February 14, 2003

Notes: Macro Field Course: February 12, 2003

Economics 236: February 12 Post-Class Notes

On February 12 I taught Andrei Shleifer's "Implementation Cycles" (Journal of Political Economy, 1986) paper to my advanced macroeconomics Ph.D. students class.

Once again, just has happened the week before, I didn't get through the paper. I had thought it would be easy--that I would finish with plenty of time to sketch extensions and qualifications. After all, the class does run from 12 to 2. However, that was not enough time.

My recurrent problem is that I spend so much time in asides on the modeling strategy--"this term is in this definition because twenty minutes from now it will cancel that when we take a derivative to establish the first-order condition", "note that even though we have started with a rather general and flexible setup in which firms have a number of different decisions to make, the setup has been carefully designed so that when push comes to shove there is only one economically interesting and non-obvious decision a firm ever has to make", "note that if this condition is not satisfied, then the consumer's utility is infinite and it is not clear in what sense we can say that the model even has an equilibrium at all," that kind of thing. These asides on modeling strategy take up a surprisingly large amount of time. Yet I don't think I can cut them out or even cut them down. After all, if I don't teach them this, when will they ever learn it?

I also found a spot in the paper where (I think) Andrei may have said something that is (I think) not quite correct. You see, in Andrei's model there are two deviations from the requirements for it to be an Arrow-Debreu economy. The first is that firms calculate and consider the effects of their own actions on prices--specifically, they know and take into account the fact that if they introduce a new technological advance in their industry segment this year, the market price of their industry segment's product will fall next year. The Arrow-Debreu proofs that a market economy is "optimal" (that is, that there is some social welfare function that has individuals' utilities as its argument that is maximized by the market equilibrium) hinges on firms being price-takers that do not calculate and consider the effects of their own actions on prices. The second is that firms are able to copy the technological advances made by other firms without paying for them: there is a "missing market." the Arrow-Debreu proofs hinge on there being no missing markets. Andrei says that the first of these is important in keeping his model from being an Arrow-Debreu economy, but that the second is not because (IIRC) the absence of profits in the industry after the technological advance becomes widespread implies that the equilibrium price in the missing market is zero, hence that its absence does not matter.

Andrei is right if the added market is one in which firms buy a single license to make unlimited quantities of their products with the new technology. But with a different licensing scheme, I think the equilibrium would be different. With a full-fledged intellectual property licensing scheme in which licensing firms are charged a per-unit-produced fee, it is not clear to me that the equilibrium price of a license to use the better technology is zero.

Looking back on the class, I think I was very smart to teach this paper as a way of pointing students to the issues involved in bringing innovation, technological progress, and market structure into aggregative macroconomics. The underlying basic model is very elegant. It begins with an initial setup that seems rather complicated, yet it rapidly simplifies to produce a situation in which:

  • A lot of firms implementing their new technologies at once creates a boom.
  • An aggregate demand externality makes it profitable to cluster the implementation of new technologies. A firm with a new technology wants to wait until a boom to implement it because its technology will be quickly copied--its edge is temporary--and it is more profitable to implement when the economy is booming and demand is high than when the economy is not booming and demand is low.
  • Partly offsetting this is the fact that the interest rate is high when a boom is expected, and thus the cost of waiting until a boom to implement your technological innovation can be substantial. (In fact with log utility or a utility function less risk-averse than log utility, the interest rate effect always outweighs the aggregate demand externality effect).
  • Thus the model can exhibit periodic "implementation cycles" in which technological advance is delayed until periodic booms.
  • However, in the basic model households always want new technology to be implemented as fast as possible: these implementation-cycle equilibria reduce welfare.
  • But this can be reversed: in a version of the model with fixed costs of implementation and with 'standing on the shoulders of giants' effects in discovery, it is very possible that technological progress is only possible if there are periodic large booms.

