Lit in Review: 3 for Intermediate Macro

The July 2015 American Economic Journal: Macroeconomics had several papers that have something to say to my intermediate macroeconomics students.

How good is the Cobb-Douglas production function at describing the real world?
Berthold Herrendorf, Christopher Herrington, and Akos Valentinyi, "Sectoral Technology and Structural Transformation" (working paper)
They use three different functions, one each for ag, manufacturing, and services and they add imported intermediate inputs to the model we use. If they allow each one to have different technology growth, they can "capture the main technological forces behind the postwar US structural transformation" from ag/manufacturing to a services-oriented economy. They tested letting each sector have a different alpha, but it turns out that doesn't make much of a difference.

Permanent and transitory income shocks
Christian Bayer and Falko Juessen, "Happiness and the Persistence of Income Shocks" (2013 draft)
Persistent income changes "have a significant impact on happiness while transitory shocks do not."

The Trilemma
Michael Klein and Jay Shambaugh, "Rounding the Corners of the Policy Trilemma: Sources of Monetary Policy Autonomy" ungated
My time in Nigeria gave me some interesting insights on some of our macro models. While I can easily wave my hands a bit and put the US, Germany/Greece/any EU country, and China on the three edges of the impossible trilemma, Nigeria tried to have it all. They don't have free capital mobility, and their controls have been getting tighter over the last ten years; they try to have a fixed exchange rate, but they are classified as free because sometimes they have to let it fluctuate wildly before reeling it back in; and they want a central bank that can still impact the economy, but it's pretty weak.

This paper asks if Nigeria's strategy could be effective: "whether partial capital controls and limited exchange rate flexibility allow for full monetary policy autonomy. We find partial capital controls do not generally allow for greater monetary control than with open capital accounts, unless they are quite extensive, but a moderate amount of exchange rate flexibility does allow for some degree of monetary autonomy, especially in emerging and developing economies."

Jobs in Africa

The African Economic Outlook (here) came out this month. It predicts continued 5% growth overall, with about 7% in the west and only 3-4% in the north and south. For Nigeria, and my former students should pay attention, it points out that most of that growth is NOT in the oil sectors: agriculture, trade, and ICT growing fastest. It also advises countries to invest more in the value added industries. Given that the vast majority of my intro economics students and even the people on the street in Nigeria not only could but did tell me the same thing on multiple occasions, I'm less impressed. It's a right answer, of course, but more needs to be done to identify why it isn't happening when everyone already knows it's the right answer and to take the political economy more seriously.

Oh, and as an aside, take a look at this graph from the AEO:

I could be wrong, but I don't think that's how gears work. The bottom two would turn just fine, but the Human Rights gear is pushing the Unequal Access gear counter-clockwise while the Exclusion gear is pushing it clockwise. From a graph standpoint, this undermines the presumed point that each of them exacerbates the others. It suggests maybe that a poor human rights record makes unequal access not as bad, or that unequal access improves human rights...

Teal argues that the increase in education supply in Africa is a good thing, but only provisionally. The question is: why is more education good? It's good from a human rights/development perspective, clearly. But whether increased education will bring people out of poverty depends in part on whether or not there are jobs available that demand the increased skills.

"Without the factories the dramatic increase in the primary educated work force will indeed see little economic gain from their education. The recent increases in the demand for education beyond the primary level certainly suggests that both students, and their parents, are aware that low levels of education have little value in the job market place. Focusing on meeting that demand rather than focusing on why that demand has arisen may well be to miss the critical problem facing educational policy in Africa."

One of the informal jobs I saw often in Nigeria is that of the porter. People, usually boys, wandered the Jimeta market with wheelbarrows, offering to carry my purchases. The Sudanese government, however, has decided that it is in the public's interest to create a monopoly on wheelbarrows in Khartoum. Porters are not allowed to own their own wheelbarrow, but must rent them at high fees, ruining what little income they were getting from a pretty thankless job.

El Alaoui, Aicha, Elhadj Ezzahid, and Jallal Eladnani (2013). "Estimating NAIRU: The Moroccan Case", MPRA Paper No 56815.
In intermediate macro we are introduced to the Non-Accelerating Inflation Rate of Unemployment (NAIRU). The idea is that if the level of unemployment is lower than NAIRU, you can expect inflation to increase, and to decrease if unemployment is higher. They estimate that the NAIRU has decreased from around 13% in 1998 to about 9% today. There is no explanation for why this happened and the policy conclusion - Morocco needs looser monetary policy based on the fact that the unemployment rate was consistently higher than NAIRU - does not capitalize on the fact that inflation has been remarkably low and sometimes negative since late 2009 or discuss the bank's mandate, goals, or governance.

