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August 7, 2012

Latest Posts from Economist's View

Latest Posts from Economist's View

Posted: 01 Jul 2012 03:33 AM PDT
Richard Green has a question:
Why are liberals so romantic about small business?, by Richard Green: There is a protest today in Los Angeles against the construction of a new Wal-mart in Chinatown.  The store would be part of a mixed use development near a transit station on a lot that has sat vacant for some time.
I am no fan of Wal-mart.  Among other things, I wish that those who attempt to bring a class action suit against Wal-mart pay discrimination had prevailed in the Supreme Court case of Wal-mart vs Dukes.   Nevertheless, it also concerns me that Los Angeles has had essentially no job growth in two decades, and that urban redevelopment is very difficult to do here.  According to the leading scholar on the economics of Wal-mart, Emek Besker, Wal-mart creates more jobs than it destroys (BTW, I don't think Emek is a particular fan of Wal-mart either).  It also allows households to buy goods at low prices. On balance, I think the construction of the Wal-mart in Chinatown will be good for that particular neighborhood and the city.
One of the arguments advanced against Wal-mart is that it hurts small business.  I particularly hear this from fellow liberals, who love to extol the virtue of small business.  Yet, according to Kelly Edminston at the KC Fed, job quality is much worse at small business than large firms. The average wage at a small firm (< 100 workers)was $15.69 an hour in 2004; for large firms (>500 workers) it was $27.05. Moreover, small businesses paid 1/4 of their labor force less than $8 per hour; for large businesses it was 3 percent of their labor force.
Meanwhile, no one lobbies harder against the minimum wage than small business trade associations. The National Federation of Independent Business was also the lead plaintiff against the Affordable Care Act.  So to those liberals who extol small business: what's the deal?
Posted: 01 Jul 2012 02:43 AM PDT
Oh my -- am I reading this correctly? This is an abstract from one of the talks tomorrow (and I hope the science is more accurate than the date given for the talk, it should be July 2, not July 3):
The Strange Case of "Global Warming", by Ivar Giaever: Lecture: Monday, 3 July, 12.00 hrs
In 2008 I participated on a panel at the Lindau meeting discussing "Global Warming" and to prepare, I looked into the subject using the internet. I found that the general belief is that the average surface temperature over the whole earth for a whole year has increased from ~288 oK to 288.8 oK in roughly 150 years, i.e. 0.3% and that it is due to increased CO2. If this is true, it means to me that the temperature has been amazingly stable.
In the same time period the number of people has increased in the world from 1.5 billions to over 7 billions. Is it possible that all the paved roads and cut down forests have had an effect on the climate?
The American Physical Society think differently, however, as its public position is:
Emissions of greenhouse gases from human activities are changing the atmosphere in ways that affect the Earth's climate. Greenhouse gases include carbon dioxide as well as methane, nitrous oxide and other gases. They are emitted from fossil fuel combustion and a range of industrial and agricultural processes.
The evidence is incontrovertible: Global warming is occurring. If no mitigating actions are taken, significant disruptions in the Earth's physical and ecological systems, social systems, security and human health are likely to occur. We must reduce emissions of greenhouse gases beginning now.
I believe that nothing in science is "incontrovertible" thus, in my view, APS has become a political (or religious?) society. Consequently, I resigned from APS in the fall of 2011.
In this talk I will explain why I became concerned about the climate, and terrified by the one sided propaganda in the media, In particular I am worried about all the money wasted on alternate energies, when so many children in the world go hungry to bed.
If you still believe that global warming is occurring and that the main cause is CO2 when I have finished this talk, I urge you to argue for two things to save the world:
1. Introduction of nuclear power
2. Limit the population increase by allowing only one child/woman
Surprise! Fox News highlighted this.
This lecture is just before the one above:
The Science and Policy of Climate Change, by Mario J. Molina: Lecture: Monday, 3 July, 11.30 hrs

