Archive for June 2021


Are scientists playing Russian roulette?

The biggest existential threat of the 20th century (nuclear weapons) was created by scientists. I’ve long suspected that the biggest existential threats of the 21st century (AI and new viruses?) will also be created by scientists. Zepnep Tufekci has an excellent article on this subject. Here’s an excerpt:

This kind of genetic manipulation had already raised concerns, especially after laboratories in the Netherlands and the United States announced in 2011 that they had created strains of flu viruses using genetic material from the H5N1 influenza A virus, which is very deadly but generally can’t yet spread among people. These new strains could spread by air among ferrets, which have humanlike lungs. The uproar had been immediate.

In defense of the 2015 coronavirus experiment by Dr. Shi and her colleagues, Peter Daszak, whose organization, EcoHealth Alliance, has worked closely with her and has been granted tens of millions of dollars in the last decade from the U.S. government, said the findings would allow scientists to focus on the greatest risk because it would “move this virus from a candidate emerging pathogen to a clear and present danger.”

Others were more worried. “If the virus escaped, nobody could predict the trajectory,” said Simon Wain-Hobson, a virologist at the Pasteur Institute in Paris.

Recent history provided plenty of reason for such concern.

Nearly every SARS case since the original epidemic has been due to lab leaks — six incidents in three countries, including twice in a single month from a lab in Beijing. In one instance, the mother of a lab worker died.

In 2007, foot-and-mouth disease, which can devastate livestock and caused a massive crisis in Britain in 2001, escaped from a drainage pipe leak at an English lab with the highest biosafety rating, BSL-4.

Even the last known person who died of smallpox was someone infected because of a lab incident in Britain in 1978.

That story about bird flu research should make everyone very nervous. A highly contagious bird flu would be far more dangerous than Covid-19. Is science playing Russian roulette? I’m not qualified to answer that question, but given that experts like Marc Lipsitch have suggested the answer is yes, it seems like something worthy of investigation.

PS. Tufekci believes it is quite plausible that Covid-19 escaped from a Wuhan lab, although she doubts that the virus was artificially created. But the article is of interest regardless of your views on the origin of Covid.

PPS. I’m using the term “existential risk” loosely, not in the literal sense of extinction threat. Unless there is a big order for paperclips . . .

AIT so far

Last August, I did a blog post suggesting that in order for the Fed’s new average inflation targeting policy to be successful the PCE price level needed to be roughly 135.207 in January 2030, which represents a 2% annual growth rate over the January 2020 price level (110.917.) The most recent PCE data is for April 2021, and shows the price level at 114.075. Thus inflation is averaging 2.27% during the first 15 months of the 2020s. The Fed needs PCE inflation to average 1.96% for the remainder of the decade in order to hit their AIT target.

Let’s hope they are serious.

Feedburner is ending

I’m not entirely sure what Feedburner is, but I’m told that it is important to many of you. The program is ending on July 1st and will be replaced by Feedblitz. You can sign up to Feedblitz here:

Basil Halperin on sticky wage models

Some of the earliest New Keynesian models featured wage stickiness. By the 1980s, NKs switched to price stickiness, which remains the standard assumption even today. Basil Halperin has an excellent essay that explains why wage stickiness is a more useful assumption for macro models. This portion of his essay caught my eye:

1. Identification: the source of the shock matters!

Recessions caused by tight monetary policy should cause real wages to increase and be too high, leading to involuntary unemployment. Recessions caused by real supply-side shocks should cause real wages to fall and nonemployment to rise.

If the economy experiences a mix of both, then on average the correlation of real wages and recessions could be anything.

Maybe in 1973 there’s an oil shock, which is a real supply-side shock: real wages fall and nonemployment rises (as in the data). Maybe in 2008 monetary policy is too tight: real wages spike and unemployment rises (as in the data). Averaging over the two, the relationship between real wages and unemployment is maybe approximately zero.

This view was around as early as Sumner and Silver (1989) JPE, where they take a proto-“sign restrictions” approach with US data and find procyclical real wages during the real shocks of the 1970s and countercyclical real wages during other recessions.

But: while Sumner-Silver was published in the JPE and racked up some citations, it seems clear that, for too long a time, this view did not penetrate enough skulls. Macroeconomists, I think it’s fair to say, were too careless for too long regarding the challenge of identification.

My sense is that this view is taken seriously now: e.g. in my second-year grad macro course, this was one of the main explanations given. At the risk of overclaiming, I would say that for anyone who has been trained post-credibility revolution, this view is simply obviously correct.