Lit in Review: Money in India, Africa, and helicopters

Gupta, Abhijit and Rajeswari Sengupta. 2014. "Is India Ready for Flexible Inflation Targeting?" , Indira Gandhi Institute of Development Research Working Paper, June 2014.

The standard intermediate macro take has been to encourage some form of flexible inflation targeting or Taylor rule approach. In developing countries, however, financial systems are less well-developed which makes the lags between data, policy, and outcomes more troubling and, because food prices form a much larger portion of the price basket, if most central banks had responded to the recent food price spikes by sharply tightening the money supply the results would have been dire. India has followed a "multiple indicator approach" since 1998 that focuses more on stable interest rates and exchange rates, but also uses money, credit, output, trade, capital flows, government debt, and the inflation rate. The lack of a single policy rate reduced the clarity of signals sent to the market and introduced (predictable) variance in other variables, however, so in 2011 the RBI officially focused on the weighted average overnight call money rate.

Gupta and Sengupta estimate a Taylor rule for India using 90-98, 98-04, and 04-13 data. Inflation matters less and less for policy making, particularly in the last period that includes the food price spike - albeit the Wholesale price index (WPI) matters more than the CPI. They also estimate exchange rate stability, monetary independence, and capital account openness over time (the impossible trinity) and show that exchange rate stability has much less weight today than it did even as recently as 2000 when it was the primary goal. The increased monetary independence this bought indicates it would be more possible than in the past for India to follow some kind of Taylor rule.

Buiter, Willem. 2014. "The Simple Analytics of Helicopter Money: Why it Works - Always" Economics, Discussion Paper 2014-24.

Milton Friedman called a permanent increase in the money supply a "helicopter drop." It turns out that Quantitative Easing (QE) fits that description so long as people believe the Fed is not likely to sell off its assets. Buiter cites other research that says helicopter drops might successfully increase aggregate demand, but they also might fail. He then demonstrates that there are three conditions for this to always boost aggregate demand: 1) people want cash for reasons other than earning more money (ie - people value cash even when there is modest inflation because we use it as a medium of exchange); 2) the price of money is positive; 3) cash is irredemable (ie - it's not a liability for the government and not backed by gold). He claims it was failure to consider this last condition that led to the erroneous idea that helicopter drops would not increase AD. (PS - that picture is really not fair to our former Chairman, but it's entertaining.)

Asongu, Simplice. 2013. ''A note on the long-run neutrality of monetary policy: new empirics", MPRA Paper 56796 and AGDI Working Paper WP/13/032, posted 23 June 2014.

Money is neutral in the long-run in Africa too.

As it should be.

Changes in monetary tectonics

At home:
Ball: "or the first time, the Fed clearly says it will be more dovish in the future than the pre-crisis Taylor Rule dicates [sic]."

O'Brian:  The Fed still thinks it’s first rate hike will come in 2015-ish, and it’s still buying $85 billion of bonds a month. This is a true fact. But it undersells the intellectual shift at the Fed. It’s gone from mostly thinking about inflation to creating a framework to guide its thinking about inflation and unemployment. And it’s done that in just a year.

Woodford:

Today’s statement provides important additional clarification of the conditions under which it will be appropriate to begin raising short-term interest rates, relative to the FOMC’s statements in September and October. Such clarification is particularly likely to help stimulate the economy when, as in this case, it indicates that the conditions required for policy tightening will not be reached as early as some might have expected on the basis of past Fed behavior.
The explicit thresholds mentioned today are not ones that will be reached as soon as a federal funds rate above 25 basis points would be dictated by a reaction function estimated on the basis of the FOMC’s pre-crisis decisions, and in that respect the announcement should change the forecasts of future Fed policy of at least some market participants.

Yglesias: This is huge. With today’s policy announcement, the Federal Reserve’s Open Market Committee has stopped screwing around and started doing real expectations-based monetary easing.

In England:
Carney [up and coming BoE head]: If yet further stimulus were required, the policy framework itself would likely have to be changed. For example, adopting a nominal GDP level target could in many respects be more powerful than employing thresholds under flexible inflation targeting.

ECO 302: Big Bag of Market Monetarism

We're doing market monetarism in my intermediate macro class tomorrow morning. Here are the handout notes, minus some explanatory material. These are just a few of the things written in the last 45 days on the subject - making the class CURRENT, baby! - without themselves being an attempt to define and explain everything about market monetarism. The main topic is why current inflation rate and interest rate targeting is ineffective, supporting the MM view that we should target the forecast of nGDP growth.

Ethiopian Bank Run Friday

There was a run on the bank today. I nearly missed it.

