Nash Equilibrium - from A Beautiful Mind

Price Gouging and the Knowledge Problem

 If we should make price gouging illegal, then we have to ask, how do we solve the 'knowledge' problem? i.e.

Is there a 'more appropriate' price that should be charged? How do we find a price that ensures that the intensity of your desire/need for a generator is consistent with my willingness to provide one? Should we rely on market forces and prices at all or simply have some authority distribute generators based on some set of rules? Rules based on what criteria? How many generators are required and how do we make sure that they get to the people that have the greatest need/desire for them? i.e. how do we know if generators are allocated to the most highly valued use? What lessons can we learn from Hurricane Katrina about the government's ability to mobilize resources during a natural disaster? See also:

The use of knowledge in disaster relief: http://www.independent.org/publications/tir/article.asp?a=628

The Government's Response to Hurricane Katrina- A Public Choice Analysis: http://www.peterleeson.com/hurricane_katrina.pdf
The Problem with Price Gouging Laws-Regulation Spring 2011: http://www.cato.org/pubs/regulation/regv34n1/regv34n1-1.pdf

The Knowledge Problem - blog posts related to price gouging: http://knowledgeproblem.com/tag/price-gouging/ 

Environmental Economics blog post related to price gouging: http://www.env-econ.net/2009/06/mike-giberson-on-antiprice-gouging-laws.html 

Job Creators? OR In Praise of Consumerism and Materialism?

The following video praises consumerism and materialism as drivers of job creation and economic growth. The policy implication is that higher tax rates on entrepreneurs and high income earners should have little impact on job creation and economic growth if consumerism and materialism (i.e. Keynesian aggregate demand) are key drivers of prosperity.
 However, their is quite a bit of empirical evidence to the contrary.

See: Can tax cuts impact entrepreneurial activity and job creation?

Is Capitalism Pro-Business?

Are Corporations People?

I, Pencil and I, Smartphone

Keynes vs. Hayek Rap Videos

PART I




PART II

Keynesian Multipliers and Fiscal Stimulus Policy

"Among academics over the last 30 years, the idea of fiscal stimulus has been discredited and in graduate courses, it is "taught only for its fallacies." - John Cochrane, University of Chicago Booth School of Business

"The calculations that I have seen supporting the stimulus package are back-of-the-envelope ones that ignore what we have learned in the last 60 years of macroeconomic research."  -Thomas Sargent, New York University, Nobel Prize in Economics 2011

"We believe two factors are behind this rather tepid rebound. An obvious one is the severe financial crisis that precipitated this recession, with many major financial institutions receiving large bailouts from the federal government...Faced with a highly uncertain policy environment, the prudent course is to set aside or delay costly commitments that are hard to reverse. The result is reluctance by banks to increase lending…These facts suggest that it was a serious economic mistake to press for a hasty, major transformation of the U.S. economy on the heels of the worst financial crisis in decades. A more effective approach would have been to concentrate first on fighting the recession and laying solid foundations for growth.”  - Gary Becker,Steven Davis & Kevin M. Murphey, Uncertainty and the Slow Recovery, Wall Street Journal January 4, 2010.

"Did Stimulus Dollars Hire the Unemployed?: Answers to Questions About the American Recovery and Reinvestment Act," by Garett Jones and Daniel Rothschild. Mercatus Center, August 30, 2011 Also featured on EconTalk with Russ Roberts. 

"Hiring isn’t the same as net job creation. In our survey, just 42.1 percent of the workers hired at ARRA-receiving organizations after January 31, 2009, were unemployed at the time they were hired (Appendix C). More were hired directly from other organizations (47.3 percent of post-ARRA workers), while a handful came from school (6.5%) or from outside the labor force (4.1%)(Figure 2). Thus, there was an almost even split between “job creating” and “job switching.” This suggests just how hard it is for Keynesian job creation to work in a modern, expertise-based economy: even in a weak economy, organizations hired the employed about as often as the unemployed."

Much of the empirical work related to the size of spending multipliers has been completed by Valerie Ramey. (see also her EconTalk Podcast discussion of her work with economist Russ Roberts)

Identifying Government Spending Shocks: It's all in the Timing
Valerie Ramey. Quarterly Journal of Economics, February 2011.
http://qje.oxfordjournals.org/content/early/2011/03/21/qje.qjq008.full

Abstract: Standard vector autoregression (VAR) identification methods find that government spending raises consumption and real wages; the Ramey–Shapiro narrative approach finds the opposite. I show that a key difference in the approaches is the timing. Both professional forecasts and the narrative approach shocks Granger-cause the VAR shocks, implying that these shocks are missing the timing of the news. Motivated by the importance of measuring anticipations, I use a narrative method to construct richer government spending news variables from 1939 to 2008. The implied government spending multipliers range from 0.6 to 1.2
.

