Random links

Part 1: Yesterday I did a post showing how all sorts of prominent people on the left recently engaged in the fallacy of composition.  On the same day, Nick Rowe posted an even better essay on the fallacy of composition in macro.  Highly recommended.

Part 2:  As you know, I’ve been highly skeptical of fiscal policy multipliers, partly for reasons of monetary policy offset.  That’s not to say I’m dogmatically obsessed with a zero multiplier argument.  I’d guess that suddenly slashing public sector jobs reduces real GDP, if only for re-allocation reasons.  But what I can’t accept is the sort of argument illustrated in this graph, which received favorable mention by Menzie Chinn and also a link from Brad DeLong (without comment):

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Look at the lowest counter-factual line.  How likely is it that Ben Bernanke allows that to happen?  We’d have been on QE7 by the end of 2009.  I find it hard to comprehend how these exercises are taken seriously.  Last summer the Fed basically drew a line in the sand at about 1% inflation—they simply aren’t willing to allow inflation to fall much below that level.  As long as we’re close to 1% inflation, more or less fiscal stimulus has little effect.  Not zero, but much less than these naive models predict.

Part 3:  I haven’t talked about China in a while.  The Economist has four neat interactive graphs here.  A few surprises; (Inner) Mongolia has rapidly climbed up the GDP per capita rankings, undoubtedly due to the mining boom.  Zhejiang seems to have slipped sharply relative to Jiangsu and Guangdong provinces in the last couple years–does anyone know why?  A result of provincial cheating on the figures?  Migrant labor distorting population?

Also, I notice that the most populous provinces are no longer inland Sichuan and Henan, but coastal Guangdong and Shandong.  That’s a sign China’s population is moving east, albeit gradually.  If you want to see how concentrated their export machine is, take a look at the graph below (in billions of dollars).  As you do so, recall that numbers 2, 3, and 4 on the list are actually one place, the Yangtze River delta.  And most Guangdong exports come out of the relatively small Pearl River delta.  If you circled those two areas on a map of China, they would look tiny.  Rapid growth is happening all over China, but export growth is still highly concentrated.


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28 Responses to “Random links”

  1. Gravatar of marcus nunes marcus nunes
    26. February 2011 at 10:51

    Scott
    Look at another useless exercise. Takes Bernanke´s answer at the Congressional Hearing seriously, although it´s hard to believe Bernanke was serious!
    http://research.stlouisfed.org/publications/es/11/ES1107.pdf

  2. Gravatar of marcus nunes marcus nunes
    26. February 2011 at 10:56

    Hard to believe Bernanke was serious because if “humble me” knows it´s not true, so must Bernanke…
    http://thefaintofheart.wordpress.com/2011/02/22/bernanke%c2%b4s-gsg-hypothesis-a-cop-out/

  3. Gravatar of marcus nunes marcus nunes
    26. February 2011 at 11:10

    To be clear: The question & answer:
    Given the difficulty of characterizing monetary policy using QE, it is natural to want to equate a given quantity of assets purchased with a given reduction in the federal funds rate target in an environment when the FOMC could reduce the target. Indeed, in a Congressional hearing
    on February 9, 2011, Representa tive Tim Huelskamp questioned how the Fed “picked $600 billion” when the FOMC decided on a second round of QE (called QE2) at its November 2010 meeting. Fed Chairman Ben Bernanke responded, “We asked the hypothetical question, if we
    could lower the federal funds rate, how far””how much would we lower it?” He noted that “a powerful monetary policy action in normal times would be about a 75 basis point cut in the federal funds rate. We estimate that the impact on the whole structure of interest rates from $600 billion is roughly equivalent to a 75 basis point cut.”

  4. Gravatar of Jason Jason
    26. February 2011 at 12:30

    I’m not sure the fallacy of composition makes as strong an argument as you say. At some number of individuals, the demand curves of individuals adds up to a whole that has a flat demand curve. These flat demand curves then continue to add up to flat demand curves. The world is a macro system; the US is a macro system; most states are probably macro systems; even big enough cities could plausibly be macro systems. A business in that city is not a macro system, though. Since no one has come up with a derivation of macro from micro yet — and it may be impossible — I don’t think anyone knows how many individuals it takes to make a macroeconomic system; therefore no one knows when the fallacy of composition applies, except to individuals vs nations.

