The question: What causes unemployment?
The answer: Over the fold, taken from a textbook currently used for O-level (roughly grade 11) social studies in Pakistan.
The question: What causes unemployment?
The answer: Over the fold, taken from a textbook currently used for O-level (roughly grade 11) social studies in Pakistan.
Take this post with a truckload of salt. This is a second in my series in which "Lost Macro Farmboy tries to get his head around Urban Economics". Think of it as sceptical pushback. I might easily be wrong, but those who know a lot more Urban Economics than I do should be able to explain why I'm wrong.
If the demand curve for X slopes up, a rightward shift in the supply curve of X (caused by relaxing legal restrictions on producing X) will cause a rise in the price of X.
Why might the demand curve for X slope up? One reason might be strong strategic complementarities, like network effects. The more people who own a phone, the bigger will be the benefit to me of having a phone, and the greater the price I would be just willing to pay to buy a phone.
Question: Why do cities exist? Why isn't population density the same everywhere inside any country?
I can think of two plausible answers:
I have never worked at these desks. They're useless for computing, as they're the wrong height. They're useless for explaining things to students, because they aren't designed for two or more people to sit side-by-side. All they're useful for is looking imposing, serving as a place to dump stuff, and creating a barrier between myself and any visitors to the office.
So this summer I decided to replace my wooden desk with a meeting table. (I bought the table a few years ago, back when I had a really large office; the chairs are rejects from the economics department's computing lab). To make room for the table, I'm using a minimalist computer desk.
I love my table. It's a friendly but professional place to meet with colleagues and students. There is enough room for students to get out their papers and laptops. I can sit beside a student and explain a diagram, or a group of students can sit down and have a mini-seminar. And I've got a big, clear space for writing, working on my laptop.
Now that I've got this new office arrangement, I've been thinking, "Why doesn't everyone do this?"
As irritating as it was, SSHRC's infatuation with Research in Buzzword Studies is not why Insight Grant (IG) success rates have stayed so low, even as the budget envelope has increased. The problem is the hard-won budgetary rigour that was established during the last years of the old Standard Research Grant (SRG) program disappeared when the IG was introduced.
When SSHRC replaced the old Standard Research Grant (SRG) program with the Insight Grant (IG) program, it did more than simply increase the budget for research grants. It also introduced "priority research areas" (see Frances on this here) that would receive special attention. It turned out that the amounts allocated to these new research areas would account for all of that grant increase, and more.
Earlier this month, the Ontario Council of Hospital Unions issued a media release for their The Fewer Hands, Less Hospital Care report, that made the following statement: “Based on the latest figures from the Canadian Institute for Health Information (CIHI), Ontario government funding for hospitals is $1,395.73 per capita. The rest of Canada, excluding Ontario, spends $1,749.69 per capita. In other words, provincial and territorial governments outside of Ontario spend $353.96 more per person than Ontario does. That is a whopping 25.3 percent more than Ontario. Overall there would be an additional 45,500 hospital employees, 15,200 of them nurses, in Ontario if funding was on par with the average for the rest of Canada.” The report goes on to say that this would amount to an additional 4.8 billion dollars for Ontario hospitals.
In the first post of this series, I noted that much of the reduction in SSHRC research grant success rates during the transition from the old 3-year Standard Research Grants (SRG) to the new 5-year Insight Grants (IG) could be explained by the stock-flow dynamics of changing grant durations. But that's not the whole story: success rates also depend on the total funding envelope.
Here is the history of success rates (projects funded as a percentage of applications) and funding rates (total research funds awarded as a percentage of total requested) for the entire SRG program:
I've participated a few times in the adjudication process for the Social Sciences and Humanities Research Council (SSHRC) research grant programs: twice as a reviewer, and three times as chair. (Chairs have to be bilingual, so Quebec profs are often called up to serve as chair.) Regular WCI readers - and of course researchers in humanities and social sciences - will recall that SSHRC reorganised the way it runs research grants: see Frances' post here and Livio's here.