Does Government Spending Stimulate Private Activity? by Valerie Ramey. July 12, 2011. Prepared for the NBER "Fiscal Policy After the Financial Crisis" preconference.
http://weber.ucsd.edu/~vramey/research/NBER_Fiscal.pdf

Abstract:This paper asks whether increases in government spending stimulate private activity, in the form of either private spending or private employment. The first part of the paper studies private spending. Using a variety of identification methods and samples, I find that in most cases private spending falls significantly in response to an increase in government spending. These results imply that the average GDP multiplier lies below unity. In order to determine whether concurrent increases in tax rates dampen the spending multiplier, I use two different methods to adjust for tax effects. Neither method suggests perceptible effects of current tax rate changes on the spending multiplier. In the second part of the paper, I explore the effects of government spending on labor markets. I find that increases in government spending lower unemployment. However, most specifications and samples imply that virtually all of the effect is through an increase in government employment, not private employment. I thus conclude that on balance government spending does not appear to stimulate private activity.

Can Government Purchases Stimulate the Economy? by Valerie Ramey. June 14, 2011. Prepared for the Journal of Economic Literature Forum on the Multiplier.
http://weber.ucsd.edu/~vramey/research/JEL_Fiscal_14June2011.pdf

Conclusion: The U.S. aggregate multiplier for a temporary, deficit financed increase in government purchases (that enter separately in the utility function and have no direct effect on private sector production functions) is probably between 0.8and 1.5. Reasonable people can argue, however, that the data do not reject 0.5 or 2.

 

Owyang, Michael T., Ramey, Valerie A. and Zubairy, Sarah. Are Government Spending Multipliers Greater During Periods of Slack? Evidence from 20th Century Historical Data. [PDF Document]. Federal Reserve Bank of St. Louis. Economic Research Division. Working Paper 2013-004A. January 2013.

“A key question that has arisen during recent debates is whether government spending multipliers are larger during times when resources are idle. This paper seeks to shed light on this question by analyzing new quarterly historical data covering multiple large wars and depressions in the U.S. and Canada. Using an extension of Ramey’s (2011) military news series and Jordà’s (2005) method for estimating impulse responses, we find no evidence that multipliers are greater during periods of high unemployment in the U.S. In every case, the estimated multipliers are below unity. We do …nd some evidence of higher multipliers during periods of slack in Canada, with some multipliers above unity.”

Several economists have also studied the impacts of the New Deal Policies during the Great Depression. 

Some Observations on the Great Depression
Edward C. Prescott,Adviser Research Department Federal Reserve Bank of Minneapolis
Federal Reserve Bank of Minneapolis Quarterly Review
Winter 1999, vol. 23, no. 1, pp. 25–31

Abstract:  The Great Depression in the United States was largely the result of changes in economic institutions that lowered the normal or steady-state market hours per person over 16. The difference in steady-state hours in 1929 and 1939 is over 20 percent. This is a large number, but differences of this size currently exist across the rich industrial countries. The somewhat depressed Japanese economy of the 1990s could very well be the result of workweek length constraints that were adopted in the early 1990s. These constraints lowered steady-state market hours. The failure of the Japanese people to display concern with the performance of their economy suggests that this reduction is what the Japanese people wanted. This is in sharp contrast with the United States in the 1930s when the American people wanted to work more.

 FDR's policies prolonged Depression by 7 years, UCLA economists calculate (Press Release) New Deal Policies and the Persistence of the Great Depression: A General Equilibrium Analysis. Harold L. Cole and Lee E. Ohanian. Journal of Political Economy , Vol. 112, No. 4 (August 2004), pp. 779-816

Abstract: There are two striking aspects of the recovery from the Great Depression in the United States: the recovery was very weak, and real wages in several sectors rose significantly above trend. These data contrast sharply with neoclassical theory, which predicts a strong recovery with low real wages. We evaluate the contribution to the persistence of the Depression of New Deal cartelization policies designed to limit competition and increase labor bargaining power. We develop a model of the bargaining process between labor and firms that occurred with these policies and embed that model within a multisector dynamic general equilibrium model. We find that New Deal cartelization policies are an important factor in accounting for the failure of the economy to recover back to trend.

The Great Depression in the United States From A Neoclassical Perspective
Federal Reserve Bank of Minneapolis Quarterly Review
Winter 1999, vol. 23, no. 1, pp. 2–24
Link

Abstract: Can neoclassical theory account for the Great Depression in the United States— both the downturn in output between 1929 and 1933 and the recovery between 1934 and 1939? Yes and no. Given the large real and monetary shocks to the U.S. economy during 1929–33, neoclassical theory does predict a long, deep downturn. However, theory predicts a much different recovery from this downturn than actually occurred. Given the period’s sharp increases in total factor productivity and the money supply and the elimination of deflation and bank failures, theory predicts an extremely rapid recovery that returns output to trend around 1936. In sharp contrast, real output remained between 25 and 30 percent below trend through the late 1930s.We conclude that a new shock is needed to account for the Depression’s weak recovery. A likely culprit is New Deal policies toward monopoly and the distribution of income.