    Do you know of any papers that try to figure that out? I imagine you could look different sized units and see if e.g. spending money in a “boom time” boosted output or not, or if printing “money” or not enough caused a recession. Krugman’s babysitting co-op seemed to behave like a macro system as far as monetary policy went and it only had a hundred or so people in it.

    Maybe the sizes are different for the two kinds of inputs: fiscal policy requires a certain sized macro system and monetary policy another size? There doesn’t seem to be any reason for the macro/micro scale to be the same for different calculations of different effects. A potential reason for different responses to fiscal policy and monetary policy in the 1930s vs today since the US was smaller back then.

  5. Gravatar of Nick Rowe Nick Rowe
    26. February 2011 at 14:55

    Thanks Scott!

    Jason: it’s not the number of individuals that determines whether it’s micro or macro. It’s whether the system is closed. Robinson Crusoe is macroeconomics. Paul Krugman’s baby sitter coop is macro, because the scrip could only be spent within the coop.

  6. Gravatar of OGT OGT
    26. February 2011 at 16:30

    Nick- So what’s ‘Open’ Macro?

  7. Gravatar of Scott Sumner Scott Sumner
    26. February 2011 at 18:17

    Marcus, That’s a really noce post on the housing boom. I left a comment.

    The 75 basis point number has to be pulled out of thin air. It all depends on expectations of future policy.

    Jason. I think you missed my point. I wasn’t making an empirical argument about whether cities or states are “large’ in some sense, or whether stimulus might or might not work. The point is that these guys are making a logical error, as all stimulus skeptics would have expected identical results, so it tells us nothing about the validity of anti-stimulus arguments. But that is what they claim it does tell us.

    See also Nick’s explanation below.

    Nick, That’s right.

    OGT, Open macro usually closes various sectors, assuming a closed monetary system or a closed labor market. If everything is open, then it’s really just regional economics.

  8. Gravatar of Ram Ram
    26. February 2011 at 18:45

    Off-topic, but Christina Romer supports price-level targeting:

    http://www.nytimes.com/2011/02/27/business/27view.html

  9. Gravatar of Mark A. Sadowski Mark A. Sadowski
    26. February 2011 at 19:32

    I like Menzie. But don’t expect me to defend all of his point of views.

  10. Gravatar of Doc Merlin Doc Merlin
    26. February 2011 at 19:57

    “OGT, Open macro usually closes various sectors, assuming a closed monetary system or a closed labor market. If everything is open, then it’s really just regional economics.”

    And like almost all macro, it assumes governmental actions are exogenous.

  11. Gravatar of marcus nunes marcus nunes
    26. February 2011 at 19:58

    Scott Ram
    More than supporting PLT, C Romer evokes both Roosevelt´s 1933 decision to devalue the dollar and Bernankes 1999 article on Japan (which was widely mentioned in the Blogosphere after SS did a post on it a long time ago).
    It´s also another piece of “evidence” for my supposition that academics don´t make good “executives”. Why, while Chair of the CEA, Romer only wrote about and defended fiscal stimulus?

  12. Gravatar of Ram Ram
    26. February 2011 at 20:20

    She has called for more monetary expansion before, but this is the clearest she has been about what she has in mind, not to mention how urgently monetary expansion is needed. It makes me wonder whether Prof. Sumner’s old post about Larry Summers being the Dick Cheney of the Obama administration might have some merit. Romer clearly supported and supports fiscal stimulus, but I seem to recall Larry Summers discussing the need for a large, government spending-oriented fiscal stimulus in mid-2008, before the bottom truly fell out of the economy. Maybe Romer was insisting on the importance of standing behind good monetary policy, so Summers deliberately kept her out of the inner circle. Hard to know, but it’s remarkable that she’d make this dramatic of a pivot so soon after leaving the White House.

  13. Gravatar of marcus nunes marcus nunes
    26. February 2011 at 20:35

    Ram
    Maybe C Romer had “no chance”, not while the super arrogant LS was on board. But you have to give the guy some understanding. With direct family ties to both Samuelson (very arrogant from what I hear) and Arrow (no info if arrogant or not) he must have had a very “unhappy” childhood. And in that environment only a “masochist” would choose to be an economist!

  14. Gravatar of Mark A. Sadowski Mark A. Sadowski
    26. February 2011 at 20:47

    Marcus Nunes,
    I sometimes wonder if being imbalanced is a prerequisite for being an American economist (and if so, I wonder if maybe that’s why American economists lead the world’s).

