Showing posts from October, 2011

I'm No Paul Krugman. But...

I really like this post : But, And, Why Every once in a while I get correspondence from someone chiding me for the way I write — in particular the informality. I received one the other day complaining about sentences that begin with “but” or “and”. There is, however, a reason I write this way. You see, the things I write about are very important; they affect lives and the destiny of nations. But despite that, economics can all too easily become dry and boring; it’s just the nature of the subject. And I have to find, every time I write, a way to get past that problem. One thing that helps, I’ve found, is to give the writing a bit of a forward rush, with a kind of sprung or syncopated rhythm, which often involves sentences that are deliberately off center. More broadly, the inherent stuffiness of the subject demands, almost as compensation, as conversational a tone as I can manage. My bible in all this is George Orwell’s Politics and the English Language . I recommen

Greenhouse Gas Emissions, Biofuels, and Strategic Trade

For a long time Nobel Prize-winning economist Thomas Schelling has argued that implementing climate change policy involves an extraordinarily challenging bargaining problem between people in different parts of the world.  Besides the well-known commons problem, the essential issue is that today's rich countries will bear most costs of curbing CO2 emissions while today's poor countries will reap most benefits. Coming from this vantage point, US stubbornness in international attempts to price carbon emissions or otherwise curb them makes a lot of sense.  We are rich enough to easily cope with a warmer climate.  Furthermore, since we're the world's biggest exporter of agricultural commodities--which lie on the front line of climate impacts--we're likely to gain if warming damages crop yields.  Prices are extremely sensitive to quantities and so price increases will more than compensate for yield losses. Our incentive to curb emissions is therefore weak at best. But

The New Neoclassical Synthesis?

Perhaps it's the desperation of the times.  Perhaps it's just my own wishful thinking.  But the so-called New Monetarists seem to be gaining a lot of credence and I think that is a very good thing.  It's been a long time coming, but I think they fully deserve it, and none too soon.  The so-called New Monetarists:  Scott Sumner , David Beckworth , Nick Rowe , among others, have been making a lot of sense for a long time.  These are the kind of people and the kind of thinking that should be leading the intellectual right. So let's have the Fed start targeting nominal GDP already . Update:   I briefly commented on this idea almost a year ago.  And I've occasionally written about the very similar idea of inflation targeting almost since I started this blog.  While I sympathize most with views that we should do both fiscal and monetary stimulus right now, I also think that nominal GDP targeting, if done on a continual basis, might do a lot to prevent future major

On the Non-Keynesianism of the New Nobels

Here's a great article about the latest economics Nobel winners, Thomas Sargent and Christopher Sims. Sargent and Sims are famous for their work connecting expectations, economic dynamics and statistical methods.  Some seem to have called this "anti-Keynesian" because the classic textbook model by Keynes/Hicks (IS/LM) is a static model devoid of expectations about the future. Today nearly all macroeconomic modelling takes expectations and dynamics into account.  If one assumes expectations are perfectly rational and assumes prices are not "sticky" then Keynes/Hicks predictions of monetary and fiscal policy effectiveness fall apart. So, it's not surprising that conservative-leaning economists point to these early findings from the 70s, most famously associated with Lucas and Prescott. Except that, empirically, fiscal and monetary policies do affect the economy.   And, theoretically, this can happen just by putting sticky prices back into the mix and ke

Krugman Is So Right And The Austerians Are So Wrong

Over time, I'm feeling Krugman's pain more and more... The Critics Of Modern Macro Are Wrong It’s even worse than they think. John Kay has a rant that I largely agree with . Yet he says this: The debate on austerity versus stimulus, in academic circles, is in large part a debate about the validity of a property called Ricardian equivalence, which is observed in this type of model. If government engages in fiscal stimulus by spending more or by reducing taxes, people will realise that such a policy means higher taxes or lower spending in future. Even if they seem to be better off today, they will be poorer in future, and by a similar amount. Anticipating this, they will cut back and government spending will crowd out private spending. Fiscal policy is therefore ineffective as a means of responding to economic dislocation. and proceeds to talk about the unrealism of Ricardian equivalence. But the fact is that even if you believe in Ricardian equivalence, it doesn’t

