Marginal Revolution

Is there a long-run deflationary trend right now?

Tyler Cowen

Although the cited source says as much, please don't take these remarks as my dismissal of the relevance of AD cyclical macro.  Still, I find this idea intriguing:

Anyone who still thinks falling prices are a cyclical phenomenon isn’t looking closely. It’s secular, and the sudden ubiquity of discount outfits shows how Japanese consumption has become a race to the bottom of the pricing spectrum.

There is more detail here and note the trend is occurring even though Japan does not have declining real per capita income. 

In a wide variety of areas, ranging from ethnic food vs. fine dining to blogs vs. books to the art world (Outsider Art is often more visceral and enduring) to clothing, there is a common realization going on: cheap stuff is often better than the more expensive stuff.  Furthermore, information technology allows you to reframe your consumption, countersignal your personal image, and reaffiliate with others, and their social movements, in ways which increase the status value of the lower priced goods.  It is now quite easy to find the (possibly) small pool of people who will respect you for your cheap hobby or obsession.  You can buy obscure items and even your uninformed friends can Google to find out what they are and why some people think they have value.  In relative terms, a famous, mainstream, and somewhat upper-class "Nordstrom" label is worth less than before.

These developments remove or at least limit the status-based reasons for buying the higher-priced goods.

Mike Munger took us all for pupusas and we loved it; no one was bitching about the absence of seared tuna.

Assorted links

Tyler Cowen

1. Applying RCTs to the rot of hamburgers.

2. PW Best Books of 2010 list; not my picks.

3. Read the comments on this article; "the culture that is NW Washington"?

4. Speculative hypotheses about China and QEII; interesting but not all well-founded.

5. The class he would like to teach.

6. Cap and trade for antibiotics?

7. Zadie Smith reviews Social Network.

Melchior Palyi, prophet of the financial crisis

Tyler Cowen

There is a very good new WSJ article on the research of my colleague David M. Levy and his co-author Sandra Peart.  The article starts:

Decades before anybody had ever heard of a mortgage derivative, an economist named Melchior Palyi predicted key causes of the 2008-2009 financial crisis with precision that makes a modern reader's hair stand on end.

His warnings help explain why investors insist on trusting market gatekeepers they know to be fallible—such as policy makers, regulators and credit-ratings firms.

The seeds of today's problem were planted long ago, and its forgotten history holds important lessons. In 1936, as part of reforms under the new Banking Act, the U.S. government mandated that federally regulated banks could no longer hold securities that weren't rated investment-grade by at least two ratings firms.

...Mr. Palyi, then teaching at the University of Chicago, was a vocal skeptic from the outset. Looking back into the 1920s, he found that investment-grade bonds went bust with alarming frequency, often in the same year they were rated. On average, he showed, a bank that followed the new rules would end up with a third of its bond portfolio going into default.

The record was so unreliable that it would be "still more responsible," Mr. Palyi growled, to "stop the publication of ratings altogether." He was especially troubled that the new banking rules switched the responsibility for credit safety from bankers—and even bank regulators—to ratings firms.

"From there," he warned, it "will have to be shifted again—to someone else," presumably taxpayers. Liquidity, Mr. Palyi argued, was being replaced by what he scornfully called "shiftability," a new kind of risk that could someday "be magnified into catastrophic dimensions."

The underlying research by Levy and Peart is here.  If the WSJ article is gated for you, just enter "Melchior Palyi" into news.google.com and an ungated copy is likely to pop up.

Claims I wish I understood -- quantum Darwinism

Tyler Cowen

The resulting theory of Quantum Darwinism is relatively straightforward:

1)      Human measurements are only one, rather unusual, means of forcing decoherence of a superposed or entangled quantum state into simpler states. The primary mechanism causing decoherence is the many types of interactions that the quantum system has with its environment. Typically quantum systems experience a vast number of such environmental interactions selectively destroying entangled quantum states.

