Tyler Cowen's Blog, page 340

An ice cream parable for recent monetary policy events

Consider this to be thinking out loud and not a series of positive claims asserted to be necessarily true:

1. Money is non-neutral and monetary expansion helps correct for negative AD shocks.

2. At the same time, monetary expansion itself has non-neutral real effects.  Imagine that the Fed conducts all open market operations on ice cream cones.

3. As the economy recovers, there are two options.

4. First, the Fed can keep buying lots of ice cream cones forever.  Eventually the economy ends up producing too much ice cream.  Note that in the early days of the purchases, however, the economy was producing suboptimal levels of ice cream, so this was not initially much of a distortion, if it was any distortion at all.

5. The second option is that the Fed can back off its ice cream purchases now.  This will hurt AD and it also will hurt the ice cream market, although it may pre-empt a more serious blow to the ice cream market later on.  Either the Fed finds it politically impossible to buy lots of ice cream forever, or the Fed minds the eventual distortion of the ice cream market.

6. Recently the Fed suggested it might back off ice cream purchases, to see what the price of ice cream would do, so as to learn more about the market.  We observed both a negative AD effect and a severe negative price effect in the ice cream market.  Some Fed officials then tried to talk those markets back up, just as they had been talked back down.  The talk-backs failed, reflecting the wisdom of the market.

7. We now all know that slowing down the rate of ice cream purchases will be harder than we had thought.

8. This parable assumes that injection effects are important, namely where the new money goes first.  This Austrian-like view is unfashionable, has weak theoretical foundations, and violates the Modigliani-Miller theorem, but at the moment markets seem to believe it.  Should we believe it too?

8b. But wait, you Austrians shouldn’t get too gleeful.  The implied theory of the market is anti-Wicksteed, anti “supply is the inverse of the demand to hold, and vice versa,” and “flows only,” a bit like some of the early Keynesians had argued.  Uh-oh.  (Or maybe the Austrians and the early Keynesians had a bit more in common than they like to let on.)

9. You will note that the demand for ice cream also spills over into cookies, cupcakes, and kulfi.

Arrived in my pile

1. Glenn Hubbard and Tim Kane, Balance: The Economics of Great Powers from Ancient Rome to Modern America.

2. F. H. Buckley, editor, The American Illness: Essays on the Rule of Law.

3. Vaclav Smil, Made in the USA: The Rise and Retreat of American Manufacturing.

*World War Z*

I was surprised how serious a movie it is and also by how deeply politically incorrect it is, including on “third rail” issues such as immigration, ethnic conflict, North Korean totalitarianism, American urban decay as exemplified by Newark, gun control, Latino-Black relations, songs of peace, and the Middle East.  Here is one (incomplete) discussion of the Middle East angle, from the AP, republished in el-Arabiya (here is a more detailed but less responsible take on the matter, by a sociology professor and Israeli, spoilers throughout).

The movie is set up to show sympathy for the “Spartan” regimes and to have a message which is deeply historically pessimistic and might broadly be called Old School Conservative, informed by the debates on martial virtue from pre-Christian antiquity.  But they recut the final segment of the movie and changed the ending altogether, presumably because post-Christian test audiences and film executives didn’t like it.  Here is one discussion of the originally planned finale.  It sounds good to me.  The actual movie as it was released reverts to a Christian ending of sorts.  My preferred denouement would have relied on the idea of an asymptomatic carrier or two, go see it and figure out the rest yourself.

By the way, for all the chances taken by the film makers, they were unwilling to offend the government of China (see the first link), in part because you cannot trick them easily with subtle, veiled references.  Such tomfoolery works only on Americans — critics included — which I suppose suggests a lesson of its own.

Here is a Times of Israel review of the movie, interesting throughout, and it notes that the Israel scenes are simply translated to “the Middle East” for Turkish audiences.

A good film, I liked it.  How many other movies offer commentary on Thucydides, Exodus, Gush-Shalom, Lawrence Dennis, and George Romero, all rolled into one?

Assorted links

1. Rwandan coffee yields are double or triple those of Haiti.

2. The diamond-embedded credit card that is Qatar.

3. Would you settle for a flying Superman?

4. An English-language summary of the new Honduran charter city information.

5. Plan B for Greece, or is this Plan C?

Is there a case against small plates on restaurant menus?

That is the current rage in the DC dining scene, namely that you can more easily order lots of “small plates” rather than a big plate with steak and spinach.  Neil Irwin makes the case against that practice here, Matt Yglesias responds and defends small plates.