On the Fallacy of Speculation-Driven Commodity Price Spikes

Update:   Mark Thoma has also has nice piece linking to the new report by the Federal Reserve. Kay MacDonald over at Big Picture Agriculture has a nice post on the role of speculation in world commodity prices . Kay is absolutely right:  commodity prices--both oil and food--appear to be overwhelmingly about fundamentals and not about excessive speculation.  Most economists I know and respect who study this stuff agree with Kay (and me) about this.   Bubbles may sometimes happen in some markets.  But I think bubbles are vanishingly rare in markets of consumable, non-durable commodities. A lot of good people have tried to explain this and have offered evidence:  Jim Hamilton at UCSD, Scott Irwin at UI, Mark Thoma at UO, Paul Krugman, and many others, not to mention yours truly.  Just consider for a moment that, when prices spike, people are still buying and consuming most of this stuff.  Inventories only account for a small fraction of one year's production. Also, during t

Homes Look Cheap

Wow.  Over 30 years median rent has increased 300% (nominally) and the median mortgage payment has increased less than 20% (also nominally). As Catherine Rampell says , this is a little bit misleading because down payments and maintenance costs have probably increased on par with rent, or perhaps even a bit more.  Perhaps the mix of homes has changed a little, making medians less comparable. But still.  If you're investing for the long term, it's hard to see how buying a home wouldn't have a good return. The fact that no one is buying suggests to me that we live in a fear-driven economy that is seriously detached from economic fundamentals.  This is a bizarre, severely credit-constrained equilibrium or no equilibrium at all. Update:   Martin Feldstein has an interesting idea to keep home prices from falling further.

Ideology and Economics

The other day I posted about Art Pope and the New Yorker article that exposed his vested influence on NC state politics and our own economics department here at NCSU. All this, a commenter, plus the general divisiveness of the times, has me thinking about how ideology affects economics, even when money isn't buying influence.  Most of us shape our ideological views at a young age and events rarely change them much.  That's probably as true for economists as it is for everyone else.  And since so much of economics has implications for policy and politics, our ideological leanings can easily influence our views about how the economy works. So how can we objectively analyze how our economic system works given our deeply imbued ideologies? Short answer: We can't; but we can and ought to try very hard. Long answer: First, I think one needs to acknowledge that one has an ideology.  I've long tried to eschew ideology, and in that vein lean heavily toward empiricism.

How to Feed the Planet Without Destorying It

I just heard this story on NPR's All Things Considered, which is ostensibly about this new article by Jonathan Foley and a hefty team of coauthors. What they do is describe a five things we need to do to feed the world--which means roughly doubling global food production--without destroying it. The five things are: 1. Stop cutting down forests to grow crops or establish grazing lands for livestock. 2. Increase productivity in places that currently have low productivity, particularly Africa and Eastern Europe. 3. Use water and fertilizer more efficiently 4. Reduce food waste 5. Eat less meat. Their recommendations seem to make sense. But, as Tom Hertel said in the NPR story, these are not strategies that get implemented by design.  World agriculture is an insanely big thing that uses about 40 percent of the world's land area.  It's  hard to talk about these big picture goals without talking about the mechanisms that get you there. People do what they do

The End of Farm Subsidies?

There's been some talk from the Obama administration about ending farm subsidies. Here's a story from a week ago at The Salt, NPR's food blog. These subsidies have been tough to justify for a very long time now.  Today's budget pressure (aka " The Pain Caucus " or " Austerity Now! ") just might be able to break them.  But don't hold your breath.  These subsidies have been around since the Great Depression and while they've gently declined over time in importance, they've been tough to kill. And the biggest subsidy of all is the implicit subsidy to grain farmers comes 50 cents/gallon given for corn-derived ethanol and the associated mandates.  There's some talk of ending the subsidy, but not the mandate.  And as long as the mandate is in place farmers will get their artificially high grain prices.  It  won't show up on the government books but it would remain just as distortionary. I also hear the crop insurance subsidies w

Zombie Economics