Archive

Archive for the ‘Economics – General’ Category

Work and beyond (crosspost from Crooked Timber)

February 10th, 2014 27 comments

A little while ago, Ross Douthat tweeted a link to this Aeon article of mine, reflecting on Keynes ‘Economic Possibilities for our Grandchildren’, which gave rise to some interesting discussion (Memo to self: Find out about Storify). Now he’s addressed the topic in the New York Times, linking directly to Keynes essay. There’s some interesting food for thought here. Unfortunately, it’s mixed up with some silly stuff reflecting his job as the NY Times token Republican, in which capacity he has to do some damage control over the exposure of the latest Repub lie saying that Obamacare will cost 2.5 million jobs. As Douthat delicately puts it “this is not exactly right”. But, although his heart clearly isn’t it, he tries to construct a narrative in which the Repubs might be right for the wrong reasons, or, in an even less-felicitous defence, mean-spirited and inaccurate but justified by the success of Reaganism thirty years ago.

More interesting though, is Douthat’s discussion comparing idealised hopes for a post-work society with the reality in which well-educated professionals are working longer hours than ever, while many at the bottom end of the income distribution, particularly poorer men have withdrawn from the formal labour force altogether (presumably, relying on disability benefits or scraping a living in the informal economy). One possible solution to this problem, is simply to give the poor more money, for example, in the form of a basic income, and not worry about whether they choose to work. Douthat isn’t too happy about this idea, saying

Both “rugged individualist” right-wingers and more communitarian conservatives tend to see work as essential to dignity, mobility and social equality, and see its decline as something to be fiercely resisted. The question is whether tomorrow’s liberals will be our allies in that fight.

But this position elides a bunch of crucial issues.

First, while work may be necessary to “dignity, mobility and social equality” in a market society, it certainly isn’t sufficient. For unionised US workers in the mid-20th century, earning middle-class incomes in relatively secure jobs and expecting better for their children, work was, arguably both necessary and sufficient to achieve a fair measure of these things. But an at-will employee, juggling two or three tenuous jobs that pay $7.25 an hour, and looking at a steady decline in real income, is scarcely getting much in the way of dignity, let alone mobility or social equality.

Equally importantly, market work isn’t the only kind of work people can do, and certainly not the most valuable. Most obviously, there’s the raising of children. The US the developed countries that does not provide any kind of paid parental leave, and even the legislative provision for unpaid leave (12 weeks a year for mothers in firms with more than 50 employees, nothing for fathers) is incredibly stingy. The idea that the ‘rugged individualists’ who block any improvements to these conditions actually care about the dignity of the working class is simply laughable.

I don’t need to tell Douthat any of this. It’s all in his book Grand New Party with Reihan Salam, notably including a proposal for a full year of paid parental leave. The book received cautiously respectful reviews from many in the centre and centre-left, but fell entirely flat with its intended audience in the Republican Party.

I’ll have a bit more to say about the kind of technological determinism that seeks to explain labour market polarisation as arising from computers and the Internet a bit later. For the moment, I’ll repeat the conclusion of my Aeon essay that a response to technological change that will preserve the link between work, dignity and equality will require both a reduction in total hours of work and an expansion in the range of social contributions regarded as work, beyond those that generate a market return

Read more…

Categories: Economics - General Tags:

Macroeconomics made easy?

February 10th, 2014 10 comments

In my book, Zombie Economics, I started the account of macroeconomics with the observation

Macroeconomics began with Keynes. Before Keynes wrote The General Theory of Employment, Interest, and Money, economic theory consisted almost entirely of what is now called microeconomics. The difference between the two is commonly put by saying that microeconomics is concerned with individual markets and macroeconomics with the economy as a whole, but that formulation implicitly assumes a view of the world that is at least partly Keynesian.

Long before Keynes, neoclassical economists had both a theory of how prices are determined in individual markets so as to match supply and demand (“partial equilibrium theory”) and a theory of how all the prices in the economy are jointly determined to produce a “general equilibrium” in which there are no unsold goods or unemployed workers.

I went on to observe how the pre-Keynesian approach had been revived by the “New Classical” school, and how the apparent convergence with “New Keynesian” economics had been shown to be illusory after the failure of Dynamic Stochastic General Equilibrium models to deal with the 2008 financial crisis and the subsquent, still continuing, depression.

With all of this, though, I still never thought of academic macro, in either saltwater or freshwater form, as being a simple reversion to the pre-Keynesian notion of general equilibrium, with no concern about aggregate demand or unemployment, even in the short run. It turns out that, at least for a large segment of the profession, this is quite wrong. I’ve just received a book entitled Big ideas in Macroeconomics: A nontechnical view by Kartik Athreya, an economist at the Richmond Federal Reserve who made a splash a few years back with a piece entitled Economics is Hard. Don’t Let Bloggers Tell You Otherwise, which, unsurprisingly, did not endear him to bloggers. As a critic of mainstream macro, I’m briefly mentioned, and I just got a review copy.

The new book is an attempt to simplify things, and indeed it has proved enlightening to me and also to Herb Gintis who contributes a blurb on the back, commending it as an accessible and accurate description of the dominant way of thinking about macroeconomics.

