One of the Oddest Posts I've Ever Written (Not Required)

SE was in one of my principles sessions during Fall 2020. It was on Zoom. A lot of you were in those Zoom classes: TB, EC, BH, AH, TH, IP, BU, AW, CY (and probably others I can't recall).

He asked a question on 11/24/20 through chat rather than audio. I saw it, but thought it took some extra consideration, and told him I'd answer it later on.

So I took a screen capture, and promptly lost the image somewhere on my hard drive.

And would you believe I've felt bad about that ever since? I can even remember telling him as that semester wound down that I'd answer that question, while covering up for the fact that I couldn't find it, and hoping that I would.

***

There's a wicked search tool you should all have on your PC's. It's called Everything, it's made by VoidTools, and it's freeware. (Ninite also has it, if you use that service).

While searching for something with the word emblem in it on Saturday, I got halfway through the word, and up in my search results popped an image with SE's last name.

I opened it up, and there was his missing question from 17 months ago.

***

Now I feel obligated to answer it. We were doing comparative advantage examples, and he asked:

I'm not sure I quite understand the question anymore. But here goes.

First, in the real world that whole "whoever can produce more" goes right out. Small countries do get comparative advantages, and they do specialize in them successfully. But big countries are so much bigger (see Chapter VI in the Handbook) that a source of comparative advantage for them is sometimes that the global market is so big that a bunch of it gets filled by the big players even if they don't have comparative advantage. This is why a place like the U.S. has someone somewhere making pretty much everything.

But I think SE was asking about textbook examples, so let's work that out.

Consider the two region two good case: Iowa and Nebraska producing corn and wheat. So you need 2 pair of numbers (one for each good) to work out a comparative advantage problem. There are 4 possibilities for those numbers.

The numbers in both pairs are ties.

	Corn	Wheat
Iowa	2	3
Nebraska	2	3

In the above case, no one has a comparative advantage, so the example is irrelevant to the question.

The second case is that number in one pair is tied. But in the other pair, one of the regions, say Iowa, has a higher number: so Iowa has an absolute advantage at wheat.

	Corn	Wheat
Iowa	2	4
Nebraska	2	3

If you work out this table, then Nebraska has the comparative advantage in corn (and Iowa in wheat). Now I'm not sure what to write. The question says "Unless one country has an absolute advantage ...", but Iowa does, so I'm not sure if that means the question  doesn't apply here. But the second part is right: the comparative advantage does go to the one with the bigger number.

The third case is that neither pair is tied, but the higher value in one pair is for Iowa, and the higher value is for Nebraska in the other pair.

	Corn	Wheat
Iowa	2	4
Nebraska	3	3

You can actually prove that this third table is a special case of the second one, and the pattern of trade is the same. I have the same problem with the question though, since now we have two absolute advantages.

The last case is that neither pair is tied, and one region, say Iowa, always has a bigger number, and, the proportions in the rows are not the same.

	Corn	Wheat
Iowa	3	4
Nebraska	2	3

In this one, there's two possibilities. With the numbers above, Iowa has the comparative advantage in corn. But if we slowly increase that 4, eventually the pattern will shift so that Iowa has the comparative advantage in wheat (and the same sort of thing could happen if we changed the other numbers too). So in this one, the comparative advantage does not always go to the bigger number.

I think the lesson here is just to always work out comparative advantage because it's just not that easy to eyeball the numbers and get it right.

Financial Contagion

Macroeconomically, we're worried about Russia because they may not be able to pay their bills. But they do have the money when things get straightened out.

But Russia's actions put pressure on other countries, and those countries may not have a big money cushion.

When financial problems hop from one region to another it's called contagion.

This week it appears as though the first sovereign default in several years may be Sri Lanka. Tuesday, they announced they were going to stop making payments on debts, in hopes something will come through for them during their 30 day grace period.

That something might be an IMF loan. The problem is the IMF usually wants debtors to be making payments before giving them new loans.

***

Sri Lanka banned the use of fertilizer last year. Farm yields are down and prices are up.

On the surface, they said this was so the country could go organic (see here and here).

Unwritten in that is that most fertilizer is imported into Sri Lanka. And fertilizer production is heavily dependent on crude oil prices. Might not have been able to afford that because COVID-19 killed their tourism industry.

