Monday, July 29, 2013

Priorities, people!

In my Macroeconomic Theory class, I sometimes have the students read a lecture by Robert Lucas, "Macroeconomic priorities". It is exemplary in the elegance of the analytical tools applied to the questions at hand. It is also cautionary in the way that Lucas overlooks some crucial elements of reality. When you bring those back into the picture, you do indeed learn something about what our macroeconomic priorities should be, it's just that they're not the ones that Lucas is promoting.

There are often said to be two basic issues in macroeconomics: business cycles and long-run growth. The argument in the lecture is that the gains to be had from further smoothing of the business cycle are quite small, while taxing and spending policies that promote growth would have a large, positive impact.

Lucas opens:
Macroeconomics was born as a distinct field in the 1940's, as a part of the intellectual response to the Great Depression. The term then referred to the body of knowledge and expertise that we hoped would prevent the recurrence of that economic disaster. My thesis in this lecture is that macroeconomics in this original sense has succeeded: Its central problem of depression prevention has been solved, for all practical purposes, and has in fact been solved for many decades. (p. 1; emphasis added)
In fairness to Lucas, he was writing in 2002/3, when lots of people shared his notion that we already knew how to prevent depressions. But it's also fair to point out that in 2009 Lucas was arguing mockingly against efforts to apply what we knew about how to prevent a depression. We skirted the precipice after the financial meltdown of 2008, but it was no thanks to Lucas.

Monday, July 22, 2013

Solving the wrong problem

On Friday, NPR's Morning Edition ran a story that was ... somehow I want to say "The gift that keeps on giving," but that would imply that I liked it. The problem with "Will robot nannies save Japan's economy?" started with the framing by the host.

"OK, you might think the U.S. with its high unemployment and slow growth doesn't have much advice for other developed countries when it comes to how to get out of an economic slump."

Obviously U.S. economic performance since the end of 2007 has been at first abysmal and then merely lackluster, but look at that phrase, "much advice for other developed countries." And how are those other developed countries doing?

I'm not one to mindlessly worship faster growth of GDP per capita as the surest sign of economic success, but that is the standard they set here. And in the last few years, the U.S. has done respectably in that regard, "beating out" most of the OECD, and almost all of the EU.

As for unemployment, our rate is high, but edging down. In the last few years, our unemployment rate has improved more than most OECD members.

In general, countries that have pursued "austerity"--cutting government expenditure in order to reduce government deficits--have stumbled in the last few years; the U.S. has pursued only modest austerity, and has only stumbled modestly.

I doubt there's some nefarious plan to promote austerity, though that's possible. I suspect it's more that they were looking for a clever segue, and they went with conventional wisdom. On the other hand, that would point to the idiocy of conventional wisdom among US elites.

But again, that was just the framing. The fun starts with the story itself, the premise of which is that the U.S. should be teaching Japan how to have more women stay in the labor force after having kids.

The main points are these:

Thursday, July 18, 2013

The scent of money

I’m finishing up a paper on money in the context of a physical understanding of the economy at the same time as I’m reading Hölldobler and Wilson, Journey to the ants, and the juxtaposition has me thinking about how we differ from other animals, and how we don’t.

Ants have to coordinate hundreds of thousands of individuals in numerous tasks: building the nest, tending the queen, tending the brood, foraging, defending the nest, attacking other nests. There’s always some division of labor: a queen who does nothing but lay eggs, female workers who tend the eggs and gather food, and males whose only role is to mate with virgin queens (I apologize if that sounds like a pitch for a cheesy movie).

In some species, the division of labor goes further, involving multiple castes in very specific roles. In leafcutter ants, the biggest individuals are the soldiers, whose only role is to fight. Below them, the biggest workers cut pieces of leaves and bring them back to the nest. Smaller ants take those pieces and chew them up into balls of vegatative matter, which they hand over to the smallest ants, the farmers. These farmers place the vegetable balls into the masses of fungus that they tend, and disappear into tunnels too small for the other castes, reemerging with harvested fungus for the others to eat.

Leafcutter ants make a chain to bend a leaf that will form part of their nest.

Ants have found a solution for coordinating huge numbers of individuals in a relatively complex division of labor, and their solution involves a repertoire of chemical signals and behavioral cues. The means are relatively simple: If I detect aroma A, pick up the thing giving off the scent and bring it back to the nest; When I smell aroma B, follow it; If something strokes my antennae, regurgitate food.