I've long been interested in the mechanics of how SSHRC allocates research funds, and I was curious to see how things had changed during the transition from the old Standard Research Grant (SRG) program to the new Insight Grant (IG) program. So when I was invited to serve again as chair for the economics committee chair for the 2014-15 exercise, I was happy to accept. That was more than a year ago, but I finally got around to writing something down about it.
Whole academic publishing industries have been built around Big Questions. There's the Big Trust Question: “Generally speaking, would you say that most people can be trusted or that you need to be very careful in dealing with people?” There's the Big Satisfaction Question: "All things considered, how satisfied are you with your life as a whole these days?" Then there are the Big Questions about labour force participation, unemployment, and so on - questions so big that they are the subject of international conventions.
Last week I was asked "what is the big question about time use?" My first thought was to look at the International Social Survey Programme (ISSP). The Family and Gender Roles cycle contains a candidate for The Big Time Use Question:
Q16a On average, how many hours a week do you personally spend on household work, not including childcare and leisure time activities?
It's not a perfect question. I worry that respondents would recall stereotypically female tasks, such as cleaning, in response to a question about "household work", and not think of, say, car repairs, home maintenance or yard work. This would tend to lead to an underestimate of the total amount of unpaid work done within the household, especially the work done by men (to see the question in context, click here). But it's a simple, straightforward question, and it produces nice, clean easy-to-analyze responses - which are both good things.
It's been reported on NPR: Americans are shrinking, while Chinese and Koreans sprout up. In the New York Times: Adults have become shorter in many countries. In the Guardian: Women and men have grown taller over last century. On Global News: Canadians don't stack up in height quite like they used to. In the Daily Telegraph: British overtake Americans after growing 11 cm in 100 years. By Quartz India: India's women are gaining height faster than India's men, but Indians are still very short.
The study is called "A century of trends in adult human height". It's attributed to a research team called the NCD Risk Factor Collaboration, and the corresponding author is Majid Ezzati, a Professor at Imperial College’s School of Public Health. The research team did a meta-analysis of 1472 studies, all of which were based on direct (not self-reported) measures of height. The aim of the project was to estimate the height, at age 18, of people born each year between 1896 and 1996. When the population sampled was older or younger than 18, the authors used a growth model to estimate height at 18 years of age. When no data on a particular birth cohort was available, they projected observed trends forwards or backwards to get some estimate of the heights of the missing cohorts.
My reaction, upon reading the study, was: “wow, they’ve done a lot of work, and they’ve got some cool data, but I’m not sure I trust the results”.
You have an infinite horizon model of inflation. Your model tells you what happens to the time-path of the price level P(t) if the central bank changes monetary policy.
Please do something:
Convert your infinite horizon model into a finite horizon model. Suppose the price level at time T, when the world ends, is pinned down at some fixed number P(T). Figure out what happens to the time-path of the price level P(t) if the central bank changes monetary policy, holding P(T) fixed.
Now figure out the results of a change in monetary policy in your finite horizon model, in the limit as T goes to infinity.
Do you get the same results as in your original infinite horizon model? If not, I think there is something seriously wrong with your infinite horizon model.
Take an example:
Suppose your infinite horizon model says that the real interest rate is [exogenous and] constant, the Fisher equation always holds exactly (nominal rate = real rate + expected inflation), rational expectations, the central bank sets a nominal interest rate, and if the central bank unexpectedly raises the nominal interest rate by 1% above the real rate at time t0, and holds it there forever, the price level will start rising at 1% per year. So if the price level is initially 100 before the central bank changes policy, and would have stayed at 100 forever, it instead rises to 101 next year, and so on.
A finite horizon version of your model will give different results. Suppose that P(T) is pinned down at 100, and let T=70 years. If the central bank unexpectedly raises the nominal interest rate by 1% above the real rate, as before, the price level immediately drops to 50, and only then starts rising at 1% per year, so it doubles to 100 over the next 70 years.
If T=140, the price level immediately drops to 25.
If T=210, the price level immediately drops to 12.5.
And so on.
In the limit, as T approaches infinity, the results for the time-path P(t) in the finite horizon model differ by a larger and larger amount from the results in the original infinite horizon model.
That is not good. Your infinite horizon model has a problem.