2)     As a result these environmental interactions, or environmental monitoring, only a small minority of quantum states, called pointer observables, are able to survive and evolve for any sustained period of time in the deterministic, classical manner of axiom 5 above. Their prolonged survival is due to the peculiar property of these pointer states that interactions with the environment and the subsequent decoherence leave them largely unchanged. They alone are able to survive in the face of environmental monitoring.

3)     As the pointer states are the only ones able to survive decoherence, and as interactions with the environment pass information concerning the quantum state to the environment, a quantum system's environment becomes heavily imprinted with redundant copies of information concerning the quantum system's pointer states. It is these environmental copies that we actually experience and from which we gain information concerning quantum systems in almost all cases. For instance quantum systems are in continual interaction with the vast number of photons in their immediate environment. When we observe an object visually we are actually accessing information that has been imprinted on photons during previous interactions with the quantum system under observation.

4)     The redundant imprinting of information in the environment makes this information available to multiple observers and provides the basis for our classical concept of objectivity or the ability of numerous observers to access and confirm the same information.

While this process may explain the emergence of classical physics from quantum physics it may not be clear where the Darwinian part comes in. Zurek explains his motivation in naming Quantum Darwinism:

Using Darwinian analogy, one might say that pointer states are most fit. They survive monitoring by the environment to leave descendants that inherit their properties. Classical domain of pointer states offers a static summary of the result of quantum decoherence. Save for classical dynamics, (almost) nothing happens to these einselected states, even though they are immersed in the environment.

Here is more.  Here is Wikipedia.

Will pot become legal?

Tyler Cowen

Megan McArdle clinches it:

In my experience, the big dividing line is having kids.  Read this interview with P.J. O'Rourke and discover some shocking things coming out of his mouth about how he doesn't want his kids to do drugs. Having kids makes you realize how narrowly you escaped killing yourself--and remember all the friends who overdosed, or got arrested on a DUI, or spent their twenties working at a job that would let them smoke up three times a day, only to realize at age 35 that they had pushed themselves into a dead end.

Before the pot-smoking parents start crawling out of the woodwork to tell me that I'm totally wrong, that there are lots of parents who support legal marijuana--I'm not saying this happens to every single person who has a kid. But in my experience, as the kids approach the teenage years, a lot of parents do suddenly realize they aren't that interested in legal marijuana any more, and also, that totally unjust 21-year-old drinking age is probably a very good idea.

I would add to this. Parents are not even preferring the policy which (necessarily) best protects their kids.  Parents are preferring the policy which gives them a slightly better feeling of being in control of their kids, whether or not they are.

The new Deirdre McCloskey book

Tyler Cowen

Bourgeois Dignity: Why Economics Cannot Explain the Modern World.

It is due out November 30th and it centers on the role of ideology in bringing about the Industrial Revolution and the modern world more generally.  

Further assorted links

Tyler Cowen

1. What would a'la carte cable TV pricing look like?

2. Did controversial votes hurt the Democratic candidates?

3. Magnus Carlsen drops out of World chess championship cycle.

4. Andrew Gelman on what happened in the election.

Assorted links

Tyler Cowen

1. Charity.

2. The cut in government spending after World War II.

3. Hail the rare variants!

4. Nerd econ T-shirts.

What's in your Wallet? Depends on your Browser.

Alex Tabarrok

What's in your wallet? Less if you use Firefox or IE and more if you use Chrome. Here from J-Walk Blog are interest rates for a car loan from Capital One if you use IE.

and here are the rates if you use Chrome:

I found something similar and the Consumerist also reports similar results. 

Price discrimination makes sense if Chrome users are better searchers, as seems likely. I suspect, however, that it is price experimentation and the Chrome<IE effect is being reported more often than the reverse.  I cleared cookies and tried a couple of times and although rates varied the lowest rate was still with Chrome.  I gave up after a few tries, however.

