Tyler Cowen's Blog, page 378
April 14, 2013
From Estonian Rhapsody to Estonian Opera
Estonian Rhapsody was the title of Paul Krugman’s 2011 blog post which argued that Estonia’s austerity program and rapid recovery wasn’t all it had been cracked up to be. The post led to a surprisingly nasty series of tweets from none other than Toomas Ilves, the President of Estonia. Krugman’s arguments against austerity and Illves response have now been turned into a real rhapsody, well, an opera to be precise. As noted on Fareed Zakarias’s GPS Blog:
The “cantata” premiered this week before a live audience in Tallinn and then was shown – all 18 minutes of it – on Estonian state television. The first act lays out the Krugman argument – even more sparingly than Krugman laid it out himself. Then the real drama begins in the second act with Ilves’ stinging response.
Why opera? Why song? Well, singing is in Estonians’ blood and has helped write their history. After all, the nation’s unraveling from the Soviet Union is known as the Singing Revolution. The Soviets had banned Estonia’s national songs and in the late 1980’s Estonians began to gather in ever increasing numbers to sing those songs as a sign of protest. By 1988, hundreds of thousands of people were gathering in a country of little more than a million. In November of that year, Estonia declared its sovereignty; three years later, it declared full independence.
Arnold Kling’s new book on Kindle
It’s called The Three Languages of Politics. It’s an extended take on the three-axis model. Get it! Write a charitable review! Use this post to give me your comments!
How are American parents different?
The biggest difference between American parents and their counterparts in Europe might be that they are far more relaxed about enrichment than we are, according to a study released this week by Sara Harkness and Charles M. Super at the School of Family Studies at the University of Connecticut.
Not only are Americans far more likely to focus on their children’s intelligence and cognitive skills, they are also far less likely to describe them as “happy” or “easy” children to parent.
“The U.S.’s almost obsession with cognitive development in the early years overlooks so much else,” Harkness told Slate .
For part of their research, the authors focused just on parents in the United States and the Netherlands. The differences are stark: American parents emphasized setting aside “special time” with each of their children, while Dutch parents spent a few hours each day together with their kids as an entire family.
…American parents were the only ones to consistently mention their children’s advanced intellect, while other countries focused on qualities like “happiness,” being “easy” to manage, or the even more zen-like “well-balanced,” in Italy. (Italians also used the word simpatico, a group of characteristics suggesting social and emotional competence).
The article, by Olga Khazan, is interesting throughout and for the pointer I thank an excellent and loyal MR reader.
Im neuen Spiegel (Poor Germany!)
April 13, 2013
*On Politics, book one*, by Alan Ryan
I picked up these two volumes on the basis of a very favorable review reproduced on The Browser, by Noel Malcolm. Yet the books sat around the house for months. I figured this was another overwrought survey by a famous person, valuable mainly as an introduction for those who don’t know much about the topic. The subtitle of volume one, by the way, is A History of Political Thought Herodotus to Machiavelli. Volume two picks up from there.
Overall I have been pleasantly surprised. When it comes to readability, interest, and integration of the intellectual narrative with actual history, I give volume one an A or A+. Along multiple dimensions, it would count as the very best book of the year. I do, however, have one major reservation. Whenever Ryan writes about a deep political philosopher, such as Plato, he makes that thinker sound prosaic and thus seem second-rate and shallow. Not terrible, just ordinary. Reading Ryan only, you would never know what all the fuss is about.
It is thus hard to assess the book as a whole, but I will continue with volume two. Ryan himself is a fairly deep thinker. Allan Bloom was a less deep thinker, and yet perhaps for that reason Bloom much better captured the depth of Plato.
Natural rates of interest, simple or tricky?
Krugman offers a full argument with graph, which you should read in total, but here is one bottom line summary:
When I say that the rate is too high, I mean relative to the rate that would produce full employment, which is, as Brad reminds us, Wicksell’s “natural rate”.
And here is his opening bit:
One of the baffling aspects of economic debate during this Lesser Depression, or so it seems to me, is the apparent urge of many economists to shy away from straightforward conclusions, the urge to make the simple complicated and the clear blurry.
If you’re asking what is at stake, it is whether we should be confident or even mildly confident about any predictions made through a liquidity trap model. I’ll stick with a few points, which I will put under the fold…
1. I am persuaded by Scott Sumner that, at least these days, the interest rate channel is not very important. Given that, one still can favor looser money, or at the very least think that tighter money would make things worse, even if the gains from looser money have by 2013 mostly come to an end.
