Tyler Cowen's Blog, page 519

From the pen of Interfluidity

Post-Keynesians did predict a crisis, on broadly the terms that we actually experienced. They argue that there are adverse side effects to using monetary policy to manage aggregate demand. Although in theory this might be avoidable, post-Keynesians point out that in practice monetary stabilization, even above the zero-bound, seems to engender increasing indebtedness and financial fragility, and to distort activity towards overspecialization in finance and real estate. They pay much more attention to the details of financing arrangements than the other schools, and emphasize that vertiginous collapses of aggregate demand are nearly always accompanied by malfunctions in these arrangements. Aggregate demand, post-Keynesians argue, cannot be managed without concrete attention to the operation of financial institutions and the conditions that lead to their fragility. Post-Keynesians make the deep and underappreciated point that fiscal policy, even if it is conventionally tax-financed, can deleverage the private sector and reduce financial fragility in a way that monetary operations cannot. Monetary operations, if you follow the cash flows, amount to debt finance of the private sector by the public sector. The central bank advances funds today, in exchange for diverting precommitted streams of future cash from the private sector entities to the central bank. Fiscal expansion is more like equity finance of the private sector by the public sector. Public funds are advanced, and captured by parties with weak balance sheets as well as strong. But taxes are not withdrawn on a fixed schedule. They are recouped "countercyclically", in good times, when private sector agents are most capable of paying them without financial distress. Further, the private sector's tax liability is distributed according to ex post cash flows realized by individuals and firms, while debt obligations are distributed according to ex ante hopes, expectations, and errors. So tax-financed fiscal policy acts as a kind of balance-sheet insurance. Both by virtue of timing and distribution, taxation is less likely than monetary-policy induced debt service to provoke disruptive insolvency in the private sector. Plus, during a depression, fiscal expansions may never need to be offset by increased taxation…Never-to-be-taxed-back fiscal expenditures, if they are not inflationary, shore up weak private-sector balance sheets without putting even a dent into the financial position of the strong. They represent a free lunch both in real and financial terms.

Here is more, and it is insightful throughout.  I would add two points, both in the skeptical direction:

1. I so rarely hear the post Keynesians utter the word "Congress" in discussions such as this.

2. Fiscal policy does best when it is obvious what should be produced, and there is a political consensus to make that stick, as was the case in 1940-45 for instance.

Assorted links

1. Peter Boettke's new paper on Henry Hazlitt.

2. Where do people go when they drop out of the labor force?

3. The sovereignty of American Indian tribes, interesting throughout.

4. Deregulation has lowered the prices of coffins.

5. Susan Sontag, an appreciation, and Doris Lessing, an appreciation.  They are both still underappreciated, especially on "the Right."  It is easy to dismiss them for their worst utterances, but they both have been brilliant writers, albeit in very different ways.

6. Which entrepreneurs are benefiting from the violence in Syria?

What happened to Alywn Young's Hong Kong vs. Singapore contrast?

From 1992, the paper is here (note by the way an interesting written comment from Paul Krugman at the end).  The basic story was that Hong Kong and Singapore had obtained their prosperity by two different paths.  Hong Kong had made real productivity gains, but Singapore grew just by throwing more factors of production at the problem of economic growth, including a massive dose of savings and investment, including foreign investment.  The share of investment in Singapore's gdp rose from 9% in 1960 to 43% in 1984, while Hong Kong's remained roughly steady at about 20%.  If you back this out from national income statistics, you can measure that Singapore had very low levels of total factor productivity growth.

But should we believe that story, which by now is twenty years old?  After all, these days, Singapore is extremely interested in cutting-edge science and on the frontier in the biosciences and with satellite launches, among other areas.  Hong Kong has done fine, but as a finance center and entrepot for the China trade.  Not many people look to them as ideas leaders.  Maybe both countries somehow turned on the proverbial dime, but I don't believe the initial Young result for a few reasons:

1. Ever since Michael Mandel, I am skeptical about backing out productivity claims from "value-added" data for extremely open economies.  The quality of the data do not support extremely strong claims, and Krugman stresses this point in his comment.  By the way, in the Singapore data TFP growth is negative in some sub-periods; see pp.24-5, can you believe -8% for 1970-1990?  I take this as indicative of problems in the data and I am not persuaded by Young's suggestion that it results from cyclical factors.