A standard monetarist model, where the central bank sets the money supply, with a standard Cagan-style money demand function (M/P a negative function of expected inflation), would not have that problem. Proof is left as an exercise for the reader.
[This is my version of what I think Narayana Kocherlakota has recently been saying about the Neo-Fisherian model. My version differs in details, but I think it's the same in spirit.]
Canada is in an abundant TP equilibrium. Washrooms in restaurants, shopping malls, museums, universities, and other public places are, generally speaking, well stocked with toilet paper (TP).
Inner Mongolia is in a scarce TP equilibrium. With the exception of elite venues such as four star hotels and airports, toilet paper is absent from public places. The trendy place that serves serious coffee, the one that looks like it was transplanted from Bloor and Bathurst in Toronto, has no TP. Neither does Hohhot's shiny new dinosaur museum. Inner Mongolia University has smart, dynamic, internationally-trained, research-active faculty, new buildings, and fast wifi - but no toilet paper that I could see. [Updated].
Yet each equilibrium is self-sustaining. An abundant TP equilibrium is maintained through competition. Any firm that deviates from the norm, and fails to provide toilet paper in its washrooms, will be shunned by customers, who don't like unexpectedly finding themselves in an uncomfortable position and, furthermore, interpret the lack of toilet paper as a signal of deficient management and poor quality service.
Finance people are good people. Economics needs finance people. Some of my best friends are finance people. But (you heard that "but" coming), finance people (though there are of course honourable exceptions) just don't seem to get money.
I can hear the reply now: "Yeah, and money people don't get finance either!". And I think you are right, but only half right, about that. I think that money people do get simple basic finance; it's the more complicated stuff we don't get. But finance people, it seems to me, often don't get the simple basic stuff about money.
And that's not because money people are smarter than finance people (though we are better-looking). It's because money is weird. Money is not like other assets. So when you take simple basic finance theory, that works OK for other assets, and apply it to money, you can get in a mess.
I watched a finance person on Twitter ask the question: what determines the market value of a zero-coupon perpetuity, like currency? That's a very good question to ask, but you won't get a sensible answer if you do a standard Present Value calculation of a perpetual stream of zeros. Why isn't it zero??
The way women and men spend their time has changed profoundly over the past century. Women in the developed and, to some extent, the developing world are spending much less time in unpaid household work, especially in tasks like cooking, cleaning, and laundry, and much more time in paid work. Men are doing a little bit less paid work, and perhaps a little bit more household work (Aguiar, Hurst and Karabarbounis).
Being in the paid workforce is not intrinsically superior to, or of greater moral worth than, being a housewife or a stay-at-home parent. But there is one salient difference between unpaid work within the home and paid work: cash. Money can be withdrawn from the household budget and used for one's own personal pleasure. Unpaid work is much harder to convert into the latest phone or an evening out with friends or a new coat.
Airbnb undermines the distinction between short-term, "hotel", accommodation and and long-term, "apartment" accommodation. Some people seem to figure this is a bad thing. New York State legislators, for example, have passed legislation imposing heavy fines on anyone listing their entire apartment on Airbnb or a similar service. But what – if anything – is wrong with what Airbnb is doing?
The distinction between hotels and apartments has always been artificial. Even before Airbnb, people turned their homes into bed and breakfasts, and other types of small hotels. Similarly, hotels have been used for long-term accommodation, either by individuals choosing hotels as their long-term residence, or by companies who have converted whole hotels into student residences or assisted living facilities.
The artificial segregation of the rental market into hotels and apartments evolved, and has been maintained, because market segmentation has been both possible and profitable. The hotel market separates itself from the apartment market through the services it offers (providing daily housekeeping instead of a washing machine), the terms on which it makes accommodation available (no background checks on tenants), and the prices it charges.
Imagine you are at an international policy conference. Someone says "Central Banks need to coordinate their monetary policies better". You nod your head wisely in agreement, along with everyone else. Because you know that what one central bank does affects not just its own economy but the economies of other central banks, so there are externalities, so they need to cooperate to escape a Prisoners' Dilemma equilibrium of Beggar Thy Neigbour policies. International policy coordination sounds really good, especially at an international policy conference.