There is one dimension in which the paper is not a good guide for students thinking about how to write their dissertations. It is a perfect-foresight model--its equilibria are those in which everyone has point expectations about what the future will bring, and those expectations are always confirmed. Today it's hard to get a job with a perfect-foresight model: too many people will say that the dive was not difficult enough.

It is, however, a great article: all kinds of issues--the role of expectations, of imperfect competition, of market profits as spurs to innovation, and of the relationship between short-run business cycles and long-run development--are raised and dealt with in a very thoughtful way.

Posted by DeLong at February 14, 2003 04:48 PM | TrackBack
Comments

I can't help but observe that this all reminds me of the humorists' definition of an economist: Someone who sees something working in the real world, and wonders if it would work in theory.

Posted by: Bucky Dent on February 15, 2003 12:06 PM

Your 3rd bullet point: the key result won't go through if the utility function is less risk averse than log. Should we worry that a result is so fragile to the area we are perhaps least willing to make assumptions about i.e. preferences? If I remember correctly, Diamond-Dybvig, another cool and plausible result, breaks down under the same condition. Just when we've sold a very slick model, I hate to have to say "by the way, there's a key piece of knife-edge math supporting the whole edifice."

Posted by: kcarey on February 15, 2003 06:52 PM

You don't really claim these ridiculous models have any relevance to the real world, do you?

Posted by: Tom on February 16, 2003 07:55 AM

>Someone who sees something working in the real world, and wonders if it would work in theory.

But isn't that just about what Newton did?

Posted by: Bob Briant on February 16, 2003 10:00 AM

>Someone who sees something working in the real world, and wonders if it would work in theory.

But isn't that just about what Newton did?

Posted by: Bob Briant on February 16, 2003 10:01 AM

Economists who try to build models to better understand real world phenomena are a bunch of empty-headed fools! Thanks to Bucky Dent for showing me the light. From now on economists should only build models of things that work in the parallel universe.

Posted by: achilles on February 16, 2003 10:34 AM

>Economists who try to build models to better understand real world phenomena are a bunch of empty-headed fools! Thanks to Bucky Dent for showing me the light.

I much enjoyed the post Bucky Dent just made in another thread: " . . . you are validating the prejudice of everyone who loathes lawyers in general, and Harvard grads in particular, by defaulting to an ad hominem baseless inferential smear."

Now try substituting "economists" for "lawyers".

Posted by: Bob Briant on February 16, 2003 11:38 AM

>isn't that just about what Newton did?

Indeed. But Sir Isaac had the advantage of working in a discipline where controlled experiments with unchanging subjects are possible.

Posted by: Bucky Dent on February 16, 2003 12:34 PM

In the absence of controlled experiments, economists use a combination of models and statistical tools to uncover important relationships. Perhaps Bucky would prefer that they dance three times around the campfire and howl at the moon?

Posted by: achilles on February 16, 2003 01:28 PM

> Perhaps Bucky would prefer that they dance three times around the campfire and howl at the moon?

Given that I professionally monitor economists, I have to admit that your suggestion is unlikely to result in *larger* misses than the ones I see weekly.

Posted by: Bucky Dent on February 16, 2003 01:42 PM

Bucky, seems to me you have three choices:

1) Monitor better economists, I hear those Harvard ones you like to mock are pretty good.
2) Do the predictions yourself
3) Find other groups - lawyers, union workers, sociologists, stock analysts, investment bankers - who can do the job better than the economists.

If you can't do any of the three options, and the economists you monitor are in fact the ones who can do the job the best, then explain to me again why your criticism makes sense?

Posted by: achilles on February 16, 2003 02:17 PM

>Monitor better economists, I hear those Harvard ones you like to mock are pretty good.

Please provide a list of all the Harvard economists I have mocked. Seriously. Name one.

>Do the predictions yourself

That's exactly what I do.

Posted by: Bucky Dent on February 16, 2003 02:22 PM

Thats great that you do the predictions yourself. You should ask the firms that employ the economists who you regularly outsmart to pay you their salaries. You truly deserve it.

