From EconLog:
… Referenced a talk by Bob Solow in 1991. It's quintessential Solow. The talk has his trademark sense of humor and his trademark clarity.
A few of his points:
…
4. He thinks that population growth in poor countries is the "largest single danger to sustainability in the world economy."
One more video (but click the link 2 paragraphs down instead):
About 15 months ago, Russ Roberts of George Mason University* and Cafe Hayek came out with a rap video about the positions of Keynes and Hayek. This is the follow-up. The original was posted here last year.
This is a serious, albeit alternative, contribution to economics education. If you go to this site, you can view the video while reading the lyrics.
I’ve known this was coming out all semester … and always meant to post it … but it just came out this morning.
Since we’re past the end of class, neither video is required. But … I know how much you all love macro ;)>
* George Mason University, in the Virginia suburbs of Washington D.C., is the “economics blogging capital”. Faculty there write Marginal Revolution, Cafe Hayek, EconLog, until recently Overcoming Bias too, and syndicated columnist Walter E. Williams.
A couple of last thoughts about technology. First, a funny video from several years ago showing that technology is a lot broader and more fundamental than most of us think:
Secondly, I didn’t have a chance to talk about the longer video in the “I, Toaster” post, but it is required for the final exam (you don’t need to know the details, so you can just put it on to play while you multitask). The point of this is not that toasters are complex, but that there is a huge amount of humanity behind the stuff you buy at Wal-Mart. That humanity is technology. When we dismiss a product as cheap crap, we’ve not only missed the point, but dissed the contributions of untold numbers of people. If their lives have meaning, then its embodied in the cheap crap, and we shouldn’t insult it.
Here’s a (funny and short) classic on that note about how our expectations are inconsistent with macroeconomic reality:
The only reason for studying macroeconomics is the overriding fact that the quality of your life has more to do with location of your birth than anything you do on your own.
This is embodied in that last result we obtained from the Solow model: that per capita income depends on per capita capital and aggregate technology, and that the (empirically confirmed) exponents make the latter much more important.
But, since high technology flows so easily across borders, it must be “low” technology — like how a book works — that doesn’t cross borders easily that is important.
So, it’s easy for us sitting in Utah to bemoan the priorities of the world’s poor: why do people in Chad have cellphones but not much else (and it’s not just Chad, that was this year’s example, but last year’s class had folks who talked about the same thing in Brazil). What’s important to the future well-being of people in Chad is not the high technology cellphones, but the fact that they use them to engage in a very old, and “low”, technology: talking to each other, and in particular, talking to strangers to expand their network of ideas. Briefly consider the article “Without His Mother’s Milk, a Haitian Boy Is Lost” from the April 25 issue of The New York Times, and ask yourself whether cellphones and/or Facebook make it more or less likely that a problem like this will persist. I assert that its less likely to persist because the great cultural contribution that America can make to the world’s poor is not Facebook, but that communicating with strangers is OK.
In that vain, consider these two posts. First, one about an experience I had finding a lost kitten’s home. The second is about the “Gates controversy” that Obama got himself into 2 years ago. I hope they help convince you that well-being isn’t about government macroeconomic policy, or macroeconomic exploitation by companies, but rather about the “low” technology of how your society functions. Macroeconomics isn’t, and shouldn’t be, about what the legacy media and politicians tell us is macroeconomics.
This post is not required; but it touches on a subject Jimmy has been bugging me about all semester.
One of the problems with being a macroeconomist is the number of people who are convinced that the future is going to be worse than the present.
You can see this in science fiction. Most science fiction movies do not present a positive future as in Star Trek, but rather a dark and terrible future as in The Terminator series (see the photo below). Fifteen years or so ago, my wife noted that all these movies seem to feature open fires burning in steel barrels … so, using the brilliant imagination of an economist, I came up with the original title of open-fire-in-steel-barrel-movies for this genre. There’s a lot of them: Blade Runner, the Road Warrior franchise, the Alien franchise,Twelve Monkeys, Back to the Future II (the one where they go to the future), Brazil, Total Recall, Soylent Green, Escape from New York, The Running Man. Is that enough to make my point? Even movies where the future has a nice, clean veneer, there’s an underlying dark side: the Star Wars saga, Avatar, Demolition Man, Silent Running, The Matrix franchise, Logan’s Run, Robocop, or Wall-E.
And yet, for the vast majority of humans who have ever lived on this planet, the human race was better off when they were older than when they were younger.
In part, this is true because the vast majority of humans who have ever lived did so within the last century or two.
But, it’s also true that for the vast majority of years of civilized human history people’s lives were just about the same when they were older as when they were younger.
For my part, I’m a person, not a year, so that last point is inconsequential. Many people don’t seem to feel that way though.
Anyway …
According to the mythos laid out in the The Terminator series almost 30 years ago, SkyNet became self-aware last Tuesday evening.