2. There is much talk about Singapore bringing in so much capital, and they did.  But getting all that capital is not as simple as throwing a switch.  Presumably the capital — especially the foreign capital — comes in part because investors expect a favorable productivity environment, if only prospectively.

3. Sometimes capital can "carry" or "contain" TFP growth; imagine spending money on a new industrial robot.

4. Some of the measured "TFP growth" may in fact reflect underpriced labor, including underpriced labor migrating from the PRC into Hong Kong.  Those workers turned out to be more productive than people were expecting, which creates an apparent TFP residual, and migration of this nature played a larger role in the Hong Kong economy than in Singapore.

5. Young's measures make him sound skeptical about the future (post-1992) course of economic growth in Singapore, and this has hardly been borne out by the facts.  I wouldn't call this an explicit or formal prediction of his theory but read the paper and the pessimism seeps through, albeit subtly.  Is this passage (p.32) prescient or a sign of a mistaken assessment?:

Although I have presented evidence earlier, on the remarkable rate of structural transformation of the Singaporean economy, I feel that the words of Goh Keng Swee, Singapore's Minister of Finance, in March 1970 are equally compelling: ". .. the electronics components we make in Singapore require less skill than that required by barbers or cooks, involving mostly repetitive manual operations." By 1983 Singapore was the world's largest exporter of disk drives. By the late 1980s, Singapore was one of Asia's leading financial centers. As of today, the Singaporean government is targeting biotechnology and, no doubt, with its deep pockets, will achieve "success" in this sector. One cannot help but sense that this is industrial targeting taken to excess.

To flesh out this history, note two further points:

1. Young is long renowned for the care and quality of his empirical work.  He is the sort of researcher who might obsess for six months over a footnote.  That is one reason why he has not produced a greater number of papers.

2. This line of research (there are other papers here) was immediately hailed as successful upon its appearance.  I read it too at the time and simply assumed it was likely to be true.  Even Krugman, despite his insightful worries in his comment, ended up endorsing the Singapore result as true (that link is also an excellent essay for background on this entire set of ideas and debates).

The funny thing is, Young's hypothesis still could be true.  It hasn't been refuted.

But if you ask me — I don't believe it, not any more.  I take this to be a cautionary tale of how difficult it can be to establish firm knowledge through economics.

How are left-wing and right-wing blogs different?

Via Kevin Lewis, here is Aaron Shaw and Yochai Benkler:

American Behavioral Scientist, April 2012, Pages 459-487

Abstract:

In this article, the authors compare the practices of discursive production among top U.S. political blogs on the left and right during summer 2008. An examination of the top 155 political blogs reveals significant cross-ideological variations along several dimensions. Notably, the authors find evidence of an association between ideological affiliation and the technologies, institutions, and practices of participation. Blogs on the left adopt different, and more participatory, technical platforms, comprise significantly fewer sole-authored sites, include user blogs, maintain more fluid boundaries between secondary and primary content, include longer narrative and discussion posts, and (among the top half of the blogs in the sample) more often use blogs as platforms for mobilization. The findings suggest that the attenuation of the news producer-consumer dichotomy is more pronounced on the left wing of the political blogosphere than on the right. The practices of the left are more consistent with the prediction that the networked public sphere offers new pathways for discursive participation by a wider array of individuals, whereas the practices of the right suggest that a small group of elites may retain more exclusive agenda-setting authority online. The cross-ideological divergence in the findings illustrates that the Internet can be adopted equally to undermine or to replicate the traditional distinction between the production and consumption of political information. The authors conclude that these findings have significant implications for the study of prosumption and for the mechanisms by which the networked public sphere may or may not alter democratic participation relative to the mass mediated public sphere.

Assorted links

1. The 50th anniversary of The Golden Notebook; it's a very good book.

2. Rebranding the Freemasons.

3. $5 markets in everything, and here.

4. The religious affiliations of various superheroes.

5. Climate Change and Common Sense: Essays in Honour of Tom Schelling, edited by Robert Hahn and Alastair Ulph, comes out today.

In my pile

Jonathan Schlefer, The Assumptions Economists Make.

Time to Start Thinking: America in the Age of Descent, by Edward Luce.   Here is his recent essay, related to the book.

Carl H. Nightingale, Segregation: A Global History of Divided Cities.