The easiest way to see why the book is so striking is to list some topics that do not appear in the index (and are not discussed, or only mentioned in passing, in the text). These include: unemployment, inflation, recession, depression, business cycle, Phillips curve, NAIRU, Taylor Rule, money, monetary policy and fiscal policy.

Read more…

New Old Keynesianism (crosspost from Crooked Timber)

January 23rd, 2014 13 comments

The term “New Old Keynesian” was coined by Tyler Cowen a couple of years ago, to describe the revival of the view that the Keynesian analysis of recessions caused by lack of aggregate demand is relevant, not only in the short run (in this context, the time taken for wage contracts to reset, say 2-3 years) but in the long run (5 years or more) as well. When Cowen was writing, in September 2011, the New Depression could still, just about, be seen as a short run phenomenon[1]. In particular, the anti-Keynesian advocates of austerity in the US, UK and Europe were predicting rapid recovery.

As 2014 begins, it’s clear enough that any theory in which mass unemployment or (in the US case) withdrawal from the labour force can only occur in the short run is inconsistent with the evidence. Given that unions are weaker than they have been for a century or so, and that severe cuts to social welfare benefits have been imposed in most countries, the traditional rightwing explanation that labour market inflexibility [arising from minimum wage laws or unions], is the cause of unemployment, appeals only to ideologues (who are, unfortunately, plentiful).

So, on the face of it, Cowen’s “New Old Keynesianism” looks pretty appealing. But what are the alternatives? Leaving aside anti-Keynesian views for the moment, the terminology suggests four logical possibilities: Old Old Keynesianism, Old New Keynesianism, New Old Keynesianism and New New Keynesianism.

But do these logical possibilities correspond to actual viewpoints, and, if so, whose?

Read more…

Philadelphia Story (crosspost from Crooked Timber)

January 8th, 2014 26 comments

I’m on the way back from bitterly cold Philadelphia at the moment after attending the meetings of the American Economic Association (and a bunch of related societies). I was at a very interesting session on long-run discounting, which had a panel of six with (as is common) one woman[^1]. Looking around the room, I realised that the panel was actually balanced (inside econometric joke) when compared with the audience, which was about 90 per cent male.

I don’t think that the academic economics profession is quite as male-dominated as that. Some casual discussions suggested a couple of hypotheses:

(i) There were some parallel sessions on gender issues for which the audience was mostly female (not surprising, but kind of ambivalent)

(ii) Men were more likely to attend the sessions while female colleagues were more likely to be on the hiring teams. For those unfamiliar with this exercise, a large part of academic conferences consists of academics sitting in hotel rooms for days on end while a string of recent PhDs give a 15 minute pitch on a piece of research (their ‘job market paper’) followed by a ritual Q&A (a plausible but depressing story)

I get the impression that academic philosophy is even worse than economics, but that most other disciplines are better. Any thoughts?

Categories: Economics - General Tags:

Mixed thinking about markets

December 29th, 2013 48 comments

I was enjoying my Xmas break too much to deal with the silliness of the Institute of Public Affairs. But Chris Berg was hard at work, writing a piece in which he claimed all the technological progress of the past two centuries as products of the “the market economy and consumer society”, and I guess I should respond.

Berg points to a comparison between a 19th century Xmas picnic in the outskirts of Melbourne, involving arduous and expensive travel, and costly communication, and the ease with which people in wealthy countries can travel, communicate and enjoy plentiful food today.

This would be a reasonable line of argument if Berg were defending the status quo. But of course he is not. He wants to argue that all the good things that have happened in the last two centuries are the product of the “market economy”, and that we should therefore scrap our existing social arrangements in favor of radical reforms in which market forces are given free rein.

In reality, modern society is characterized by a mixed economy, in which large components of economic activity take place outside the market, within households or through publicly funded and provided services. Even within the private business sector, the majority of activity takes place within corporations whose internal operations are characterized by central planning, not markets.

All of this reflects the fact that a pure market economy doesn’t work well. Rather than list all the problems which have led modern societies to constrain the role of markets (environmental pollution, inequality and so on), I’ll focus on the one discussed by Berg, that of technological innovation. Information is what economists call a public good: making it available to one person doesn’t reduce its usefulness to others. And while it’s possible to keep useful information secret for a while, it gets harder and harder over time. So, a pure market system often doesn’t provide much of a reward to people who come up with new ideas.

All sorts of solutions to the problem have been developed. They include patents (a temporary grant of government-enforced monopoly), prizes and awards, and publicly funded research institutions such as universities. These interventions played a crucial part in most of the innovations discussed by Berg. Most notably, the university sector developed the Internet, which makes debates such as this possible.

Berg’s argument is an example of a characteristic fallacy among advocates of market liberalism. Beginning with the fact that all modern societies are, in some sense, capitalist, they point to the successes of modern society to argue in favor of a particular version of capitalism (free markets, on the US model but taken even further) and against others that have been more successful in terms of human welfare (various forms of social democracy) or that might exist in the future.

I guess it’s possible to find symmetrical kinds of fallacies on the left, but I’ll leave that to commenters.

