A simple theory of elasticity assumptions

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Tyler Cowen writes,

Do you right now favor both a lot of stimulus and a big minimum wage hike? What are your assumptions about elasticities?

Start from a policy preference to subsidize demand and restrict supply. You want to say that subsidizing demand will increase output and that restricting supply will not decrease output. Your elasticity assumptions have to be consistent with those policy preferences, not with one another.

8 thoughts on “A simple theory of elasticity assumptions”

  1. Arnold, you say “subsidize” demand and “restrict” supply which can be related to the price elasticities of particular demand and supply curves. I think the relevant policy preferences are “to equal” some demands and “to control” their supplies by relying on policies that imply shifts in both the demand and supply curves, so the price elasticities of the initial curves are a secondary issue.

    The minimum wage increase that the barbarians want to legislate applies to a large variety of local labor demands and supplies and their “aggregate” outcome has nothing to do with the price elasticities of the demand and supply of each type of local labor. You know the impossibility of aggregating those varieties of labor so don’t waste your time guessing about the “aggregate” outcome.

  2. BTW, you cannot ignore the barbarians’ report on Covid and what they plan to aspire rather than transpire:

    https://joshuagans.substack.com/p/the-aspiration-needs-perspiration?token=eyJ1c2VyX2lkIjo3ODI5MDI2LCJwb3N0X2lkIjozMTc3MjcwNCwiXyI6IjdhZnA1IiwiaWF0IjoxNjExMzMzMzIxLCJleHAiOjE2MTEzMzY5MjEsImlzcyI6InB1Yi03NTI5NSIsInN1YiI6InBvc3QtcmVhY3Rpb24ifQ.OTg_n4OD-6GMzzJn7E2aXElXTOXV1UtD2N-yo3YywF4

    I laugh at your mentor Tyler because last night he was too busy understanding New Zealand to pay attention to the barbarians’ report and plan. I bet that the two MR clowns will not assess the plan’s economic consequences. How do you assess “virtue signaling”?

  3. If the goal is to increase inflation, which the Fed continuously states that it wants, then subsidizing demand and restricting supply is just what the doctor ordered.

    • Isn’t it a better strategy for heavily indebted fiat countries to go the other way, and follow Japan to near zero inflation so the otherwise crippling debt load generates a slight income stream via negative rates?

  5. Subsidize demand, restrict supply seems like an accurate summation of USA policy preferences. Nevertheless, it would seem it is also a recipe for a higher rate of inflation more like what we see with college tuition than what exists elsewhere in the economy currently. Perhaps economy wide inflation should not be considered a test, but it is tempting to think that cutting subsidies for demand, or removing restrictions on supply might make a difference.

    John Cochrane seems to be suggesting that inflation will arrive with a bang at some point: https://johnhcochrane.blogspot.com/2021/01/low-interest-rates-and-government-debt.html?m=1. Perhaps Biden flooding troops into Syria for no apparent reason will trigger the military misadventure that finally upsets the apple cart?

    Timothy Taylor seems to suggest there are many independent factors at play: https://conversableeconomist.blogspot.com/2020/01/the-inflation-puzzle-why-has-it-move-so.html?m=1

    From a PSST perspective, the new policies of greatly increased immigration and wealth transfers from investors to consumers would increase demand for consumer goods, while increased restrictions on energy and gasoline powered cars will stimulate inflation in those industries. So, if Inflation breaks out, would a PSST approach to subsidies and supply restrictions provide a responsive strategy?

  6. The goal of the high national minimize wage is simple: to lead to more power for wealthy Blue areas vs. poorer or lower cost of living Red zones. The latter are likely to suffer more from a high min wage and the former are likely to suffer less while gaining more from transfers and increased political influence.

    Claims of a rational aggregate welfare benefit are disingenuous.

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