Tyler Cowen's Blog, page 530
March 19, 2012
Lunch with Scott Sumner (and others) at China Star
How is that for self-recommending? Here in a short paragraph is my current take on where Ben Bernanke would differ from Scott. As the shadow banking system was imploding in 2008, due to a downward revaluation of collateral, nominal gdp stabilization would have required that the Fed resort to the medium of currency printing on a very large scale. Scott favors such a move. Bernanke would worry that the collapse of (some) intermediation would mean you get most of the output losses anyway, while the printing of currency would create subsequent problems with management of expectations, relative sectoral shocks (currency is only a partial substitute for credit), and medium-term adjustment once the smoke has cleared, not to mention political relations with Congress and interest groups within the Fed system itself. Therefore Bernanke didn't want to do it, even though in principle he likes to see nominal gdp stabilized, and has written and said as such.
I am not suggesting that Scott agrees with this perspective.
From the comments
From Dan Weber:
Maybe this should be posted once a week: http://marginalrevolution.com/marginalrevolution/2011/03/the-fallacy-of-mood-affiliation.html
Italy Fact of the Day
Italian labor unions represent more retirees than workers.
From a good piece on reforming Italian labor law in the NYTimes.
Addendum: Some commentators are asking whether this is surprising. Answer: Italy has far more retired union members than any other European country. Circa 2003-2004 (when 48% percent of Italian union members were retired) in France and Germany just 20% of union members were retired, in the UK 10%, in Spain 4.5%. Oddly, I could not find a source for the US, although some unions like the UAW clearly have more retirees than members my guess is that the overall number is quite low and certainly well below the Italian rate.
*The Idea Factory*
I loved this book and devoured it in a single sitting. The author is Jon Gertner and the subtitle is Bell Labs and the Great Age of American Innovation. Here is one excerpt:
Scientists who worked on radar often quipped that radar won the war, whereas the atomic bomb merely ended it. This was not a minority view. The complexity of the military's radar project ultimately rivaled that of the Manhattan Project, but with several exceptions. Notably, radar was a far larger investment on the part of the U.S. government, probably amounting to $3 billion as contrasted with $2 billion for the atomic bomb. In addition, radar wasn't a single kind of device but multiple devices — there were dozens of different models — employing a similar technology that could be used on the ground, on water, or in the air.
One lesson of this book is how much war can spur innovation. Here is one Gertner article on the themes of the book. Here is a review of the book. Anyone interested in the history of science, tech, or innovation should buy and read this book.
Do we remember less well when we read from computer screens?
From Maia Slalavitz:
E-books, however, provide fewer spatial landmarks than print, especially pared-down versions like the early Kindles, which simply scroll through text and don't even show page numbers, just the percentage already read. In a sense, the page is infinite and limitless, which can be dizzying. Printed books on the other hand, give us a physical reference point, and part of our recall includes how far along in the book we are, something that's more challenging to assess on an e-book.
Jakob Nielsen, a Web "usability" expert and principal of the Nielsen Norman Group, believes e-reading does lead to a different type of recall. "I really do think we remember less" from e-books, he says. "This is not something I have formally measured, but just based on both studies we've done looking at reading behavior on tablets and books and reading from regular computers."
He says that studies show that smaller screens also make material less memorable. "The bigger the screen, the more people can remember and the smaller, the less they can remember," he says. "The most dramatic example is reading from mobile phones. [You] lose almost all context."
I liked this sentence from the piece:
"We bombarded poor psychology students with economics that they didn't know," she says.
I would consider these results "speculative," but the questions are nonetheless interesting to ponder. The full article is here.
March 18, 2012
Temporary vs. permanent increases in government spending
Not long ago Paul Krugman wrote:
To a first approximation, in other words, the effect of current fiscal policy — whether stimulus or austerity — an [on?] the actions of future governments is zero.
He makes further points at the link, although there is not a citation to the literature. I thought we should look at the evidence a little more closely. Some of it contradicts Krugman as read literally, though it is not all bad news for his larger point.
