Greed, Green & Grains

The infamous quote from Milton Friedman was: "We're all Keynesians now." Some, including Friedman, claimed that quote was taken out of context.  I can't find the precise quote right now, but he prefaced that statement with something along the lines of "in a sense.."  and appended that comment with something along the lines "and in another sense none of us are Keynesians now." What Friedman  meant at that point in time, and I believe he thought up until the day he died, was that the vast majority of economists were Keynesians in the positive sense.  That is, the Keynesian model of macroeconomic business cycles was essentially correct.  But Friedman disagreed with Keynes' normative solution to the problem of severe recessions and depressions: that fiscal stimulus should be used to rescue the economy from recessions and depressions when interest rates hit the zero lower bound.   Instead, Friedman argued that appropriate management of the money

Given the theme of this blog, I feel obligated to write something about the big salmonella egg recall.  I guess I've been slow to comment because in some ways it seems like an old story and I really don't have any special insights. Every now and then some kind of infectious disease gets into our food system wreaks reeks (that too?) havoc.  While our food in generally safe, and probably safer today than at most times in history, huge farms and centralized distribution systems can cause an outbreak to spread far and wide very fast.  So while we get a few outbreaks, they can be pretty bad when they do happen.  Often, as seems to be the case here, the problem can come from a single bad actor .  Actually, I'm a little surprised something much more dramatic hasn't happened yet. So, what should we do?  Well, I think there are a lot potential solutions to the problem.  I also think those solutions will probably happen more-or-less automatically.  First, folks in the egg bus

Lunch break (for math/probability/statistics wonks): So 11 of 12 jurors thought Blagojevich was guilty of selling a seat in the U.S. Senate .  Assuming those jurors were a representative sample of the kind of jurors we might expect from a retrial, what are the odds he would be convicted if he were retried? I see two ways of answering this question, one is pretty easy and the other, which has a Bayesian flair to it, is more difficult.  The two answers are probably pretty similar, but I haven't done the harder and probably more appropriate one yet. I'll post my answers later in the day.  In the meantime, if you're up for a fun distraction you can tell me your answer in the comments. Update :  So the easy answer is obtained by assuming the probability of a "guilty" verdict juror is the frequentist estimate of 11/12, since in our sample of 12 jurors, one voted "not guilty."  Then the probability of getting twelve "guilty" verdict jurors is

Exquisite Tyler Cowen in the New York Times today, about how we pay much too little for parking.  Parking isn't really free, but when we pay nothing for the marginal use of a parking space, it causes us to use land, cars, and generally structure our whole lives in grossly inefficient ways. His article was inspired by a book by Donald Shoup . So, this reads like an advocacy piece for higher parking fees and, perhaps implicitly, market pricing of everything.  Okay, I might be able to get behind that. But the more interesting question is, why is parking so often free? First, I'd like to point out that when parking costs get really expensive the price does go up.  I know some prime parking spots in DC can cost $50,000, and $25,000 is commonplace. Some parking spaces in Manhattan cost more than houses do in other parts of the country . So, the free parking we're talking about is also the parking that generally tends to be less costly to provide.  Yes, I also imagine t

It took me an embarrassingly long time to fully understand the difference between Bayesian and frequentist views of probability.  I don't think I fully appreciated the Bayesian perspective until I got to listen to Arnold Zellner, who spent his emeritus years at my alma mater, UC Berkeley ARE , when I was in graduate school there.  I only interacted with him personally a couple of times, and then only very briefly, but was often privy to his comments and questions during seminars.  I found it interesting how he combined passionately strong views with an amazingly kind and gentle demeanor. From Andrew Gelman's blog : Steve Ziliak reports: I [Ziliak] am sorry to share this sad news about Arnold Zellner (AEA Distinguished Fellow, 2002, ASA President, 1991, ISBA co-founding president, all around genius and sweet fellow), who died yesterday morning (August 11, 2010). He was a truly great statis

I can't believe I was naive enough to write this 15 months ago : Finally we have direct talk of inflation targeting While I'm no macroeconomist, I've read a lot of good macroeconomists, and this has made me question why explicit inflation targeting backed by unconventional monetary policy was not on the table like six months ago. Better late than never. Here are excerpts from the story at Bloomberg . What the U.S. economy may need is a dose of good old-fashioned inflation. So say economists including Gregory Mankiw , former White House adviser, and Kenneth Rogoff , who was chief economist at the International Monetary Fund. They argue that a looser rein on inflation would make it easier for debt-strapped consumers and governments to meet their obligations. It might also help the economy by encouraging Americans to spend now rather than later when prices go up. “I’m advocating 6 percent inflation for at least a couple of years,” says Rogoff, 5

I've had a number of relatively technical posts, a couple recently, about behavior of commodity prices.  It's because I'm generally wondering if there is excess volatility in commodity prices, much like Robert Shiller and others have long pointed out about the behavior of stock prices and housing prices. As astute readers may have noticed, I really don't have a strong opinion on this yet.  At this point I don't see any smoking-gun evidence that commodity prices display anything but rational market behavior.  But the amount of volatility we do see suggests that both supply and demand are very inelastic, and/or policies and trade restrictions facilitate what are, in effect, very inelastic supply and demand. There is one exception.  While I haven't studied it as closely, gold prices are looking an awful lot like a bubble to me.