Categories: Economics - General Tags:

Gillard on equal marriage

December 14th, 2013 70 comments

I’ve long been mystified by Julia Gillard’s position on equal marriage, and her almost complete silence on the matter. However, on a recent Google search, I found this, which left me even more mystified than before

“I do understand that the position I took on gay marriage perplexed many people, given who I am and so many of my beliefs. I’ve actually had lot of conversations with many of my old friends about this, some of whom have got a different view than me.

“But, I’m a lot older than you,” Ms Gillard told the young man, “and when I went to University and started forming my political views of the world, we weren’t talking about gay marriage indeed as women, as feminists, we were critiquing marriage. If someone had said to me as a twenty year old, ‘what about you get into a white dress to symbolise virginity, and you get your father to walk you down an aisle and give you away to a man who’s waiting at the end of the aisle’, I would have looked with puzzlement and said ‘what on earth would I do that for?’.

“I’m conscious that these may be views that have dated and that the way people interpret marriage now is different to the kinds of interpretations that I had. I think that marriage in our society should play its traditional role and we could come up with other institutions which value partnerships, value love, value lifetime commitment. You know, I have a valuable lifetime commitment and haven’t felt the need at any point to make that into a marriage. So I know that that is a really different reasoning that most people come at with these issues, but that’s my reasoning.

So, apparently she used to be against marriage altogether, but now wants to promote alternatives. If I read her correctly, she proposes to do this by stopping some people from getting married at all, while retaining “traditional” marriage for others. Is the idea that we could gradually extend the ban, for example, by prohibiting various kinds of mixed marriage until no-one at all could get married? Or is there some more coherent argument I’ve missed here?

Categories: Economics - General Tags:

Peak aluminium?

November 30th, 2013 76 comments

The announcement that Rio Tinto is to close its alumina refinery at Gove struck me for a number of reasons, starting with the fact that members of my family are affected by it. First up it’s worth noticing what’s mentioned (the high dollar and low aluminium price, which flows through to bauxite and alumina) and what isn’t (the carbon tax and legislation for its removal). Having claimed that he was going to save industries like alumina and aluminium smelting from the carbon tax “wrecking ball”, Abbott is now shown up, once again, as a fraud[1].

In the short run, the obvious policy implication is that the RBA needs to be firmer in pushing the dollar down. It was, I think, a mistake to hose down talk of direct intervention, as was done recently. Given our declining terms of trade, we should be closer to $US0.80 than $US0.90 now, and heading down further.

The bigger question of interest, though, is the future of aluminium. The big story of the past 10-20 years has been the massive growth of production in China, driven by cheap coal-fired power and lots of subsidies. That’s driven prices down to historically low levels (inflation-adjusted, probably record lows). Production in Australia is now clearly uneconomic, but even the Chinese are losing billions.

Declining prices have driven steady growth in demand for aluminium. Since the supply of recycled aluminium is dependent on past production, there has been a multiplied effect on demand for primary aluminium, which is the big driver of greenhouse gas production in this industry.

The general assumption (as with most trends) has been that these trends will continue indefinitely. But it’s clear that prices have to rise just to cover costs, and will rise further as China starts to price the local and carbon costs of coal-fired electricity. Moreover, in technological terms, aluminium is definitely a 20th century commodity. Its inherent properties of lightness and strength gave it great advantages, but it is now being displaced in advanced uses by carbon fibre and in some basic uses by lightweight steels.

So, it seems to me quite plausible that aluminium demand could stabilise over the next decade or two, with the result that most demand can be met by recycling rather than energy-intensive production of primary aluminium from bauxite (via alumina).

Note: I topic-banned regular commenter Hermit from talking about aluminium smelters, as it become an idee fixe. The ban is lifted for this post.

fn1. Has any new PM ever been shown up so comprehensively in such a short time? Not in my memory, which goes back to Harold Holt, and includes some shockers.

Categories: Economics - General, Environment Tags:

Wall Street isn’t Worth It

November 15th, 2013 55 comments

That’s the title of my new piece at Jacobin, which links back to a variety of discussions at Crooked Timber, in particular this one from Ingrid Robeyns. Mankiw, whom Ingrid cites, offers an implicit defence of the 1 per cent, implying though not quite asserting, that the gains accruing to those in this group (largely senior executives and the financial sector) have been the price we pay for a process that benefits everyone, yielding a Pareto improvement. As Ingrid says, Pareto improvements aren’t as self-evidently desirable as Mankiw assumes. My argument focuses on Mankiw’s factual premise, concluding that the expansion of the financial sector has made the majority of people worse off. This implies that a response to the global financial crisis focused on attacking the financial sector is feasible as well as being, in my view, politically necessary as an alternative to rightwing populism.

Jacobin doesn’t appear to have a comments section, so feel free to comment and criticise here. I’ve had an interesting discussion with Daniel on Twitter already, but it’s not really a great medium when more than a few people are involved.

Categories: Economics - General Tags:

Colin Clark lecture

November 14th, 2013 4 comments

I presented the Colin Clark lecture today, on the topic “National Accounting and the Digital Economy: The Case of the NBN’

Synopsis

Colin Clark’s greatest contribution to economics was his pioneering role in the construction of national accounts. In the industrial economy of the 20th century, the central problem in the national accounting was the need to avoid double counting, by measuring only the value added at each stage of production. This problem is closely related to that of benefit-cost analysis for public projects. In the 21st century digital economy, value is primarily derived from the flow of information rather than physical inputs and outputs. This creates new problems for national accounting, and for benefit-cost analysis. One example of these problems is the question of how to evaluate alternative proposals for the National Broadband Network.