"Regime Uncertainty: Why the Great Depression Lasted So Long and Why Prosperity Returned After the War," by Robert Higgs. The Independent Review, Spring 1997. http://www.independent.org/pdf/tir/tir_01_4_higgs.pdf

and via Podcast at EconTalk with Russ Roberts 

Conclusions:  The economy remained in the depression as late as 1940 because private investment had never recovered sufficiently after its collapse during the Great Contraction. During the war, private investment fell to much lower levels, and the federal government itself became the chief investor, directing investment into building up the nation’s capacity to produce munitions. After the war ended, private investment, for the first time since the 1920s, rose to and remained at levels sufficient to create a prosperous and normally growing economy....the insufficiency of private investment from 1935 through 1940 reflected a pervasive uncertainty among investors about the security of their property rights in their capital and its prospective returns.

Wartime Prosperity? A Reassessment of the Wartime Economy of the 1940s," by Robert Higgs. Journal of Economic History, March 1992.  http://www.independent.org/newsroom/article.asp?id=138

ABSTRACT: Relying on standard measures of macroeconomic performance, historians and economists believe that “war prosperity” prevailed in the United States during World War II. This belief is ill-founded, because it does not recognize that the United States had a command economy during the war. From 1942 to 1946 some macroeconomic performance measures are statistically inaccurate; others are conceptually inappropriate. A better grounded interpretation is that during the war the economy was a huge arsenal in which the well-being of consumers deteriorated. After the war genuine prosperity returned for the first time since 1929.

2013-21| FRBSF Economic Letter

Uncertainty and the Slow Labor Market Recovery

Sylvain Leduc and Zheng Liu

http://www.frbsf.org/economic-research/publications/economic-letter/2013/july/us-labor-market-uncertainty-slow-recovery/

 “Since 2009, U.S. job vacancies have increased but unemployment has fallen more slowly than in past recoveries. There is evidence that heightened uncertainty about economic policy has been an important factor behind this change. Increased uncertainty may discourage businesses from filling vacancies, thereby raising unemployment. An estimate indicates that, without policy uncertainty, the unemployment rate in late 2012 would have been close to 6.5%, 1.3 percentage points lower than the actual rate.”

The Enterprising Americans: A Business History of the United States
BY JOHN CHAMBERLAIN 1963

http://www.entrewave.com/freebooks/docs/a_pdfs/jcea.pdf

One central theme behind Roosevelt's stimulus policies, like today, was that business was sitting on their hands and the government had to tax and spend to get things going and regulate to keep them going and prevent the next downturn. But as Chamberlain pointed out:

"the magnitude of the response of U.S. business to the war is in itself refutation of the thesis that in the thirties businessmen simply sat on their hands…it simply would not have been able to produce the new type of goods when the war button was pressed"

While it was true that total investment was low, investment opportunities were proliferant. He points out the infinite number of industries ready to bust out with thier innovations, including such leaders as du Pont, Dow Chemical, American Cyanamid, and Monsanto that many in the ag industry would be familiar with. During this time GE was ready to go with flourescent lighting and Kodak with color photography and commercial air travel was in the making.

But these great ideas were suppressed and kept on the back burner under the massive interventions of Roosevelt's expanding government.

"Businessmen came to ask themselves whether Roosevelt really understood a system where the hope of profit sparks expansion and investment. Or did he believe simply in centralizing decision and authority in boards and "planners" along the Potomac?"

The Tragedy of the Commons and Externalities

The Tragedy of the Commons

See also: http://economicsprinciplesandapplications.blogspot.com/2011/05/tragedy-of-commons.html



The Coase Theorem


See also: http://economicsprinciplesandapplications.blogspot.com/2011/05/coase-theorem.html

Game Theory- From the Economist

More examples and applications of Game Theory

Comparative Advantage

Spontaneous Order

Models in Economics: Game Theory

From the movie, A Beautiful Mind.
Full Screen - click here

Rent Seeking in History and Hollywood

Government and the Economy in "The Aviator"

by Dirk Mateer

Rent seeking, the political pursuit of gains that would not be earned engaging in the market process, is a common theme in many films. With clips from the acclaimed 2004 film “The Aviator,” the discussion of rent seeking can be broadened to include the related concept of regulatory capture. After Pan Am leader Juan Trippe (played by Alec Baldwin) is unable to convince TWA’s Howard Hughes (portrayed by Leonardo DiCaprio) not to offer competing flights across the Atlantic, Trippe turns to Senator Owen Brewster (played by Alan Alda) to introduce a Civil Aviation Bill that would hamper TWA’s ability to compete with Pan Am. The clips illustrate the gains, in this case campaign contributions, prestigious committee chairmanship, and personal travel, that politicians can receive from pushing rent seeking legislation such as that favoring Pan Am.

