Category Archives: PSST and Macro

A More Timely Measure of Rent Inflation

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Adam Ozimek writes,

As I proposed in my work, CoreLogic utilizes an approach that mirrors the S&P/Case-Shiller house price index. This approach measures current market prices by using only new leases, and controls for housing quality by tracking the same units over time.

Pointer from Tyler Cowen.

The standard BLS measure is more like a smoothed lagging indicator. Relative to the BLS path for rental inflation since 2008, Ozimek’s revised path shows inflation dipping by more early in the recession and then climbing by more during the recovery (should I say “recovery”?).

Unlike Ozimek, I see this as having zero impact for the macroeconomic theory of the Phillips Curve. That theory deals with the rate of wage change, and changing how you measure rent inflation does not change the history of wage inflation. To show a meaningful trade-off between wage growth and unemployment in recent years, you are going to have to find another data-massaging trick.

Of course, I admit that I used consumer prices in my recapitulation of Phillips Curve history. If I were extending that essay today, I would say that the Phillips Curve died again in 2008-2016, which is another period in which conventional macro does poorly. The Kling/FischerBlack view of inflation, which is not confounded by recent data, is presented in my latest book.

Six Breakthrough Ideas in Economics (?)

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In the opinion of The Economist, they are:

1. Akerlof’s Market for Lemons
2. Minsky’s Financial Cycle
3. The Stolper-Samuelson Theorem (Wikipedia explanation).
4. The Keynesian multiplier
5. The Nash equilibrium
6. The Mundell-Fleming trilemma (Wikipedia explanation).

Pointer from Greg Mankiw.

In Specialization and Trade, I discuss many of these ideas.

I mention (1) as an example of economists finding a theoretical market failure for which markets have found solutions. Used cars are sold with guarantees, or with information provided by third parties, or by reputable dealers.

I endorse something like (2), although I offer a different mechanism for the financial cycle. Minsky describes it in terms of the risk proclivities of capitalists. I describe it in terms of the trust that people place in financial intermediaries.

I do not discuss (3) specifically, but I do say that the “two-by-two” model of international trade is an example of economic modeling that is more misleading than insightful. In any case, of all of the Heckscher-Ohlin-Samuelson results, I would have picked factor-price equalization over Stolper-Samuelson.

I explain why (4) is a terrible idea.

I do not mention (5) by name, but I do describe the maintenance of cultural norms from a game-theoretic perspective.

I do not discuss (6), but I argue against monetarism, and thus I implicitly discount the trilemma.

Tyler Cowen on Brexit, Steven Pinker, and Joseph McCarthy

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And also other topics. The link goes to a Twitter post with a video.

Judge for yourself, but to me it sounds like he is telling a PSST story. He says that, for better or worse, the UK spent the last twenty years working with a set of rules on trade in services with other European countries, and now that those rules have been cast into doubt by the Brexit vote, the British economy is in trouble. It is a very different take from that of those who think in GDP-factory terms.

Also, in my other post today, I mention an event on plutocracy co-sponsored by the Hudson Institute and The American Interest. Tyler Cowen makes remarks that have little or nothing to do with the article that he wrote for the event. Two of his more provocative opinions:

1. Steven Pinker may be wrong. Rather than mass violence following a benign trend, it could be cyclical. When there is a long peace, people become complacent, they allow bad leaders to take power and to run amok, and you get mass violence again. (Cowen argues that there are more countries now run by bad people than was the case a couple of decades ago)

2. Joseph McCarthy was not wrong. There were Soviet agents in influential positions. Regardless of what you think of that, the relevant point is that today Chinese and Russian plutocrats may have their tentacles in the U.S. and may be subtly causing the U.S. to be less of a liberal capitalist nation and more of a cronyist plutocracy.

War and Mobility

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Concerning Civil War veterans, Dora L. Costa, Matthew E. Kahn, Christopher Roudiez, and Sven Wilson write,

Veterans preferred to move to a neighborhood or a county inhabited by men from their same war company. This co-location evidence highlights the existence of persistent social networks. In our study, the social network already exists but an individual veteran seeks out economic opportunities. A co-ordination game arises and by co-locating in cities, veterans can achieve the mutually beneficial gains from cities while still preserving their network.

I believe that something similar happened after World War II. I think that this new mobility might have been a significant factor in making the economy stronger after the war than it had been in the 1930s. It is easier for new patterns of sustainable specialization and trade to form if people are willing to move.

