I just learned that a rough version of a paper that I am working on called “The Trouble with Macroeconomics” was posted on a server and has been making the rounds.
I lived with a surgeon for 25 years. From the decisions Ginny made, I learned that doctors are better than economists at balancing the costs and benefits of delay.
Economists teach that time is money, but we never specify the exchange rate. If delay costs $x per day per person, the total cost scales with the number of people. In my lifetime, the most important lesson economists have learned is that in countries of all sizes–small ones like Singapore, medium-sized ones like South Korea, large ones like China and India–better policy can lift people out of poverty more quickly than we dared hope. Because a billion people still live in extreme poverty, each day of delay in taking full advantage of this lesson imposes a cost that is staggering.
Alain Bertaud once told me, ruefully, that he was part of a failed effort at the World Bank to end the implicit subsidy for car trips created by the Bank’s offer of free employee parking. This proposal generated complaints, but that does not mean that it was a bad idea. If Steve Jobs had followed a strategy of avoiding all complaints, my MacBook Pro would still have an optical disk drive. Examples like these suggest a general lesson about cooperation in large groups:
Everyone wants progress.
Nobody wants change.
Someone asked “What if Germany ran Detroit?” This kind of what-if-pigs-could-fly question mixes abstraction and specificity in a way that I do not find helpful. What works for me is iterating back and forth between two extremes — abstraction and radical specificity — and avoiding the middle.
At one extreme, I ask abstract questions such as “Could there be gains from trade in government services like the gains from trade in private services?” Then I consider specific questions such as “Could the new authority that was formed to fix the street lights in Detroit sell its services to other cities?”
In my work, I have tried to avoid revealing anything about my personal political beliefs and even worked to obfuscate as necessary. When my father was visible in national politics as a Democrat, it was helpful to have a letterhead appointment at the Hoover Institution.
Although I stay away from the battles of national politics, in my role as an advocate for science as the greatest human institution, I am now drawn into the battles of academic politics. I seem to be the designated nag when Nobel Prize winners disappoint.
Ed Prescott has a new NBER paper (with a co-author I do not know) on monetary policy with negative nominal interest rates. Other economists have written on this topic. None of the work I know in this area is mentioned in Ed’s paper.
Last Friday at the NBER Summer Institute, Martin Stuermer presented a thought provoking paper (written jointly with Gregor Schwerhoff.) It takes an important and puzzling fact seriously, then uses some credible theory to work out the implications of the fact. In the discussion afterwards, a challenge to the paper’s apparent optimism yielded an insight that might have practical implications for ongoing policy debates. It was a wonderful illustration of how science works.
The practical insight is that there are two very different types of optimism. Complacent optimism is the feeling of a child waiting for presents. Conditional optimism is the feeling of a child who is thinking about building a treehouse. “If I get some wood and nails and persuade some other kids to help do the work, we can end up with something really cool.”
What the theory of endogenous technological progress supports is conditional optimism, not complacent optimism. Instead of suggesting that we can relax because policy choices don’t matter, it suggests to the contrary that policy choices are even more important than traditional theory suggests.
- Why do I go back and forth between periods of active blogging/tweeting and periods of silence?
Sometimes I have an idea I want to explore. Digital media can be a good way to start a conversation akin to those that we used to have only in the physical space of the seminar room.
Continue reading “Blogging and tweeting”
I’m pleased to report that President Jim Yong Kim has asked me to join the World Bank as Chief Economist and I have agreed to accept his offer. This may surprise you. It surprises me.
I have often said to myself that the intersection of the set of jobs in Washington DC that I would find intellectually exciting and the set of jobs that I would accept is empty. Intellectual excitement depends on the chance to learn. The decisions people make when they work in Washington tend to have real consequences, so it is risky to be learning on the job there.
In an update on an old story, an investment banker asks the client to pay by placing one penny on the first square of a chessboard, two pennies on the second square, four on the third, doubling the number on each square that follows. If the banker had asked for this on only the white squares, the initial penny would double thirty-one times to $21,474,836 on the last square. Using both the black and the white squares, the sum on the last square is $92,233,720,368,547,758.
People are reasonably good at estimating how things add up, but for compounding, which involved repeated multiplication, we fail to appreciate how quickly things grow. As a result, we often lose sight of how important even small changes in the average rate of growth can be. For an investment banker, the choice between a payment that doubles with every square on the chessboard and one that doubles with every other square is more important than any other part of the contract. Who cares whether the payment is in pennies, pounds, or pesos? For a nation, the choices that determine whether income doubles in one generation or two dwarf all other economic policy concerns.
Continue reading “Economic Growth”
Martha Derthick died recently at the age of 81. I never met her, but I became intimately acquainted with her book Policymaking for Social Security. I stumbled when I was collecting raw material for a paper I wanted to write to illustrate the importance of what political scientists call “expressive” voting. The book turned out to be a gold mine. It has more page markers than any other book I own. (See the photo below.)
When the Social Security program was introduced in the 1930s, it covered only a portion of the labor force. In some recent posts (see e.g. here), Paul Krugman cites this fact to illustrate the harsh realities that policymakers face when they innovate.
The evidence in Derthick’s account drives this point home with the power of a pile driver. Policymaking is like battlefield medicine. The leaders who succeed sustain a clear-eyed commitment to triage.