Pre-requisite: second year macro (go read the intermediate textbook on ISLM).
Pre-requisite: second year macro (go read the intermediate textbook on ISLM).
The minimum wage debate has heated up in Ontario given the Ontario Ministry of Labor’s Minimum Wage Advisory Panel is travelling the province looking for input on how to adjust the minimum wage in the province and sparking debate as to whether the minimum wage should be raised from the current general minimum of $10.25 per hour to $14.00. Yesterday, there were student demonstrations in Ontario and the one in Thunder Bay generated a news story that bumping the minimum wage to $14 an hour would inject 5.1 billion dollars into the economy.
If I were a different sort of person, I would now be accusing some macroeconomists of deliberately misrepresenting the policy implications of their models in order to further their own political agenda.
But I am not that sort of person. I don't generally go for conspiracy theories. And I myself used to make the same mistake that they are now making. Because I didn't understand that model properly. So I figure it's very likely the simple explanation: they don't understand it properly either. But it would be prudent for them to avoid throwing stones.
It's important that we do try to understand our own models properly, so we can try to teach them properly. And at least try to present the policy recommendations of our models without spin. Subject to all our usual human imperfections, of course. And if we don't like those policy recommendations, that's OK too. That should lead us to re-examine our models.
Microeconomic models usually have negative feedback. Take a simple demand and supply model. Suppose there is a shock that causes the demand for apples to increase by 100 apples. That creates an excess demand for apples that causes the price to rise, that causes the quantity demanded to fall. If the supply and demand curves have the same elasticity, the equilibrium quantity of apples demanded will rise by only 50. That model has a multiplier of 0.5.
Now take a very simple macroeconomic model. The simple Keynesian Cross model with unemployed resources. That model has positive feedback. Suppose there is a shock that causes the demand for goods to increase by 100. That causes an increase in income and a further increase in the demand for goods. If the marginal propensity to consume is 0.5, the equilibrium quantity of goods demanded will rise by 200. The multiplier in that model is 2.
Negative feedback creates a multiplier of less than one, and positive feedback creates a multiplier of greater than one.
This post won't be as clear as I want it to be. I'm trying to get my head straight on something. Sorry.
Why are real interest rates positive? Turgot's answer was "Well, suppose they weren't, and never would be. Then the price of land would be infinite, because the present value of the rents would be infinite, so any landowner could sell off a tiny plot of land and use the proceeds to buy an infinite amount of consumption forever. And every landowner would want to do that, so land prices would fall, until they were finite, which means the interest rate would be positive." (OK, that's an extremely loose translation from the French. OK, I made it up.)
Could real interest rates ever be less than the growth rate, forever? Samuelson's answer was "Well, suppose they were. Then a totally useless asset, if it were in fixed supply, could become valuable, and its value would rise over time at the same rate as the growth rate of the economy, so the real interest rate would equal the growth rate." (Another very loose translation, from the math.)
Samuelson called that totally useless asset "money". People hold Samuelson's "money" only for the capital gains it provides. In Samuelson's model, people save enough "money" when young to live off when they are old and retired.
Stefan Homburg said that land is in fixed supply. And unlike Samuelson's "money", land isn't totally useless. Land pays rent. So land will always beat Samuelson's "money" as a form of savings. So Samuelson was wrong. People will always prefer to save by holding Turgot's land than by holding Samuelson's "money".
Ontario released its fall economic statement this week and the government insists that it will be balancing the budget by 2017-18. From an actual deficit of 9.2 billion dollars for 2012-13, it is anticipated that the deficit will be 11.7 billion dollars in 2013-14 and will go down to 3.5 billion dollars by 2016-17. Yet, between 2012-13 and 2013-14, revenues are anticipated to rise 3.1 percent and expenditures will rise 4.1 percent. The short term forecasts a growing rather than shrinking gap.
[Update: short version. It is not stupid to use rules of thumb. Rules of thumb can be rational. It is stupid to use rules of thumb that don't work well in the world you live in; and never change those rules of thumb if the world changes. And in the olden days, before rational expectations, we really did use models where we assumed people could be stupid like that. But it's hard to know how quickly people will change their rules of thumb if the world changes.]
Are you concerned about high and rising private debt/GDP ratios? Then look at this World Bank data, and you will get a whole new perspective on the question. Would you feel less worried if Canada had the same ratio as Afghanistan?
You will see massive cross-country differences in private debt/GDP ratios. The ratios range from near 0% to well over 100%.
What explains these massive cross-country differences?
You will also see that rich countries tend to have higher private debt/GDP ratios than poor countries. The cross-country relationship between per capita GDP and private debt/GDP ratio looks roughly linear (though with a lot of noise), which means that if per capita GDP doubles, per capita private debt quadruples. Things don't all grow in proportion when a country gets rich.
Why do rich countries have much higher private debt/GDP ratios than poor countries?