Trust the reactions of your peers more

Tyler Cowen

Dan Gilbert, Tim Wilson, and co-authors have found:

Two experiments revealed that (i) people can more accurately predict their affective reactions to a future event when they know how a neighbor in their social network reacted to the event than when they know about the event itself and (ii) people do not believe this. Undergraduates made more accurate predictions about their affective reactions to a 5-minute speed date (n = 25) and to a peer evaluation (n = 88) when they knew only how another undergraduate had reacted to these events than when they had information about the events themselves. Both participants and independent judges mistakenly believed that predictions based on information about the event would be more accurate than predictions based on information about how another person had reacted to it.

The link to the article is here.

What I've been reading

Tyler Cowen

1. Hector Abad, Oblivion: A Memoir.  A boy's, and then a man's, relationship with his father; it may put this bestselling Colombian author on the Anglo-American map.

2. Robert D. Putnam and David E. Campbell, American Grace: How Religion Divides and Unites Us.  This book is very well done, but it suffers from the "I already agree with it" problem; it shows for instance that religious people make better neighbors, even after making the relevant statistical adjustments.

3. The Penguin Book of Irish Poetry, edited by Patrick Crotty.  This is spectacular, covering both the medieval material (beautifully translated) and the last fifty years, and everything in between.  The volume looks like it should sell for $40, yet it goes for $15 on Amazon.  Definitely recommended, a real contribution and also a wonderful Christmas present.

4. Manuel de Lope, The Wrong Blood.  For those who love poignant Spanish meditations on memory, at the expense of plot.  I finished it, eagerly, but take the caveat seriously.  One good bit: "...no one on his way to a wedding seems like a dangerous man, and experience taught that dangerous men can come from a wedding...and so the owner of Etxarri's Bar gave no thought to his loaded shotgun."

Political games

Tyler Cowen

The vote- or seat-maximizing incentive for the Republican Party as a whole is to lay low, put forward no "Newt Gingrich" villain figure, and let Obama continue to take the blame for the ailing economy, while avoiding fights they can lose, because of the President's superior bully pulpit and media presence.

The incentive for individual Republican Congressmen is...different.

When it comes to marijuana legalization, I believe that the "anti-" forces will muster as many parental votes as they need to, to defeat it when they need to.  The elasticity of supply is nearly infinite at relevant margins.  Legalization may appear "close" for a long time, but in equilibrium it will not spread very far.  The "no" votes will pop up as needed.

Assorted links

Tyler Cowen

1. God and country.

2. Markets in everything, Pee Wee Herman edition.

3. Markets in everything, Jeff Koons skin care products edition.

4. Theories about how the UK times paywall might work.

5. The seven most powerful new economists?

Sentences to ponder

Tyler Cowen

California law (namely the Coogan Act) states that a child actor's income is 100% theirs, making it difficult for parents to use the money to support the family.

There is more here.

Regulatory Capture and Judicial Incentives

Alex Tabarrok

John Kay recounts the classic story of regulatory capture:

In 1887, Congress passed an act to regulate the US railroad industry. The legislation originated in the demands of farmers and merchants for protection against the “robber barons”.

Despite this background, railroad interests supported the bill. Charles Adams, president of the Union Pacific Railroad, explained his reasoning to a sympathetic congressman, John D. Long. “What is desired,” he wrote, “is something having a good sound, but quite harmless, which will impress the popular mind with the idea that a great deal is being done, when, in reality, very little is intended to be done.”

On the whole, he got what he wanted. The Interstate Commerce Commission established by the act was chaired by a lawyer with experience of the railroad industry – acquired, naturally, by acting on behalf of his railroad clients. When, a decade later, the Supreme Court ruled that a rate-fixing agreement between railroads was illegal, the ICC was crestfallen: surely, the commission said, it should not be unlawful to confer, to achieve what the law enjoins – the setting of just and reasonable rates. Soon after, Congress approved legislation making it a criminal offence to offer rebates on tariffs the ICC had approved, and the commission thereafter operated as the manager of a railroad cartel.