2. I am struck by the remarks of Angus that:
Again and again I see the economy’s problem described along these lines:
“At the ZLB (zero lower bound), the real interest rate is too high to get us to the optimum. The nominal interest rate cannot fall any further by definition. So to get to the optimum the expected rate of inflation must rise.” Those are Simon Wren-Lewis’ words (they appear in a comment at the link), but Krugman and many others tell roughly the same story.
As always, I have questions.
In the IS/LM framework many (not Wren-Lewis) are using, doesn’t this mean that we are getting “growth” by firms investing in projects with a negative NPV now made profitable by an even more negative discount rate?
Second, how is that inflation expectations rise and the nominal interest rate remains unchanged?
Brad’s rather abstract talk about “lower” interest rates does not deflect me from recognizing this visceral wisdom from Cherokee Gothic. I am sorry, but on this one I have to vote for “complicated,” not “simple.” I will gladly admit that I do not myself have the final answers here.
3. It is not always useful to talk of “*the* interest rate” and apply that across both Treasury securities and the private sector. Our government can borrow at some negative real rates, but are we really to think that the private sector is looking at negative rates of return in the United States? Hardly. Wicksell, yes, but in this case we need some Sraffa too. Some kind of asset segmentation is going on, as David Beckworth and others have stressed, and that segmentation does matter a great deal for the transmission belt of monetary policy, at least to the extent you believe in an interest rate mechanism.
4. This is a side point, but it is Brad who doesn’t get Wicksell and Wicksell’s theory of the natural rate of interest. Brad blogged:
The large demand for relatively safe assets like U.S. Treasury securities means that the interest rate consistent with full employment–the “natural” interest rate, in Wicksell’s terms–is lower than normal, and the natural rate is in fact less than zero.
On the natural rate of interest, what did Wicksell actually write?:
There is a certain rate of interest on loans which is neutral in respect to commodity prices, and tend neither to raise nor to lower them. This is necessarily the same as the rate of interest which would be determined by supply and demand if no use were made of money and all lending were effected in the form of real capital goods. It comes to much the same thing to describe it as the current value of the natural rate of interest on capital.
That’s from the beginning of chapter eight. Now it’s more complicated than that, as Wicksell juggles and sometimes equates three or four different definitions of the natural rate of interest, not to mention the contrast between the natural rate of interest and the normal rate of interest. David Laidler once referred to the “Wicksellian muddle.” Still, DeLong is barking up a different tree.
Brad also chides me for neglecting “basic Geldzins und Guterpreis”, but speaking of basics he neglects the umlaut and also the plural on “price”, so it should be “Güterpreise“, the German-language title then being translated somewhat inexactly into “Interest and Prices.”
5. Stephen Williamson has some interesting comments on the issue. John Cochrane has an excellent post on this entire question, and it will not push you into thinking the matter is simple. I also recommend these Scott Sumner remarks.
You will recall Cowen’s Third Law: “All propositions about real interest rates are wrong.”
Max wants to know what to do
Max has me stumped. I promised him an answer months ago, but I’ve come up with nothing of value, other than perhaps citing Adam Smith on alienation and the division of labor. I’ve felt guilty ever since and I suppose today is the day I fess up to having no good response at all. Here is his initial email:
1) As a fairly recent graduate of an Ivy League institution (with a bachelor’s degree), most of my classmates seemed to have some idea that career and life path choice should be driven by a “passion” such that the right choice is self-evident to the chooser. What does this belief mean to you as a social scientist?…
For question two, then, you may sense where this is going…
2) Assume I have no such passion. Furthermore, I am a fairly well-qualified young generalist.* What paths should most appeal to me if my goal is to maximize doing “interesting” work? Doing meaningful work? Achieving social status? (Which of these goals should be primary?) Need I try to develop a passion before selecting a life path/career, and if so how do I do it?
All the best,
Max
*Two years out with a BA from an Ivy League school. Top 10% of the class but not an academic rock star. A record of primarily reading/writing-intensive courses, as well as basic to intermediate economics, calculus, statistics, a proofs course. Time spent abroad in study and travel, though no foreign language fluency. Two years in the private sector with a decent amount of analytic and management experience, but without a big name behind it.
Max is hardly doomed. Still, reading emails such as Max’s makes me more of a determinist. He seems to have a meta-preference for more career passion, but no way of getting there. I would tell Max to at least consider the world of consulting (and here is Robin Hanson on same). I also would tell him that meta-preferences are overrated, as there is no reason per se to side with the meta-preference over the preference. Passion isn’t a value in and of itself.
What other advice can you all give?
April 12, 2013
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