Paul Syvret covered it in the Courier-Mail. I also did an interview with Steve Austin on the local ABC 612[1], which started off with a brief discussion of Rudd’s economic legacy, and another for AM on Radio National which didn’t make it to air.

The slides are here

fn1. Illustrated with a slightly goofy candid shot, taken in the ABC Green Room

Categories: Economics - General Tags:

Pandora Post-mortem

November 10th, 2013 107 comments

I have a piece in the Guardian responding to the pro-nuclear film Pandora’s Promise. The core of my argument is that, in most countries, political resistance to nuclear power is no longer the primary problem – the big difficulty is with the economics. The key paras

he fact that the world has not turned to nuclear power as a solution to climate change is a matter of economics. In the absence of a substantial carbon price, nuclear energy can’t compete with coal and other fossil fuels. In the presence of a carbon price, it can’t compete with wind and solar photovoltaics. The only real hope is that, if coal-fired generation is reduced drastically enough, always-on nuclear power will be a more attractive alternative than variable sources like solar and wind power. However, much of the current demand for “baseload” power is an artifact of pricing systems designed for coal, and may disappear as prices become more cost-reflective.

To put the point more sharply, if we are convinced by the arguments of Pandora’s Promise, what would the makers of the film have us do? Stop protesting against nuclear power? Most of us did so decades ago. Abandon restrictions on uranium mining and export? The Australian government has done so already, with barely a peep of protest. The only remaining restrictions on exports to India relate to concerns about nuclear weapons proliferation, not nuclear energy, and seem likely to be dropped in any case. Give nuclear power a level playing field to compete against renewables? In the US at least, nuclear power is already treated more favourably than alternatives, leaving aside the massive subsidies already handed out in the 20th century. The same is true in many other countries that have sought, with limited success, to promote a nuclear renaissance.

Two of the leading environmentalists quoted as supporting nuclear power are Mark Lynas and George Monbiot. They have some interesting reactions to the recent announcement that EDF will build a nuclear reactor, Hinkley C, under a deal with the UK government. Monbiot sees it as a disaster, going for massively expensive Generation III technology when the alternative was to build an Integral Fast Reactor, a design with lots of theoretical advantages but one that has never been built (other breeder reactors have been expensive failures). Lynas, writing before the announcement has a more sanguine view of the cost. Lynas compares the “strike prices” offered by the UK government for various renewables, ranging from 100stg/MWh for onshore wind, to 305stg/MWh for experimental technologies like wave and tidal energy. Offshore wind (the only source without severe supply constraints in the UK context) comes in at 150 and large-scale solar at 125. These are guaranteed for 15 years from 2014. Hinkley has as strike price of 92.50, for 35 years from the estimated start date of 2023.

Read more…

Categories: Economics - General, Environment Tags:

The end of the coal boom

November 4th, 2013 188 comments

A bit over a year ago, I put up a post with the same title as this one, except that it ended with a question mark. At that point, most of the authorities I cited took the view that the decline in the world price of steaming coal was just a blip. In fact, prices have kept on falling and are now, in real terms, not much higher than they were in 2004. More importantly, there is now no expectation of a recovery any time soon. The clearest evidence of that is the abandonment or deferral of a string of proposals to create or expand coal export terminals, most recently by BHP at Abbot Point. Investors are desperately trying to get out of the most recently completed project, at Wiggins Island.

A few observations on this

* It’s common for participants in the Australian debate to claim that the rest of the world is going ahead with coal-fired power stations and fossil fuel projects at an unprecedented rate. That was the view that motivated these port expansion projects, and it’s been falsified as clearly as it can be by their abandonment.

* Much of the discussion about climate mitigation is based on the assumption that Australia can decide how much or how little of the burden we should bear. Leaving aside the risks of a free rider strategy, our status as a coal-exporter means that the biggest impacts will arise from decisions made overseas

* Finally, for some light relief here’s former Queensland Treasurer Andrew Fraser (paywalled) citing the now-abandoned Abbott Point project as evidence of the benefits of the Bligh government’s asset sales program, of which he was the biggest booster. It will be interesting to see if he now changes tack and claims that the state was lucky to get of these assets when it could (a more plausible line, but both dubious and contradictory of his previous position).

Categories: Economics - General, Environment Tags:

Colin Clark Memorial lecture: National Accounting and the Digital Economy – the Case of the National Broadband Network,

October 28th, 2013 13 comments

I’ll be presenting the Colin Clark Memorial lecture on 14 November.

Colin Clark’s greatest contribution to economics was his pioneering role in the construction of national accounts. In the industrial economy of the 20th century, the central problem in the national accounting was the need to avoid double counting, by measuring only the value added at each stage of production. This problem is closely related to that of benefit-cost analysis for public projects. In the 21st century digital economy, value is primarily derived from the flow of information rather than physical inputs and outputs. This creates new problems for national accounting, and for benefit-cost analysis. One example of these problems is the question of how to evaluate alternative proposals for the National Broadband Network.