The paper I did with Steve Silver is my first published use of “never reason from a price change” (NRFPC). My subsequent research also relied heavily on that maxim. I’m not sure why it didn’t “penetrate enough skulls”, but perhaps it had something to do with the fact that we both taught at Bentley College. In any case, I’m glad to hear that it has now penetrated more skulls. This blog has been bashing people over the head with NRFPC for 12 years.

As Pissarides (2009) ECMA pointed out, it doesn’t really matter if the wages of incumbent employed workers are sticky. What matters is that the wages of new hires are sticky.

Why is this? Suppose that the wages of everyone working at your firm are completely fixed, but that when you hire new people, their wages can be whatever you and they want. Then there’s simply no reason for involuntary unemployment: unemployed workers will always be able to be hired by you at a sufficiently low real wage (or to drop out of the labor force voluntarily and efficiently). If new hire wages were sticky on the other hand, that’s when the unemployed can’t find such a job. . . .

And the best evidence from Hazell and Taska does argue for sticky wages for new hires from 2010-2016 – in particular, sticky downwards.

It’s hard to image a world where existing workers have sticky wages and new hires do not. In that case, a company could announce that it was firing 100% of its workforce at 5pm on Friday and hiring back 100% of its workforce the following Monday morning at 10% lower wages. Surely wage stickiness must be more deeply embedded in labor markets than suggested by the new hire/existing worker distinction. Something more is involved.

Halperin summarizes a great deal of empirical and theoretical evidence and reaches this conclusion:

[I]f you think of involuntary unemployment as being at the heart of recessions, you should start from a sticky wage framework, not a sticky price framework.

And here’s the policy implication:

More importantly, this should affect your view on normative policy recommendations:

1. Sticky prices – when modeled via Calvo – prescribe inflation targeting: in the simplest setup, stabilize aggregate inflation so that the stickiness of prices need never affect anything. (This provides an intellectual foundation for the policy of inflation targeting used by most developed central banks today.)

2. Sticky wages on the other hand prescribe stabilizing nominal wages: in the simplest setup, stabilize an index of aggregate nominal wages, so that the stickiness of wages need never affect anything.

Halperin illustrates the advantage of nominal wage targets with this graph:

The aggregate nominal wage series (blue line) correctly signals a mild recession in early 2008 and a major recession in late 2008. The price series (red line) does not suggest any sort of problem in the first half of 2008.

PS. I hope David Beckworth is correct:

PPS. I interpret the market reaction to the Fed’s recent announcement as reflecting a growing realization that the Fed is serious about 2% AIT. They removed some tail risk of high inflation, and thus TIPS spreads fell about 10 basis points. Otherwise policy did not change, and hence there wasn’t much reaction in the stock market. So far, so good.

The new “election fraud”

Here’s Bloomberg:

“We are witnessing the greatest election fraud in the history of the country, in my opinion in the history of any democracy,” Israeli Prime Minister Benjamin Netanyahu said this week, echoing Trump as he smeared an unusual political coalition formed to unseat him. Though he is also mired in a corruption trial, Netanyahu said he won’t recognize a new government. Vitriol among his supporters has prompted Israel’s domestic security service to warn of escalating, possibly lethal, violence.

Brazilian President Jair Bolsonaro faces re-election next year and has already lashed out at his country’s courts and made baseless claims of voter fraud. He has refused to condemn the Jan. 6 siege in the U.S. because, he said, there were “a lot of reports of fraud.” Should he “have problems” in Brazil, he said he would deploy the military to solve them.

Netanyahu and Bolsonaro have absorbed a valuable lesson from Trump: If you co-opt the imagination and intentions of enough members of your own party and your voters, you can persuade them to buy into your lies and rise up on your behalf when power slips from your grasp. 

Claims of election fraud have been around for decades. So why do I call this the “new” election fraud? What’s new about it?

Correct me if I’m wrong, but most of the claims of widespread election fraud during the 20th century were made by the candidate that was challenging the incumbent. After all, the government controls the electoral process, and thus is in a position to assure that it is reasonably fair. What’s new is not claims of election fraud—candidates challenging authoritarian leaders have been complaining about fraud for decades—what’s new is that there are now lots of incumbents crying fraud.

PS. Yes, this argument is a bit less applicable to the US where the election apparatus is controlled by state governments. But there were lots of claims of anti-Trump election fraud even in states controlled by the GOP. Weird.

PPS. I recently appeared on the Bob Murphy Show. We discussed monetary policy during the Great Recession.