But the results are seemingly miraculous. The system is thoroughly decentralized, with nobody in control (the queen doesn’t give orders, she just lays eggs), yet the colony as a whole exhibits what looks like purposive behavior. In some of the essays in The mind’s I, Douglas Hofstadter plays with the idea (not unique to him) of an ant colony as a superorganism, exhiiting a kind of intelligence, if not necessarily consciousness.

Humans face a similar problem of coordinating thousands or millions of individuals in a division of labor more articulated than what you see with the ants, and we have two basic solutions. One is hierarchical, anything from a tribal chief (if the chief has real authority) to the empires of the ancient world, to the nested hierarchy of European feudalism, to the “state capitalism” of the Soviet bloc.

The decentralized, non-hierarchical solution is markets.

Monday, July 8, 2013

What's an uninformed consumer?

NPR's Morning Edition had a pair of stories today relating to the negotiations that are just starting for the Transatlantic Trade and Investment Partnership, or T-TIP as the cognoscenti are fond of calling it. (Doesn't it just sound so cute?) The stories focused on two farmers, one in Delaware, the other in Burgundy.

The French farmer was not excited about competiting with U.S. agriculture:
"I'm worried about open business because [I'm] sure we will not win because it's too different," he says. "If it's open, I think in 10 years, we all disappear in France and Europe. The cost in the U.S. is less than in Europe."
The story explains that "Most American beef is banned in Europe. Only a small percentage of what is known as non-hormone treated cattle is allowed in."

Conspicuously missing from the story was any mention of the health concerns around meat animals raised with hormones to make them grow faster, to say nothing of the heavy use of antibiotics in cattle, both to promote growth and as a prophylactic measure to more or less control the diseases that would otherwise run rampant through groups of cows living in their own dried shit and eating a grain-based diet for which the cow is not evolved. By which I mean, the story said nothing about any of that.

Tuesday, July 2, 2013

Bridge lessons

When I lived in Seattle from 1992 to 2002, I was fascinated by the Ship Canal Bridge that carries I-5 across the canal connecting Lake Washington to Lake Union and from there to Puget Sound.
On my bike, I often wished there were a bike lane somehow suspended from the bridge, so that when I was traveling between the University District and Capitol Hill, I wouldn't have to go all the way down to water level, cross the canal on University Bridge, then make my way back up the other side.

(Well, not all the way down to the water; it's not like I had to swim. And I didn't try any Evel Knieval stunts going over it when it was open like this.)

But that notion of a bike lane in the sky was just a wistful dream. What really fascinated me about the bridge was the way it illustrated the interface between economics and engineering.
an aerial veiw of the bridge, the UW campus, the Evergreen Point floating bridge,
and the Cascade Mountains
On each shore of the canal, the approach to the bridge is made out of ferro-concrete, and is supported by relatively closely spaced piers.

For the next section, the structure becomes steel, the spans become longer, and the piers become taller, as the land falls away toward the water and the bridge rises slightly on its way to the necessary high clearance over the canal.

Finally, in the middle of the bridge you get the longest, highest span--it has to be high to let sailboats under it, and it has to be wide to keep the bridge piers from getting in the way of the navigable waters.

The steel has a better strength-to-weight ratio, so it can reach across longer spans than the ferroconcrete. But concrete is cheaper than steel, so the ferroconcrete by itself is cheaper than the steel.

For the middle of the bridge where you need a really long span, you use the steel. For the approaches, where the ground isn't that far below you and you can use short piers, you use ferroconcrete.

But the place where you really see the economics is in the part between the approaches and the central span. You don't have to have your piers far apart, because you're still over land. But the piers are getting so tall that they're getting expensive. When you look at the bridge as a whole, you can see the point where the savings from having fewer tall piers outweighs the cost of building the spans out of a more expensive material.

Of course, this is probably oversimplifying. The other advantage of fewer piers is that you don't have to sacrifice as much stuff on the ground. There's a lot of space on the ground between those high piers to carry on normal activity (unless of course you're a plant, in which case the reduction in sunlight and rainfall is a bit of a problem).

But I suspect that the cost tradeoff of fewer tall piers vs. more expensive material played a role in the bridge's design.