Z **Inactive** Worthwhile Economics Read by Brad DeLong

Krugman: Notes on Speculation

Paul Krugman (2008), "Notes on Speculation" :

About 20 years ago there was an argument about exchange rates and the trade balance.... The issue then was whether the United States had to have a real depreciation — a fall in the relative price of its goods and services — to reduce its trade deficit. A significant number of well-trained economists said no... if capital inflows fell, so would the trade deficit — no need for real exchange rate changes. John Williamson had the perfect phrase for this delusion: he called it “the doctrine of immaculate transfer.” The point was that ultimately, to reduce the trade deficit something had to provide incentives for higher exports and lower imports; the financial markets could only affect trade to the extent that they changed those incentives. Right now I see well-trained economists getting caught up in an equivalent fallacy.... Whatever you say about the futures market, it can only drive up the spot price by causing physical hoarding of physical goods....

[S]ome readers have asked me why my inventory argument didn’t apply to the housing bubble. The answer is that a house is a durable good.... To see the equivalent in housing of what the oil bubble types think they’re seeing in oil, we’d have to have seen a sharp rise in rental rates. It didn’t happen....

Third, some people have asked what I said about the California energy crisis of 2000-2001, perhaps history’s greatest example of market manipulation.... During that whole period, I was pretty much the only voice in a major news outlet even suggesting that market manipulation might be a central factor. And here’s the thing: I applied pretty much the same reasoning to that crisis that I’m applying now. The only way market manipulators could have been driving up prices was by keeping physical supply off the market. And they were in fact doing just that: there was huge unused generating capacity, consistent with the idea of deliberate withholding. Some years later we would actually get hold of control room tapes in which Enron traders called plants and told them to shut down, and boasted about cutting off Grandma Millie’s power. I’m still waiting for evidence that physical withholding is going on in the oil market.

Acemoglu, Johnson, Querubín, and Robinson: Central bank independence: failures, successes and the “seesaw effect”

Daron Acemoglu, Simon Johnson, Pablo Querubín, and James A Robinson (2008), Central bank independence: failures, successes and the “seesaw effect”:

Lansing: Speculative Bubbles and Overreaction to Technological Innovation

Kevin Lansing (2008), "Speculative Bubbles and Overreaction to Technological Innovation"

The dramatic rise in U.S. stock prices during the late 1990s, followed similarly by U.S. house prices during the mid-2000s, are episodes that have both been described as bubbles.... Caballero et al. (2006) argue that rapidly rising stock prices provided firms with a low-cost source of funds from which to finance their investment projects. The resulting surge in capital accumulation served to increase measured productivity growth which, in turn, helped to justify the enormous run-up in stock prices.... History tells us that periods of major technological innovation are often accompanied by speculative bubbles as investors overreact to genuine advances in productivity. Excessive run-ups in asset prices can have important consequences for the economy as firms and investors respond to the price signals, resulting in capital misallocation.... On the one hand, speculation can magnify the volatility of economic and financial variables, thus harming the welfare of those who are averse to uncertainty and fluctuations. On the other hand, speculation can increase investment in risky ventures, thus yielding benefits to a society that suffers from an underinvestment problem...

Eichengreen: Asian macro policy is out of kilter

Barry Eichengreen (2008), "Asian macro policy is out of kilter"

What should Asian central banks do now? They should raise rates.... It makes no sense when most Asian countries are growing at or near capacity that they should have negative real interest rates. Negative real rates are an unhealthy subsidy for borrowing by households and firms. They encouraged inefficient investment and excessive leverage in Asia in the first half of the 1990s, and we all know what followed. These negative interest rates and their artificial stimulus to consumption and investment are also why we haven’t seen more of a slowdown in Asia – why we haven’t seen more recoupling.... Critics of inflation targeting will say that central banks have a dual mandate not just to fight inflation but also to foster growth and that Asian central banks have no business raising rates in a deteriorating growth environment. But the fact of the matter is that they now face a very serious test of their credibility, leaving no alternative to tightening. The alternative to painful interest rate increases now will be even more painful increases later...