Posted by: achilles on February 16, 2003 02:46 PM

Oh and Bucky, do you use a model to make predictions? Or just your sophisticated grasp of "what works in the real world"?

Posted by: achilles on February 16, 2003 02:48 PM

>You should ask the firms that employ the economists who you regularly outsmart to pay you their salaries.

That's exactly what they do. Only instead of showing up as a salary or consulting expense, it shows up as trading losses. :)

Posted by: Bucky Dent on February 16, 2003 02:49 PM

Wow. You are such a smart guy. So your trading gains come directly as a result of forecasting mistakes made by economists at firms? Wow, I am impressed.

You have not answered my question yet. So what model do you use? And why aren't others using it? They just don't have the perfect balance of analytical keenness and good ol' fashioned common senses that you have?

Posted by: achilles on February 16, 2003 02:53 PM

I'll be happy to let you in on my techniques after I've retired, the kids are educated and married off, and I've endowed the Hank Rearden Chair of Economic History at my alma mater. :)

Still waiting for that list of Harvard economists, BTW.

Posted by: Bucky Dent on February 16, 2003 03:00 PM

Andrei Shleifer is a Harvard economist. And you mocked him in your first post. You also, according to Bob Briant, seemed to have mocked Harvard lawyers elsewhere. Brush that chip off your shoulder.

By the way, you continue to miss the inherent contradiction in your own posts. You must yourself be using a model to understand a real world phenomenon if you are as successful a trader as you claim to be. And if you are doing better than some Wall Street prognosticators, you must be using a better model than they are.
Why you mock models is then a mystery to me. Your model for the stock market may not look like Andrei Shleifer's model for implementation cycles, but by mocking Shleifer all you are doing is revealing your own ignorance or obliviousness, I am not sure which.

Posted by: achilles on February 16, 2003 03:25 PM

>Andrei Shleifer is a Harvard economist. And you mocked him in your first post.

You call *that* mocking? Wow. No dissent allowed here.

>according to Bob Briant, seemed to have mocked Harvard lawyers elsewhere

Someone with a law.harvard.edu email smeared me, and I called him on it. You got a problem with that?

>You must yourself be using a model to understand a real world phenomenon

You, of course, have no possible way of knowing that. So save assertions for things others have a reason to believe you *can* know.

Remember, Achilles was held by his heals, not his hair.

Posted by: Bucky Dent on February 16, 2003 03:50 PM

Bucky,

1) I am not sure what the link between 'mock' and 'dissent' is? I said you mocked Shleifer (I didn't say you humiliated him, slandered him or insulted him) which you did. It is no big deal, but just as you are free to mock him, I am free to mock you for being dense in that regard.

2) I now realize that you have no idea what a model is, given your insistence that you are not using one to enrich yourself at the expense of dumb yokels of Wall Street. Your model may not have equations like Shleifer's model but a model does not always have to have equations.

3) I am sorry someone with a law.harvard.edu address mocked you. That's terrible.

4)Something happened to achilles' 'heels' not his 'heals'. I have no idea what this has to do with me or with my hair, but that last sentence of your post is pretty much a representative summary of your posts in general.

Posted by: achilles on February 16, 2003 04:09 PM

I don't spell-check for trolls.

Posted by: Bucky Dent on February 16, 2003 06:17 PM

>>Given that I professionally monitor economists<<

What does this mean? That Bucky observes their social behaviour at conferences?

Or is it that Bucky forecasts against professional economists who forecast, and he does at least as well or better than them on average?
Good on him. Not only does forecasting not require formal economics training, but forecasting as an activity for professional economists is about the weakest link of the whole profession.

Moreover, economics predicts that the average forecaster (formally trained or not) will not do better than a coin-tosser would, at least in predicting ups and downs.

This commentary seems to have turned into some silly muscle flexing ...