Kay is a little too quick, however, to argue in favor of judges.  Aside from the tradeoff (which Kay notes) that Judges will be less informed than people closer to the industry (the bias-efficiency tradeoff familiar from econometrics), judges also have their own set of interests and incentives.  Elected judges, for example, tend to be biased towards plaintiffs (voters) and against out-of-state corporate defendants (non-voters).  More generally, I think Kay understands politics without romance but still sees law with a romantic lens.

The application of public choice insights to legal institutions, "law without romance," is a new and growing field. If you are interested, I recommend The Pursuit of Justice, a very good new book on this topic (edited by Ed Lopez, I was general editor.)

Request for podcast requests

Tyler Cowen

You write the questions or requests and Jerry Brito will cull through them, choose his favorites, and interview me, based on your questions.  The podcast will then appear on his podcast blog and I will link to it.

Comments are open...I might even cover one or two of the residue questions here on MR.

Britain fact of the day

Tyler Cowen

In 1960, the British drank 3.6 pints of wine per head per year; by 1971 they drank 7 pints, by 1973 9 pints, by 1975 11 pints and by 1980 almost 20 pints.  One obvious reason was that it was cheaper than ever, with the duty having been slashed when Britain joined the EEC; another was that people picked up the taste on holiday; a third was that wines were advertised more successfully, being associated with glamour, luxury, and ambition, and aimed particularly at young women.

That is from Dominic Sandbrook's excellent State of Emergency, The Way We Were: Britain, 1970-1974.

My impression of the election results, from a great distance

Tyler Cowen

There is an anti-gay backlash in Iowa and I don't see marijuana climbing the legalization hill, if it can't make it through current-day California.  We're seeing the high water mark for pot, as aging demographics do not favor the idea.  Just 32% of the Tea Party candidates won; admittedly that figure should be adjusted by the rate of incumbency (a lot of Tea Party candidates were challengers).  In any case, there was not a Tea Party tidal wave.  Sarah Palin as nominee is up a few points on InTrade.com, although I do not see why.  Haley Barbour is also up and Chris Christie is down considerably (why?).  Given that the Democrats did better than expected in the Senate, Obama's reelection chances look better now than they did a week ago.  The Republican strategy is not dominating in broad constituency, MSM-reported, "lots of scrutiny" races, even with an abysmal economy and a not so popular health care bill.  My mental model of Obama is that he will cut deals with the Republicans, even on (mostly) their terms, if indeed any deal is on the table.  I would be pleased if critics of the Obama presidency would indicate their managerial background and expertise, yet few do.  How many of them could manage a team of ten people with any success? 

The next step in FinReg?

Tyler Cowen

Mr Bachus told the FT that he would go “page by page  [through Dodd-Frank]. . . to identify job-killing provisions or lending-killing provisions”. He highlighted new rules pushing over-the-counter derivatives trading through clearing houses and on to exchanges as a problem for non-financial corporate users.

“The derivatives provisions in Dodd-Frank alone... as they stand now they’re going to take a trillion dollars out of our economy. Think how many jobs that’s going to kill,” he said.

It is difficult to fathom how that last pararaph (article here) can make any sense, other than as fabrication.  What is the public choice factor here?  Ag producers who trade customized swaps and who wish to keep doing so?  Or is it financial institutions, including the trading branches of commodities firms, which earn money trading the spread?  How about traders which don't want to deal with the potentially onerous margin requirements at a newly established clearinghouse?  All of the above?

Which cities have the cheapest taxi rides?

Tyler Cowen

The ten cheapest are:

$0.90 – $1.58 Delhi, India
$0.97 – $1.28 Mumbai, India
$1.04 – $1.73 Cairo, Egypt
$1.14 – $1.71 La Paz, Bolivia
$1.17 – $1.87 Manila, Philippines
$1.22 – $2.03 Mexico City, Mexico
$1.23 – $2.94 Panama City, Panama
$1.23 – $1.68 Kuta, Bali, Indonesia
$1.24 – $1.86 Fez, Morocco
$1.29 – $1.94 Kuala Lumpur, Malaysia

I am surprised that Panama City and KL make that list, otherwise it fits with the Bela Balassa hypothesis about cheap services in low productivity countries, or at least those with low productivity laborers at the margin, such as Mexico.  Panama City has quite a large percentage mark-up for time spent in traffic.  The most expensive rides are in Zurich, Switzerland and then Oslo, Norway.  I recall seeing a small pizza for sale in the Oslo airport, priced at $35.  The full list is here.