All of us at the conference were told to visit the bank to get refunds and daily stipends. We could only do so today, and we could only do so during one of two coffee breaks. To someone teaching Game Theory this semester, this sounded like a perfect set up for a simple coordination game.

I played a waiting game. I dislike waiting. When I observed most of my colleagues heading across during the first break, I decided the clear game solution was for me to wait to the second coffee break so I wouldn't have to wait so long in line. They indeed got back late, it taking more than 45 minutes to service them all.

When I eventually went with just three other colleagues, I was feeling pretty good about my choice. But then one of us told a joke: the bank was out of money and would only have enough for him and not for us.

I suddenly realized that if I were in a bank run game, I had played the entirely wrong strategy. Observing other people racing to get their money out in the early period, I ought to have gone early also. We covered that extensively in the Cornell macro group – sunspots determining bank runs, psychology determining bank runs, self-reinforcing beliefs, on and on. If you see other people running, run.

When I get back to AUN, I will be introducing my game theory class to risk and uncertainty. What if there is a probability p that I’m playing the bank run game and probability (1-p) I’m playing a waiting game? At what critical value of p should I go with the first group instead of with the second? I smell a midterm question. And if you’re in Eco 404 this semester, you’re welcome.

Best of 2011

Time for some intense naval-gazing. I wasn't going to do one of these, but then I enjoyed others' so much for the posts I missed that it seemed much more interesting.

Top Ten Posts of 2011
1. Google's statement on AUN's amazing internet usage, got a lot of doubting comments and a few  defending and very plausible explanations.
2. Nutrition Labeling, describing the new requirement that meat include information on calories from fat.
3. Unemployment: Leads and Lags - Breaking unemployment into separate decisions to hire or fire will give us a better indicator of where the economy is going (has been) than total unemployment.
4. AEA session on agricultural export bans during the 07/08 food price crisis.
5. Microinsurance in Kenya via cellphone
6. My first visit to AUN. Classes will resume Thursday the 24th
7. Low saturated fat diet vs. low simple carbohydrate diet
8. QE2 and food prices - debunking the idea that the Fed is causing global food price inflation
9. Food safety, food movements, and paternalism
10. Lit in Review: Food Demand -- Ethiopia and Speculators
Honorable Mention (because I thought it was fun): The socially acceptable price of fried chicken, also known as the political economy of fast food markets in South Korea.

Top Ten Posts of 2010 (in 2011)

1. My pictures of the Thorvaldsen's Christus and apostles statues, mentioned in a Church lesson this year.
2. Lit in Review: Grossman and Helpman, there has been steady interest in summaries and other papers that make use of the "Pay to Play" model of lobbyists.
3. Food in Africa: Too much and too little discussing the problem of getting food from food-surplus states to food-deficit states. There was never a large spike, but a steady stream of interest throughout the year.
4. High Hopes for Rwandan Agricultural Development
5. Food Security in Nepal which has been of increasing interest lately
6. Cutting Costs Through ... Fonts?? Some fonts go easier on the printer's ink
7. Population Health vs. Individual Health - commentary on macro vs. micro in economics and health
8. Ethiopian Monetary Policy - combines monetary policy, food prices, Ethiopia's development goals (food self-sufficiency), and growth prospects
8. Five from vacation: education, hyperinflation, and Chinese food safety.
10. Fed governor: if we could guarantee 5% NGDP growth, it would be great - I'm glad this made the list because I think it was my most significant post, interviewing Governor Dudley about what they are targeting and Sumner's policy.

Where did my visitors come from in 2011?

FDR on the Recession: Monetary Targeting

From Rortybomb (via @TimHarford), some political comics of FDR as the grand architect of society. Normally this is a phrase that makes me shudder, but there is something very interesting about this picture. Notice pillar 7 of Pulitzer-Prize winning editorial cartoonist John T. McCutcheon, October 25th, 1933. Oh, wait, is it too small for you? Let's zoom in:











Pillar 7 translates as "target a particular price level" rather than an inflation rate. No inflation, which hawks ought to love; rules based; but in a circumstance like this would encourage the Fed to do a lot more easing than they have. As Rortybomb puts it:

Notice that Pillar 7 isn’t “Buy $X amount worth of Y” (like QE does) but “set the level.”  It’s not a floor or a step but a destination.  The cartoonist understands that the administration must do whatever it takes across all available monetary tools to get us to the targeted destination.

"I started the war against subsidies."

Head of the Central Bank, Sanusi, explaining in more detail why he is against the fuel subsidies in Nigeria. There is a pretty thorough description of how the subsidy really supports corruption and some of the evidence of it. Interesting throughout.

So for two years I have been convinced that this thing is a scam and that it cannot be stopped because the entire controls have been compromised. ... So yes, I am willing to take all the criticism and labels and be unpopular but this has to stop and govt can find other ways of alleviating pain.