Posted by: Michael Harris on February 16, 2003 06:31 PM

B. Dent: "I don't spell-check for trolls"

Nor do you apparently check for clarity or understandability, for the benefit of the trolls or for the benefit of the ordinary folks.

Trolls - big hair - heals - heels - achilles somehwere in the fog of nonsense, I think Bucky Dent was tryng to make a wisecrack. But alas, he as usual got lost in a jumble of words.

Posted by: achilles on February 16, 2003 07:02 PM

>>Indeed. But Sir Isaac had the advantage of working in a discipline where controlled experiments with unchanging subjects are possible.<<

Newton was attempting to predict the movements of the planets! "Controlled experiements with unchanging subjects" were about as impossible as you can get. Which is part of the reason why Newton was, in fact, wrong.

I don't like Shleifer's model, by the way, because it's all dependent on productive technologies. In actual fact, if you look at the companies floated in any boom, very few of them were based on new technologies. Of the dot coms, most of them were either mail-order firms or media companies with no real technological innovation. Even if you disagree with this, it doesn't work as a theory of the 1960s "Go-Go Years", where the "innovations" were conglomerates and mutual funds. I think that a theory of booms which doesn't have a special role for debt finance is always going to seem unsatisfactory.

Posted by: dsquared on February 17, 2003 06:02 AM

DD

"I think that a theory of booms which doesn't have a special role for debt finance is always going to seem unsatisfactory."

An interesting point. The 60's boom was echoed by a rapid expansion of mutual stock funds. Though money market funds expanded in the 70's both stock and bond funds contracted. The booms of the 80's and 90's were echoed in the 80's by stock and bond fund expansion and from 1994 on by stock fund expansion.

John Bogle points out how little of the stock and bond market gains from 1982 on were captured by mutual fund investors. The problems were high fund costs, high fund turnover, failure to remain fully invested or attempts at market timing. The average mutual fund investor had a woeful return over the past 20 years of the great bull market.

Please do elaborate....

Posted by: anne on February 17, 2003 07:46 AM

Robert Rubin reversed dollar policy from weak to strong on becoming Treasury Secretary. There was a steady inflow of financing from abroad from 1994. Also, interest rates began a sharp decline at the end of 1994. The stock market took off in December 1994, and baby boomers at the height of their earning power were encouraged to pour money into mutual stock funds and individual stocks.

Financing became cheaper and cheaper as they stock market boom continued. In 2000, Wall street analysts were insisting the Federal Reserve tightening would have no effect on technology companies, because they could raise funds in the stock market. [Great time to sell stocks.]

A company such as Enron [yuch] could announce it was going to begin to trade fiber optic capacity and watch its stock price soar from 50 to 70 in a week or so despite an absurd p/e ratio to begin with. There was cheap money for innovation, real and pretend innovation.

Posted by: anne on February 17, 2003 08:15 AM

Also, the tax increases President Bush and President Clinton reversed the accumulating federal deficit and apparently allowed for progressively lower interest rates with less government competition for funds. We should not forget that.

Again, I find it a significant problem that a generally NON-competitive Wall Street and mutual fund industry gained so much of the boom returns at the Expense of investors they were supposed to serve.

Posted by: anne on February 17, 2003 08:28 AM

>Robert Rubin reversed dollar policy from weak to strong on becoming Treasury Secretary.

Lloyd Bentsen's gaffe-o-rama was a series of gifts for sharp FX traders.

>a generally NON-competitive Wall Street and mutual fund industry

The Street and the fund families are very competitve with one another, and internally as well.

Posted by: Bucky Dent on February 17, 2003 08:39 AM

I am not sure that a large bulid-up of debt is the sine qua non of every boom. The most remarkable aspect of the dot-coms bubble was that most of the companies had very little debt. They relied exclusively on equity financing.

Posted by: YM on February 17, 2003 08:41 AM

I am not sure that a large bulid-up of debt is the sine qua non of every boom. The most remarkable aspect of the dot-coms bubble was that most of the companies had very little debt. They relied exclusively on equity financing.