Quiggin: Equity between overlapping generations

John Quiggin (2008), "Equity between overlapping generations" http://www.uq.edu.au/rsmg/WP/WPC08_01.pdf

Tax Policy Center: A Preliminary Analysis of the 2008 Presidential Candidates’ Tax Plans

Tax Policy Center (2008), "A Preliminary Analysis of the 2008 Presidential Candidates’ Tax Plans" http://www.taxpolicycenter.org/UploadedPDF/411693_CandidateTaxPlans.pdf

Blattman and Miguel: Civil War

Christopher Blattman and Edward Miguel (2008), "Civil War" http://www.chrisblattman.org/JEL-Civil-War_11jun08.pdf:

Most of the world’s nations have experienced an internal armed conflict since 1960. The past decade has witnessed an explosion of economics research into the causes and consequences of civil wars, belatedly bringing the topic into the mainstream of economics. This article critically surveys advances in this emerging, interdisciplinary literature and charts productive ways forward. Formal theory has centered on a central puzzle: why do civil wars occur at all? Given the high costs of war, groups have every incentive to reach an agreement that avoids fighting. Explanations have focused on information asymmetries and the inability to sign binding contracts in the absence of the rule of law. Economic theory has tended to ignore, however, the thornier (but equally important) problems of why antagonistic armed groups form and cohere, and why individuals decide to fight. Likewise, the actual behavior of armed organizations and their leaders is not well understood. On the empirical side, a vast cross-country econometric literature has aimed to identify the causes of civil war, with geographic conditions favoring insurgency and low per capita incomes the most robust relationships. We argue that to truly decipher conflict’s causes, and understand the recruitment, organization, and conduct of armed groups, micro-level analysis and data will be needed. Finally, turning to the economic legacies of war, we frame the literature in terms of neoclassical economic growth theory. Emerging stylized facts include the ability of some economies that to experience rapid macroeconomic recoveries, while certain human capital impacts appear more persistent. Yet econometric identification has not been adequately addressed, and there is little consensus on the most effective policies to promote postwar recovery. The evidence base is weakest where it is arguably most important: in understanding civil wars’ effects on institutions, technology, and social norms.

Waldmann: Optimal Capital Income Taxation It Is

Robert Waldmann (2008), "Optimal Capital Income Taxation It Is" http://www.economia.uniroma2.it/nuovo/facolta/docenti/curriculum/Robert%20JamesWaldmann.pdf

It is well known that, in standard growth models, the optimal tax on capital income goes to zero asymptotically. Even some serious economists (cough Glenn Hubbard cough) seem to have decided this means that capital income taxes should be eliminated right now. However, asymptotically we'll all be dead. One can tell more if one looks at the simplest cases of standard growth models: an aK model with optimizing consumers who have logarithmic utility or a Cass-Koopmans model with Cobb-Douglas production and logarithmic utility (OK that was wonky but it's about assumptions so I have to be honest).

Consider such an economy in which the distribution of wealth is unequal at time 0. A utilitarian state would want to redistributed income. The first best way to do this is with a lump sum transfer. Let's rule that out by setting an upper limit on the tax on wealth (or an upper limit on the tax on capital income). What is the best policy?

The best policy would be to tax capital income at the maximum allowed by the assumption and use the revenues to reduce inequality until perfect equality is achieved. After perfect equality is achieved, there is no more reason to tax and taxes are zero. Thus, as noted above, the optimal tax goes to zero in the long run. The reason is that it is optimal to tax as much as is allowed by assumption so long as there is any reason at all to tax. Then stop.

A simple-minded application of the model to policy would suggest that we should tax as much as we can until everyone is perfectly equal. Now the model is not the world and this would be a terrible policy. However, the argument for roughly the opposite policy is based on the same silly model plus totally turning its implications upside down by pretending that time has already gone to infinity.

The assumption of logarithmic utility is not at all innocent. It makes a huge difference. A more general assumption (which is standard in the literature) is constant elasticity of substitution utility. In this case the optimal policy depends on the intertemporal elasticity of substitution of consumption and on whether the state can pre-commit to a policy that it would like to change later if it could.

If the state can't precommit, the implications are just like those for logarithmic utility described above: tax as much as possible so long as there is any reason to tax at all, then stop when everyone is perfectly equal.

With precommitment, if the intertemporal elasticity of substitution is less than one (as are all empirical estimates of said elasticity) the result is to tax even more, that is to tax as much as possible until the initially rich are as poor as the initially poor, then tax them some more.

These conclusions follow from analysis using standard techniques of the simplest case of the standard model. I think that they are not noted in the literature. I conclude, as always, that to the economics profession mathematical analysis of stylized models is taken seriously exactly so long as the conclusions fit the prejudices of economists. Thus when an economist says "Mathematical analysis which you wouldn't understand of my model shows that X is a bad policy" you should hear "I don't like X."

Acemoglu, Johnson, Querubín, and Robinson" Central bank independence: failures, successes and the 'seesaw effect'

Daron Acemoglu, Simon Johnson, Pablo Querubín, and James A Robinson (2008), "Central bank independence: failures, successes and the 'seesaw effect'":

Krugman: Speculation and Signatures

Paul Krugman (2008), "Speculation and Signatures" http://www.princeton.edu/~pkrugman/Speculation%20and%20Signatures.pdf