Assorted links

Tyler Cowen

1. File under "failed symbolisms."

2. The economics of gated newspaper content.

3. Martin Feldstein is skeptical about QEII.

4. Tanker gas, rule the skies.

5. A strange Soviet story.

6. When are people most and least likely to break up, a study using Facebook data.

The High Cost of Free Parking, continued

Tyler Cowen

A collection of nearly 50 cars that is parked on the streets is revving-up the tempers of neighbors in an unincorporated community of Covina. According to several neighbors and DMV records, the cars belong to 51 year old Mark Shoff who lives in the 16000 block of Kingside Drive.

Shoff keeps five unregistered vehicles in the driveway of his home and at least 43 over vehicles are parked in the neighborhood's surrounding streets.

 

Here is more and the hat tip goes to the other Duncan Black.

Restoring gender equilibrium in China

Tyler Cowen

The real estate bubble is helping out:

Internet chat groups have sprang up where women exchange advice on how to conceive girls.

Rising property prices are driving the change, which is expected to be confirmed by China’s once-a-decade census that started on Monday, because Chinese families must traditionally buy a flat for a son before he can marry.

“My husband and I don’t earn much and I can’t imagine how we can buy a flat for a son,” says Zhang Aiqin of Pujiang in Zhejiang province.

“And it is not only a flat,” says Zhang Yun, a Shanxi province native who lives in Shanghai, alluding to the cost of educating and marrying off a boy. “Sons bring economic pressure ... [but] ‘a daughter is a warm jacket for a mother’ when she is old,” she says, quoting an ancient Chinese idiom to illustrate the fact that many urbanised Chinese think daughters are better caregivers.  

Meta-list of *Fanfare* classical music recommendations

Tyler Cowen

I've read through the November/December issue of Fanfare, in particular the Christmas Want Lists, as I do every year.  These are the new releases which appear on more than one list:

1. Stephen Hough and Osmo Vanska, playing the Tchaikovsky piano concerti.  This was the only item selected by three critics.

2. John Butt, conducting J.S. Bach, Mass in B Minor, Joshua Rifkin style.  This is the recording which is supposed to convert the unpersuaded to the minimalist vocal approach.

3. Dennis Russell Davies, conducting Haydn's complete symphonies.  Elevated for the sake of completeness, no one is saying it is better than Dorati.

4. Volkmar Andreae, conducting the Bruckner symphonies and Te Deum.  Remastered mono from the 1950s, supposed to be perfection.

5. Robert Schumann, Carneval, Kreisleriana, Arabeske, by Vassily Primakov.

I have found Fanfare Christmas lists to be a very reliable source of excellent music.

Portuguese drug decriminalization

Tyler Cowen

Caitlin Elizabeth Hughes and Alex Stevens have written a new study:

The issue of decriminalizing illicit drugs is hotly debated, but is rarely subject to evidence-based analysis. This paper examines the case of Portugal, a nation that decriminalized the use and possession of all illicit drugs on 1 July 2001. Drawing upon independent evaluations and interviews conducted with 13 key stakeholders in 2007 and 2009, it critically analyses the criminal justice and health impacts against trends from neighbouring Spain and Italy. It concludes that contrary to predictions, the Portuguese decriminalization did not lead to major increases in drug use. Indeed, evidence indicates reductions in problematic use, drug-related harms and criminal justice overcrowding. The article discusses these developments in the context of drug law debates and criminological discussions on late modern governance.