Removing it has costs in terms of nigerians paying more for PMS-which by the way is not the fuel for genrators, power plants, production facilities, heavy duty goods transportation trucks and even luxury buses. It is fuel used by the middle class and car owners to drove around town and from city to city not to employ workers and produce goods and services. Diesel which is critical to manufacturing and employment creation is not subsidized

1. I am a strong advocate for subsidies if they are for production and not consumption, and if they benefit the poor and not middle men and rent seekers. The US government subsidizes cotton and wheat farmers and nigeria spends its reserves importing wheat from america and keeping american farmers employed....

Finally: removing subsidy is not a silver bullet that solves our economic problems. And there is a huge trust deficit that government has to address. Government needs to investigate subsidy payments and punish any violations of extant guidelines. It needs to cut on unnecessary and waste ful expenditure. It needs to fight corruption and show seriousness in that. It needs to deliver on capital projects, power and infrastructure including irrigation, farm-level storage and agri-processing. These are all valid issues that are to be taken IN ADDITION to and not in place of subsidy removal.

How do you know when the Fed is being successful?

The first question you should ask is: successful at what?

Sumner on the 1936 Fed:

This is one of the most chilling statements I have ever read.  The opening sentence is the sort of thing juvenile delinquents say to each other when their prank has gone horribly awry, and they are nervously working on a joint alibi.  An incredible effort at denial runs all through the piece.  First he admits that they raised reserve requirements because “some recession was desirable.”  Then he claims it was just a “coincidence in time” that the downturn followed the reserve requirement increase, even though the express purpose of the increase was to cause a “recession.”  Then he claims that if they reverse their decision it will look like the previous decision had caused the recession.  Then he said that a depression can’t be happening, because there is no good reason for a depression.  Well it was happening, unemployment rose to almost 20% in 1938.  In the end, they decided to stick with the high reserve requirements throughout the rest of 1937.

Sumner on the 1960's-70s Fed:

The Fed can always raise short term rates.  It’s true that this doesn’t always result in higher long term rates.  But that’s not a sign that monetary policy is ineffective, rather exactly the reverse.  The Fed raises short term rates to keep inflation down close to 2%.  If long term rates don’t budge very much, that’s a sign that monetary policy is credible.  In the 1960s and 1970s both long and short rates tended to rise together, hence increases in short rates weren’t enough to get ahead of the curve.  Real rates didn’t rise, as the Fed wasn’t following the Taylor Principle.  Because the “tight money” policies weren’t credible, inflation expectations rose.

Glasner on the September 2011 Fed:

In this environment small changes in expected inflation cause substantial movements into and out of assets, which is why movements in the S&P 500 have been dominated by changes in expected inflation.  And this unhealthy dependence will not be broken until either expected inflation or the expected yield on real assets increases substantially. ...

Operation Twist has almost certainly not been responsible for the rise in stock prices since it was implemented.

Why has the stock market been rising? I’m not sure, but most likely market pessimism about the sway of the inflation hawks on the FOMC was a bit overdone during the summer when the inflation expectations and the S&P 500 both were dropping rapidly. The mere fact that Chairman Bernanke was able to implement Operation Twist may have convinced the market that the three horseman of the apocalypse on the FOMC (Plosser, Kocherlakota, and Fisher) had not gained an absolute veto over monetary policy, so that the doomsday scenario the market may have been anticipating was less likely to be realized than had been feared.

Sumner on the August 2011 and January 2012 Fed:

My hunch is that I misjudged the Fed move back in August, when they promised low interest rates for the next two years.  That seemed pointless without making the promise condition on some sort of nominal growth target (GDP or inflation. Now there are indications that the Fed may do just that at the January meeting. ... It’s interesting that it took me so many months to have second thoughts about my negative verdict on the policy last August.  Equity investors seemed to need only about 30 minutes to figure this out (after the 2:15 announcement.)

And what should the Fed be doing? Here is Glasner arguing in favor of targeting nominal GDP over nominal wages - though both are highly correlated, targeting nominal GDP will avoid mistaking good supply shocks for contractions.

Lit in Review: SSA Development

Wantchekon, Leonard, "Deliberative Electoral Campaigns and Transition from Clientelism: Evidence from a Field Experiment in Benin." Wantchekon got permission from the major presidential political candidates in Benin to run an experiment on their campaigns. The randomly selected treatment villages had two town hall-style discussions about important political topics while control villages had the standard rallies. Among the interesting conclusions from his research, rallies cost $15/person to hold but town hall meetings only $2/person; turnout is 5% higher after town halls; and average spending (cash and gifts) to voters was not statistically different between treatment and control groups so that's not what's driving it. It seems that town hall meetings may be the more efficient way to go in national elections.