Climate change is the most serious environmental challenge facing society in the 21st century. The basic science is clear: the International Panel on Climate Change concluded that there is more than 90% probability that human activities are causing the observed changes in the Earth's climate in recent decades. The average temperature of the Earth's surface has increased so far by about 0.8 degrees Celsius since the Industrial Revolution, and the frequency of extreme weather events such as droughts, floods and intense hurricanes is also increasing, most likely as a consequence of this temperature change. There are scientific uncertainties that remain to be worked out, connected with issues such as the feedback effects of clouds and aerosols. Nevertheless, the consensus among experts is that the risk of causing dangerous changes to the climate system increases rapidly if the average temperature rises more than two or three degrees Celsius. Society faces an enormous challenge to effectively reduce greenhouse gas emissions to avoid such dangerous interference with the climate system. This goal can only be achieved by taking simultaneously measures such as significantly increasing energy efficiency in the transportation, building, industrial and other sectors, using renewable energy sources such as solar, wind, geothermal and biomass, and possibly developing and using safer nuclear energy power plants.
These are Nobel Prize winners in physics. I thought physics and its adherence to the scientific method was supposed to be free of the kinds of controversy over models, politics, etc. that plagues economics.
Posted: 01 Jul 2012 12:06 AM PDT
Posted: 30 Jun 2012 02:34 PM PDT
Robert Frank discusses market failures in health insurance markets, and how the president's health care plan helps to overcome them:
Giving Health Care a Chance to Evolve, by Robert Frank, Commentary, NY Times: ...Nearly every economic analysis of the health care industry rests on the observation that individually purchased private insurance is not a viable business model...
The fundamental problem is that ... people ... with serious pre-existing conditions ... are likely to need expensive care. Any company that issued policies to such people at affordable rates would be driven into bankruptcy, its most profitable customers lured away by competitors offering lower rates made possible by selling only to healthy people.
Economists call this the adverse-selection problem. Because of it, unregulated private markets for individual insurance cannot accommodate the least healthy — those who most desperately need health insurance.
Many countries solve this problem by having the government provide health insurance for all. In some, like Britain, the government employs the care providers. Others, like France, reimburse private practitioners — as does the Medicare program for older Americans. ...
Modeled after proposals advanced by the Heritage Foundation, the American Enterprise Institute and other conservative research organizations in the 1990s, the main provisions of the president's health care law were intended to eliminate the most salient problems associated with the current system. ...
It isn't that people should buy health insurance because it would be good for them. Rather, failure to do so would cause significant harm to others. Society will always step in to provide care — though in much more costly and often delayed and ineffective forms — to the uninsured who fall ill. To claim the right not to buy health insurance is thus to assert a right to impose enormous costs on others. Many legal scholars insist that the Constitution guarantees no such right. ...
What's important now is how ... the law will ... extend coverage to tens of millions who now lack it. In addition, new insurance exchanges will provide a broader array of care options. ... The point worth celebrating is that last week's ruling will at last enable our distinctly dysfunctional health care system to evolve into something better.
[More on market failures in health insurance markets here and here.]
Posted: 30 Jun 2012 11:07 AM PDT
I think I've made this point repeatedly, though I tend to use the term ideological instead of political, but just in cast the message hasn't gotten through:
Macroeconomics and the Centrist Dodge, by Paul Krugman: Simon Wren-Lewis says something quite similar to my own view about the trouble with macroeconomics: it's mostly political. And although Wren-Lewis bends over backwards to avoid saying it too bluntly, most – not all, but most – of the problem comes from the right. ...
By now, the centrist dodge ought to be familiar. A Very Serious, chin-stroking pundit argues that what we really need is a political leader willing to concede that while the economy needs short-run stimulus, we also need to address long-term deficits, and that addressing those long-term deficits will require both spending cuts and revenue increases. And then the pundit asserts that both parties are to blame for the absence of such leaders. What he absolutely won't do is endanger his centrist credentials by admitting that the position he's just outlined is exactly, exactly, the position of Barack Obama.
The macroeconomics equivalent looks like this: a concerned writer or speaker on economics bemoans the state of the field and argues that what we really need are macroeconomists who are willing to approach the subject with an open mind and change their views if the evidence doesn't support their model. He or she concludes by scolding the macroeconomics profession in general, which is a nice safe thing to do – but requires deliberately ignoring the real nature of the problem.
For the fact is that it's not hard to find open-minded macroeconomists willing to respond to the evidence. These days, they're called Keynesians and/or saltwater macroeconomists. ...