Anything but the election, part II

Tyler Cowen

In The Journal of Cosmology, Rhawn Joseph, Ph.D. writes:

Humans are sexual beings and it can be predicted that male and female astronauts will engage in sexual relations during a mission to Mars, leading to conflicts and pregnancies and the first baby born on the Red Planet. Non-human primate and astronaut sexual behavior is reviewed including romantic conflicts involving astronauts who flew aboard the Space Shuttle and in simulated missions to Mars, and men and women team members in the Antarctic. The possibilities of pregnancy and the effects of gravity and radiation on the testes, ovaries, menstruation, and developing fetus, including a child born on Mars, are discussed. What may lead to and how to prevent sexual conflicts, sexual violence, sexual competition, and pregnancy are detailed. Recommendations include the possibility that male and female astronauts on a mission to Mars, should fly in separate space craft.

The piece has numerous flaws, which are some mix of sad, funny, and outrageous, depending on your point of view. 

Hat tip goes to The Browser.

Anything but the election

Tyler Cowen

A 15-month-old girl survived a fall from a seventh-floor apartment in Paris almost unscathed after bouncing off a cafe awning and into the arms of a passerby, police said today.

The baby had been playing unsupervised with her four-year-old sister yesterday when she fell out of the window, a police spokesman said.

A young man saw the baby starting to fall and alerted his father, who raced into position, arms outstretched, to catch her after she hit the awning, the daily Le Parisien reported.

...The owner of the cafe, located at the foot of the block of flats in north-east Paris, said it was a stroke of luck he had decided to leave the awning open that afternoon.

"I usually close it to stop it catching fire as people tend to throw their cigarette butts on to it,"...

Here is more.  It seems that no adult was at home in the apartment.

Here is Montaigne's short essay on fortune.  The word "fortune" appears over 350 times in Montaigne's Essays.  

Is Obama a Keynesian?

Alex Tabarrok

Hat tip: Stephen Miller.

Very good sentences

Tyler Cowen

But insofar as many people do have nationalist convictions, it’s worth noting that there’s a tradeoff between the nationalist impulse to seal the borders and the nationalist impulse to prolong the period of American hegemony.

In other words, if a country has a small or shrinking number of people it will lose international power and status.  That is from Matt Yglesias.

Assorted links

Tyler Cowen

1. How digital reports get out of North Korea.

2. Good but brutal analysis of Bruce Springsteen.

3. The swing voter's curse.

4. Is this election information or war?

5. Dunkin Donuts abolishes the penny, sort of.

6. Once Upon a Title.

7. Keynes vs. Hayek, rap part II.

Raising the status of real business cycle theory

Tyler Cowen

Garett Jones's guest post on El Salvador reminded me of a more general point: real business cycle theory explains 98 percent or more of the business cycles in human history, especially before the eighteenth century and the advent of modern financial markets.  Some parts of the world still are ruled by real business cycle theory.

And yet somehow the theory has low status or sometimes is considered outside the mainstream.  Admittedly, the theory can be misapplied or oversimplified by its proponents.  Yet...it explains 98 percent or more of the business cycles in human history.  It also helps explain the propagation mechanisms of monetary-based cycles.

I call that an important theory.

If only there were a textbook which taught RBC!

I guess they really are for sanity

Tyler Cowen

 

For the pointer I thank Thomas Acox and also Joshua Hall.

Assorted links

Tyler Cowen

1. H.G. Wells and Adam Smith.

2. LSE denies it is privatizing.

3. The culture that is Washington.

4. Dutch author Harry Mulisch passes away; his The Discovery of Heaven is still worth reading.

5. This year's UChicago job market candidate packet.  

6. The origins of cap-and-trade in economic thought, namely Thomas Crocker.

7. Height, genes, and IQ.

The "Dalai Lama" effect on international trade

Tyler Cowen

Andreas Fuchs and Nils-Hendrik Klann report:

