Friday, March 25, 2011

Surowiecki on the Solow Model

In the current New Yorker, James Surowiecki discusses the implications for Japanese growth and well-being of the Sendai earthquake. He references the same article I found on disasters and growth, which suggests that beyond the neoclassical implications (fast growth along a return to the steady state), there might be something good about being forced to replace old capital with new capital.

Friday, March 18, 2011

UNSCEAR on Chernobyl health effects

The UN Scientific Committee on the Effects of Atomic Radiation maintains a website on the Chernobyl disaster with a summary of their findings and PDFs of reports from 2000 and 2008. Their statistics aren't uncontroversial. To date, the UN estimates 28 fatalities associated with acute radiation syndrome (ARS) out of 134 highly exposed plant staff and emergency workers, another 19 deaths among that group that do not appear to be associated with ARS, and 15 deaths among the more than 6,000 children or adolescents exposed to iodine-131 via milk and diagnosed with thyroid cancer. The UN also cites some evidence of increases in the incidence of leukemia and cataracts among the larger group of recovery workers but argues it is inconclusive due to low statistical power.

Reports seem to suggest that conditions at the Fukushima Daiichi reactor are unlikely to result in releases of Chernobyl-sized plumes of radioactivity.

Wednesday, March 16, 2011

Earthquakes, tragedy, and growth

In my undergraduate class at Queens College today, I found myself trying to turn a tragedy into a teachable moment, at least in the limited sense of better understanding macroeconomics. Humans are irreplaceable, but buildings and equipment are not. I suppose it might also be appropriate to observe that the environment is also irreplaceable, to the extent we might harm it enough that nature can't heal. My initial guess based on what we know is that the environmental impact of the 9.0 magnitude earthquake in Sendai is likely to be minimal compared with the human and capital costs, but I could easily be wrong given the current uncertainties.

Especially in a country like Japan, where population growth is zero or negative, people are very dear. They're dear regardless. But one of the lessons of the standard neoclassical growth model is that capital, on the other hand, is replaceable. Shocks to the Japanese capital stock, such as that associated with an earthquake, will reduce the levels of wealth and income in the short run, but income growth is likely to be more rapid after the shock than before.

A 2002 article by Mark Skidmore and Hideki Toya in Economic Inquiry went further than that, suggesting that turnover of the capital stock might also be good for fostering technological innovation. Another relevant article is by George Horwich in 2000, writing about the 1995 Kobe earthquake, where he argues that the greater importance of human capital, of which losses were high but not catastrophic, contributed to the quick recovery. He cites an estimate of fatalities of about 6,500 and destroyed capital of about $114 billion, or 0.8% of the nation's capital stock.

Costs, benefits, and nuclear

This Monday's Room-for-Debate featured a perspectives from several U.S. physicists about the earthquake-related damage at the Fukushima Daiichi nuclear plant. The third, MIT's Michael Golay, points out some of the more subtle aspects of the problem that only an economist could love. (His piece is entitled "Realism about costs and benefits.")

In a study he led for Tokyo Power and Electric, the authors argued that any earthquake large enough to result in problems with radioactivity containment would cause many more direct fatalities than through any associated release of radiation. Thus the marginal dollar (yen) might better be spent on earthquake preparedness rather than nuclear safeguarding, because the former would result in more lives saved.

Not an argument that anybody probably wants to hear right now, but a sound if ultimately sad one.

Saturday, March 12, 2011

New evidence on ARRA multipliers

Jim Feyrer and Bruce Sacerdote report that at least a few quarters out, some of the fiscal stimulus had large effects, some had zero or even negative effects, and the total effect was probably lower than expected by administration economists, but not significantly lower.

A compelling part of their results is that they find that aid to state and local government to support teachers and police apparently did not save any jobs, or in other words, had no "permanent" effect on employment. Support to low-income families, on the other hand, did. This is fairly consistent with a "permanent income hypothesis" view of the stimulus. As reported by the authors, groups with long time horizons, like state and local governments and unions, correctly perceived the relief as temporary and didn't permanently hire or save a job, preferring instead to conduct business-as-usual as they would have without the stimulus. Groups with shorter time horizons or liquidity constraints made "permanent" changes, probably by spending the cash, a different outcome than in the counterfactual with the recession but no stimulus.

Core versus "populist" inflation

The Wall St. Journal and Reuters reported on NYFRB President William Dudley's remarks about total versus core inflation (core is total excluding food and energy) in a Q&A session after his prepared remarks at a meeting of the Queens Chamber of Commerce and Queens Economic Development Corporation in Flushing. Dudley made the mistake of referencing the iPad 2, which the food-price conscious in the audience didn't appreciate.

My experience teaching macro at Queens College suggests that at least among college students, there is a general perception that the rate of price inflation never falls, and furthermore that prices never fall. I attribute some of this to the large portion of budget spent on rent here in NYC, where rent control and stabilization policies will typically prevent rents from ever falling. But I'm not sure whether people internalize how food and energy prices go down as well as up.

To be sure, central banks aim for a target rate of core inflation around 2 or 3 percent, so prices typically rise rather than fall. But we haven't done a very good job explaining why the target needs to be positive, nor why it should be core rather than total inflation.

Ironically, I'd say Dudley explained himself fairly well in his remarks, but probably not in a way that made sense to his audience:

[E]ven if commodity price pressures were to prove persistent, they have a smaller impact in the United States than they do in many other countries. Relative to most other major economies, the U.S. inflation rate is lower, the amount of slack much greater and commodities represent a relatively small share of our consumption basket. This small share helps to explain why the “pass-through” of commodity prices into core measures of inflation has been very low in the United States for several decades.

Thus, while rising commodity prices may be giving some of you a bad headache, they are not likely to lead to a sustained rise in inflation to levels inconsistent with our dual mandate. We will have to ensure, however, that these pressures do not cause inflation expectations to become unanchored.

Wednesday, March 9, 2011

Retirement, budgets, spending

Today's Conversation Blog post with David Brooks and Gail Collins raises some interesting points about retirement, pensions, and spending. The passage about the replacement rate --- a pension might replace 70% of income, for example --- caught my eye. Brooks jokes that the extra 30% you don't need was for gin and psychotherapy, which stress-addled middle-aged workers need to replace loss happiness.

A recent working paper by Michael Hurd and Susann Rohwedder shows only modest declines in spending associated with retirement, with somewhat larger decline among low-income households where health shocks may have caused retirement. This contrasts with evidence in the cross section or with limited spending data that had suggested larger declines in spending, more consistent with Brooks's gin and psychotherapy idea.

The blog post also discusses some fiscal sustainability issues with a clear eye.

Monday, March 7, 2011

I use slides

I had to chuckle when The Times's David Carr compared Glenn Beck to a macroeconomics professor in an article today:

What had been a fast and loose assault on all things liberal has grown darker and less entertaining, especially with the growing revolution in the Middle East, a phenomenon Mr. Beck sees as something of a beginning to some kind of end. He’s often alone in the studio with his chalkboards and obscure factoids, a setting that reminds me of an undergrad seminar on macroeconomics with an around-the-bend professor I didn’t particularly enjoy.

Saturday, March 5, 2011

Perceptions and war

Another Disunion Blog post considers the rationality and expectations of both sides prior to the Civil War. The final two sentences nicely summarize the main point, that it seemed not to be irrationality that led to war, but miscalculation:

"Neither had a marked advantage when it came to rationality or madness. And neither had the least idea what war would mean, as is often the way with the best and the brightest."