Would Keynesians have been willing to change their views drastically if the experience of the global financial crisis had warranted such a change? I'd like to think so – but we'll never know for sure, because the basic Keynesian view has in fact worked very well in the crisis.
But then there's the other side – freshwater, equilibrium, more or less classical macro.
Recent events have been one empirical debacle after another for that view of the world – on interest rates, on inflation, on the effects of fiscal contraction. But the truth is that freshwater macro has been failing empirical tests for decades. Everywhere you turn there are anomalies that should have had that side of the profession questioning its premises, from the absence of the technology shocks that were supposed to drive business cycles, to the evident effectiveness of monetary policy, to the near-perfect correlation of nominal and real exchange rates.
But rather than questioning its premises, that side of the field essentially turned its back on evidence, calibrating its models rather than testing them, and refusing even to teach alternative views.
So there's the trouble with macro: it's basically political, and it's mainly – not entirely, but mainly – coming from one side. Yet this truth is precisely what the critics won't acknowledge, because that would endanger their comfortable position of scolding everyone equally. It is, in short, the centrist dodge carried over to conflict within economics.
Do we need better macroeconomics? Indeed we do. But we also need better critics, who are prepared to take the risk of actually taking sides for good economics and against dogmatism.
Before adding a few comments, I want to be careful to distinguish the "Keynesianism" discussed above from the New Keynesian model. I'll end up rejecting the standard NK model, but in doing so I am not rejecting Keynesian concepts. As Krugman summarizes, these are things like "the concept of the liquidity trap..., acceptance ... that wages are downwardly rigid – and hence that the natural rate hypothesis breaks down at low inflation.
Let me start by noting that one of the best examples of a  macroeconomic model being rejected that I know of is the New Classical model and its prediction that only unanticipated money matters for real variables such as employment and GDP. At first, Robert Barro and others thought the empirical evidence favored this model, but over time it became clear that both anticipated and unanticipated money matters. That is, the prediction was wrong and the model was rejected (it had other problems as well, e.g. explaining both the magnitude and duration of business cycles).
However, the response has been interesting, and it proceeds along the political lines discussed above. Some economists just can't accept that money might matter, and therefore that the government (through the Fed) has an important role to play in managing the economy. And unfortunately, they have acted more like lawyers than scientists in their attempts to discredit New Keynesian and other models that have this implication. After all, markets work, and they work through movements in prices, so a sticky price NK model must be wrong. QED.
Now, it turns out that the New Keynesian model probably is wrong, or at least incomplete, but that's a view based upon evidence rather than ideology. Prior to the crisis, I was a fan of the NK model. Despite what those who couldn't let go of the markets must work point of view argued, I believed this model was better than any other model we had at explaining macroeconomic data. But while the NK model did an adequate job of explaining aggregate fluctuations and how monetary policy will affect the economy in normal times with mild business cycle fluctuations, i.e. from the mid 1980s until recently, it did a downright lousy job of explaining the Great Recession. When it got pushed into new territory by the Great Recession, the Calvo type price stickiness driving fluctuations in the NK model had little to say about the problems we were having and how to fix them.
Thus, from my point of view the Great Recession rejected the standard version of the NK model. Perhaps the model can be fixed by tacking on a financial sector and allowing financial intermediation breakdowns to impact the real economy -- there are models along these lines that people are working to improve -- we will have to see about that. A more general NK model that has one type of fluctuation in normal times -- the standard price stickiness effects -- and occasional large fluctuations from endogenous credit market breakdowns might do the trick (there were models of this type prior to the recession, but they weren't the standard in the profession, and they weren't well-integrated into the general NK structure). So we may be able to find a more general version of the model that can capture both normal and abnormal times. But, then again, we may not and, as I've said many times, we need to encourage the exploration of alternative theoretical structures.
But no matter what happens, some economists just won't accept a model that implies the government can do good through either monetary of fiscal policy, and they work very hard to construct alternatives that don't allow for this. There is less resistance to monetary policy, the evidence is hard to deny so some of these economists will admit that monetary policy can affect the economy positively (so long as the Fed is an independent technocratic body). But fiscal policy is resisted no matter the theoretical and empirical evidence. They have their ideological/political views, and any model inconsistent with them must be wrong.
Update: Noah Smith responds to Paul Krugman here.

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