How can we tell whether a rising private debt/GDP ratio means dangerously elevated household imbalances, or is just a symptom of us getting richer, or some other long run change?
I don't remember anyone talking about this long run cross-country question recently. Shouldn't we be trying to answer this long run question before talking about the short run question?
This is a simple model, with diagrams, of adverse selection in an insurance market. It's mostly for teaching purposes. (Adverse selection is currently very topical in the US, but it's a perennial problem that applies to all forms of insurance markets, and many other markets too.)
I don't know if these diagrams are in any way original. I don't know how other people teach adverse selection, but I would be interested to compare.Adverse selection depends on asymmetric information. I assume that each individual knows his own risk, but that the insurance company is unable (or is not allowed) to discriminate between individuals and must charge the same premium to all. Since all pay the same premium, the higher risk individuals will be more likely to buy insurance than the lower risk individuals.
Canadians are less inclined towards marriage than Americans. How much less?
There was a recent piece in the New York Times on Italy’s economic situation and how its high unemployment rate and stagnant economy appears to have led to a return of Italian emigration. This story struck a personal chord given my own parents came to Canada during the post World War Two wave of immigration. While current Italian emigration it is not near the levels of the 1950s and 1960s, about 400,000 university graduates have left over the last decade. This is quite different from the out migration of the past, which saw the outflow of mainly unskilled labor. This represents an outflow of valuable human capital and the departure of future potential economic growth and innovation. It also reminded me that we have seen this before in Canadian economic history.
Typepad puts almost all my comments in spam. Me! Don't they know who I am? I can fish them out of the spam filter when it's my own post, but it means I have given up commenting on other people's posts, both here and on other blogs, if they use Typepad. Because my comments go straight to spam, and don't get fished out, which presumably confirms to Typepad I really must be a spammer.
But my problems with Typepad are just a symptom of a wider problem.
Most people who say "interest rates should be set by the market and not by government-owned central banks" are confused. But not all who say that are confused.
People who want the government to get out of the money business altogether, and de-nationalise money and central banking, are not confused. They might be right or they might be wrong, but they are not confused. But this post is not about them. Off-topic.
Modern central banks, like the Bank of Canada for example, have an inflation target. And they adjust the overnight rate of interest to try to hit that inflation target. Does this mean that the Bank of Canada, rather than the market, sets that overnight rate of interest? Well, yes and no.
In Ottawa, plastic and glass recyclables go into a "blue bin", and are picked up once every two weeks as part of the regular household garbage collection.
Styrofoam is not recyclable. It has never been recyclable. The instructions on the City of Ottawa website are clear: place these items in your regular garbage. It's not like a person has to go to the website to find this out, either. Every household in the city receives recycling information on a regular basis, with lists of what can and cannot be recycled.
So why is it that, every recycling day, I see blue bins containing styrofoam? Not to mention blue bins with plastic bags. Coat hangers. Scrap metal.
I have several theories, but no evidence (if you have evidence, please let me know):
Sometimes I have to remind myself that the sort of short run macro I do doesn't really matter much. Things like the recent global recession don't make much difference in the big scheme of things. So I'm writing this as an antidote to my own narrow perspective. Or, maybe I'm just a typical boomer seeing everything through the lens of my own age-group.
The first big macro shock was the invention of agriculture. Productivity rose, then fell again for Malthusian reasons. The second big macro shock was the agricultural/industrial revolution. Productivity started growing so quickly it outran those Malthusian reasons.
I think the third big macro shock will be the retirement revolution. Poor people, on the Malthusian margin, retire when they die (or die when they retire). Rich people retire before they die. The world population is ageing. But age per se has no macroeconomic implications. Retirement does have macroeconomic implications. The fact that there will be a greater percentage of old people doesn't matter. The fact that there will be a greater percentage of retired people does matter.
Today's dumb question(s) from teaching monetary and financial institutions:
1. What is the difference between a "depository" and a "non-depository" financial institution?
2. Why is that difference economically important?
I've been having a hard time getting my head around the 'hollowing out of the middle class' theme that were seeing so much of. What, exactly, does that mean? And is it actually happening? In a Maclean's post a couple of months ago, I tried looking at it in terms of the proportion of the income distribution that was within a certain distance of the median, and this is what I got:
Assume that corn is identical across all countries, and is freely traded with zero transportation costs. We then know that "the law of one price" will hold for corn. The price of corn in Canada will be the same as the price of corn in the rest of the world.
Why? Suppose it weren't. First suppose the price of corn were higher in Canada than in the rest of the world. Then Canada would import all its corn, and there would be an excess supply of corn in Canada, and the price of corn in Canada would fall. Or suppose the price of corn were lower in Canada than in the rest of the world. Then Canada would export all its corn, and there would be an excess demand for corn in Canada, and the price of corn in Canada would rise.
That second paragraph is perhaps obvious, but it is not redundant. It explains why the law of one price holds.