The talk is bundled with a lunch at Customs House, which (from past experience) will be very pleasant, but fairly expensive, so this event is mostly going to appeal to people whose employers can pay. For those who aren’t in this category, or who aren’t in Brisbane, I’ll post a link to the slides after the event.

Categories: Economics - General Tags:

The macro foundations of micro (crossposted at Crooked Timber)

October 25th, 2013 57 comments

Twitter alerted me to an amusing exchange between Chris Auld, posting a list of “18 signs you’re reading bad criticism of economics and Unlearning Economics, responding with 18 Signs Economists Haven’t the Foggiest. UL suggests that Stephen Williamson manages an impressive 9 out of 18 in his review of Zombie Economics (my response here with more from Noah Smith.

Scoring myself against Chris Auld’s list, I’d say I’m in the clear. But quite a few commenters on Zombie Economics have made complaints along the lines of his point 1, that I focus too much on macroeconomics (and finance). The implication is that, even if macro is totally wrong, only a minority of economists do it, and microeconomists are in the clear.

This defense doesn’t work, at least not in general.

Read more…

Categories: Economics - General Tags:

Why do we *still* have a Nobel Prize in Economic Sciences?

October 15th, 2013 35 comments

Ingrid Robyens at Crooked Timber links to some fascinating discussion from Philip Mirowski of the role of Swedish domestic politics in the establishment of the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel, with emphasis on the way in which claims of “scientific” status for economics helped the claim of the Swedish central bank to independence from government.

In the broader context, it seems pretty clear that, if the idea had arisen even a few years later, it would have been rejected. In 1969, economics really did seem like a progressively developing science in which new discoveries built on old ones. There were some challenges to the dominant Keynesian-neoclassical synthesis but they were either marginalized (Marxists, institutionalists) or appeared to reflect disagreements about parameter values that could fit within the mainstream synthesis.

Only a few years later, all of this was in ruins. The rational expectations revolution sought, with considerable success, to discredit Keynesian macroeconomics, while promising to develop a New Classical model in which macroeconomic fluctuations were explained by Real Business Cycles. This project was a failure, but led to the award of a string of Nobels, before macroeconomists converged on the idea of Dynamic Stochastic General Equilibrium models, which failed miserably in the context of the global financial crisis. The big debate in macro can be phrased as “where did it all go wrong”. Robert Gordon says 1978, I’ve gone for 1958, while the New Classical position implies that the big mistake was Keynes’ General Theory in 1936

The failure in finance is even worse, as is illustrated by this year’s awards where Eugene Fama gets a prize for formulating the Efficient Markets Hypothesis and Robert Shiller for his leading role in demolishing it. Microeconomics is in a somewhat better state: the rise of behavioral economics has the promise of improved realism in the description of economic decisions.

Overall, economics is still at a pre-scientific stage, at least, as the idea of science is exemplified by Physics and Chemistry. Economists have made some important discoveries, and a knowledge of economics helps us to understand crucial issues, but there is no agreement on fundamental issues. The result is that prizes are awarded both for “discoveries” and for the refutation of those discoveries.

Categories: Economics - General Tags:

The Ultimate Nightmare: American Default

October 4th, 2013 16 comments

That’s the self-explanatory headline on my latest piece in The National Interest. I guess “ultimate” is a little hyperbolic, given the perils of nuclear war and climate catastrophe, but even a short-lived default on US debt could bring the global financial system to its knees.

Categories: Economics - General Tags:

Market monetarism: a first look

September 1st, 2013 91 comments

One of the more confusing of the macroeconomic debate is the emergence of a profusion of schools of thought with very similar names, but very different viewpoints. The one I’ve had most to deal with is Modern Monetary Theory. I had a go at this topic here and . My brief summary is that MMT pretty much coincides with traditional Keynesian views in the context of a liquidity trap, but that I reject the claim commonly made in popular presentations of MMT, that increased government spending doesn’t imply increased taxation.

Then there’s New Monetarism, associated with Stephen Williamson. He and I had a set-to a while back, which entertained many but didn’t produce a lot of enlightenment, and left me disinclined to put a lot of effort into understanding the differences between New and Old Monetarism. (For the record, I’m pretty much an Old Keynesian, but I have learnt a fair bit from New Keynesians like Akerlof and Shiller).

The third entrant is “Market Monetarism” associated mainly with Scott Sumner (though Wikipedia tells me the term was coined by Lars Christensen). I was aware in general terms that Sumner advocated a more expansionary monetary policy in response to the current crisis (I agree), that he prefers Nominal GDP level targeting to inflation targeting as the basis for monetary policy (I agree again though I’d prefer targeting levels rather than growth rates) and that he thinks this would be sufficient to fix the problem without any role for fiscal policy (I disagree). However, I wasn’t really aware that these ideas formed the basis of a school of thought, and I still haven’t investigated the underlying theory in any detail.

Sumner has commented on my recent posts on fiscal and monetary policy with a couple of his own, so I guess it’s time for me to look more closely at what he is saying. A first response is over the fold.