Aye and Gupta, "The Effects of Monetary Policy on Real Farm Prices in South Africa." They find using a VAR model that both anticipated and unanticipated monetary policy impacts farm prices in the way we would expect (more money supply --> higher prices, big surprise; but lower money supply does not lower prices) but while statistically significant they don't explain much of the variation in what is happening from 1970 to 2010. I wonder if they would have gotten much different results if they looked at  1975-2005 instead and took out the two major episodes of international food price volatility. How much are they driving the small impacts? They also do not attempt to explain how anticipated monetary shocks could have a significant impact or why negative money shocks don't have price impacts. I would hypothesize at least for the latter that it is because of an inflationary shock to supply that the monetary authority chose lower money supply growth, so we wouldn't see a change that direction because of endogeneity problems.

Clemens and Demombynes' latest salvo in the Millennium Villages conflict: the MVP released a paper for the first time comparing progress in the villages to progress in the rest of SSA. Unfortunately, they still do this improperly. What would they have found doing it more properly?

In rural areas of the Ashanti region where the MVP site is located, stunting has been falling just as much as at the project site. The Millennium Village contains less than 1% of Ashanti Region’s population, so even allowing for a generous “spillover” effect of MVP programs to neighboring areas, it is implausible that the village is driving the trend across Ashanti. Comparing the project site to the national trend is likely to overstate the impact of the project.

Blattman reports on the results of an experiment in Kenya by Friedman, KIremer, Miguel, and Thornton, giving education grants to girls in secondary school. In addition to improved test scores and later marriage years, they find improved knowledge of politics and therefore ... more legitimacy for political violence as a way of solving political problems. Ooh. Blattman notes that his own work is starting to find a similar trend in Ugandan women.

Nicita, Olarreaga, and Porto examine "Pro-poor trade policy in Sub-Saharan Africa." They find that the average (of 6) country's trade policies are biased in favor of poorer households, but that developed countries' barriers are biased in favor of richer African households. This suggests, potentially, that reducing average trade barriers in Africa may harm the poor

The price of seeds (and everything else) in Africa

Good news: the prices of cereals, edible oils, sugar, and dairy products were down sharply in October, bringing FAO's food price index down to its lowest point for the year. Not that it's all that low, but it's something. However, peanut butter prices are up 40% in the US, but not abroad (so American expat families everywhere can breathe a sigh of relief). Since the US government shields peanut growers from the world market, the weather in Georgia and Alabama matters for the US price, but not the international price.

Swaziland's government has retracted its usual agricultural input subsidies: no more discount or free seeds, no more discount tractors (government was charging $17.30/hr rental; private cost is $26.60). The article also discusses how the feudal land tenure system makes things more difficult. One farmer laments:

“I live on the banks of a river [the Nkomati]. My maize crops could easily thrive if I had a simple pump and piping. What I harvest would pay for the loan, but I have no collateral because there is nothing to offer the bank" [because he does not own the land and so can't put that up as collateral.]

Roving Bandit notices the South Sudan National Bureau of Statistics report: annual inflation in South Sudan is up to 60% from September 2010 to September 2011. For the year, the biggest contributor is food prices that went up 64%. The price of furniture and furnishings went up far more (108%) as did alcohol (95%), but food carries a much larger weight (71/100) in the basket of goods than anything else. Food price increases have been very small this month, thankfully.

Big Bag of Money and Macro

History a la Sumner: US monetary policy didn't change permanently in 1979 with Volcker's appointment. It happened two years later:

The tight money of late 1979 was not really all that tight, and it lasted very briefly.  By late-1980 monetary policy was highly expansionary, indeed perhaps the most expansionary in my lifetime.  Only in mid-1981 did the Fed seriously commit to tight money.

How highly expansionary? Well, nominal GDP grew by ... 19%. That's some pretty high inflation for you.


Friedman emphasized how monetary policy was not loose in Japan, despite low interest rates, and his arguments apply just as well here when it wasn't loose for the last 3-4 years (HT: Tabarrok):

 it shows how unreliable interest rates can be as an indicator of appropriate monetary policy. The Japanese bank has supposedly had, until very recently, a zero interest rate policy. Yet that zero interest rate policy was evidence of an extremely tight monetary policy. Essentially, you had deflation. The real interest rate was positive; it was not negative. What you needed in Japan was more liquidity. ... They can buy long-term government securities, and they can keep buying them and providing high-powered money until the high powered money starts getting the economy in an expansion. What Japan needs is a more expansive domestic monetary policy.