  15. Gravatar of marcus nunes marcus nunes
    26. February 2011 at 21:06

    Mark, I wouldn´t know! Are you (imbalanced)?
    I saw you “challenged” Scott to do the “Poland Graph”. I collected the data and will do a “For you Mark” post tomorrow!
    Good night. It´s just past 2 AM over here.

  16. Gravatar of Mark A. Sadowski Mark A. Sadowski
    26. February 2011 at 21:14

    Marcus,
    You bet! I’m very much proud of my insanity. But I’ll be greatly amused by a “for you Mark” post. It just might shake me out of my current bipolar depression.

  17. Gravatar of StatsGuy StatsGuy
    26. February 2011 at 21:35

    “Rapid growth is happening all over China, but export growth is still highly concentrated.”

    Remember assembly vs. full component construction. Exporters are concentrated, but there’s a huge feeder network of SMEs sending components and materials to Guangdong. The public transportation network has become a limiting factor that pressures this activity to the east (and concentrates it), while rising real estate and proximity to raw materials pulls the other way. The level of manufacturing concentration and high real estate prices is a strong indicator that China still has a lot of investment potential left in transportation infrastructure.

    @ Nick Rowe

    “it’s not the number of individuals that determines whether it’s micro or macro. It’s whether the system is closed.”

    Yes, but you need a “relatively” closed. Even macro systems are actually not closed, since the outcomes affect the structure of the system. Herbert simon had an essay a long time ago on identification. Basically, you can consider inputs to the system exogenous under two scenarios – the input reacts so fast to the system that it can be considered an equilibrium condition, or it reacts so slowly to the system that it can be considered relatively unchanging. he conceptualized this as the magnitude of eigenvalues in a system of equations.

    But one of the interesting things about his observations was that, over the long term, the items that react more slowly to the system have a greater impact. Or, more accurately, they are responsible for the bigger cycles. That’s one of the reasons why I get annoyed when economists argued for 30 years that the trade deficit was irrelevant to the macroeconomy because it was small relative to the size of the GDP.

  18. Gravatar of Doc Merlin Doc Merlin
    26. February 2011 at 22:03

    @StatsGuy
    “But one of the interesting things about his observations was that, over the long term, the items that react more slowly to the system have a greater impact. Or, more accurately, they are responsible for the bigger cycles. That’s one of the reasons why I get annoyed when economists argued for 30 years that the trade deficit was irrelevant to the macroeconomy because it was small relative to the size of the GDP.”

    Well the trade deficit isn’t /necessarily/ relevant to the macroeconomy… it really depends on its composition.

  19. Gravatar of marcus nunes marcus nunes
    27. February 2011 at 11:55

    Mark
    It´s done, and there is some “homework” for you!
    http://thefaintofheart.wordpress.com/2011/02/27/poland-didn%c2%b4t-miss-many-beats/

  20. Gravatar of Mark A. Sadowski Mark A. Sadowski
    27. February 2011 at 13:10

    Marcus,
    Homework completed (it was easy). Now if only Scott will take a look at your magnificent post. Maybe it will open his mind (a little further tha it already is).

  21. Gravatar of Jason Jason
    27. February 2011 at 16:49

    @Scott: I think I did miss your point, but only a little bit. You are saying:
    -Anti-stimulus (aS) theory implies positive employment effect at micro level
    -Pro-stimulus (pS) theory implies positive employment effect at micro level
    … so a positive employment effect at the micro level does not differentiate between the two theories. Which makes sense.

    I was saying that the aS argument crosses over a macro-micro threshold: an aS theory says there is a positive effect at the micro level but a negative or neutral effect at the macro level. The pS theory argues there is a positive effect at the macro level, and the only way that could be achieved is through positive effects at the micro level. You’re not going to have increased overall employment without some business somewhere adding jobs. The latter doesn’t need to cross a macro-micro threshold as it follows from a different argument.

    pS: All the jobs in the US are made up of individual jobs.

    aS: All the micro positive employment effects add up to a neutral or negative employment effect.

    So a fallacy of composition can occur in the aS argument, but
    not in the pS argument.

    @Nick, I don’t think Krugman’s babysitting coop was a closed system since people still made real dollars that could pay for a nearly perfect substitute babysitter — it was more like a regional economy.

    Coming at this from a physicist’s perspective, I tend to see macro as the point where the emergent phenomena like inflation and the paradox of thrift start to show up, or as in Nick’s very good post, where the downward sloping demand curves add up to a flat demand curve. Which I realize is probably a bad model to have in my head since these emergent behaviors can show up at very small scales indeed.