Ruchir Sharma, Breakout Nations: In Pursuit of the Next Economic Miracles.

Chris Mooney, The Republican Brain: The Science of Why They Deny Science — and Reality.

Non-Google digital library in the works, connected with Robert Darnton.

Ronald Coase has a new book coming out

With Ning Wang, it is called How China Became Capitalist, due out later in April.

Here is their Op-Ed in today's WSJ.  Ronald Coase, Nobel Laureate, is now 101 years old.

The WSJ reviews *An Economist Gets Lunch*

From Graeme Wood, the review is here.  It has the excellent title "From Invisible Hand to Mouth."  Excerpt:

For authenticity, he awards points to Pakistani restaurants that feature pictures of Mecca, since they're more likely to cater to Pakistani clientele. ("The more aggressively religious the décor, the better it will be for the food.") Find restaurants where diners are "screaming at each other" or "pursuing blood feuds," he says—indications that people feel comfortable there and return frequently with their familiars.

I liked this line:

These labor-intensive operations, Mr. Cowen writes, show "just how uneconomical true barbecue art can be"—which suggests that if you want to eat like an economist, you should find a chef who doesn't cook like one.

Note, however, that if you have talent but do not wish to scale it up very far, running an excellent local barbecue restaurant still may be a good use of your time.  The last two lines are sincere flattery:

Mr. Cowen says to beware of scenic views, bevies of beautiful women, and well-stocked bars. "You want to see that the people eating there mean business," Mr. Cowen writes. Food is a business he knows intimately, although his preference for delicious meals in windowless rooms with ugly women, pictures of the Kaaba, and active blood-feuds will not be a taste shared by all.

You can pre-order the book on Amazon here.  For Barnes & Noble here.  For Indiebound.org here.  It is due out April 12.

"After ten years they let you cook the eggs…"

That line was from Jiro Dreams of Sushi.

Think of this film as a learning by doing model.  Bosses would like to invest in training workers, but they fear the workers will leave them high and dry, unable to recoup their investments.  Bosses therefore train workers excessively slowly, keeping them as apprentices in the meantime.  Only in the end stages of training do the workers learn how to handle the high-margin items, namely the sushi itself.  Furthermore Japanese customers demand high quality, which make it difficult for an incompletely trained worker to open his own sushi bar.  As long as there are many very good sushi bars, this equilibrium with well-informed customers can persist and sustain long-term worker training.  Quality is inefficiently high, and productivity in the service sector is inefficiently low, while personal service quality is inefficiently high (let him greet and bow to customers before he learns how to shape the rice), but training occurs and the elderly retain lots of social and economic bargaining power.

Young workers earn not so much, but can cash in on equity (i.e., open their own sushi bar) later in their lives.  They are not promising marriage prospects for young women.

Imagine a shock which limits the future profitability of sushi bars, such as fish depletion or greater competition from foreign foods or from cheaper sushi produced by lower-skilled workers.  This will shift the composition of apprentices toward somewhat older individuals, and indeed the movie suggests this has happened under Jiro.

Jiro: "I have been able to keep at the same line of work for seventy-five years."  The viewer does not expect anyone else in the movie to be making the same claim, years from now.  In the meantime, such an economy is not good at reallocating labor in response to sectoral shifts.

At age 85 Jiro holds three Michelin stars, although his restaurant has only ten seats and the bathroom is outside and down the hall.

They serve slightly smaller portions to the female customers, so that everyone in a party finishes their portion at more or less the same time.

Addendum: The new "SushiBot" makes 3,600 pieces of sushi an hour, albeit at lower quality.

What (and how) Whit Stillman reads

You have a lot of freedom in reading a book. I'm unable, for some reason, to read books from beginning to end. I have to go to what interests me most in the book. And if I like that, I start going backwards and forwards. And it starts to become a really complicated endeavor of just reading the parts of the books once and not sort of overlapping. I don't know why I have to sort of re-edit the books myself. I don't know why I can't read a prologue and read a first chapter. I mean, if I really love a book I'll get to them too. For some reason, I usually find them deadly dull, the prologues.

And this:

And my favorite reading of all is the unabridged Boswell's Life of [Samuel] Johnson. It's my favorite thing because it's interesting and has no import or forward narrative momentum. So you're interested and edified but it doesn't keep you up at night.

Here is more.