Posted by: YM on February 17, 2003 08:41 AM

"I think that a theory of booms which doesn't have a special role for debt finance is always going to seem unsatisfactory."

The point is that had interest rates not been progressively falling from late 1994, there would have been no explosion of equity financing. As Warren Buffett repeatedly says, changes in interest rates change the cost of all financing.

Posted by: anne on February 17, 2003 08:59 AM

John Bogle and Warren Buffett and Charles Munger have repeatedly stressed how little competition there is among financial intermediaries here. Same in Europe. Fortunately, there are index funds. Though technology advances have surely spread to mutual fund management, management costs have sharply risen these 10 and 20 years.

No matter, pay what you wish, but costs DO matter in investing. Imagine paying a 4% sales charge for the privilege of buying GNMA fund shares. Then, imagine 70 basis points of cost a year in addition. Add to these sorts of costs and you have the "croupier's" take from stock fund after stock fund.

Posted by: dahl on February 17, 2003 09:02 AM

>John Bogle and Warren Buffett and Charles Munger have repeatedly stressed how little competition there is among financial intermediaries here.

Bogle himself capitalized on the concept of the low management fee index fund. Buffet and Munger, as "takers" of services, will naturally gripe about the cost. Buffett just does his own homework, cutting the bankers out altogether. Hard to say something isn't competitive if you can do it yourself cheaper!

>Though technology advances have surely spread to mutual fund management, management costs have sharply risen these 10 and 20 years.

I am not a student of fund management costs, but from what I have noticed, the proliferation of ETFs and index funds means the average joe can now invest "professionally" for about 1/4 of what it used to cost.

I have been a student of Wall Street competition for years, both inside and out. It is very tribal, and the factions within and between firms hate one another with a lust at variance with their superficial mannerisms.

Also, note that commission costs and bid/ask spreads in stocks have collapsed to near zero.


Posted by: Bucky Dent on February 17, 2003 09:36 AM

>>I am not sure that a large bulid-up of debt is the sine qua non of every boom. The most remarkable aspect of the dot-coms bubble was that most of the companies had very little debt. They relied exclusively on equity financing.<<

Hrrrmph. From the point of view of the economy as a whole, the 1990s/00 boom was a telecom phenomenon. Yer actual dot coms, were pretty small; what was really driving the huge growth in capital was a) massive investment in telecoms infrastructure, financed by debt and b) massive spending on internet infrastructure, for the most part financed by debt (in the sense that these corporations were simultaneously increasing their balance sheet gearing). The actual dot coms were the froth, not the torrent.

I have no figures supporting the above, and am thus prepared to be argued against.

Posted by: dsquared on February 17, 2003 10:10 AM

Thanks.

Almost certainly. The technology implementation revolution of 1994 to 2000, was enabled by the building of a massive communications infrastructure. All was building on debt, investment grade and high yield bonds, and debt spread among financial intermediaries. The high yield market reached interest rate lows in the spring and summer of 1998. The Asian crisis high yield debt more expensive, but stock prices were soaring and credit to build infrastructure was always there.

Yes.

Posted by: anne on February 17, 2003 10:29 AM

Right.... There are the discount brokers, and increasingly available exchange traded index funds. Perhaps, that is the point. Given discount brokers, as exchange traded funds were introduced the idea of paying a premium for a managed mutual fund should come down to strickly judging the possibility of enhancing returns beyond a relevant index. There is competition.

Whether the same holds for bond funds as well as stock funds, I will find out.

Posted by: anne on February 17, 2003 10:38 AM

Also, the weak dollar policy began in 1985 with the "Plaza Accord" designed to lower the dollar value and aid the American trade imbalance. The weak dollar policy, however, never produced a single quarter of positive trade balance. That leaves me to wonder whether the same would hold even if the dollar were to continue to weaken for quite some time. A weak dollar might simply mean reduced prices from the Japanese and others to avoid losing market share in America.