This Is Astounding

In macroeconomics, Larry Summers is huge. Professor at Harvard (youngest tenured economics professor ... ever). On everyone's medium list for a future Nobel Prize. Entered MIT at age 16. Won the John Bates Clark Medal (given to the best economist under the age of 40) — widely seen as a Nobel predictor — in 1993 (the two people who won the medal before and after Summers already have won their Nobel prizes).

In Democratic politics, Larry Summers is huge. Economic advisor to the 1988 Dukakis campaign. Chief Economist at the World Bank (not political, but generally liberally oriented). Undersecretary for International Affairs, and later Secretary of the Treasury during the Clinton administration. Served on Obama's transition team. Then directed Obama's National Economic Council (an alternative to the Council of Economic Advisors, doing more policy and less research). Initially an advisor to the Biden campaign, but he got pushed out.

In economics, Larry Summers is royalty. His mother and father were both economics professors at Penn (she's in the Wharton School, he was in the economics department). Mother, Anita, was recruited as one of the initial faculty in the first public policy schools in a business school, where she taught urban economics specializing in census data. Father, Robert, did seminal work in applying purchasing power parity to the GDP of countries around the world, and helped created the original Penn World Tables on which a lot of cross-sectional macroeconomics are based. Oh ... and her brother, Ken Arrow, won a Nobel Prize in 1972, and his brother, Paul Samuelson, won a Nobel Prize in 1970 (and both of them won the John Bates Clark Medal earlier, in 1947 and 1957).

Oh ... and being an economist on the White House's Council of Economic Advisors is not very political. But maybe a little embarrassing for a Democrat if you worked on Reagan's, as Summers did. 

Oh ... and President of Harvard for a few years (not a Republican place).

Oh ... and important enough to be portrayed in The Social Network.

***

I have personal reasons to dislike Larry Summers (did not play nice academically with friends of mine).

Professionally, I've read a ton of his papers and I like them, but I've never read one that super-impressed me. That's OK.

Summers has come up many times on this blog, since its inception: here's a search page linking to the 20 times I've written something related to him.

***

In short, if you're an economics major, and Larry Summers says something ... listen. If he writes something ... try and find time to read it. That's hard: it seems like he writes more paragraphs than most professors write words.

***

Summers is on the outs with the Biden White House. He was pushed out by progressives before the election.

***

Soooooo ... Ezra Klein, a progressive economics guest columnist for the New York Times (and co-founder of Vox) interviewed Summers on what's gone wrong with inflation and current policies. You can read the transcript or listen to the podcast. They're both easy to find online, and ungated.

I've posted a highlighted and commented version to the class's folder on Google Drive. DO NOT just read the highlights and comments ... that's the regurgitated version for my principles students. The big kids get to read the whole thing.

This piece is astounding. He all but calls President Biden and/or Senator Warren idiots (amongst others). And he suggests that White House advisors are so off base and have lost so much credibility that they should get less attention. 

He says this because his read on the data is that inflation is bad, continuing to get worse, intentionally caused by political operatives who were dismissive of the economic concerns voiced by economists, and who still don't get it. 

He also notes, with some evident disgust, that poor Democratic policies in the 1960's and 1970's led directly to Margaret Thatcher and Ronald Reagan. He sounds worried about the current situation.

***

There's an acronym, RINO, short for Republicans In Name Only. It applies to Republican politicians who tend to vote for Democratic proposals more often.For example, Senator Romney is often called a RINO.

There's needs to be an alternative one — DINO — for Democratic In Name Only. But for very different reasons.

I heard a joke about a month ago that the Republican Party is being held political hostage by its crazy majority, while the Democratic Party is being held political hostage by its crazy minority.

So to me, a DINO is one of the minority of contemporary progressives who are in frequent conflict with the way the majority of Democrats thought as recently as a few years ago.

Economically, the Biden White House is all DINO's. It is hard to emphasize sufficiently that being in an intellectual war with Larry Summers is repudiating everything Democrats have stood for the last 2 generations. What we are seeing is not Democrats vs. Republicans, it's DINO's vs. {Democrats & Republicans}.

And the DINO's are proud of this. They view the 2020's as a big referendum on their progressive policies. If the economy turns out great, they win the argument. They've been very clear about this (see here, here, here, here, and here). I'd say it's still before halftime, but they're already behind.