In 1984, this was the vision of the years after 2011:
FTNItK: The Terminator features thinking machines from the future. Skynet is the first machine in the future that becomes self-aware: it knows what it is, and it knows what it wants. Specifically, that it is not a human, and that humans are a violent threat. The problem is that Skynet is a Defense Department computer system, so it uses those capabilities to attack humans in the future, and for convoluted reasons, to find a way to attack humans in the past as well.
I keep telling you to read David Leonhardt’s stuff in The New York Times, even if your politics finds it painful, because he’s bright and insightful. Well, now he has a Pulitzer Prize to prove it.
Standard and Poor’s signaled that they might downgrade their rating of US debt.
S&P is the largest rater of government bonds in the world. They have rated the US, and about 20 other advanced economies as AAA — their highest rating.
But, about 20 years ago, they started also announcing a signal of where the rating may be going. This is what changed on Monday — the US was downgraded from “AAA Stable” to “AAA Negative”. That’s why I put "downgrade” in quotes, because we’re still AAA (sort of). Here’s a chart for comparison:
These ratings are used by buyers of government bonds (typically other countries, central banks, insurance and reinsurance companies and pension funds) to decide how much interest they need to justify the purchase. So this “downgrade” will result in our government having to pay higher rates.
This “downgrade” is purely in response to political moves; most likely Obama’s unprofessional speech last week that pilloried Republicans in Congress for supporting Representative Paul Ryan’s plan to reduce the national debt. The “downgrade” can be taken as a sign that S&P has interpreted Obama’s speech as indicating that he is unwilling to make a deal with House Republicans.
It would not be correct to interpret the “downgrade” as a response to economic fundamentals. These are not good, but they simply don’t change that rapidly. Here’s the story we already know:
This didn’t change last week. Politics did. The top chart also shows that we’re not out of the range of other countries — like Canada. The difference is that our political situation is not currently favorable to improving the numbers.
This all came from a piece in Tuesday’s issue of The Wall Street Journal called “U.S. Warned on Debt Load”.
Nouriel Roubini is famous for constantly saying everything (economically) is bad, and getting worse. Sometimes he’s right.
I don’t tend to find his pronouncements interesting — I think he’s selling something … mostly himself.
But, he’s a bright guy, who’s famous for a reason. This past week he’s been ranting about China, and since I’ve used China as an example of the perils of unbalanced growth, I thought I’d link to his recent piece from Project Syndicate.
China has grown for the last few decades on the back of export-led industrialization and a weak currency, which have resulted in high corporate and household savings rates and reliance on net exports and fixed investment (infrastructure, real estate, and industrial capacity for import-competing and export sectors). When net exports collapsed in 2008-2009 from 11% of GDP to 5%, China’s leader reacted by further increasing the fixed-investment share of GDP from 42% to 47%.
…
The problem, of course, is that no country can be productive enough to reinvest 50% of GDP in new capital stock without eventually facing immense overcapacity and a staggering non-performing loan problem. China is rife with overinvestment in physical capital, infrastructure, and property. To a visitor, this is evident in sleek but empty airports and bullet trains (which will reduce the need for the 45 planned airports), highways to nowhere, thousands of colossal new central and provincial government buildings, ghost towns, and brand-new aluminum smelters kept closed to prevent global prices from plunging.
…
…All historical episodes of excessive investment – including East Asia in the 1990’s – have ended with a financial crisis and/or a long period of slow growth. To avoid this fate, China needs to save less, reduce fixed investment, cut net exports as a share of GDP, and boost the share of consumption.
The trouble is that the reasons the Chinese save so much and consume so little are structural. It will take two decades of reforms to change the incentive to overinvest.
Traditional explanations for the high savings rate (lack of a social safety net, limited public services, aging of the population, underdevelopment of consumer finance, etc.) are only part of the puzzle. Chinese consumers do not have a greater propensity to save than Chinese in Hong Kong, Singapore, and Taiwan; they all save about 30% of disposable income. The big difference is that the share of China’s GDP going to the household sector is below 50%, leaving little for consumption.
Several Chinese policies have led to a massive transfer of income from politically weak households to politically powerful companies. A weak currency reduces household purchasing power by making imports expensive, thereby protecting import-competing SOEs and boosting exporters’ profits.
Low interest rates on deposits and low lending rates for firms and developers mean that the household sector’s massive savings receive negative rates of return, while the real cost of borrowing for SOEs is also negative. This creates a powerful incentive to overinvest and implies enormous redistribution from households to SOEs, most of which would be losing money if they had to borrow at market-equilibrium interest rates.
The article refers to SOE’s: State Owned Enterprises. We’ve talked about this a bit in class, but not in several weeks. The form of capitalism practiced in China is similar to fascism: politically connected people get access to equity stakes in “private” enterprises in return for political support. This is a system that can perform well for years (if trade is discouraged, as in Latin America for most of the 20th century) or decades (if trade is encouraged, as in Japan in the postwar period). But it doesn’t end well.