Fengler at the World Bank shows some sloppy thinking about food price inflation. Food prices are going up in Kenya, but that does mean it is inflation. Inflation includes increases in wages and other forms of income. If food prices go up 100% and wages go up 100%, how are people worse off? Instead, we see food prices going up 25% and other prices going up 10%. That suggests that there is really 10% inflation and real food prices are going up by another 15% on top of that. That isn't inflation. Inflation is a "tax" on savings, it's a "tax" on holding cash in the sense that your money doesn't buy as much as it used to, but it is a tax that can be imposed by the outside as in this case, unlike any other form of tax that exists.


Evidence that the stock market corrects prices from false information within 7 days.

The original story of what monetary policy looks like as a babysitting cooperative. I have a feeling this is going to make an appearance next semester in my intro macroeconomics course.

What is Development? -- Students' answers

At the start of my course on development economics this semester, I asked my students to ponder a question. Suppose you woke up from a long sleep and were told that Nigeria is now a developed country. What would that mean to you? What would be different? What the same?

I should put forward at once that this not a random sampling by any stretch of the imagination. This in no way purports to be what "average Nigerians" (whatever that means) think -- these are economics majors at a private university, with all those facts imply. It was fascinating nevertheless and I will also be interested to see if their idea of development changes over the course of the semester.

Out of 12 students, 8 mentioned improved standard of living with a few using words like "economic growth" and one who even whipped out "GDP and GNP."

But how does that improved standard of living manifest itself? In order of mentions:
1 - Better infrastructure (sometimes as a catch-all term, sometimes with examples listed - roads and power being the top two)
2 - More job opportunities
2 - A stable and constant supply of electricity. During our discussion, with half the evening class spend without power, this got the widest noise of approval from the group. As Hans Rosling said, if you give people the right to vote, they will vote for the washing machine.
2 - Other public goods, which they mostly called "amenities," listing schools and hospitals most frequently.
5 - Lower poverty
6 - Lower corruption

Two students mentioned monetary factors: the Naira exchange rates would be more stable and would appreciate compared to other currencies. One mentioned food, but it was less clear whether food security, food safety, food quality, or food variety were implied. One voted for a high life expectancy, another for sport facilities, another for a balanced economy. Among other interesting comments were that Nigeria would then truly be independent, that former government leaders had all "died or were caught", and one person averred that nothing would change - "Nigeria is the same."

There was a general agreement that their culture would not be changed by development. I'm scarcely a sociologist, but coming from Cornell and a culture that fears Americanization, and right after a conversation with political scientist about how development changes a people's sense of priorities and timeliness, it was odd. It shouldn't have felt that way, though - America will always be America, right? I mean, sure, we've drifted a little from 19th century - or even 1950s - ideals over the course of our development, but that's all for the best, right??? /sarc

The other thing that would be the same? People who won't work continue to set up conditions that lead to  suffering.

Countries we know not of

Tabarrok recommends Nothing to Envy, a book describing life inside North Korea. He provides this excerpt about a doctor escaping to China:

Dr. Kim looked down a dirt road that led to farmhouses. Most of them had walls around them with metal gates. She tried one; it turned out to be unlocked. She pushed it open and peered inside. On the ground she saw a small metal bowl with food. She looked closer – it was rice, white rice, mixed with scraps of meat. Dr. Kim couldn’t remember the last time she’d seen a bowl of pure white rice. What was a bowl of rice doing there, just sitting out on the ground? She figured it out just before she heard the dog’s bark.
Up until that moment, a part of her had hoped that China would be just as poor as North Korea. She still wanted to believe that her country was the best place in the world. The beliefs she had cherished for a lifetime would be vindicated. But now she couldn’t deny what was staring her plain in the face; dogs in China ate better than doctors in North Korea.

We've also been searching 200 years, apparently, for the economy I was taught about in my introductory economics class. You know, the one whose economy is run entirely by barter before the invention of coinage. Instead, Graeber argues that the first economies ran on credit money, with tablets recording monetary values of debt owed in order to keep track of who owned what without an actual coin responding to it:

As an anthropologist, it’s kind of a professional pet peeve. ... The spot trade, where it’s in the moment and you never see each other again, this is the opposite of any kind of exchange in primitive economies. In order to create the idea that life is just a series of exchanges we can all walk away from - a very antisocial notion of what people are about - you have to eradicate all obligations that people have to each other. ... Credit money is the original form....

Some S&P Opinions

The .Plan seems to firmly believe the S&P is off their rocker:

1) In fact, the evidence from the past five years suggests that it may be worthwhile to adopt a contrarian investing strategy that specifically bets against S.&P.’s ratings. ... 

2) Back when I was an in-house lawyer for an investment bank, I had extensive interactions with all three rating agencies. We needed to get a lot of deals rated, and I was almost always involved in that process in the deals I worked on. To say that S&P analysts aren’t the sharpest tools in the drawer is a massive understatement. 