Three Myths About Capitalism

Should we boycott or ban products made by sweatshops?

From the New York Times:  Where Sweatshops Are a Dream  by Nicholas D. Kristof January 14,2009

"I often hear the argument: Labor standards can improve wages and working conditions, without greatly affecting the eventual retail cost of goods. That’s true. But labor standards and “living wages” have a larger impact on production costs that companies are always trying to pare. The result is to push companies to operate more capital intensive factories in better-off nations like Malaysia, rather than labor-intensive factories in poorer countries like Ghana or Cambodia.

Among people who work in development, many strongly believe (but few dare say very loudly) that one of the best hopes for the poorest countries would be to build their manufacturing industries. But global campaigns against sweatshops make that less likely.

Look, I know that Americans have a hard time accepting that sweatshops can help people. But take it from 13-year-old Neuo Chanthou, who earns a bit less than $1 a day scavenging in the dump. She’s wearing a “Playboy” shirt and hat that she found amid the filth, and she worries about her sister, who lost part of her hand when a garbage truck ran over her.

“It’s dirty, hot and smelly here,” she said wistfully. “A factory is better.”

The Unbelievable Truth About Sweatshops 

WHAT REWARDS VIRTUE

What role does greed play in society? What rewards virtue?




What role do profits and prices play in society?

Data Distributions: The Gaussian Copula & Fat Tails

For a  basic explanation of mortgage backed securities &  toxic assets as they relate to the credit crisis see:

The Credit Crisis Visualized Part 1

The Credit Crisis Visualized Part 2

 From: In defense of the Gaussian copula, The Economist

"The Gaussian copula provided a convenient way to describe a relationship that held under particular conditions. But it was fed data that reflected a period when housing prices were not correlated to the extent that they turned out to be when the housing bubble popped."

Decisions about risk, leverage, and asset prices would very likely become more correlated in an environment of centrally planned interest rates than under 'normal' conditions.

See also: Models and Agents-Hit by a Fat Tail

"Economists talk about fat tails when they want to refer to the probability that extreme events such as the above occur in a much higher frequency than you would regard as "normal."

"So why tails? And why fat?!" read more to find out.

Some examples of data generated from various copula functions and assumptions (using R) :

Energy Prices and Natural Resouorces

An application directly from Greg Mankiw's principles of economcis textbook applied to energy prices:

"In a market economy, scarcity is reflected in market prices. If the world were running out of natural resources, then the prices of those resources would be rising over time. But in fact, the opposite is more often true. Natural resource prices exhibit substantial short run fluctuations, but over long spans of time, prices of most natural resources (adjusted for overall inflation) are stable or falling. It appears that our ability to conserve these resources is growing more rapidly than their supplies are dwindling." –Greg Mankiw, Brief Principles of Macroeconomics, 5^th Ed Ch. 7 p. 144

There Will Be Fuel: NYT

"The same high prices that inspired dire fear in the first place helped to resolve them. High oil and gas prices produced a wave of investment and drilling, and technological innovation has unlocked oceans of new resources. Oil and gas from ocean bottoms, the Arctic and shale rock fields are quickly replacing tired fields in places like Mexico, Alaska and the North Sea...."The technology producing these resources has absolutely made the difference," Mr. Odum said. "It's the same with the Arctic, with the shale oil, all over the world. Technology is the key...."When you add it up," Mr. Morse noted, "you get something that very closely approximates energy independence."

Economic Optimism: NYT

"It's true that the real price of oil is slightly higher now than it was in 2005, and it's always possible that oil prices will spike again in the future. But the overall energy situation today looks a lot like a Cornucopian feast, as my colleagues Matt Wald and Cliff Krauss have recently reported. Giant new oil fields have been discovered off the coasts of Africa and Brazil. The new oil sandsprojects in Canada now supply more oil to the United States than Saudi Arabia does. Oil production in the United States increased last year, and the Department of Energy projects further increases over the next two decades.........You can always make news with doomsday predictions, but you can usually make money betting against them. "

The Energy Future Ain't What it Used to Be: NYT

"The price of natural gas and electricity will be low over the next quarter-century, and crude oil will become more expensive but not radically so, the Energy Department predicted on Thursday, in a report that contradicts widely held notions. And even without a national global warming law, American carbon dioxide emissions will not inexorably set new records; they will stay below the rate of 2005 for the next 15 years because of economic forces, the forecast said. "

A great video on comparative advantage, economic growth, & technological change

See also:


and