Read more…

Categories: Economics - General Tags:

A note on the ineffectiveness of monetary stimulus (updated and corrected)

August 26th, 2013 98 comments

A commenter on the previous post raised the idea, promoted by the “market monetarist” school, that monetary policy is so effective as to make fiscal policy entirely unnecessary, at least when interest rates are above the zero lower bound. My views on this issue were formed by the experience of the late 20th century, and in particular, the recession that began in 1990, following steep increases in interest rates. Having planned a “short, sharp, shock”, the RBA started cutting rates in January 1990.

They didn’t go for 25 basis point moves in those days. Over the period to March 1993, rates were cut by more than 12 percentage points, from 17.5 per cent to 5.25 per cent. Over the same period, unemployment rose from 6 per cent to nearly 11 per cent, a record for the period since the Depression, and stayed around that level well into 1994, until the adoption of the Working Nation package of fiscal stimuuls active labour market policies. As I said in the previous post, tight monetary policy can reliably cause recessions, but expansionary monetary policy in a deep recession is “pushing on a string”.

Update As pointed out by Mark Sadowski in comments, these are nominal rates of interest. To get the real rate, which is more relevant, you need to subtract the expected rate of inflation, which fell from around 7 per cent to around 4 per cent over this period (as measured by surveys, and by the premium for inflation-adjusted Treasury bonds). So, you get a 9 percentage point reduction in the real rate from 10 per cent to 1 per cent. This doesn’t make much difference to the story. Most economists would regard policy as contractionar/expansionary if real interest rates are above/below the long-run neutral level, about 3 per cent. So, we still have a shift from strongly contractionary to moderately expansionary.

However, market monetarists want to argue that the stance of policy should be assessed relative to a policy rule (Taylor rule or NGDP) that already incorporates a prescription of cutting rates when GDP falls and unemployment rises. This doesn’t make a lot of sense to me. It’s like arguing that Obama’s stimulus was actually a contractionary policy because it wasn’t as big as (according to a standard analysis based on Okun’s Law) it should have been. It’s partly a question of semantics, but it’s associated with the claim that, if only rates had been cut even more, we wouldn’t have had the recession, or would have recovered quickly. Having been around at the time, I disagree.

Fiscal multipliers and employment (wonkish)

August 26th, 2013 53 comments

With two weeks to go in the election campaign, we still haven’t seen anything resembling a budget proposal from Tony Abbott and the LNP. Various people have made estimates of the cost of his promises and the cuts likely to be needed to fund those promises and return to surplus. My main concern is that Abbott has locked himself so thoroughly into the rhetoric of surplus that, in the event of a downturn or recession, he will feel compelled to adopt the kinds of austerity measures that have had a disastrous impact in Europe and prevented any real recovery in the US. To make this point properly, we need some numbers. One way to get such numbers is with a macroeconomic model. That gives you some better precision, but often hides the key assumptions. Instead, I will give a very simple Keynesian analysis, yielding back-of-the-envelope estimates.

For illustration, I’ll assume a public expenditure cut of $10 billion a year – the calculation is linear so it can be scaled up or down as needed. In a recession, the fiscal multiplier is likely to be around 1.5 (that’s the value used by Christina Romer when she pushed for a larger fiscal stimulus in 2009, and consistent with recent estimates by the IMF). So, the impact of the cut, when multipliers are taken into account is $15 billion or around 1 per cent of national income (or GDP if you prefer that measure).

Now we can use Okun’s Law to estimate that the cut will raise the unemployment rate by around 0.5 percentage points. Taking participation rates into account, employment will also fall by around 0.5 per cent (about 50 000 jobs).

A bunch of qualifications and observations over the fold

Read more…

Cronyism and the global city again (crosspost from crookedtimber.org)

August 24th, 2013 15 comments

Alex Pareene at Salon points to a bunch of evidence showing, in essence, that the rich look out for themselves and their kids, and no one else, then to a piece by Andrew Ross Sorkin defending nepotism in the US, and by extension in China. There was a time, not so long ago, when Asia’s reliance on guanxi and similar networking practices was denounced as ‘crony capitalism’, to be contrasted with the pure and hard-edged version to be found in the US. This was supposed to explain the vulnerability of Asian economies to the crisis of 1997, and the stability of the US, then well into the Great Moderation.

A few years later, in the very early days of blogging, I wrote a post pointing out that the eagerness of financial sector workers to congregate in the same physical location, even though their work was supposed to be based on objective evaluation of data transmitted by computer, was pretty good evidence that the “global city” phenomenon, much in vogue at the time, was just guanxi writ large.

I turned that into a magazine article at Next American City (now Next City, whose web site seems to have lost it). Then I wrote a longer and more academic version and submitted it a lot of journals in economic geography, urban geography and so on, none of whom were interested. I think it stands up well in retrospect (much more so than most of the ‘global city’ literature, at any rate), but of course I’m biased.

At any rate, at least now everyone, and not least a defender and beneficiary of the system like Sorkin, is comfortable with the notion that capitalism is a rigged game, in which the ability to fix the next round is part of the prize for winning this one.

Update/clarification I’ve implicitly taken the efficient markets hypothesis as a benchmark, and assumed that features of the financial sector (for example, physical colocation) that can’t be explained by EMH are likely indicators of cronyism. It’s possible to take the view that the financial sector does things that are inconsistent with EMH, but nevertheless socially beneficial. An obvious example is the kind of opaque, over-the-counter derivatives that Dodd-Frank has tried to ban, and that the finance sector is lobbying hard to protect: it seems clear that doing these kinds of deals would benefit from face-to-face contact. So, if such deals are, in aggregate, socially beneficial, my argument fails – the converse also holds.