Boudreaux is confused:

Why is the first remotely serious effort in ages to oblige government not to borrow beyond a certain limit portrayed as fiscal imprudence?

But perhaps that is because he is making the mistake of taking what politicians say at face value. There was never a danger of them not raising the debt ceiling. The brinksmanship was theater. The points S&P make are that 1) politics should be about more than theater, and 2) even with this disfunctional yelling match, so little of the deficit was actually addressed. Now, a 5% reduction in the deficit over 10 years is nothing to sneeze at. It's a start. But there doesn't seem to be much willingness for either side to address their sacred cows, and until they do the outlook is for more deficits as far as the eye can see ... and that sounds more like imprudence than prudence. On the other hand, I'm not entirely certain that the theater is a significant change from the status quo over the last 20 some-odd years.


Marron takes a more neutral approach, pointing out that three other ratings agencies -- two in the US, one abroad -- had downgraded US credit-worthiness prior to S&P. He earlier pointed out that, technically, the US has defaulted once in 1979, because the "Treasury's back office was on the fritz". Everyone got their money back, but the result still wasn't pretty.


Addiionally, it pays to remember that S&P's rating are only about the risk of a default occuring, not the size of the default, its duration, or how much investors will eventually get back. Moody's, by contrast, includes these factors. So the fact that US bond investors are likely to get everything back, even if payment were delayed by a few days in event of a default, makes US bonds still the "assets of choice for global investors seeking a 'safe haven'"


But then, Sumner says the reactions in the relevant market (US Treasuries, not stocks) are actually against what S&P said anyway: The markets this morning gave a massive vote of no confidence to S&P ratings service, as yields plunged on Treasuries.

Very large comic below the fold

A few monetary thoughts

I just read through Hamilton, Pruitt, and Borger's new piece in the AEJ:Macro. They come up with a method for estimating people's daily expectations both of economic outcomes and Fed policy. Sadly, they stop just short of the recent financial crisis. That would really have been the most interesting use: to see how people's expectations of Fed responses adjusted during the crisis. Ah well. Their more modest results for the 1994-2007 show that people do not expect the Fed to react as quickly to changing economic news but that when it does react, the reaction will be larger. Putting the two together makes the Fed's gradual policy changes destabilizing.

Quantitative Easing in the Great Depression - Five Second Beckworth

This QE program was put in motion by FDR telling the public he wanted to return the price level to its pre-crisis level.  In other words, FDR was signalling a price level target.

Among the measures taken were a devaluing of the price of gold from $20.57/ounce to $35.

Ryan Avent recently summed up QE2 very nicely.  He said QE2 changed the direction of monetary policy, but it didn't set the destination.  That is the problem.

Sumner added: QE did start in 1932, but Hoover opposed dollar devaluation and didn't set a higher price level target. Hence the policy was not credible. … The Fed was worried about inflation by 1936, and raised reserve requirements. Perhaps that could be viewed as an "exit strategy." This policy was similar in spirit to the IOR program. The Fed has indicated they might raise IOR as an exit strategy. And yes, the zero bound problem existed throughout much of this period, with T-bill yields near zero.

Romer’s wonderful analysis of what it means to have a “strong” dollar, recommended to me by economists on both the left and the right (yes, this is old, but I've been out for a while)

I think someone may be confused

Current polls show Romney, Palin, and Paul in the lead for the Republican primary. I am mildly surprised that college graduates significantly prefer Romney, but given the amount of populist rhetoric coming from most of the other candidates, maybe I shouldn't be. The odd thing to me is this chart breaking down Paul's support by other demographics:

I can understand "Republican-leaning independents" going for Paul. RLI is one of the many code-words for libertarian, after all. The funny thing though is seeing confessed "moderate/liberal" voters plumping for Paul. I have to suppose that those libertarians decided to tell the pollsters that they were liberals, because I have yet to hear a moderate sound bite from him. His monetary policy and hatred of the Fed is anything but moderate. His isolationist foreign policy is extremely conservative, even if it's not neocon. It might be his opposition to our recent wars that does it, or maybe his approval of industrial hemp farming... I dunno. The thing to me is, given the brush people are using to paint Romney (as Obama's running mate), I would have expected actual moderate/liberal Republicans to lean heavily in his favor. So my suspicion is that Gallup doesn't bother clarifying if a person means "classic liberal" or "lefty" when they say liberal RLI.

Also interestingly, if by some happy coincidence Palin actually decides not to run, her voters are fairly evenly scattered among the other candidates: 2% more for Romney, 2% for Paul, 3% for Gingrich, 2% for Bachmann.