Here is an abstract from Brian Goff:
In spite of Peacock and Wiseman's 1961 NBER study demonstrating the "displacement effect", simplistic theoretical and empirical distinctions between temporary and permanent spending are common. In this paper, impulse response functions from ARMA models as well as Cochrane's non-parametric method support Peacock and Wiseman's conclusion by showing 1) government spending in the aggregate displays strong persistence to temporary shocks, 2) simple decomposition methods intended to yield a "temporary" spending series have a weak statistical foundation, and 3) persistence in spending has increased during this century. Also, as a basic "fact" of government spending behavior, the displacement effect lends support to interest group and bureaucracy models of government spending growth.
There is persistence to spending, although this study does not create a category for stimulus spending per se, however that concept might be defined. The work of Robert Higgs also provides a clear look at ratchet effects on government spending, control, and regulation, although Higgs focuses on war rather than spending. State governments also seem to exhibit a ratchet effect, whereby good times bring about permanently higher budgetary demands, if only through endowment effects, lock-in, and status quo bias.
That said, the federal debt/gdp ratio seems to show mean reversion, as does the measure of primary surplus. That would mean that fiscally troubled situations are followed by improvements, though not necessarily from spending decreases. In fact there has been considerable reliance on a "growth dividend." And here is Henning Bohn from the QJE:
How do governments react to the accumulation of debt? Do they take corrective measures, or do they let the debt grow? Whereas standard time series tests cannot reject a unit root in the U. S. debt-GDP ratio, this paper provides evidence of corrective action: the U. S. primary surplus is an increasing function of the debt-GDP ratio. The debt-GDP ratio displays mean-reversion if one controls for war-time spending and for cyclical fluctuations. The positive response of the primary surplus to changes in debt also shows that U. S. fiscal policy is satisfying an intertemporal budget constraint.
In other words, we make up for first-temporary-then-permanent spending boosts by a mix of growth and higher taxes. Krugman might well be happy with that scenario, but the data do show intertemporal interdependence for budgetary decisions, with a mix of persistence on one variable (spending) and mean-reversion on another (debt-gdp ratio). And if you think a lot of government spending is inefficient, you should still be troubled by apparently "temporary" spending bursts.
As with much of macroeconomics, I would apply a good dose of agnosticism to these results (noting that agnosticism is not the same as assuming zero effect), but still the correlations are consistent with my intuitions more generally.
Assorted links
1. Zero- or positive-sum game?
2. Via Chris F. Masse, which classic books do the French buy? Asimov beats out Proust and Stendahl.
3. Interview with Martin Walser, on literature and religion.
4. More Charles Murray, on economic vs. cultural forces; "It is condescending to treat people who have less education or money as less morally accountable than we are. We should stop making excuses for them that we wouldn't make for ourselves. Respect those who deserve respect, and look down on those who deserve looking down on."
5. What lessons are other countries learning from the Greek default?
6. Article about me in Calcalist, Israeli periodical, in Hebrew.
Project Nim
I highly recommend Project Nim, the documentary about the life and times of the chimpanzee Nim who was raised as a baby in a human home and taught sign language.
There are a lot of strange moments in the film but perhaps none stranger than this: Stephanie LaFarge, Nim's adopted mother who breast-fed him as a baby, is eager to reasure us that as Nim grew older and more interested in sex:
I never felt sexually engaged with him. There was a sensuality but Nim was a pre-teen.
Do think about that for a moment.
Nim is later taken from her but she sees him once again when she is now a much older woman. She describes her first thoughts and reactions:
He wasn't particulary attracted to me now that he was an adult chimpanzee. I wasn't beautiful or anything like that.
Project Nim is from director James Marsh who also made the great Man on Wire.
March 17, 2012
Facts about Italy
Industrial output in January was five per cent down on a year earlier, while a study by Intesa Sanpaolo, a bank, shows that national consumption of food, drink and tobacco fell in 2011 to levels last seen 30 years ago.
And:
John Elkann, chairman of Fiat, expects Italians to buy fewer cars this year than they did in 1985. Registration of new Fiat group cars in Europe fell 16.7 per cent in February from a year earlier.
And:
Whereas electricity producers were fretting four years ago that Italy lacked generating capacity, one senior utility executive told the Financial Times he feared that industrial consumption would never return to the then levels.
Analysts warn the worst is yet to come. This month Italians will feel the first impact of Mr Monti's revenue-raising measures when they start paying higher regional income tax. In June reintroduction of a tax on first homes and higher rates on second homes come into force, to be followed in October by a further rise in value added tax.
The article is here.
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