Posted by: anne on February 17, 2003 11:44 AM

The US does have a weak dollar policy right now, far as I can tell. The trend against European currencies like the Euro and the Pound is very revealing. And it has not helped the trade deficit.

If the dollar were to drop significantly against Asian currencies that might have a more significant effect. However many of those countries are likely to devalue in step with the US to maintain their exporting ability.

Moreover it is hard for the US, even with its productivity, to compete against low cost environments in mature industries. That's why you need to continually drive technology. In new tech low cost environments can't compete - but in old tech they can. Unfortunately every new tech becomes old tech and the speed with which it occurs is increasing.

Moreover, as has been discussed here before, low cost environments are increasingly taking away jobs thought to be immune in the service and professional sectors. Again, in principle it's hard for an American professional to compete with an Indian one working in India - fixed costs are just too high.

Only jobs that really are localized are immune - but even things like surgery are at risk (with teleoperation). At the low end things like automated checkouts are putting pressure on - and if automated checkout machines are made in the States today - they won't be in ten years. The technology for automated burger flipping, as another example, has existed for some time as well.

The rush to the lowest common denominator is coming home to roost and the logic doesn't end anywhere very pretty for 1st world nations. It's time for economists to take a serious look at this and make some suggestions other than "in the long run it'll raise standards of living around the world and we'll all be better off", because, as a famous economist once said - in the long run, we're all dead. And stability and happiness are correlated to prospects for future improvement - not absolute living standards

Posted by: Ian Welsh on February 17, 2003 07:29 PM

The US does have a weak dollar policy right now, far as I can tell. The trend against European currencies like the Euro and the Pound is very revealing. And it has not helped the trade deficit.

If the dollar were to drop significantly against Asian currencies that might have a more significant effect. However many of those countries are likely to devalue in step with the US to maintain their exporting ability.

Moreover it is hard for the US, even with its productivity, to compete against low cost environments in mature industries. That's why you need to continually drive technology. In new tech low cost environments can't compete - but in old tech they can. Unfortunately every new tech becomes old tech and the speed with which it occurs is increasing.

Moreover, as has been discussed here before, low cost environments are increasingly taking away jobs thought to be immune in the service and professional sectors. Again, in principle it's hard for an American professional to compete with an Indian one working in India - fixed costs are just too high.

Only jobs that really are localized are immune - but even things like surgery are at risk (with teleoperation). At the low end things like automated checkouts are putting pressure on - and if automated checkout machines are made in the States today - they won't be in ten years. The technology for automated burger flipping, as another example, has existed for some time as well.

The rush to the lowest common denominator is coming home to roost and the logic doesn't end anywhere very pretty for 1st world nations. It's time for economists to take a serious look at this and make some suggestions other than "in the long run it'll raise standards of living around the world and we'll all be better off", because, as a famous economist once said - in the long run, we're all dead. And stability and happiness are correlated to prospects for future improvement - not absolute living standards

Posted by: Ian Welsh on February 17, 2003 07:30 PM

The US does have a weak dollar policy right now, far as I can tell. The trend against European currencies like the Euro and the Pound is very revealing. And it has not helped the trade deficit.

If the dollar were to drop significantly against Asian currencies that might have a more significant effect. However many of those countries are likely to devalue in step with the US to maintain their exporting ability.

Moreover it is hard for the US, even with its productivity, to compete against low cost environments in mature industries. That's why you need to continually drive technology. In new tech low cost environments can't compete - but in old tech they can. Unfortunately every new tech becomes old tech and the speed with which it occurs is increasing.

Moreover, as has been discussed here before, low cost environments are increasingly taking away jobs thought to be immune in the service and professional sectors. Again, in principle it's hard for an American professional to compete with an Indian one working in India - fixed costs are just too high.