Categories: Economics - General Tags:

Krugman, Keynes, Kalecki, Konczal

August 18th, 2013 22 comments

Paul Krugman’s recent columns, responding in various ways to JM Keynes, Michal Kalecki and Mike Konczal have made interesting reading, signalling a marked shift to the left both on economic theory and on issues of political economy.[^1] Among the critical points he has made

* Endorsement of Kalecki’s argument (which he got via Konczal) that “hatred for Keynesian economics has less to do with the notion that unemployment isn’t a proper subject of policy than about the notion of shifting power over the economy’s destiny away from big business and toward elected officials.”

* Rejection of the Hicks-Samuelson synthesis of Keynesian macroeconomics and neoclassical microeconomics and advocacy of (at a minimum) comprehensive financial controls

* Abandonment of the idea that the economics profession is engaged in honest intellectual debate, in favor of the conclusion that the rightwing of the profession, including leading economists, is characterized by denialism and bad faith. As he says, while many economists would like to believe otherwise ” you go to economic debates with the profession you have, not the profession you want.”

Read more…

Categories: Economics - General Tags:

NZ & Oz: why it matters

July 30th, 2013 46 comments

My previous posts put up various bits and pieces about the sharp economic divergence between NZ and Australia, but I didn’t say much about why this topic is of interest right now. The issue has come up in several different contexts, where the contrast between the two countries, starting from fairly similar positions, seems to me to provide some pretty strong evidence. The questions include

* Do recessions have sustained effects on income levels, or does the economy rapidly return to its previous growth path? The evidence from NZ (six recessions since 1975) and Australia (two) suggests that effects are sustained
* Is market-oriented microeconomic reform a major determinant of economic growth? NZ reformed more, and more vigorously than did Australia and did drastically worse in economic terms.
* Do more flexible labour markets yield better macroeconomic performance? Again, the evidence from NZ and Australia suggests the answer is No.

Obviously, given the points above, I take the view that bad macroeconomic policy in NZ, particularly during the reform era of the 1980s and 1990s, is an important reason for poor economic performance. Important examples include the adoption of a contract-based 0-2 per cent inflation target in the early 1990s, and the misconceived idea of the Monetary Conditions Index at the time of the Asian crisis. I don’t think bad macro policy is a sufficient explanation, but the gap is so large and persistent, it’s hard to explain in terms of standard microeconomic analysis.

Read more…

Categories: Economics - General Tags:

NZ & Oz – a bit more

July 29th, 2013 19 comments

Readers have sent in a couple more instances of claims that the NZ economy has done, or was about to do, better than competitors, most notably Australia. Here’s Tony Abbott on the alleged success of NZ macro policy

there are other countries which have chosen a different path and there’s no evidence that their response has been any less effective than ours. For instance, in New Zealand they have tried to reform their way through the global financial crisis under the new government’s leadership and they seem to be doing pretty well

and here’s a picture from 1989 of then Finance Minister, David Caygill, showing what he thought the reforms could achieve.

Caygill1989

Categories: Economics - General Tags:

Declining electricity consumption in Australia

July 25th, 2013 68 comments

I missed this when it came out a few weeks ago, but the Australian Energy Market Operation (AEMO) has released new forecasts of electricity demand to 2020. The forecasts represent a further reduction on the big cuts in estimated demand made between 2011 and 2012. In 2011, the medium forecast was for nearly 250 000 GWH by 2020, up from 200 000 in 2010. The latest medium forecast is 211 000 GWh for 2020, and the low forecast stays below 200 000 out to 2022-23. These forecasts would be even lower if it were not for three large export LNG projects in Queensland.

Even more striking is the forecast for residential and commercial consumption per persom. In much of the debate around energy issues, it is assumed that increases in living standards must go hand in hand with higher consumption of all forms of energy. But AEMO, assuming moderate rates of economic growth, is predicting that consumption per person will drop to 6000 KwH per year by 2020. In 2005, it was around 7200 KwH, so that’s a drop of more than 15 per cent. Over that time, income per person is likely to rise by around 30 per cent.

The AEMO measures don’t include rooftop solar, but they do include large-scale renewable energy (wind and grid-connected PV). Current policy calls for an additional 20 000 GWh of large-scale renewables by 2020, which would imply a significant reduction in energy-related CO2 emissions over the next decade.

Of course, a lot of this is the fortuitous result of high electricity prices, driven mainly by distribution costs. But it’s certainly an impressive demonstration that lower energy consumption does not mean lower living standards.

Categories: Economics - General, Environment Tags:

Why gold is different from Bitcoins

June 6th, 2013 35 comments

I have a new piece out in the National Interest, explaining why gold, unlike Bitcoins, will remain valuable for many years to come. In essence, gold has an intrinsic value derived from its industrial and decorative uses, and this value is enhanced by the demand for gold as a store of value, and by the belief (mistaken in my opinion, and certainly not an option I would favor) that gold-backed currencies may be restored.

