Tyler Cowen's Blog, page 449

The bottom line on the euro right now

From Matt:

… it’s not that long ago that the world was optimistic that Mario Draghi and the European Central Bank had finally gotten the situation under control. But the politics of the thing essentially prevent a “once and for all” resolution from taking place. That’s because the ECB’s game is to centralize as much authority in Frankfurt as possible which means that peripheral governments must be continually put to squeeze between the demands of the central bank and the demands of the voters. The fear is that if the ECB goes “too easy” on the Spanish government, that Rajoy will give in to the political unpopularity of the ECB agenda and back off. Spain needs to be perched perennially on the brink of a crisis since its citizens can’t be trusted to Ireland/Baltic-style simply go along with austerity budgeting.

The Spanish ten-year yield is back up over six percent and climbing…

The private sector can manufacture its own nominal gdp

Loyal MR readers will know I’ve long had sympathy with ideas such as ngdp targeting, even though I think they require more rule-oriented behavior than our political system is able to supply.  It’s still worth pushing in that direction.

There is however one tendency in some of the writings on ngdp which I would frame differently, so I will lay this out in a little more detail. I”m not sure anyone has written anything which I consider literally wrong, but I get nervous at what seem — to me — to be the implications.

Here is one example from Bill Woolsey:

The typical Market Monetarist perspective is that nominal GDP has shifted to a 14 percent lower growth path.    For real output and employment to remain on its previous growth path, the price level and nominal wages need to also shift to 14 percent lower growth paths.   They haven’t.   Instead, they are only about 2 percent lower.

My worry is that some Market Monetarists speak of ngdp as if it is some block of stuff, handed down from on high (of course in the past our central banks have not been targeting ngdp).  It’s as if ngdp determines the size of the room, and a carpenter is then asked to build a house within that room.  If the room is too small, a large house cannot be built.  Or, if you are not given enough clay, you cannot build a very large sculpture.  Along these lines, if the growth path of ngdp is not robust enough, the economy cannot do well.

I get nervous at how ngdp lumps together real and nominal in one variable, and I get nervous at how the passive voice is applied to ngdp.

My framing is different.  My framing is that the private sector can manufacture its own ngdp.  It can do so by trade and it can do so by credit and of course velocity is endogenous to the available gains from trade.  Most of the major central banks are, today, not obsessed with snuffing out recovery and increases in real output.

To say “ngdp is low,” or “ngdp is on a low growth path,” or “ngdp is below trend,” and so on — be very careful!  Those claims do not necessarily have causal force.  Arguably they are simply repeating, in a new and somewhat different language, the point that the private sector has not seen fit to engage in more trade, credit creation, velocity acceleration, and so on.  Formally speaking, the claims are not wrong, but I don’t find them useful as an explanation for why economic growth or recovery, at some point in time, is slow.  It is one way of repeating or re-expressing the slowness of economic growth, albeit with some transforms applied to the vocabulary of variables.

This matters when we consider sticky nominal wages.  Sometimes it is suggested that the “inside workers” have frozen up or taken up so much ngdp with their sticky wage demands that the outsiders cannot find the ngdp to fuel their activities.  It’s as if there is not enough ngdp to go around, just as there was not enough clay to make a sufficiently large sculpture.  I would like to see this modeled (I will report back on any credible citation you offer me), but note in the meantime it is not how the most popular or most influential sticky wage models work.  Once you see the private sector as being able to manufacture its own ngdp, this argument does not seem to have enough force to prevent the outside laborers from exploiting available gains from trade.

The outside laborers are sometimes locked out, but that is when businesses simply do not wish to expand output.  Once businesses are wishing to expand output, the sticky wages of the insiders should not prove an insuperable obstacle to hiring the outsiders at lower wages.  The private sector can support this by manufacturing its own ngdp and if demand is low, well, the wages for the new workers will be lower too, as indeed is the case at Caterpillar and many other companies.

I also see that we have undergone some reflation — current ngdp is about ten percent above the pre-crash peak — so there ought to be enough clay, even if we accept that metaphor.  And the number of laborers in the work force is down.  Here are some related comments from Scott Sumner.

I do believe in the nominal stickiness of many wages, but only in the short run and only for some classes of workers.  Especially when the quality of jobs can and does change so readily, I don’t see the nominal stickiness of wages as lasting for more than a few years, at the most, at least not for the United States.  For legal and regulatory reasons, Western Europe is often a different story.