Barry Eichengreen’s GDP-factory Economics

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He writes,

Just as tariff protection is not a macroeconomic problem in deflationary, liquidity-trap-like conditions, freer trade, the economist’s familiar nostrum, is not a solution.

Pointer from Mark Thoma.

This illustrates the difference between thinking about the economy as a GDP factory and thinking about it in terms of Specialization and Trade. For those, like Eichengreen, who think in therms of ae GDP factory, there is no heterogeneity of goods or labor, and hence no benefits from trade of any kind. The key question is whether or not there is enough spending to keep the factory going at full capacity.

In contrast, the way I look at the economy, the key question is how well the economy is creating patterns of sustainable specialization and trade. Entrepreneurs must attempt, through trial and error, to find ways to utilize the available work force as tastes and technology evolve. From this perspective, Eichengreen’s ideas about the supposed costs of free trade and the supposed benefits of restrictions make no sense.

Today’s Elites

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In a widely-read column, Ross Douthat disparages them.

But Tyler Cowen asks, compared to what?

A couple thoughts.

1. A hundred years ago, elites gave us World War I; fifty years ago, they gave us the Vietnam War.

2. As the economy becomes more specialized, there are going to be more aspects of it with which elites are unfamiliar. Someone in the elite fifty years ago had a decent probability of having grown up on a farm. And a high probability of having done physical labor or worked on a car–changing a tire if nothing else. Consequently, even if today’s elites are better educated and have broader experience than their predecessors, the gaps in what they know may be larger.

A Commenter and I Think Along Similar Lines

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He (or she) writes,

Not enough talk about elite hypocrisy; Elite professions like finance or law have a [boat]load of regulatory protectionism but even economists don’t really like to talk about that; but when non-elites want protectionism for their trades they are racists and economically ignorant and what not

One of my fantasies is of a classroom in which a tenured economics professor at an accredited institution of higher learning says, “We must have free trade,” and a few students leap out of their chairs and shout, “You first!”

We are all natural-born hypocrites when it comes to competition. My new book helps to explain why. As producers, we specialize in a few tasks. As consumers, we enjoy products that come from millions of tasks. So if competition emerges in a small set of tasks, it has only a small effect on us–unless it happens to be in the set of tasks that we do to earn a living. Then we get very upset, and make up reasons for that competition to be dangerous and unfair.

The other night, we had several friends over for dessert. All of them were licensed professionals. I can imagine that the social workers would be appalled if suddenly they faced competition from unlicensed social workers. I can imagine that the attorney would be appalled if suddenly he faced competition from uncredentialed lawyers. And so on. So is it surprising that British blue collar workers are appalled at facing competition from a rapid influx of Poles and Hungarians?

Those of us with a lot of educational credentials are happy to speak up for free trade and free movement of people, and I believe that we are right to do so. But it would be better if we were to say, “Me first” when it comes to encouraging competition.

A Commenter’s Suggestion

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He writes,

May I humbly/respectfully suggest, Arnold, that you consider replacing your economics-is-not-a-science meme with an economics-is-like-applied-science (i.e. engineering and medicine) one.

Reading a draft of Jeffrey Friedman’s next book, I gather that this was John Dewey’s notion. Just as doctors often “treat empirically” (by trial and error), policy science can improve by trial and error.

The parallels with medicine are interesting. Just as it seems to be the case that a lot of health care spending goes to medical treatments with high costs and low benefits, it is the case that a lot of government programs and regulations have high costs and low benefits.

I reject Dewey’s model as a description of actual policy practice. Policy makers almost never design proper trials, and they almost never correct errors. Pretty much every anti-poverty program that has been tried since the 1960s is still around, regardless of how (or whether) it was evaluated.

In my latest book, I argue that the profit system does a much better job of trial-and-error learning. The incentives to learn are much stronger. If you make enough mistakes, you lose money and go out of business. Also, upstart companies are much more willing to attempt a radical innovation than are established organizations, whether those established organizations are corporations or government agencies.

Also, I believe that social phenomena are more complex than the problems that engineers encounter. That is why I see mathematics in economics as pretentious. More than that, it can be harmful, as it focuses economists on building models that are so simple that they are deceptive rather than helpful.

All that said, I prefer that economists present themselves as doctors than as scientists, as long as they make it clear that they have not discovered the cures for the diseases with which they are presented.