There is a dilemma as to whether these two policies are complementary, or act as substitutes to each other for achieving macroeconomic goals. Policy makers are viewed as interacting as strategic substitutes when one policy maker’s expansionary (contractionary) policies are countered by another policy maker’s contractionary (expansionary) policies. For example: if the fiscal authority raises taxes or cuts spending, then the monetary authority reacts to it by lowering the policy rates and vice versa. If they behave as strategic complements, then an expansionary (contractionary) policy of one authority is met by expansionary (contractionary) policies of the other.

  • But when the patient is as ill as is the case now (and is going to get sicker in the days to come!), well then monetary and fiscal policy are not substitutes: both need to be at play at the same time.
  • For example, in the 2008 recession, American policymakers resorted to both monetary and fiscal policy measures (all countries did, to be clear. I’m just using the American example because its data is easier to find and present)
  • The monetary policymakers announced, among other things, TARP. By the way, astute readers might want to point out that this seems to have been run by the Treasury Department, not the Federal Reserve. True, not arguing with that. It’s complicated! Also, watch this movie.
  • And, among other things, the American government also announced ARRA. The original website is no longer up, but you can see this, or read this.

 

Now, all that being said, we’re going to take a look at fiscal policy alone from here on in. It is not that monetary policy isn’t important (oh dear lord, it is!) but the question is more focused on fiscal policies.

To understand the answer to this question, let’s go back to an earlier post of mine, and quote from it:

Let’s break this tweet by Paul Krugman down.

  • The government has decided that it will give away money. Ergo, fiscal policy.
  • To whom should it give the money? It can give the money to firms, or to households.
  • If it gives the money to households (in India for example, this would have been through Direct Benefits Transfer), might that help people more?
  • Or should it give the money to firms instead?
  • Payroll taxes, which is what is being spoken about in the tweet, is tax paid on behalf of employees to the government, by firms. Here’s Wikipedia:

    Payroll taxes are taxes imposed on employers or employees, and are usually calculated as a percentage of the salaries that employers pay their staff.[1] Payroll taxes generally fall into two categories: deductions from an employee’s wages, and taxes paid by the employer based on the employee’s wages. The first kind are taxes that employers are required to withhold from employees’ wages, also known as withholding tax, pay-as-you-earn tax (PAYE), or pay-as-you-go tax (PAYG) and often covering advance payment of income tax, social security contributions, and various insurances (e.g., unemployment and disability). The second kind is a tax that is paid from the employer’s own funds and that is directly related to employing a worker. These can consist of fixed charges or be proportionally linked to an employee’s pay. The charges paid by the employer usually cover the employer’s funding of the social security system, Medicare, and other insurance programs. It is sometimes claimed that the economic burden of the payroll tax falls almost entirely on the worker, regardless of whether the tax is remitted by the employer or the employee, as the employers’ share of payroll taxes is passed on to employees in the form of lower wages that would otherwise be paid.

  • So when there is a payroll tax holiday, firms no longer have to pay these taxes. So who is benefiting here? Firms or the employees of firms? To the extent that the firm no longer has to pay these taxes, it has more money with itself. It can either keep this money and use it for other things, or it can pass on this money to the employees. What will actually happen is tricky to predict, and trickier still to measure!
  • For example, imagine the Indian government says to the Gokhale Institute of Politics and Economics (GIPE) that the Tax Deducted at Source (TDS) from the professors salaries need no longer be given over to the government. (To people who know their macro, I know it is not the same thing. Treat this as an illustrative example)
    • If GIPE was due to pay me a 100 rupees every month, it would deduct 10 (that’s the TDS) and pass it on to the government. That need be done no longer.
    • But the government doesn’t say that this money should be given to the professors instead – GIPE can do with it whatever it wishes.
    • Will (should) GIPE pass on this money to the professors? Or use this to pay other people employed by GIPE? Or just keep it with GIPE (who knows when the college will reopen, hoarding cash may be a good idea). Or… anything else you can think of, really!
  • So “giving” to industries really can mean a variety of things. And it really depends on what industry chooses to do with this money. You could apply conditionalities and say you will only get the money if:
    • It’s passed on to employees
    • You qualify because your firm falls in an important sector (employs a lot of people, is important from a social viewpoint, is critical to combat the virus etc)
    • Anything else you can think of
  • Or the government could spend the money itself! Build roads, bridges, dams, employ thousands more teachers, temporary employees – but all of this is assuming we can control the spread of the virus, of course. Without that, all of this is difficult, if not impossible to achieve.

 

So the correct answer to the question that the reader asks is: all of the above. At this point in time, a good fiscal policy move will be to spend, and give tax benefits to firms and households. This is roll out the big guns territory, no half measures will do.

Homework:

A useful exercise to do: go through the fiscal stimulus announced by our government, and try and pinpoint which parts are directly in the hands of the people, which in the hands of the firms, and which is spending by government on building out infrastructure etc. Here’s one article to help you along.

Homework Part Deux:

Are we Rawlsian?

Homework Part Trois:

Are we Rawlsian enough?

 

MMT and the corona virus, courtesy Yash Agarwal

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Yash Agarwal (here is his Twitter page) messaged yesterday, asking about MMT and whether it could be used to tackle the current crisis. He has shared a video as well, and asked a rather specific question, both of which we will get to shortly.

But first things first, what is MMT?

MMT stands for modern monetary theory. For there to be a “modern” monetary theory, there must have been a monetary theory, right?