The Faces of Development

Development in Mexico, according to its census (HT: MR via Andrew Sullivan):

In 1990, one in five dwellings had a bare-earth floor. Now only 6% do. … More interesting still is what Mexicans put in those homes. More houses have televisions (93%) than fridges (82%) or showers (65%).

In part that is because of the impressive Mexican work ethic: “Mexicans work an average of ten hours a day, paid and unpaid labor, even though the country is far from the world’s poorest.  Belgians work the least number of hours a day, at seven."

I was quite surprised, though, when searching through Google Images for a good shot of a bare-earth floor. There were more pictures of Westerners deliberately installing earth floors than there were of people too poor to get a proper floor. Searching for "dirt floor" scored somewhat better. So here's another development paradigm for you: Westerners use earthen floors, everyone else uses dirt floors.

Development in Zimbabwe over the last two years of national unity government and dollarization

The economy grew at nine percent in 2010, following on six percent in 2009. Government revenues climbed to 29 percent GDP in 2010; they were just three percent of GDP in 2008. … This good performance starts from a low base; the economy had contracted by more than 45 percent from 1999-2008. Furthermore, world prices of commodities, such as platinum, tobacco and gold, which are Zimbabwe’s main exports, have been on the rise. Weather has been good in the past two years. But the point is that Zimbabwe was able to make good use of these conditions. There was a supply response to high prices in agriculture and mining, and manufacturing showed signs of life.

Development in Africa: “The African Development Bank says that one out of three Africans are considered to be middle class” – that is to say, earns $2-20/day. Of the 313 million in that range, 180 million are between $2-4/day. “Tunisia, Morocco and Egypt had proportionately the biggest middle classes in Africa, while Liberia, Burundi and Rwanda had the smallest.”

Development through sweatshops, consensual market transaction edition: “Field interviews reveal that subjects perceive their alternatives, including agricultural work and street vending, as less desirable when compared to sweatshop labor. Non-monetary benefits are an important part of this appraisal.” Yglesias puts a different spin on it, based on Duflo and Banerjee’s new book on poverty that surveyed poor people and asked what they aspired to. Mostly what they want for their children is a government job, not entrepreneurship: “What the very poor want, overwhelmingly, is a job where you show up, do as you’re told, and get a guaranteed paycheck at the end. Given the fact that the prospects for government employment are always limited, I assume this explains a lot of the appeal of super low wage sweatshop work when it becomes available in poor countries. “

Interesting Sentences

The Economist: The world could be on the verge of a great management revolution: making robots behave like humans rather than the 20th century’s preferred option, making humans behave like robots.

HT: Grandiloquent Bloviator: “If you’re not the consumer, you’re the product.” Also known as: there is no such thing as a free lunch on the internet. If you can’t tell what the website is trying to sell you, they are either selling your eyes to advertisers or your information. 

Beckworth: “money is special: it is the only asset on every other market (i.e. it is the medium of exchange) and thus is the only one that can affect every other market.  Money, therefore, is what makes it possible to have economy-wide recessions.”

Marron: Sometimes, it’s more than $100 lying on the sidewalk: “You can sell 9,999 shares of The Donald …  at $0.52 a piece [on Intrade]. In just that one trade, you can pocket almost $5,200 of free money.” The only question is whether the government decides this is an illegal activity for influencing voting and elections. “For the latest Trump action, click here.”

The Economist: “The [United Arab Emerites] government aims to reduce the rising number of single local women by offering prizes of up to $19,000 to men who marry them.”
 

The history of political cartooning in South Africa: “I tried to define when South African cartooning started … all the way back to a cartoon which was published in 1819 by George Cruikshank who was a leading London caricaturist of the day. I called it the Cruikshank’s cannibal cartoon. It shows the white settlers being devoured by these cannibal figures – these huge, hulking monstrous figures. … For me that became an iconic cartoon, a prototypical South African cartoon.”
 

Yglesias on Chomsky’s denunciation of Osama’s death as an illegal assassination: “International law is made by states, powerful states have a disproportionate role in shaping it, and powerful states have obvious reasons to not be super-interested in the due process of suspected international terrorists or the sensibilities of mid-sized countries. Many people are pacifists and/or strong critics of western military power, and that’s fine. But it’s simply not the case that international law is identical with these policy preferences. On the contrary, one of the main functions of the international institutional order is precisely to legitimate the use of deadly military force by western powers."

Calzadilla, Rehdanz, and Tol: “Trade liberalization tends to reduce water use in water scarce regions, and increase water use in water abundant regions, even though water markets do not exist in most countries “

Easterly and Freschi: “Belief in Hell raised … economic growth potential. … A different twist than the Protestant Ethic: Scared Rich?