  22. Gravatar of Rien Huizer Rien Huizer
    27. February 2011 at 18:22

    Scott,

    Just a minor point: Sichuan shrunk not (only) because everyone flocked to the coast, but mainly because the very large industrial city of Chongqing was made autonomous, ie a city with provincial status, direct under the State Council.

    Also to put things in perspective: Guandong’s exports are about the same size as Holland’s. The Three big export areas (Yellow Sea, Yangzi & Pearl deltas combined export 95 of the PRC total. About the same as Benelux and Scandinavia combined…So there are a few problems down the road for a central gvt that has employment growth as it’s main goal. What could monetary policy do for them? For instance liberalizing the currency? Or would you regard China as predominantly a supply factors story for the next decade or so, where monetary policy drowns in the noise?

  23. Gravatar of Scott Sumner Scott Sumner
    28. February 2011 at 06:01

    Ram, Thanks, I did a new post.

    Doc Merlin, Yes. And there is a good reason. Macro is a how-to manual for policymakers.

    Marcus, Good point. If you hadn’t sent me the old Bernanke papers, I wouldn’t have blogged them, others don’t pick up on it, and she never sees them.

    Thanks for doing that Poland post–it is excellent.

    Statsguy, Those are good points about China. The booming interior manufacturing sector has thus far focused on the domestic sector, but it’s beginning to branch out into exports. Many electronic firms are moving inland to Chongqing, where they are building a huge new airport.

    Jason, I’m afraid I don’t follow your argument.

    Rien, Yes, I knew about Chongqing leaving, but even so it has slipped.

    I don’t follow the rest of your comment. It’s normal for big countries to devote a much smaller share of their economy to exports than little countries. I’d bet Benelux exports almost as much as Japan. I don’t see a link between exports and jobs, except perhaps in a cyclical context.

  24. Gravatar of Rien Huizer Rien Huizer
    28. February 2011 at 18:00

    Scott,

    China’s policymakers are especially concerned about job creation (and even more so when old central planning era industrial structures were dismantled and jobs had to be created for redundant workers even in the cities). My question was really/obviously what sort of policies (and assuming the regime will not change, ie legitimacy remains paramount) could China use once their export potential has been exhausted ( the low hanging fruit has already been picked) and employment growth expectations (plus productivity growth, they let that cat out of the bag a long time ago) plus popular aspirations can no longer be satisfied by displacing production from more expensive locations elsewhere. And within that question, what would monetary policy do in a country like China (only partially modernized and the bulk of productive capacity (especially goods) still in gvt hands. What would be the channels? Of course this is more a growth story than business cycle (and within that more looking for a way for the CCP to remain in power via peaceful means), but I thought it was a legitimate question.

  25. Gravatar of ssumner ssumner
    1. March 2011 at 06:52

    Rien, First of all let’s put aside monetary policy, which is not relevant for long run growth. (But it clearly does affect the cycle in China, through the same channels as here.)

    If exports are maxed out then China will do what it is already doing, build up industries for domestic consumption/investment. The car industry has gone from near zero to the world’s largest in just a few years. There has been huge growth in real estate, home appliances, infrastructure, etc. All the things you need to be a modern economy. I presume China will keep building up these industries. As it gets richer, the service sector will boom.

  26. Gravatar of Doc Merlin Doc Merlin
    2. March 2011 at 09:39

    @Scott:
    “Doc Merlin, Yes. And there is a good reason. Macro is a how-to manual for policymakers”

    I would argue that the /vast/ majority of government policy is covered by micro-economics not macro…. but I see your point.

  27. Gravatar of D. Watson D. Watson
    2. March 2011 at 13:11

    Scott,

    While you’re talking about random things, let me pose this question to you: Suppose food prices suddenly increase. What happens to equilibrium wages?

    Here is my answer and it ends with proposing the need for inflation to pull us out of a recession. I’m not entirely confident in my analysis, though, so I would appreciate your thoughts. How much do you believe in backward bending labor supply curves?

  28. Gravatar of Scott Sumner Scott Sumner
    3. March 2011 at 07:14

    D. Watson, I don’t think inflation affects wages, I think NGDP growth affects wages.

    The slope of the labor supply curve depends on what you are holding constant.

    I agree that if we have an adverse supply shock, we need even more inflation to get out of recession.

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