Neither mentions price discrimination or for that matter does much analysis of price.  You will recall Glazer’s Law: “It’s either taxes or price discrimination.”  And usually it is price discrimination.

Here is Alex on bundling cable channels as a form of (possibly) welfare-improving price discrimination.  Read through that stuff if you don’t already know it, but the punchline is that big plates are like a “take it or leave it” cable contract, and small plates are like the a’la carte cable pricing schemes.  The bundled contract gets some marginal channels to people who wouldn’t otherwise be willing to pay for them if those channels were sold on a stand-alone basis.   In the TV context some of us browse reality TV, Farsi news, and women’s roller derby, even if we wouldn’t pay for those transmissions per se.  In the restaurant context, the big plate gets some of us to eat more vegetables and munch on more parsley.  Who would pay much for coleslaw?  Output goes up under many of the most basic scenarios and consumer welfare goes up too.

In a more competitive market, as indeed the DC restaurant scene has become, bundling breaks down somewhat.  We move toward a system of “small plates.”  So the increasing competitiveness is good for consumers but the breakdown of bundling can be bad for them, with indeterminate welfare results, which means either Neil or Matt can be correct (but do lay out the whole story, and never ever ever reason from a plate size change!)

Those who have a relatively low marginal value for the add-on items of a meal (vegetables?) will be the ones who eat less under a regime of small plates.  How their consumer surplus fares, a priori, is more complex and is not easily settled by theory alone.  But, using some typical numbers, very often those who value the vegetables inelastically are worse off under a regime of small plates.

I wonder whether Neil Irwin or Matt Yglesias likes vegetables more?

The political economy of drones

That is a new paper by Christopher Coyne and Abigail Hall, here is the abstract:

This paper provides a political economy analysis of the evolution of unmanned aerial vehicles (UAV) or “drones”, in the United States. Focus is placed on the interplay between the political and private economic influences; and their impact on the trajectory of political, economic, and, in this case, military outcomes. We identify the initial formation of the drone industry, trace how the initial relationships between the military and the private sector expanded over time, and discuss how the industry has expanded. Understanding the history and evolution of UAV technology, as well as the major players in the industry today, is important for ongoing policy debates regarding the use of drones, both domestically and internationally.

Let’s detect and undo one of the most popular intellectual fallacies ever

As a case in point, consider my recent post arguing that Andrew Sullivan is the most influential public intellectual of the last twenty-five years.  Such a claim will raise the status of Sullivan.  While I am happy to see his status raised, that is not my point.  My point is merely that he has been very influential, and in the sense of changing actual real world outcomes, a claim which most other public intellectuals of high status cannot even begin to make.  The comments on the post are mostly weak, especially those comments critical of Sullivan.  Some people are arguing that Sullivan does not in fact deserve higher status.  And that in turn is causing them to misjudge, or fail to judge at all, the claim about his influence.

If you can avoid this fallacy consistently, and unpack the positive claim from any and all implications about changes in status, you will think much better and learn much more.  I find also that very smart people are not necessarily more protected against this mode of fallacious reasoning.

Many blogs of course pander to this very fallacy.  Why not be more explicit?  One could put a post up with the person’s name and photo and simply write: “OK people, let’s argue in the comments whether this person deserves a higher or lower status.”  But that would be too explicit, and it would lower the status of the blogger and commentator, so something else is written and the same debate ensues.

Assorted links

1. “group that appreciates the Japanese language.”

2. Short, on-line microeconomics class, in Spanish, at MRUniversity.com, by Andres Marroquin.

3. Video of Malcolm Gladwell on his new book.

4. Strauss on reading.

5. New “cover” versions of Shakespeare.

6. The suicide doctor.

Amish arbitrage fact of the day

Eight percent of one sample (n = 112) of Lancaster county Amish have sought medical care in Mexico.

That is from Donald B. Kraybill, Karen M. Johnson-Weiner, and Steven M. Nolt, The Amish, which is an excellent social scientific look at what we outsiders know about Amish communities.

I also learned that the Amish strongly frown on home schooling of children and consider it possible grounds for excommunication.  The requirement to use the internet has pushed many Amish out of public school systems, and the Amish are experts at making apprenticeship systems work.  Inequality of wealth seems to be rising among the Amish.

The future of manufacturing jobs in developing nations

Nike is to tackle rising labour costs at its Asian factories by “engineering the labour out” of its shoe and clothing production as it seeks to defend its profits.

Don Blair, Nike’s chief financial officer, said its objective was to reduce the number of people making its products as he highlighted the impact of a sharp increase in wages in Indonesia.

From the FT, here is more.  Here is my recent NYT column on related developments.