In any case, these are my worries about some of the current framings of ngdp.

Catalonia, just to keep things interesting

Catalonia government president Artur Mas has called early elections for the powerful northeastern region, a vote that will likely be seen as something of a referendum on independence from Spain.

In a regional parliamentary debate Tuesday, Mas set the date for Nov. 25.

Mas called the elections more than two years ahead of schedule after the central government in Madrid last week rejected a demand to grant Catalonia special fiscal powers.

That is from The Montreal Gazette.  Here is FT coverage.  You can follow the issue on Twitter here.

I wonder where Andreu Mas-Colell (Finance Minister of Catalonia) stands on all of this?

The polity that is Vietnam

Three Vietnamese bloggers have been found guilty of spreading anti-government propaganda and given jail sentences ranging from four to 12 years.

The cases against the two men and one woman are some of the most high-profile being prosecuted by the country’s Communist rulers.

One of the defendants’ lawyers, Ha Huy Son, says the three were found guilty of writing online articles “opposing the government” by a court in Ho Chi Minh City on Monday.

Mr Ha says Nguyen Van Hai was sentenced to 12 years, Ta Phong Tan received 10 and Phan Thanh Hai four years.

Here is the FT article.  For all the talk about Asian economic miracles, keep in mind that Bolivia still has higher per capita income than does Vietnam.

Life extension that works?

Castration had a huge effect on the lifespans of Korean men, according to an analysis of hundreds of years of eunuch “family” records.

They lived up to 19 years longer than uncastrated men from the same social class and even outlived members of the royal family.

Caveat emptor!  For the pointer (sans endorsement) I thank Mo Costandi.

Noah Smith’s guide to EconoTrolls

It is very funny, which is hard to manage for it being a) economics, b) blogs, and c) relying on obscure knowledge about the potential illiquidity of an ngdp futures market.  The best case I’ve seen lately for esoteric humor.

MR is Going to Korea: Gangnam Style!

Tyler and I will both be in South Korea in early October for the Asian launch of Marginal Revolution University. Tyler will be speaking at the World Knowledge Forum (Oct. 9-11). The WKF is known as the Asian Davos. In addition to Tyler, the speakers include Paul Krugman, Daron Acemoglu, Malcolm Gladwell, Cass Sunstein, Dani Rodrik, a number of other well known economists and social scientists and a host of political and business leaders.

Coincidentally, Google invited me to speak in South Korea on Oct. 9. I will be speaking on Innovation at the Google Big Tent event in Gangnam! I will also be on several panels at the WKF on the 10th and 11th.

Neither Tyler nor I have been to Korea before so we are looking forward to the trip. Recommendations welcome in the comments.

We are committed to making MRU a global player in online education.

Assorted links

1. What Emma Thompson likes to read.

2. is there a poet for romney?

3. The sad tale of infrastructure in Valencia.

4. Beijing’s dangerous game, and the economics behind the islands dispute.

5. Felix Salmon encounters Joseph Stiglitz and theology.

6. New Chronicle story of neuroeconomics, and there is no great stagnation.

The $35 tablet (perfect for MRU)

Do you want a tablet but don’t have enough money to buy one of those high-end tablets available in the market today?  Here’s some good news for you.  There’s a new $35 tablet, the catch is, you can only get it in India.

The new Aakash UbiSlate 7Ci comes equipped with WiFi so you can connect to the internet but if you’re living in India, you can avail of the $64 upgrade and have yourself a cellular Internet package of $2/month for 2 GB of data which translates to roughly 25 emails, 25 websites, 2 minutes of streaming video, and 15 minutes of voice chat a day.  It also features voice search, so it might help pacify your need for something similar to Apple’s Siri.

It features a 7.5-inch display, a front facing VGA camera, and a Cortex A8, 1Ghz Processor.  According to reports, it’s as fast as an iPhone, so it can’t be too bad.  It runs Android but the version hasn’t been specified yet.

The cheap tablet is part of the Indian government’s move to technologically mobilize the country.  The first batch of the affordable tablets will hit universities around India sometime this month and via a “special offer”, DataWind, the carrier and maker of the tablet, will offer broadband for a monthly cost of US$1.78.  And for those living in remote areas where electricity is sparse, they can get a solar charger for the Aakash UbiSlate 7Ci.

Here is more, and for the pointer I thank Mark Thorson.

Quartz

qz.com, from the folks who bring you The Atlantic, great site I will follow it with interest.