By contrast, in my view, this piece by Robert Murphy misses the crucial distinction. Monetary demand can enhance intrinsic value, but it can’t make an intrinsically worthless asset valuable. He also fails to state the crucial point about fiat money. The “fiat” comes from the fact that a state can demand taxes can declare (“fiat”) that its money is acceptable in payment of those obligations. Hence, as long as the state can enforce its demands, its money has real value.

Categories: Economics - General Tags:

Some electricity links

April 30th, 2013 21 comments

The Australia Institute has a report out making the point that the growth in the administrative and marketing costs of electricity companies, following the reforms of the 1990s, has added more to electricity prices than has the carbon price.

Also, the Centre for Policy Development has a nice piece on solar PV coming out soon. Look for it.

Finally, here’s a piece I wrote for the The Economic and Labour Relations Review in 2001. Conclusion over the fold. I think it stacks up pretty well, certainly compared to the gushing praise for reform that was commonplace at the time.

Read more…

Categories: Economics - General, Environment Tags:

The Bitcoin Bubble and a Bad Hypothesis

April 17th, 2013 93 comments

That’s the title of my latest piece at The National Interest. The blurb sums it up pretty well. Under the efficient-markets hypothesis, a worthless digital currency should have never gotten off the ground.

Categories: Economics - General Tags:

Another encouraging graph

March 30th, 2013 90 comments

Wandering around the web, I found this OECD graph on per-capita oil use in residential/commercial/agricultural uses reproduced here

45-Per-capita-oil-use-in-residential-commercial-agriculture-1971-2009-OPEC-WOO2012

It raises some interesting points
Read more…

Categories: Economics - General, Environment Tags:

The good news

March 14th, 2013 58 comments

Discussions about reducing CO2 emissions often have a dismal tone, saying that we can’t reduce emissions without a drastic reduction in living standards. Sometimes the inference is that we should do nothing, other times that we should embrace drastically lower living standards (but probably won’t). Most people share this intuition to some extent, particularly as regards activities like driving, that seem central to a modern lifestyle. So, it’s striking to see what’s been happening to per capita gasoline consumption in the US

gasoline-volume-sales-per-capita-vs-price

There’s a lot going on here: prices, fuel economy regulations, ethanol and general cultural shifts which have reduced distances driven. But the big point is that this drastic decline has happened with only modest policy measures, and without any obvious impact on living standards (US living standards haven’t done well in the 2000s, but for entirely different reasons). Looking ahead, Obama’s fuel economy regulations and sustained high prices should drive US gasoline consumption much lower.

Categories: Economics - General, Environment Tags:

Starting as I mean to go on (updated)

March 13th, 2013 125 comments

As I said in my last post, I’m giving as good as I get from now on, and today I seem to be getting plenty

Over at Catallaxy (Google it if you want), Sinclair Davidson is complaining about my Australian Laureate Fellowship (total budget, including lots of postdocs, PhD students etc, $2 million over 5 years) as an imposition on the taxpayer. Sinclair also receives a taxpayer funded salary of at least $150K. The standard assumption is that 30 per cent of a professorial salary is for research, the rest for teaching, administration, community service and so on. By contrast, I’m funded 100 per cent for research, my own and that of my students and collaborators. So, let’s see who is goofing off on the taxpayer dollar.

Here’s Sinclair: two journal articles\, and zero working papers in the last five years. On my arithmetic, allowing 30 per cent of salary for research, that’s a rate of over $100k per publication.
Here’s me 29 journal articles and 36 working papers in the same period. That’s about $30k per publication, without allowing for material produced by the postdocs and PhD students funded by my grant.

Those aren’t exhaustive lists of publications by any means, but I doubt that the relativities would change if we had a more complete list, including books, reports and so on. Adjusting for journal quality, as perceived by the profession, would make the difference even sharper.

Updated With their usual affinity for conspiracy theories, commenters here at and Catallaxy are suggesting that my current Fellowship is a favor from my Labor mates (readers here will be aware of my slavish devotion to our PM, which has, it seems, finally paid off). Of course, the great thing with conspiracy theories is that, the longer you look, the more conspirators you find. I’m sure the Catallaxians will be unsurprised to discover that this is, in fact, my fifth fellowship of this kind (the publication count above refers to my previous one), and that the previous four were all awarded by the Howard government.

Further update Sinclair Davidson has responded with a more complete list of his publications, including quite a few that appear neither on the IDEAS database (because it doesn’t include low-grade journals like Agenda and Policy nor on his personal webpage at RMIT. As I said above, it doesn’t change the relativities.

Yet further update Davidson has managed to convince the ever-gullible Andrew Bolt that pieces in Policy (not even ranked as a peer-reviewed journal by the ARC ranked C by the ARC), Agenda (ranked B) and a bunch of CIS/IPA publications constitute a stellar publication record. There’s nothing wrong with publishing in magazines like these (I do plenty of it), but it’s supposed to be a by-product of academic research, not a substitute for it. Bolt (innumerate, and out by two orders of magnitude on the impact of emissions policy), also repeats his claim that I’m the math-challenged one.

Monday Message Board

March 11th, 2013 20 comments

Another Monday Message Board. Post comments on any topic. As usual, civilised discussion and no coarse language. Lengthy side discussions to the sandpits, please.

Categories: Economics - General Tags: