Onion Economics: International Finance

U.S. Dollar Drops Against Counterfeit U.S. Dollar

What are the economics of counterfeiting?

What is the equilbrium exchange rate at which a fake dollar will trade for a real dollar? (Assume fixed costs of entry into the counterfeiting business, legal penalties for gettin' caught and a zero marginal cost of printing extra fake and real dollars)

References anyone?

Liberte, fraternite ... but no egalite
(mostly to try out the LaTex)

You'd think that a more altruistic society, one where everyone cares about their fellow man, woman and child, would be a more redistributive society. But unless you mix up your fraternite with some of your egalite, you'd be wrong. The intuition is pretty straight forward, but all the same, here's the maths, done mostly to try out the Latex thing for blogger.

This post was partly prompted by Gabriel's comments on the mixin' of the welfare state (egalite) and immigration (fraternite, or the lack of it) and the related idea that if natives care only about the utility of other natives, but not the migrants, they will vote for less redistribution. What I'm saying here is that if natives care about natives, they will vote for less distribution anyway.

Throughout I assume that people's utility depends on income in a linear way. First, assuming a utility function with diminishing marginal utility of wealth is pretty much sneakin' in egaliterianism through the back door. Second I don't feel like integrating concave functions of a variable with an unspecified distribution (income) for the purposes of a blog post (I think a good bit of this would work if the marginal rate of substitution is low enough). So a person's utility is just their pre-tax income, minus their taxes, plus lump sum transfers. Specifically indirect utility of person i from the tax rate t given that she attaches weights b_k to the incomes of all other members of the economy is




Here y(i) is person i's pre tax income, t is the tax rate (between 0 and 1), lambda is a "Leaky bucket" parameter, y(A) is average income, and N is total population.



is the lump sum transfer each person receives when the tax rates is t, essentially an individual Laffer curve.

b_k=0 for all k corresponds to the case in which there is no altruism. Then V(i|t) simplifies to



For the rest, I'm gonna assume the median voter theorem holds so that the actual tax rate chosen by society is that of the median voter. Furthermore, I'm gonna assume that the median voter's income is less then the average income which is pretty much the case for all economies.

The optimal t for the median voter is then given by



where y_m is the pre tax income of the median voter. If there is no altruism then again b_k=0 for all k and we have simply



These tax rates will be less then one if the bucket is sufficiently leaky - lambda big enough. Otherwise we have t=1 and complete redistribution.

Now we assume there is altruism --> b_k>0, but no egaliterianism, b_k=b for all k. This simplifies the above tax rate to



But this tax rate is decreasing in b. In other words as the weight you attach to the income/well being of your fellow man rises, the smaller the tax rate and the level of redistribution you'd prefer.

Actually that applies only to the median voter, whose income we assumed was less then average, and everyone else who has below average income. Individuals with income above average would actually prefer higher tax rates, but in their case this just means "less negative tax rates".

To get a higher tax rate under altruism then without it you need also some egaliterian sentiments on the part of the median voter. Roughly speaking, given the right-skewness of the income distribution (as given by the fact that y_m is less than y_A) the distribution of weights on other's income, the b_k has to be sufficiently right skewed as well. If the b_k's are given by a function b_k=f(k) and individuals (k's) are arranged in order of increasing income then f(k) has to be downward sloping, probably convex and then sufficiently so.

Immigration at Reason and elsewhere

Katherine Mangu-Ward has an excellent column about BoA issuing credit cards to illegal immigrants over at Reason.

Here's the Brown Peril by Peter Bagge

Here's (old) Julian Simon at Cato

Here are Ottaviano and Peri - abstract, paper, presentations.

The basic point of the Ottaviano and Peri paper is pretty simple. Immigrants ain't like us (well, they ain't like the native Americans). But that's a good thing. It means immigrants' skills are more likely to complement natives' skills which means less downward effect on wages for similar groups and a greater positive effect on wages for unlike groups.

The distribution of skill among natives looks like a normal distribution (or some kind of a bell curve). There's relatively few unskilled workers, relatively few very skilled workers and lots of folks in the middle. But for immigrants to US this the distribution is essentially flipped - n-shaped. US is importing lots of unskilled workers, a fair number of very skilled workers (doctors, engineers, etc.) and little in between. In other words US is importing precisely the kind of labor that is scarce in US, which implies much larger overall economic gains.

Ottaviano and Peri go further (much much further then the Borjas papers) and estimate the substitution/complementarity within each skill group. A perhaps somewhat surprising finding is that even within skill groups the immigrants tend to be more complementary/less substituting than you'd think. Even for unskilled workers, the substitution elasticities between natives and immigrants is fairly small, implying only a modest pressure on natives' unskilled wages (and for the most unskilled workers, immigrants actually push up wages a bit).

The presentation linked above makes this point in a pretty straight forward way (if you don't feel like reading the paper with all the technical details). While unskilled workers might be a little hurt by immigration, the magnitude of the immigration effect on their wages is very small compared to other factors.

The authors also account for changes in capital stock which results from changes in the number of people in the economy. If you're a neoclassical growth guy then you think that an increase in the number of workers raises the marginal product of capital. This in turn means that the return to capital is higher prompting more capital accumulation. As capital stock rises the marginal product of labor rises as well and the negative effect on wages is ameliorated. Note that in the standard neoclassical growth model (the Ramsey/Solow model) an increase in the number of workers has no effect on per capita income in steady state since capital/labor ratio remains constant (here there's a bit of a fudge on whether migration increases L or n). It's more complicated with different types of labor and different substitution/complementarity relationships among them, but the end result is that it's an empirical question. An the data are favorable to the immigrants having a large positive overall effect and only a small negative effect on unskilled workers.

In other words, we shouldn't be building fences, we should be paying their relocation costs.
(Or at least sell entrance visas to capture some rents now going to the coyotes and the like)

Scientist says something nice about economics. Sort of.
Or maybe an economist says something nice about a scientist (a review of a review).

According to Joel Mokyr, who reviews Geerat Vermeij's book Nature: An Economic History in the latest edition of the JEL, Vermeij believes that biologists and naturalists should learn from economists, or at least appropriate some of the concepts developed by economists.

Now, I haven't read Vermeij's book but Mokyr's word on that score is good enough for me (his Lever of Riches is a must read for anyone interested in the history of technology and economic development) . Doing a quick search on Amazon inside Vermeij's book for "economics" and "economists" also confirms that he thinks there is a good bit of a parallels that biologists can draw between economic concepts and the natural world. He does seem to have some of the blinders typical of non-economists (and nature-scientists in particular) when he worries about "growth" and there seems to be a misconception, or at least a misemphasis, about the central role of "profit" in economics. On the whole though he seems familiar enough with how economics works - again, just going by the bits and pieces gleaned from Mokyr's review and from Amazon.

Mokyr's an excellent writer (and he's hilariously smart in person) so I'm just gonna cite a few choice passages from his review:

"Marshall famously felt that biology, not physics, should be "the Mecca of Economics" - though he did little more than apologize for subsequently going to the Medinah of comparative statics"

"[Evolutionary economics] has had some important achievements, but displacing the "neoclassical paradigm" - whatever one might mean by that - has not been one of them... one indication of how limited the success of evolutionary economics has been is the paucity of application of [it] to historical issues."

"[Vermeji's book] is above all ... aimed at Vermeji's fellow biologists, who are admonished to look at economic concepts... to deepen their understanindg of how the natural world evolves."

"Indeed, in one amusing instance, [Vermeji] seems to have independently discovered real business cycles when he maintains that "recessions" result from exogenous shocks to productivity"

"On the whole this [Vermeji's approach] seems to a nonbiologist a helpful method of analyzing nature. Both the competitive economy and the world of living beings are decentralized systems in which uncoordinated individuals make decisions based on their needs, preferences, or instincts, but in which nonetheless there is order of sorts and trends emerge"

"Above all, what nature and economics share is the budget constraint and the pervasive idea of opportunity costs"

Mokyr goes on to list some short comings and misconceptions of the book. The first basically center around the fact that some concepts, like "utility" or "specie" (not the pecuniary kind but the living thing) do not map easily between the disciplines (wait...pecuniary...pecu...cows!) but then since these are distinct areas one shouldn't always expect them to after all. In addition whereas economics focuses on optimality, in evolution "good enough to survive and reproduce" (i.e. adaptation) is, uh, good enough.

As far the second, I already noted some of it above. Mokyr also notes that Vermeji seems to subscribe to the "stagnationist" view that productive capacity always outstretches demand. Furthermore "Nor is it clear what on earth is the basis of his ex-cathedra pronouncement that 'human curiosity is a far more potent weapon of technological progress than is inquiry motivated only by economic gain". And then there are allegedly a few instances of just getting historical facts wrong.

It should also be noted that Mokyr himself is no apologists for "neoclassical paradigm" - whatever that means:
"But more important, this book may persuade (if nothing has before) that thinking about very long term historical change in terms of equilibrium models is not very helpful, that history is not a random walk but really does have a trend and is going somewhere"
i.e. there's historical path dependence:
"After all, if that asteroid that hit the Yucatan at the end of the Cretaceous had veered just an epsilon to either side of the planet, the dinosaurs or their descendants would still rule the planet."

So Vermeij's book is going on the reading list, right after I get done with Acemoglu and Robinson.

Disputandum about the Gustibus, eh?

Over at Yet another Sheep on the post about The Housing Paradox and General Equilibrium, in the comments there's some Becker hatin' going on (some, most, of it justified) along with some Stigler hatin' as well.

This reminds me of a story - I have a friend who did a Masters in Public Policy at Chicago. Once he witnessed Kevin Murphy having a spirited discussion with Gary Becker. He couldn't hear everything, but it ended with KM throwing his hands up in the air and shouting "But sometimes tastes DO change!!!"
I don't know if the story is really true.

I'm willing to buy into weaker version of the whole De Gustibus Non Est Disputandum Becker-Stigler argument (the strong version basically says that it makes sense for the purpose of research agenda to assume that people's tastes are invariant over time and all people have the same tastes):

If you can explain it with something else, don't explain with appeal to "tastes"

(an appeal to tastes is not tautological, per Kevin Murphy above, but it's pretty damn close)

I probably should've written this in Michael's comments but I needed a cheap blog post since I ain't got the time to write a...,um, un-cheap one.

If that link above didn't work for you try this one. Here's the real thing on JSTOR.

(And looking at that guy's (I don't know him it just popped up in a google search) blog header (or whatever the kids call it these days) it looks like he's solving a Bellman with money in the utility function. Ah yes, the Sidrauski model. It's been awhile.

((And apparantly neither Sidrauski nor his model have an entry in Wikipedia. One more thing I could do to procrastinate....nah, my good deeds for the day are at the bliss point.))

(((No Wikientry on "bliss point" either. Now I'm just rambling)))

Busy

I got to finish grading, write review questions for upcoming exam, write the exam itself, meet with some people I promised to meet, and go see a play. Also clean my messy apartment, review an article on an econ topic I don't care about at all and try to revise one of my own papers (I've soooo procrastinated on that. A part of me, the evil lazy part, says "the idea's there, it works, why should it be dressed up and made to fit some freakin' standard? Relabeling all the equations, moving figures around, formating to fit whatever requirements are imposed by a particular journal, etc.". Of course the good but still lazy part of me understands the need for all this.)

Anyway. So new stuff coming up soon but for now you'll just have to read about colliding monkeys. Again.

Art by Commies

The cover of Acemoglu and Robinson's book "Economic Origins of Dictatorship and Democracy", which I just got in the mail, has a detail from a Diego Riviera mural "Dream of a Sunday Afternoon in the Alameda Park" (click to enlarge) which is I guess somehow appropriate to the subject matter - it shows a bunch of folks including who I think is Benito Juarez (it could be Ignacio Comonfort, but given Riviera's politics, I doubt it) holding up the Constitution of 1857.

Anyway. I like Riviera despite his politics (and he gets a bit of a pass for getting kicked out of the Soviet Union for anti-Soviet activities and out of the Mexican CP) and I think he's one of the very rare instances of political art that's actually pretty good (though I might argue that it is good despite the politics rather than because of them). Here's some more good art by Commies, more along the lines of what you'd expect (I like the ones by Miro quite a bit). Here is a good one of angry workers beating up on British imperialists. The compostion of it and the sheer dynamism is very powerful.

When enjoying the aesthetic pleasure of it all, just don't think about the statistics.

Here is Modigliani's (the guy at the upper left) portrait of Riviera. For the record, as far as I know Modigliani was no Commie, just your run of the mill bohemian.

Most painters are leftist. The only exception I can think of off the top of my head are Emil Nolde and the older Dali.
Writers tend to distribute themselves more evenly (on the right you got Hamsun, Celine, maybe Cela, Borges, others - look'em up yourselves)
Musicians I don't know much about but there it's more about whether you're metal or not.

Strange, these correlations.
(and yes, I have both those videos in my YouTube favorites)

---------------
Oh yeah. One time in grad school me and a Mexican friend were killing time in between problem sets by teasing each other about our respective nationalities.
Me: "You guys killed Napoleon's nephew!"
Him: "Yes, but he deserved it."

Poverty in the US

One of my pet peeves is when people conflate poverty and inequality. Usually this occurs when someone is trying to score some ideological points, you mention that Absolute Poverty has actually decreased and then they pull the first switcheroo and say they were talking about Relative Poverty. Then you point out that that has actually been constant, and in any case Relative Poverty is essentially a measure of inequality. At that point they tell you that you need to “familiarize” yourself with the literature on poverty and inequality.

Welp. I’ve familiarized myself. A good overview of some poverty issues can be found in last Winter’s (06) Journal of Economic Perspectives. There are two poverty-related papers there. First, deals with Absolute Poverty in the US, while the second looks at Relative Poverty comparisons between US and various European nations (though it has some things to say about Absolute Poverty as well).

Here I’ll basically describe/make-some-notes on the first one. I’ll try to write up a post on the second one shortly.

The article in question is Hoynes, Page and Stevens “Poverty in America: Trends and Explanations”

First let’s get the old people out of the way (whenever I teach Fiscal Policy, Social Security comes up and then you can start hatin’ on the Old People, which the monkeys always love) – absolute poverty (from now on assume I’m always referring to absolute poverty based on pre-tax income but including transfers) among the elderly fell dramatically between early 60’s and early 70’s, from something like 30% to 15%. It fell another 4 or 5 percentage points up to 2003. So the focus is on the non-elderly. What happened to them?

For non-Old People poverty fell between ‘59 and ’69, went up between ’70 and ‘80 and pretty much stayed constant there (fell a bit during the 90’s, went up a bit after ’00). So much for alarmist cries about increasing poverty (as opposed to inequality).

The basic breakdown that you’d expect is there: women, particularly unmarried, are more likely to be poor than men, minorities more than whites, unmarried people more than married people, children more than adults, those without a high school diploma more than those with. But the main focus of the paper is to look at what determines the poverty rate and fluctuations in it.

This is an applied Micro paper which means it’s pretty ad-hoc-y. In particular at least one variable which the authors slap on the right hand side might actually belong on the left hand side. That being inequality.

In any case there’s four explanatory variables; real wages (to account for income growth), median wages relative to 20^th percentile wages (as an inequality measure), unemployment rate (to control for the business cycle) and fraction of women working (to account for the large influx of women into the labor force since 1967).

To give away the punch line, the Butler did it. And changes in the poverty rate are mostly affected by the business cycle. So much for blaming particular policies or outsourcing or some other boogeyman for poverty. But there are some further interesting aspects. The table below basically gives the estimated coefficients. They're all stat. significant except for fraction of women working for the 67-79 period which I set to 0 (point estimate was low anyway).



This basically means a few things. First, unemployment rates and wage growth seem to have much more effect on poverty rates than inequality - this is definetly true for the period 80-03. Second, the ability to explain the data by these variables went down for the second period - partly reflecting less fluctuation in poverty rates, as well as the fact that the included fixed effects (for states and time) are picking up more. Third, the increases in women working lowered poverty rates in the later period but not in the first.

If you think that it's easier for the government to redistribute resources than it is for it to make the economy grow and not fluctuate (which it is) then there isn't much blame you can put on the government, Democratic or Republican. The converse of this being of course that what the government can do to reduce poverty - aside from ensuring long run growth and not doing anything crazy with the money printing press - can be very limited. Finally, the case that "fighting inequality also fights poverty" looks pretty weak.

To wrap this overgrown post up, let me just note that the paper also considers the impact of family structure (more unmarried women), anti-poverty spending (TANF) and immigration on poverty rates. These don't play as much of a role, if any, than you'd think. More unmarried women effect is offset by increased female labor force particpation, rise in women's wages and education. Anti-poverty spending doesn't do much because most of it is phased out as people's income rise (and EITC is not part of the definition used). Immigrants, though more numerous, are still a relatively small fraction of the overall population and as a result don't affect the poverty rates much.

Growth or Equality? (This one I'm for real)

Whenever you start talking about growth usually someone chimes in with a "But what about inequality?". The World Bank and other international agencies used to be a lot more focused on income/consumption growth alone but after a decade or two of criticisms they've redefined their goals to make them more "fuzzy" (which of course is a preemptive strike against potential criticisms). Now if you read WB reports, etc. there's a lot more talk about "empowerment", "development" and of course "inequality". (As an aside, some of the shift in focus of the WB is probably good and like any big bureaucracy they can use a tongue lashing every once in awhile)

Anyway (Man, I suck at intros), here's an argument why we should focus on growth.

1. Assume that both growth and equality are "goods", that is, other things equal we'd like to have more of both of them. Higher growth raises income, lifts people out of poverty and makes life a bit less nasty and brutish, as well as longer. Equality...well I assume it's a good partly because I want to argue that we should focus on growth anyway. But one can invoke the (Classical) Utilitarian justification of Diminishing Marginal Utility of Wealth which states that a dollar to a rich man is worth less then a dollar to a poor man. This is the original 19th century justification for egalitarianism.

Given that both growth and equality are goods we can think of them in terms of indifference curves. In other words we can keep social well being constant by trading of between the two. If we make the society a little more unhappy by making it more unequal, we can compensate it back to the previous level by giving it some more growth (of everyone's income) - and vice versa. This basically means that the indifference curve for the two has the standard concave, downward sloping shape:




So equality as measured by say, the Gini coefficient, is on the x-axis and the growth rate of income/consumption growth is on the y-axis, blue guys are the indifference curves along which social well being is constant and the red arrow is the indirection in which utility is increasing - higher indifference curve means more social well being.

Note that this is just about preferences and it doesn't say anything about whether growth CAUSES inequality or inequality CAUSES growth.

But aren't they related? Probably. Take a look at this Policy Brief no. 4 (not linking directly to avoid pdf-ing your browser). Don't have to read all of it, just scroll down to page 28, Chart 3. The point here is that both high-inequality and high-equality are bad for growth. At high inequality you get social conflicts, envy and KUWJs effects. At high equality there seems to be little incentive for innovation, plenty of free riding and other problems. Growth is highest at an intermediate level of inequality/equality.

We can take that graph (which is basically the Kuznets curve in terms of growth) as a sort of structural/technological constraint which describes the possible combinations of growth and equality available:



Now we do the standard thing and find the highest indifference curve subject to the structural/technological constraint:



The important thing to note is that with a convex constraint which looks like it does, the optimal level of growth is going to be pretty close the maximum achievable growth (depending on how slopes work out exactly it might be THE maximum) while the optimal level of equality is intermediate.

If you try to push equality too far there'll be a high cost in growth and as long as you think both of these are good the trade off becomes not worth it for all but insane egalitarians. On the other hand picking the maximal growth might be sub-optimal but the deviation from optimum is likely to be small.

So sorry egalitarians, even if you're very egalitarian, growth trumps equality.

*Note - strength of society's preference for equality would be measured by that stinky parameter "eta" that pops up all over the place - the inverse of marginal rate of intertemporal substitution, the risk aversion coefficient, the measure of egalitarianism. However no matter how high the eta, that indifference curve is still downward sloping and concave.
Also note that this is somewhat related to the growth vs. fluctuations issue - at least the indifference curve part. The constraint may look different (and in fact usually it's assumed that the trade off is a monotonic one between mean and variance so the constraint may be upward sloping)

Too good not to link to for an econ geek

Run, run, run; run those regressions awayyyy!

My favorite part is when he starts headbanging (around 1:50 or so). So let's get this straight. Headbanging=funny. Bald guy headbanging=even funnier. Bald guy headbanging to a song about econometrics = Hilarious. (I'm a little scared that there's a non zero probability that I might run into him at some conference. Just let it be known that this post is written in a spirit of profound respect)

The closest I can come to that is that I used to doodle in class all the time rather than take notes. As a result I'd end up with economics related doodles. Here's one:

People are weird. Particularly old hippies.

So I’m sitting at a coffee shop workin’ on some stuff. It’s mostly empty it being Sunday night and all. But down couple tables there’s three older men, in their 50’s or so, talkin’ loud politics.

Now if you didn’t speak English you’d conclude these guys are vehemently disagreeing with each other. The conversation is obviously heated, there’s hand waving, pointing of fingers and a second ago one of them stood up to emphasize his point. You almost expect one of them to grab a chair and start an all out coffee-shop brawl.

Except that they’re all agreeing with each other. Apparently they’re three old hippies and they’ve pretty much covered all the standard political issues you’d expect. They all hate George Bush. They’re pissed off at the war in Iraq. They’re mad that pot is illegal. And they think the whole trouble started in the 50’s when “anti-communists” took over in the US.

So part of it is just convincing the others that one is truly outraged, “more outraged than thou!” which is what lies behind a lot of the heat. The other part is that they manage to differentiate their outrage. One of them is pissed off about Afghanistan while the other two think that “it sort of made sense”. Two of them think that 9/11 was a conspiracy while the third insists that “it was more than a conspiracy, it was a Coup D’Etat!”. My least favorite old hippie (I do wish someone would smack this guy with a coffee shop chair) wants to put all the blame for everything on the fact that “After WWII the US turned on our allies, the Russians, and started the Cold War!”. So a bit of this dogfight where no one has any dogs at stake is about which issue deserves the most outrage.

If I was gonna be snarky I’d say it reminds me of comment threads on certain blogs.

H. L. Mencken on Veblen and status goods

"What sound reason was there for believing that exclusive possession was the hall-mark of luxury? There was none that I could see. It might be true of a few luxuries, but it was certainly not true of the most familiar ones. Did I enjoy a decent bath because I knew that John Smith could not afford one—or because I delighted in being clean? Did I admire Beethoven's Fifth Symphony because it was incomprehensible to Congressmen and Methodists —or because I genuinely loved music? Did I prefer kissing a pretty girl to kissing a charwoman because even a janitor may kiss a charwoman—or because the pretty girl looked better, smelled better and kissed better? "

From here.

If the Devil was being tried in the court of law, I'd perjure myself in his her defense
Or the Antimilton.

In one of the comments Gabriel responds to my assertion that a particular model is too "Ad-hoc-y" by noting that none the less, it's good at matching the data.
Let's poke at this a little more.

OUTPUT: Model Usefulness (MUness)
INPUT: Ad-hoc-y-ness (AHness)

Other variables: Plausibility (PL) and Ability to Match Data (AMD)

Assumption 1: Ad-hoc-y-ness is positively related to the Ability to Match Data.

This is because with more Ad-hoc-y-ness you have more free parameters, fudge constants, etc. so it's easier to make the sucker fit. This is just an ad-hoc assumption.

Assumption 2: Ad-hoc-y-ness is negatively related to Plausibility.
As the amount of Ad-hoc-y-ness goes up it justs gets harder to buy into it. Various arbitrary assumptions pile on top of each other, pushing things in different directions. Also even if one arbitrary assumption is innocous two arbitrary assumptions together may very well not be.

Assumption 3: Model Usefulness is positively related to Plausibility.

Other things equal, a more plausible model is a more useful model. Anyone care to disagree?

From these we get the following:

Proposition: Given above assumptions, the worse a model matches the data the more useful it is and vice versa.

Proof:


Q.E.F.D

Of course the above is nothing compared to the brilliance of this.

Status=Externalities=Zero Sum=Efficiency!

I think I was too quick to give in to Michael in the comments on the "Keeping Up With the Joneses" post. Here's what he says:

KUWJ has mainly a strong effect on the composition of consumption. The externalities in that wont go away.

Well, first, in an intertemporal setting "composition of consumption" means "the path of consumption over time" and the point of my original post was that the presence of KUWJ effect does not change the steady state of the economy only possibly the transition path. Whatever distortions occur only take place as the economy adjusts to its long run level (this is also why I'm thinking this effect could have more of a role in a stochastic RBC model) - in a sense if the number of goods in an economy is large and the degree of status envy the same across them then the distortions are likely to be small (proof forthcoming in the long run). If you've got log utility, then even the transition path is the same. This essentially corresponds to the static case with Cobb-Douglas utility where the KUWJ effect is also a non-effect (constant out front of the utility function).

But even there I don't think the externalities play (much of a) a role. In an extreme case where every one cares only their relative consumption of every good and there's a fixed number of goods we get a zero-sum game, as was argued over at that Crooked Timber thread or wherever some time ago. But in a zero sum game, almost by definition, every outcome is Pareto efficient. You can only carry out Pareto improvements in non-constant sum games. So while the presence of status-externalities may alter the choices and outcomes relative to a situation where they're absent they do not cause inefficiencies.

I think the fallacy here is to compare an economy with KUWJ to some idealized one where people don't care about KUWJ and try to argue that somehow the second one is better. But we can't do that. (Almost) Any self respecting Social Planner has to take the preferances of the agents as given. That means that if people care about KUWJ then people care about KUWJ and any welfare comparisons must take that into account.

It gets more complicated if you consider production or a mix of status and non-status goods but I think a good portion of the argument survives.

So still. Don't worry about whether others try to Keep Up with the Joneses or not.

Krambambulya

I don't know a first thing about Belarussian music but the band linked to below sure has some catchy tunes. I've had the first one stuck in my head all day even though I don't speak...actually I'm not even sure if that's Russian or Belarussian (and if you wanna see some dirty fights look at the talk pages for Belarussian and Ruthenian in the Wiki) (I'm gonna guess the song is in Belarussian).

Quick google search suggests they have a webpage, and after some time spend spelling out the cyrillic I'm fairly certain that it's about the band, not the related drink or something else. The webpage's also got the same goofy/silly look as the videos.

Anyway, here they be:
Gostsi
Turysty

and this one's a cover of the theme song to an old Polish TV show for kids "Four tank men and a dog", which is how I originally stumbled upon'em.

Anybody know anything more about these guys (like how to get a record) let me know.

Some links related to the last post

Here is a portion of Greg Clark's book on the Malthusian economy and why the Black Death ruled! It's for a popular audience so it's fun to read and non-headache inducing. Plus he's a good writer. I actually covered some of the Malthus stuff in my Principles course this term and the monkeys loved it. (I mean that in an affectionate kind of way. Actually it's an inside joke from grad school back when we were the monkeys. Ay, I gotta feeling there's gonna be a lot of inside jokes between me myself and I on this blog.)

On the switch between "old technology" and "new technology" during the industrial revolution there's a bunch of stuff (I made use of it myself before). Here's a Hansen and Prescott paper that does it (old version, then published in AER 02). Anyway, it's a bit too ad-hoc-y for my taste.

So I prefer Oded Galor, though to steal a catchy phrase from someone else, he does "fetishize OLG models". (There's two links there Sparky).

Here's Reason magazine's review of Avner Grief's book on the role of institutions in history. I'm gonna fess up right at the start that I haven't read the book yet, just some of the articles that led up to it.

And Jeffrey Williamson (even though he runs a cabal he's a really nice guy) has a bunch of his papers on his Harvard web page.

Correlation is Not Causation

Or how Pollution makes women insist on Condoms.

KUWJ - Keeping up with the Joneses

This article is pretty old ("old" in the sense of the Prehistoric Ice Man) but it's related to something I've been thinking about recently.
The basic idea is:
People care about their consumption RELATIVE TO other's consumption (the "Keeping Up with the Joneses" effect)
As a result they 1. Work too much and 2. Consume too much. Then throw in stuff about being "slaves to advertisers" (I can't honestly remember when an advertisment actually made me purchase anything I normally wouldn't have).

If you step back and think about it, however, it's hard to see how the conclusion necessarily follows from the premises.

But first the empirical facts. Pretty much all increases in hours worked in the post WWII period are due to women entering the labor force. Men have actually cut back and gotten lazier. Average man works less hours today (and fewer men are in the labor force) than in 1950's and in 1960's. So to keep the story straight you'd have to argue that the reason why women entered the labor force is to "Keep Up With The Joneses" (KUWJ from now on). But that's pretty silly. Other factors seem a lot more important. Labor-saving household appliances. Less discrimination in the work place and less social stigma associated with what traditionally were perceived as "men's jobs". Decline in agriculture (on the farm - the women work (and so do the kids), the decline in female labor force particpation is very strongly associated with urbanization). Rising educational attainment of women. On the whole these seem like "good things" rather than the "bad things" of the KUWJ.

For consumption, the first thing to realize is that there's only two things you can do with your income. Eat it (consume!) or save it (consume later). Now, US does have lower saving rates then a lot of other countries, like say Stinkonia or Badonkadunk. But most of that can also be explained by a recourse to other factors like the rate of return (interest rate) on saving, taxes on capital income and other more boring but more pertinent economic aspects.

On a theoretical level if you're a fella or a gal who's all into the KUWJ, it's not clear at all that you will consume more and save less. Think about it. Presumably, you not only care about KUWJ today, but also tomorrow. So you face a choice - consume a bunch today and KUWJ and save less - but this means it'll be harder to KUWJ tomorrow, or - consume little today, save a bunches and it'll be easier to KUWJ today. So actually it could go either way. Envy on the part of consumers could actually drive them to save more as they all struggle to keep up with each other tomorrow.

How it works out in practice is gonna depend on the marginal rate of intertemporal substitution (MRIS) or in other words whether consumption today and consumption tomorrow are substitutes or complements. If utility is logarithmic in any given time period then that pretty much means that it is separable between your own consumption and that of others. This in turn means that other folks' consumption, even though you care about it, has no effect on your own saving/consumption decision. What's more, it means that even though there's an externality present, the outcome is still optimal. So strike one against KUWJ.

More generally if MRIS>1 (the inverse of "eta" in a CES utility function) then the KUWJ effect will make you save more if the rate of return on saving is below your rate of time preferance. And vice versa. That means "vice versa" over MRIS and over rate of return vs. rate of time preferance. And if you're in the long run steady state where the rate of return on savings is equal to the rate of time preference then it don't matter no how. Your saving decision is totally pinned down by the technological aspects of the economy - i.e. the real interest rate (note: this isn't exactly true if there's technology growth). Now, a "mature" economy such as that of US is probably pretty close to the long run steady state so once again KUWJ probably don't matter much. Strike two.

For the effect of the KUWJ on how much a person works it gets more complicated. This is because the labor supply curve can be messy even without putting a lot of crazy stuff in it. The income effect may dominate the substitution effect. As wages go up people may wanna work less and consume more leisure. That sucker can even be backward bending. And there's probably a big difference between the labor supply elasticity in the short run and the one in the long run - as Larry Katz argues (and he'd know). So putting in the KUWJ effect is just saying "anything can happen" on top of a "anything can happen" situation. Combine this with the empirical evidence presented above and it's strike three against the KUWJ effect. (This isn't even to ask the question as to why we're supposing that people are envious of other's consumption but not of other's leisure).

I'm sort of thinking about filling in the details, writing down the maths and so on and maybe sending it in to some goofy journal but it's very much a "nothing happens, it's not important, keep doing what you were doing before oh ye economists" type of result which usually doesn't have much of a chance of getting published. The only way I can think of spinning it is to slap it into some RBC model (and given my very mixed opinions about RBC models, this would constitute a cynicism of sorts) and argue that the KUWJ effect is some kind of a "propagation mechanism" in the same way that some folks got published by putting "habit persitence" in those models. But that would be being cynical, wouldn't it? And it's been awhile since I freakin' linearized an RBC model around it's steady state or quadratically approximated one and I don't know if I wanna go back and remember how to dig those ditches again.

Anyway. When people say that people work too much or consume too much because they're trying to keep up with other people just don't pay attention.




There's a bust of Thorstein down the hall from my office. As a result I am really quiet as I type this lest he hear my blasphemies.

Polish art links:

Zdzislaw Beksinski
(spooky paintings and drawings)

Ewa Demarczyk
singing a poem by the pretty much untranslatable Julian Tuwim

Andrzej Wroblewski
was, IMO, a very uneven artist. Some of it is just, I dunno, goofy. But some of it like "And the queue goes on" the "Executed" series and the "Driver" are really good.

The second poem of Zbigniew Herbert's on this site "Why The Classics" maybe somehow related to the current, um, situation. Herbet, unlike Tuwim, or Baczynski (who I'm not even gonna link to) is very translatable. Here's more. And I always thought Herbert looks like Derek Jacobi.

And if you want some "realistic" art this and this will slap you upside the head (Malczewski).

The kids these days can still make you proud:

Let's just say School, Penis, Outerspace

That WAS a stupid joke. One of the many to come. Tune in often. All of you.

Okay, let's get this thing rolling:

Open Thread. Have fun in the comments.

Someone said I should have a blog. That's not saying much seeing as how everyone else has one. Well, I guess *should* is different from *does* so I'll take that as a complement.

So here it is.

Is this going to turn into an additional source of work, headaches and responsibilities? Or will it end with not even a whimper?

BTW, the fella in the picture to the right ain't me. It's also not Franco Modigliani the NOBEL prize winning economist (I am currently in charge of a campaign which would rename the Nobel Prize in Economics to The Only True and Legit Nobel Prize, All the Other Prizes are Just Imitatin'). It's Amadeo Modigliani, the painter who was pretty good at painting naked ladies, drank too much and died young.