 

OK, Lerner: His argument was that countries that (a) rely on fiat money they control and (b) don’t borrow in someone else’s currency don’t face any debt constraints, because they can always print money to service their debt. What they face, instead, is an inflation constraint: too much fiscal stimulus will cause an overheating economy. So their budget policies should be entirely focused on getting the level of aggregate demand right: the budget deficit should be big enough to produce full employment, but no so big as to produce inflationary overheating.

The excerpt is from Krugman’s blog/column in the NYT, but if you want the academic paper behind this, here you go.

Here’s the short version of the Lerner argument: so long as you don’t borrow from abroad, and so long as you print your own money without any backing (such as gold), well, there can never be no crisis. Just, literally, print your money and throw it at the problem. The one thing you gotta keep in mind is you want to do this until aggregate demand is “just” right. Too much of AD, and you’re in inflationary territory. Too little and you never solved the crisis – print more money in that case.

So today, given the low interest rates that are likely to prevail in the economy, just have the finance minister and team spend, spend and spend, until aggregate demand rises and the economy is back on track. Build more schools, lay more roads, build more bridges – spend, spend and spend. That, best as I understand it, would have been the Lerner position.

And what about the debt and the deficit once things are back to normal? Well, that’s the problem with the Lerner doctrine. It involves running, then, a primary surplus – which means cutting subsidies and raising taxes. And no, I don’t see that happening.

If you want the modern version of this monetary theory, which is MMT, a good place to begin might be this blog post I wrote a while back.

But they key thing, best as I can tell, about MMT is that you must not worry about deficits, especially during a crisis. Print more money and spend your way out of it.

Here’s a more recent take on the issue:

The world is changing that is for sure. Governments around the world are promising to spend billions to address the coronavirus crisis and no-one (other than a few so-called progressives – see below) are talking about how governments will pay for the interventions. Everybody knows how. They have always known. The shams about governments not having enough money to provide adequate housing, schooling, health care, employment, other services, and a sustainable response to climate change are now exposed for all to see. The game is well and truly up. Everybody can now see that governments just have to announce billions of intervention and it will happen. Forget all the ‘complexity’ about accounting arrangements. Forget all the stuff that we will also drown under massive tax burdens if the government dares to help some disadvantaged person get a leg up in life. Forget all the stuff about bond markets punishing profligate governments with insolvency. Everybody can now see that the bond markets are the beggars and the government rules. Even in the Eurozone, it is obvious that the ECB is able to fund fiscal deficits of any size – ‘there is no limit’. Only the Modern Monetary Theory (MMT) economists have consistently outlined the rationale for what is going on at present. And that point is increasingly being recognised although not always in ways I think does our work justice.

That’s mostly rhetoric (and I do not mean that as a criticism), the meat is found later on in the article. In particular, note the 2×2 matrices that are to be found further down, of which I present one below:

Original can be found here

Essentially, MMT says that if a country has monetary sovereignty (and India does), and if a country has an aggregate demand crisis (and India does), then proceed full steam ahead with MMT. Go full steam ahead on expansionary fiscal policy, and don’t worry about finding the money to do this, or about the debt: just create the money!

 

Here’s Stephanie Kelton on the topic, in conversation with Michael Moore:

 

For a more theoretical look, especially at the operational aspects from a global viewpoint, read this article by William Buiter:

Much of the US response will come in the form of “helicopter money,” an application of Modern Monetary Theory (MMT) in which the central bank finances fiscal stimulus by purchasing government debt issued to finance tax cuts or public spending increases. The US economy is deteriorating at a spectacular rate, partly because of the direct health impact of the COVID-19 pandemic, but mostly as a result of social-distancing mandates that are preventing people from producing and consuming.

So ok, let’s say we’re going to do MMT: what exactly might this entail for, say, the USA?

What is more important is a set of policies that tackles the health crisis head-on while also mitigating the economic uncertainties faced by households and their communities. These include:
..
(1) full coverage of medical costs associated with testing and treatment of COVID-19;
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(2) mandated paid sick leave and full coverage of associated costs;
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(3) debt relief for families;

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and (4) swift deployment of testing and treatment facilities to underserved communities. We will probably still need some demand stimulus, but these four steps require immediate attention.

I learnt about their article by reading about Amol Agarwal’s take on MMT, available here:

After being ignored (and humiliated), is this the MMTers moment in the sun? Will their ideas get a hearing? One would say that we should keep all options open and not be bound by the shibboleths of economics. The speed at which the pandemic has shifted gears and become an economic crisis needs all possible policies which need to be executed at even faster speed. My gut feel is most of the economies will eventually be implementing ideas from MMT without calling it so. The Governments are being pressed to introduce fiscal support and will be calling their central banks to finance the support. MMTers might not mind their not being given due recognition. First they are used to being ignored. Second, they may well think that as long as humanity benefits, a rose by any other name would smell as sweet.

Now (phew, that was a long introduction!) here’s the video that Yash shared:

And here’s his question:

I just watched this and I was wondering if it would be correct to state that the modern monetary theory is practically possible just for the United States of America since it issues the global reserve currency?

The answer is no: so long as you have your own currency (where the “you” in question is a sovereign government), and you are only borrowing domestically, you can go ahead with MMT.

And I agree with Amol Agarwal: right now, we need all the propping up of AD that we can get, and so we should do “whatever it takes”. And that right soon!

That doesn’t mean there won’t be problems later – there may well be – but now is about now. Spend!