Only jobs that really are localized are immune - but even things like surgery are at risk (with teleoperation). At the low end things like automated checkouts are putting pressure on - and if automated checkout machines are made in the States today - they won't be in ten years. The technology for automated burger flipping, as another example, has existed for some time as well.

The rush to the lowest common denominator is coming home to roost and the logic doesn't end anywhere very pretty for 1st world nations. It's time for economists to take a serious look at this and make some suggestions other than "in the long run it'll raise standards of living around the world and we'll all be better off", because, as a famous economist once said - in the long run, we're all dead. And stability and happiness are correlated to prospects for future improvement - not absolute living standards

Posted by: Ian Welsh on February 17, 2003 07:33 PM

The US does have a weak dollar policy right now, far as I can tell. The trend against European currencies like the Euro and the Pound is very revealing. And it has not helped the trade deficit.

If the dollar were to drop significantly against Asian currencies that might have a more significant effect. However many of those countries are likely to devalue in step with the US to maintain their exporting ability.

Moreover it is hard for the US, even with its productivity, to compete against low cost environments in mature industries. That's why you need to continually drive technology. In new tech low cost environments can't compete - but in old tech they can. Unfortunately every new tech becomes old tech and the speed with which it occurs is increasing.

Moreover, as has been discussed here before, low cost environments are increasingly taking away jobs thought to be immune in the service and professional sectors. Again, in principle it's hard for an American professional to compete with an Indian one working in India - fixed costs are just too high.

Only jobs that really are localized are immune - but even things like surgery are at risk (with teleoperation). At the low end things like automated checkouts are putting pressure on - and if automated checkout machines are made in the States today - they won't be in ten years. The technology for automated burger flipping, as another example, has existed for some time as well.

The rush to the lowest common denominator is coming home to roost and the logic doesn't end anywhere very pretty for 1st world nations. It's time for economists to take a serious look at this and make some suggestions other than "in the long run it'll raise standards of living around the world and we'll all be better off", because, as a famous economist once said - in the long run, we're all dead. And stability and happiness are correlated to prospects for future improvement - not absolute living standards

Posted by: Ian Welsh on February 17, 2003 07:34 PM

Oh Darn. Sorry all, I was getting error messages and thought it wasn't taking. Apologies.

Posted by: Ian Welsh on February 17, 2003 07:37 PM

S'OK, Ian. It got better with each reading! ;-)

Posted by: Michael Harris on February 18, 2003 01:19 AM

By the by, interesting case study in thread drift, these comments.

First we have the economists-are-idiots, oh-no-they're-not, oh-yes-they-are exchange started by Bucky. (Which had several somewhat conflicting sub-elements. Firstly, they're idiots who use dumb models. Second, OK, they use models like Ike Newton did, but he could control his experiments, so there! Third, Bucky really does what economists do when you boil it all down, but he does it better.)

Second, and more fruitful, were the digressions over how booms occur and how different financing mechanisms matter to the process. (Keep it up chaps and chappettes!)

Probably only one comment related to Brad's main (I think) point, which is how to teach both models and modelling strategies to graduate students.

Anyways, carry on all ...

Posted by: Michael Harris on February 18, 2003 01:56 AM

One more thing.

http://www.ustreas.gov/press/releases/js28.htm

*drops stink bomb and runs away*

Posted by: Michael Harris on February 18, 2003 02:33 AM

>Only jobs that really are localized are immune - but even things like surgery are at risk (with teleoperation). At the low end things like automated checkouts are putting pressure on - and if automated checkout machines are made in the States today - they won't be in ten years. The technology for automated burger flipping, as another example, has existed for some time as well.

Posted by Ian Welsh at February 17, 2003 07:29 PM


I'd guess that the immunity is less than appears at first glance. That's because of subsitutibility within job markets. Taking programming as an example - some software jobs might be highly transferrable, others might require the programmer to be on site. However, many 'have to be on site' people will find that they are competing for jobs with the displaced programmers.

