Worthwhile Canadian Initiative

Inequality rules

Last March, Bell Canada Enterprise circulated its 2012 executive compensation policy: 

we use three key elements of compensation with an aggregate target value positioned at the 60th percentile of what is paid in the competitive market for similar positions.

A few weeks later, Human Resources minister Diane Finley announced "a more efficient and responsive temporary foreign worker policy". This new policy allows employers to pay temporary foreign workers up to 15 percent less than the prevailing occupational wage rate:

Dutch Capital Theory

Very few economists are aware of Dutch Capital Theory (DCT to us insiders). It was invented by my ancestor Nick van Rowe, over a century ago, but has been suppressed by a conspiracy of silence and ignorance ever since. Think of this as a teaching post.

Money is always and everywhere a hot potato

And the Law of Reflux is always and everywhere wrong. Unless the central bank decides to make it true. (The Law of Reflux says an excess supply of money will always revert to the issuing banks).

This post is too long. It was a bit off the top of my head, and I'm too busy and lazy to make it shorter. Sorry.

This post is for David Glasner. (Sorry for the delay, David; I was thinking about the best way to say it.)

This post is also for everyone who believes in the Law of Reflux, and that means almost every economist nowadays.

And especially for Mike Sproul (pdf), who makes a perfect foil because he is such a hardline waffle-free believer in the Law of Reflux! I'm going to go equally hardline in the exact opposite direction. How extreme a position can I stake out and defend? Just watch me!

(And also for those of you who say obviously true things like "the quantity of money is endogenous", or things that don't strictly make literal sense like "the supply of money is demand-determined"; because what you are really trying to say is that you believe in the Law of Reflux.)

I am going to tell you a (true) story about money, opals, and a used car. And lemons.

The very short run

Most macroeconomists make a distinction between the short run (sticky prices) and the long run (flexible prices). I want to talk about the very short run. We mostly ignore the very short run, and I don't think we should. Because the very short run probably isn't really that short.

Old Keynesians used to talk about the very short run. So did Old Monetarists. New Keynesians maybe won't even know what I'm talking about.

When Old Keynesians were talking about the successive rounds of the multiplier process, they were talking about the very short run.

When Old Monetarists were talking about how the monetary hot potato gets passed from person to person, they were talking about the very short run.

The New Gold Rush

This post was written by HEC-Montréal professor Simon van Norden

With changes to environmental review processes, I get the feeling that the Harper government is keen to speed up development of the Oilsands. That’s not particularly odd. Oil prices tripled and Canada is sitting on the second largest reserves in the world; the Canadian dollar now rises and falls with the price of oil. Development of this resource has the potential to have an important effect on Canadian GDP for many years.

Elinor Ostrom, you were turtley right

Mother turtle laying eggs on banks of Rideau River

Elinor Ostrom, Nobel-prize winning political economist, died on June 12, 2012. That same day, a mother turtle pulled her way out of the Rideau River, and made her nest on the river bank.

 

A turtle's idea of a good nesting place is somewhere with soft, loose earth, sand or gravel. For an urban turtle, that means, say, a playground sandbox, or some freshly-turned up earth on a construction site. The turtle pictured made her nest on nice bit of fresh gravel right beside a road, just off a popular dog-walking trail.

A turtle nest can be seen as a common property resource. A long tradition in economic thought argues that such resources will inevitably be neglected, untended, and over-exploited. Turtle eggs will be dug up by dogs, trampled on by careless walkers, or harvested by people dedicated to eating local, organic produce - the tragedy of the commons.

Economic Forecasting: Is Google Trends the Future?

Google Trends is a quick and popular way to assess the importance of ideas, events and trends by looking at the results of people’s web searches.  In fact, as is well known, it has been used to study flu activity based on searches for flu related terms. And, right here on WCI, it has been used to study marital discord  and the holiday spirit. Indeed, it can also provide economic information and is apparently even becoming a way to supplement economic forecasting tools.  If the searches for something are trending up, it is suggestive that it is growing in importance as an economic force.

Supertanker and canoe Phillips Curves, and inflation targeting

This post is an attempt to give some intuition for my previous post.

There are two differences between a supertanker and a canoe:

1. Position. You can easily pick up a canoe and make it jump a nautical mile north or south of its present position; while a supertanker really wants to stay where it is.

2. Direction. If a canoe is heading north at 2 knots, you can easily turn it to head south at 2 knots; while a supertanker heading north at 2 knots really wants to keep on heading north at 2 knots.

The Calvo Phillips curve is a hybrid of supertanker and canoe. It is like a supertanker in terms of position, but like a canoe in terms of direction. It's really heavy, so it can't jump; but it can change direction instantly. Imagine a boat that's really heavy, but really short and with a really powerful rudder, so it can turn on a dime. That's the Calvo Phillips Curve. The price level cannot just jump; but the inflation rate can change instantly.

Boy versus Teacher: A Lesson in Mastery

"Read each sentence or poem. Mark an X on the word or words that need to be capitalized. Then write the sentence correctly on another sheet of paper."

"Writing it again is a waste of time."

The rejection letter I'm too politically correct to send

Dear Professor Faraway,

Thank you for your submission to Review of Economic Theory of Consumer Habits (RETCH).

Like most papers we receive from developing country academics, your submission is not suitable for publication in our journal.

Calvo vs Mankiw/Reis, and IT vs PLPT/NGDPLPT

An economy is humming along very nicely in full long run equilibrium. All real variables are at their natural rates. Actual and expected inflation are both equal to the 2% inflation target. As the years go by, the price level goes: 90, 92, 94, 96, 98, and everybody expects it to continue 100, 102, 104, forever and ever.