The Chinese government frequently threatens that meetings between its trading partners’ officials and the Dalai Lama will be met with animosity and ultimately harm trade ties with China. We run a gravity model of exports to China from 159 partner countries between 1991 and 2008 to test to which extent bilateral tensions affect trade with autocratic China. In order to account for the potential endogeneity of meetings with the Dalai Lama, the number of Tibet Support Groups and the travel pattern of the Tibetan leader are used as instruments. Our empirical results support the idea that countries officially receiving the Dalai Lama at the highest political level are punished through a reduction of their exports to China. However, this ‘Dalai Lama Effect’ is only observed for the Hu Jintao era and not for earlier periods. Furthermore, we find that this effect is mainly driven by reduced exports of machinery and transport equipment and that it disappears two years after a meeting took place.

For the pointer I thank The Browser.

Ideological searches

Tyler Cowen

You can do them on the new www.blekko.com search engine.  For instance here is "Tyler Cowen/libertarian," which I believe mines libertarian sites for the results.  Here is "Tyler Cowen/liberal" and "Tyler Cowen/conservative."

Here are many articles about Blekko.  By the way, MR itself counts as a libertarian site in their schema.

*State of Emergency*

Tyler Cowen

Could it be the best non-fiction book so far this year?  The author is Dominic Sandbrook and the subtitle is The Way We Were: Britain, 1970-1974, here is an excerpt:

As a spender, Joseph had only one Cabinet rival: the Education Secretary, Margaret Thatcher.  Derided as the "Milk Snatcher" in 1971 because she had to carry out Macleod's plan to scrap free school milk for children aged between 8 and 11.  Mrs Thatcher was actually a big-spending education chief who secured the funds to raise the leaving age to 16 and to invest £48 million in new buildings.  In December 1972, she even published a White Paper envisaging a massive £1 billion a year for education by 1981, with teaching staff almost doubling and vast amounts of extra cash for polytechnics and nursery schools.  She wanted "expansion, not contraction", she said.  It never happened; if it had, her reputation in the education sector might be very different.

Every page of this book has excellent analysis and information, attractively presented.  It masterfully covers a wide range of topics, ranging from how the British started drinking wine, to how the power cuts affected public morale, to the strategies of British labor unions, to the insightfulness of Fawlty Towers.  It's a key book for understanding how the Thatcher Revolution ever came to pass.

It is simply a first-rate book.  It is out only in the UK, but I was happy to pay the extra shipping charge from UK Amazon, which you too can pay here.  Or maybe try these used sellers.  Some reviews are here.

Why I assign less weight to the liquidity trap argument

Tyler Cowen

A few people have been asking me about this, so here is a summary statement of some points:

1. The liquidity trap argument implies that the money-short bonds margin doesn't, at current magnitudes, matter.  I am more closely wedded to marginalism than that.  The argument also sees all the action (or should I say, non-action) in one margin, the money-bonds margin.  The money-goods margin matters too.  In the liquidity trap argument, everything is decided by one irrelevance result at a single margin in a highly complex multi-trillion dollar economy.

2. Short-term interest rates being zero, and short-term interest rates being almost zero, are very different cases, especially for understanding nominal shocks and whether they can stimulate aggregate demand.  Unless short-term rates are literally the same as the rate on cash, asset swaps still can succeed.  And QEII isn't be the same as simply switching the term maturity of the debt, as Krugman has suggested.  There will be nominal effects also.

3. Even Keynes didn't believe he had ever seen a liquidity trap, including in the Great Depression.

4. Most of the good predictions of the liquidity trap models are covered by recognizing there are lots of unemployed resources and weak business confidence.  

5. Consumer spending just rose 2.6 percent and business profits are high, yet we are in a liquidity trap?  What exactly is the story here?  "We can get spending up by 2.6 percent but not a smidgen higher"? 

6. The stock market responded positively to the announcement of QEII and the TIPS spread went negative; both are the opposite of what a liquidity trap model would predict.  Markets don't seem to think the liquidity trap idea is a very useful one and that alone creates real positive effects from monetary policy.  If markets don't believe in a liquidity trap, that's enough for the trap not to bind.