Posted by: Barry on February 18, 2003 06:05 AM

Chinese and Hong Kong currencies are tied in value to the dollar. Japan needs to generate moderate inflation, and so a moderately weak or at least stable currency value is a must. Latin American economies are growing weakly if at all and do not need stronger currencies.

Perhaps Canada and Australia with their resource base might find their currencies strengthening. England would not wish a stronger currency. Euro countries, who can ever tell.

No, Stephen Roach notwithstanding, I do not think a sustained decline in the value of the dollar likely.

Also, why can the transition effects of growing world trade on a developed economy not be offset by programs expressly aimed at employment creation and mobility?

Brad is a globalist. I am perhaps a pinch less enthusiastic, but simply wish negative effects whether in Africa or America to be offset by domestic policy.

Posted by: anne on February 18, 2003 06:07 AM

Though we may be concerned about software engineers or tele-com assistance in India competing, there is a significant and growing need for medium and highly skilled nurses in America. Just an example.

Creation of a job in Malawi in textiles does not have to mean more than a transition for a textile worker whose company is effected in America. We do not have a fixed amount of fine world work to be done.

Posted by: anne on February 18, 2003 06:16 AM

>economists-are-idiots

FOR THE RECORD, I STARTED THIS THREAD WITH A JOKE! A JOKE! A TONGUE-IN-CHEEK EFFORT AT LEVITY AND SELF-DEPRECIATION.

I was/am stunned at the vehemence and bear-baiting that followed.

Even my subsequent faux chest-thumping got taken seriously by many folks. Note my clear use of emoticons. " :) "

This is not only a study in thread-drift, but a study of what preconceptions are brought out regardless of context or intent.

BTW, I get error messages every time I post, so I learned the hard way to hit "post" once no matter what I see on the screen.

Posted by: Bucky Dent on February 18, 2003 07:29 AM

"And stability and happiness are correlated to prospects for future improvement - not absolute living standards" - Walsh

Or, more elegantly, "Felicity consisteth in prospering, not in having prospered" - Hobbes.

Yea, verily, there is nothing new under the sun.

Posted by: derrida derider on February 18, 2003 02:39 PM

Anne: excellent posts as always. I'm less sanguine than DeLong and Krugman on the issue of job loss due to Globalization. There have to be new jobs available to replace the old jobs - a new job for your example textile worker to transition to. Moreover it has to be a job that that textile worker is considered capable of doing. (Being able to do it is a separate issue). During technologically fecund time periods the first part isr reduced though the second isn't, particularly.

But new telecommunications technologies are really putting pressure on jobs previously thought as immune to localization and likewise so is automation. The possibility was always there, you can go back a hundred years or more and read missives concerned with overproduction and the loss of jobs to other jurisdictions but until the last couple decades it didn't seem to effect the US in a major way.

Like many other trends it seems to be accelerating. There is no substantial commitment to retraining that I am aware of. Even if there were - if there is no job to move to - the retraining does little.

Over the 90's the US had a policy, in programming industries, for example, of bringing foreign labor to the US to undercut wage pressure. Viewed from a different perspective, one can't but see it as a way to transfer skills and cultural capital - those visa holders went back to their own countries and competed with their former companies and coworkers. It was a massive transfer of skills.

So, healtcare costs are rising and there is a surge in demand for nurses and other healtcare workers. Where else are the jobs of the future going to come from? Perhaps there is a place we can't anticipate - but perhaps, just perhaps the next waves of technology - the next telecom wave for example - won't be primarily US based. Certainly other countries are ahead of the US on the next round of energy techs, like hydrogen.

Overly alarmist? Perhaps. Perhaps. But even Brad had an economic scenario that had the US standard of living in decline while the rest of the world got better. That's fine for the rest of the world, and it's fine for the US elites, but it's not fine for the rest of the US population and I will tell you one thing I'm certain of - a decline of standards of living WILL lead to social and political unrest. It already has, in some respects.

Posted by: Ian Welsh on February 20, 2003 07:51 PM
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