Then a negative Aggregate Demand shock hits, and the central bank is slow to respond. Instead of going to 100, as everyone had expected, the price level in year 0 is 99. What else happens?

There's a recession. Real output and employment fall below their natural rates, and unemployment rises above its natural rate. But the story doesn't end there.

1. Now suppose that the central bank wakes up, announces that it will make sure the price level rises at 2% per year from now on, and everybody fully expects the central bank will do what it says, and the price level does in fact go: 99, 101, 103, 105, etc.

Question 1: in year 1, when the price level is 101, and the actual and and expected and target rates of inflation are all equal, will this economy still be in recession, or will it have completely recovered to the natural rates of output, employment, and unemployment?

Joint outputs

There's something a bit weird about the way we normally do economics. Or maybe it's just the examples we normally use. My mind isn't quite clear on it yet. So I'm writing this blog post.

We usually talk about multiple inputs producing one output. Labour, land, and capital are inputs used to produce apples. Three inputs, and one output. We know that's a simplification. It's lots more than just three. There are lots of different types of labour, natural resources, and capital goods, and all combine together to produce one output good. Then we go on to talk about the degree of substitutibility between different inputs in the production function. At one extreme we have perfect substitutibility, so Y=AXa + BXb + CXc; and at the other extreme we have the fixed proportions, so Y = min{AXa , BXb , CXc}. In between we have imperfect substitutibility like Y=Xa^a.Xb^b.Xc^c.

Why isn't it the other way around? Why not one input producing multiple outputs?

Or at least, n inputs producing m outputs, where m could either be bigger or smaller than n?

Is it because that's just how the world usually is?

Why is Ontario's Government Being So Mean to Its Teachers?

Being in Toronto for the Rimini Conference in Economics and Finance 2012 and standing in the shadow of Queen’s Park has led me to contemplate why the Ontario government  is suddenly being so mean to its teachers.  After years of Dalton McGuinty as the education premier with an expansion of education funding and programs, the government does seem to have become rather uncharacteristically harsh-imposing new contracts to prevent wages increases.

Reswitching and the term structure of interest rates

Treat this as a rough draft, on a topic I haven't thought much about for over three decades. The punch line is at the end. I may be wrong (of course).

A farmer considers whether to switch to a new technique for growing food. Compared to the old technique, the new technique would produce less food in the first year, but more food in the second year and all subsequent years.

How does the rate of interest affect his decision? (But watch out for that "the", because it hides a massive implicit assumption.)

How I spent my gap year

Some economists think the 1871 revolution was a big mistake, and led economics down the wrong path. They take their inspiration from pre-1871 economics, especially Ricardo and Marx, and proceed from there. Many of them are very smart and knowledgeable people. They think that most academic economists ignore them and know little or nothing about their work. I think they are right about that. And I think that many of them get frustrated because they think they've got something important to say and the people who most need to hear it don't listen or don't even know they exist and so continue down their wrong path in blissful or even willful ignorance.

Bureaucratic Entropy?

The Association of Ontario Municipalities is having its annual conference August 19-22 in Ottawa, the mother city of all governments in Canada.  Among the items on the agenda are the keynote address on:  “new secrets to leadership with five powerful tools to improve negotiation effectiveness”, a speech by Ontario’s premier (followed by the opposition leaders the day after), and concurrent sessions of how to build a better school, fiscal sustainability of infrastructure and managing municipal risk.  This is even a session called “Bring Back the Wild” which my councilors and city officials should find of interest given the recent spate of bear and alleged cougar sightings in Thunder Bay.  And of course, my personal favorite is “The Beer Store: Your Partner in Economic and Environmental Success” sponsored of course by The Beer Store. What you won’t find on the agenda is a discussion of bureaucratic entropy.

Flowcharts as models

Give an economist a problem such as "Why do people waste their time playing video games?" and she'll typically model it like this:

Should new editions of intermediate microeconomics textbooks be banned?

The basic content of intermediate micro - choice theory, theory of the firm, market equilibrium - has not changed for decades. The latest Intermediate micro textbooks cover substantially the same material - indifference curves, budget constraints, cost curves- as do 20 year old texts.

Sure, there are some differences across editions. Take, for example Eaton, Eaton and Allen's intermediate microeconomics textbook. The application “Why Everyone Loves Britney Spears” in the 6th edition was changed to “Why Everyone Loves Christina Aguilera” in the 7th edition (the page number, p. 272, is unchanged). 

Or consider Browning and Zupan's Microeconomics. Previous editions focused on the inefficiency of food stamps and the virtues of school vouchers. The latest one (11th edition) has a new discussion of ObamaCare: "We have no expertise in constitutional law, but it is easy to use our consumer choice model to show that a mandate combined with the subsidy can make some recipients worse off than they would be with no subsidy at all."

Publishers produce new editions of undergraduate textbooks every three years for one reason: to kill the second hand market.

The Loanable Funds and other theories

This is a long and boring post. (Though some will no doubt find it highly controversial, and a very few might even get over-excited). It might be useful for economics students who want to put the Loanable Funds theory into perspective. They are my main intended audience. And maybe for those who teach them too.

Loanable Funds is a theory of "the" rate of interest. (I'm coming back to that "the" later). There are other theories of the rate of interest. That's why we call it a "theory".

Signs of population aging

While wandering the world in recent weeks, I've spotted some sure signs of population aging...