Bloomberg : Corn futures rose the most in almost two weeks and soybeans gained on speculation that the recent Midwest heat wave will mean smaller production than the record crops predicted today by the government. August has gotten off to the second-warmest start since 1960, T-Storm Weather LLC said today in a report. Another forecaster, Commodity Weather Group LLC, said about 25 percent of the U.S. soybean-growing area won’t get enough rain for proper plant development over the next two weeks, and that the dryness could harm a third of the Midwest should rain miss sections of Illinois this weekend, as expected. “The crops are going downhill rapidly in parts of the Midwest and South,” said Mark Schultz , the chief analyst for Northstar Commodity Investment Co. in Minneapolis. “Our farmers are already preparing for corn yields that may fall 5 percent to as much as 10 percent from earlier field samples.” Update : Current temperatures.  They are still rising fast.  If this keeps up

Deflation here we come.  I'm glad I moved to long-term treasuries: At today's close: U.S. Treasuries: 3-Year:   0.79 5-Year:   1.45 7-Year:   2.13 10-Year:  2.76 30-Year:  4.01 I think the only way to stop this slide is extremely aggressive monetary and/or fiscal policy.  I don't think that's going to happen. So, how low will rates go? My armchair guess is that 10-year treasuries will fall below 2.0 percent before this is over.  But I really don't know.

The other day I wrote about how a classic puzzle in the academic literature on commodity prices has apparently been solved in a nice paper by Cafiero et al .  The puzzle concerned an apparent excess autocorrelation in commodity prices and the solution was rather technical.  It turned out that approximation errors in the statistical calibration of that model, not the theory itself, led to the puzzle.  A better calibration by Cafiero and coauthors led to a model with much more inelastic demand that also fit the price data well. But on a deeper level I think some puzzles remain. The model traditionally used in the commodity price/storage literature is one with a steep consumption demand curve and a vertical, perfectly inelastic supply curve that shifts horizontally with the weather.  Production shocks are buffered by a competitive storage market that buys and stores commodities when prices are low and sells when prices are high. For explaining price behavior,  it is somewhat arbitrar

That's Paul Ryan Paul vs. Paul Krugman (Oops.  Very sorry.  Maybe my jet lag made me dyslexic.  If it's any consolation, a lot of people call me Robert instead of Michael). Krugman says Paul Ryan's Paul's math doesn't add up.  Math (and facts) don't usually matter in political debates, and I suspect that is true here as well.  But on factual grounds I'd say the second guy with the given name Paul has utterly eviscerated the other. The budget situation isn't complicated.  It's mainly about medicare and taxes. In the long run we have to cut one, increase the other, or some balance of these two. Obama's health care bill has possibly made some modest gains on the Medicare side of things.  We'll see.  The rest is chump change. Now Libertarians and most Republicans most of the time are for much larger cuts in Medicare, or even dismantling Medicare altogether.  This is one way to cut spending for real.  But since it isn't politically

Do you have a PhD in economics or a related field, love to crunch numbers, and have an interest in how climate change will affect world agricultural markets?  Come work with David Lobell, myself and Wolfram Schlenker! What we're working on is nicely illustrated by the current situation with wheat prices (see the last post).  We're hoping to hire someone quickly, probably well ahead of the formal job market. You can find the job posting here .  It will go up on JOE relatively soon. Let us know ASAP if you're interested.

The weather has been terrible in Russia this year: too hot and too little precipitation.  This has led to widely reported increases in wheat prices as well as higher prices for corn, soybeans, rice and other food staples.  A couple days ago wheat prices went up more than six percent in one day as Russia announced it would stop exports in an attempt to keep domestic wheat prices from getting too high.  This of course led to higher price for the rest of the world and possibly export bans in other countries. This, I think, illustrates some of the worry about climate change and agricultural production.  These kinds of policy responses, and indeed much of agricultural policy in general, tends to come along in response to extreme events.  Some and perhaps most of these knee-jerk policies, like export bans, tend to make the problem worse. Now we can all emphatically argue that countries shouldn't ban exports in response to a crisis.  But the reality is that these kinds of responses w