Or maybe it's all BS.
I want to think about the alleged "Central Bank Coordination Problem" very abstractly. Is it a real problem? And if so, under what conditions? The important distinction is between monetary policy targets and monetary policy instruments.
To: Generation X, Generation Y and Millennials
From: The Baby Boomers
Re: Pension Savings
Date: June 21, 2016
It has come to our attention that you are not saving sufficiently for your retirement. This does not surprise us. We haven't saved sufficiently for our retirement either. Some of us have made enough money in the housing market to be relatively comfortable, and a good number of us have workplace pensions. Low-income Baby Boomers will be protected by Old Age Security, Guaranteed Income Supplement and the Canada Pension Plan. But middle-income Baby Boomers without workplace pensions - people making $60,000 or $80,000 a year - are facing a big drop of their standard of living upon retirement.
So we've decided to reform the Canada Pension Plan. You have to understand: we are doing this for you. It's for your benefit, so that you will have a secure retirement. Now we know you might be a little bit sceptical.
Roger Farmer always has done interesting and different stuff. We need economists like that. But it's risky of course. What I'm trying to do here is articulate something that makes me uneasy about his recent line of macro theorising. Like his simple model here with Konstantin Platanov (pdf).
Consider a simple model with three goods: Apples, Bananas, and Mangoes. Mangoes are used as money. So there are two markets: the apple market (where apples are traded for money); and the banana market (where bananas are traded for money. And there are two prices: the price of apples in terms of money; and the price of bananas in terms of money. Something like my old minimalist model.
If both prices are perfectly flexible, and instantly adjust to clear the two markets, this model has a unique equilibrium.
Now let's change the model. Assume the apple market has costly search. It is difficult for individual buyers and sellers of apples to find each other. So when they do meet there will be strictly positive gains from trade to that particular pair of individuals. It's not like a textbook competitive market where each can credibly threaten to switch to another trading partner if the other raises/lowers his price by a penny from the market-clearing price. Because it's costly to find another trading partner. So there is a range of prices within which each would prefer to accept that price rather than search for another partner.
But the banana market is textbook.
Economists usually assume that in these cases of bilateral monopoly/monopsony the apple price will be determined by relative bargaining power, so if the two have equal relative bargaining power (for example) they will split the difference and agree on a price in the middle of that range. The Nash Bargaining Solution is one way to model cases like this.
But Roger Farmer does not want to follow that path. OK, let's follow Roger.
The Modigliani Miller Theorem says that a firm's financing policy is irrelevant. It's wrong of course, but it's a good place to start thinking about firms' financing policies.
It would be presumptuous to talk about an Irrelevance "Theorem" for Basic Income. The math is trivial, and the economics is obvious. (And I hope this is not at all original.) But it might be an equally good place to start thinking about Basic Income.
There is only one assumption needed for the Irrelevance "Theorem": the only thing that matters to individuals and to the government is Net taxes (taxes minus transfer payments).
Let there be an initial net tax function Ni = N(Income of individual i, other stuff). It is possible to define a new net tax function M( ) - C = N( ), where C is some constant. Interpret C as "Universal Basic Income". Done. An outside observer, who observed only the net taxes each individual paid, would be unable to distinguish between a system with and without a Universal Basic Income.
If we want to argue for or against UBI, we must argue that the assumption is false. For example:
Let me start out with an extreme (and very silly) assumption, just so I can explain something simply. Assume that the demand for currency does not depend on the price level, nor on real income, nor on interest rates, nor on anything. It's just fixed. Every individual wants to hold exactly $100 in currency, no more no less, regardless of anything.
And let's start out with a very simple monetary system. There's a central bank that issues currency, that people use as their sole medium of exchange, to buy and sell everything else. No other banks at all. So it's a simple money supply function, and a totally degenerate money demand function Md = $100 x population.
And let's start out in monetary equilibrium, where the money supply (the stock of currency in circulation) is exactly $100 per person.
Is Helicopter Money impossible? If the central bank prints more currency, and drops it out of a helicopter, will the people refuse to pick it up, and leave the newly-printed notes lying on the sidewalk?