7. Monetary policy worked quite well in the Great Depression, when it was tried.  And on Japan I am persuaded by Scott Sumner.

These points are a less fundamental, but they are still relevant to the debate, if not always to the substantive issue itself:

7. There are different liquidity trap models.  For instance I often see the "short nominal rates are zero" model being confused with the more stringent "money demand is a bottomless sink" model.  It's only the latter case -- clearly not true today -- which generates the extreme results of liquidity trap models.  Otherwise the money-goods margin remains operative and monetary policy can succeed.

8. Some of the LT models imply upward-sloping AD curves and downward-sloping AS curves, yet I don't see anyone applying those assumptions consistently to other decisions, such as tax policy for instance.

9. If a liquidity trap is to persist beyond the short run, something must be preventing the marginal product of capital from adjusting upwards and solving the problem.  In other words, a non-short-run version of the liquidity trap has to be combined with an account of problems on the real side.

10. I see liquidity trap proponents spending a lot of time criticizing naive versions of real business cycle theory, bond market vigilante arguments, and so on.  They spend less time engaging the most serious criticisms of the liquidity trap argument.  A study of the liquidity trap literature does not raise one's confidence in the idea, though it might sound OK if the relevant alternative seems sufficiently bad.

11. Whether or not we should use fiscal policy depends on how well our government can target and mobilize unemployed resources; you don't need a liquidity trap to address that argument.

12. Ultimately I view the liquidity trap idea as a kind of shaggy dog that's been pulled out of the closet.  If it's going to be made convincing, it needs a lot more work than simply repeating that some short-term interest rates are near zero.

Theodore Sorensen quotation

Tyler Cowen

The ambassador was never present, but his presence was never absent.

Here are two more.

Questions about durable goods

Tyler Cowen

C.J. Chivers, via Andrew Sullivan:

Do you own anything that was manufactured in the 1950s and still is in regular, active use in your life?

Our house!  Otherwise it is a few artworks, but even most of the record collection, or for that matter the book collection, was made after that date.  I was manufactured in the early 1960s.  Am I forgetting something?

Assorted links

Tyler Cowen

1. George Starostin's music reviews.

2. Mount Everest now wired for internet and cell phone access.

3. Examples of North Korean painting.

4. Via Chris F. Masse, David Hockney is painting on the iPad.

How immigrants create jobs

Tyler Cowen

Here is my latest New York Times column, excerpt:

The study notes that when companies move production offshore, they pull away not only low-wage jobs but also many related jobs, which can include high-skilled managers, tech repairmen and others. But hiring immigrants even for low-wage jobs helps keep many kinds of jobs in the United States, the authors say. In fact, when immigration is rising as a share of employment in an economic sector, offshoring tends to be falling, and vice versa, the study found.

In other words, immigrants may be competing more with offshored workers than with other laborers in America.

American economic sectors with much exposure to immigration fared better in employment growth than more insulated sectors, even for low-skilled labor, the authors found. It’s hard to prove cause and effect in these studies, or to measure all relevant variables precisely, but at the very least, the evidence in this study doesn’t offer much support for the popular bias against immigration, and globalization more generally.

We see the job-creating benefits of trade and immigration every day, even if we don’t always recognize them. As other papers by Professor Peri have shown, low-skilled immigrants usually fill gaps in American labor markets and generally enhance domestic business prospects rather than destroy jobs; this occurs because of an important phenomenon, the presence of what are known as “complementary” workers, namely those who add value to the work of others. An immigrant will often take a job as a construction worker, a drywall installer or a taxi driver, for example, while a native-born worker may end up being promoted to supervisor. And as immigrants succeed here, they help the United States develop strong business and social networks with the rest of the world, making it easier for us to do business with India, Brazil and most other countries, again creating more jobs.

Here is the paper.  Here is related work by Peri on European labor markets.

From the Rally to Restore Sanity

Alex Tabarrok

A few more in the extension.

Continue reading "From the Rally to Restore Sanity"