Posts Tagged ‘Nick Rowe’

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Nick Rowe, gifted teacher

Wednesday, August 1st, 2012

Carleton University economist Nick Rowe is an incredible teacher. His success, I believe, is due to his intelligence, his curiosity and – most of all – to his patience. I am always impressed by Nick’s patience and respect for those who comment on his posts, even when the comments make little or no sense. Here is a somewhat trivial recent example: an interchange Nick had last Sunday with ‘Peter N’, a person who seems to know something about accounting, but nothing about economics. Peter N insists that the term GDP (gross domestic product) is not meaningful, being “neither a stock nor a flow”.

Peter N writes (among other things): GDP … is neither a stock nor a flow …. (12:01 PM)

Nick Rowe responds: Could you explain what you mean by GDP being neither stock nor flow? Are you referring to measuring it in discrete vs continuous time? (01:26 PM)

Peter N writes: GDP is the integral of value adding flows for a defined period. While you could define a GDP flow (and IIR Keen does) I don’t see how you could measure it, given the complexities of imputation and reconciliation.

It certainly isn’t a stock. You can treat it as one if you want to compare it to itself over other periods or with its sector totals, but a true stock has a value at any given point in time, and this value is quantity, not a rate.

This distinction is made more important by the peculiar nature of GDP. Because it combines results from (at least) 3 different forms of accounting and contains a significant component of imputations, it’s difficult to compare it with stocks at known times. The result of accruing across the different systems is only meaningful compared with other examples of itself. (02:14 PM)

Nick Rowe responds: Peter N: OK. I would say that GDP is strictly a flow, but if you measure any flow in discrete rather than continuous time it becomes a stock, rather than a flow. A PITA theoretically, but not a big deal. GDP is a flow. Stats Canada measures a discrete time stock approximation to that flow. (02:17 PM)

Nick Rowe, “Can you please read a first year textbook?“, Worthwhile Canadian Initiative, 29 July 2012.

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Eurozoners

Saturday, July 28th, 2012

What should we call inhabitants of the eurozone? ‘Europeans’ cannot be correct, because not all Europeans use the euro as their currency.

Carleton University economist Nick Rowe has a suggestion: Eurozoners. Sounds good to me.

This problem may not last for long, however. See:

Nick Rowe, “Kill the Euro now?“, Worthwhile Canadian initiative, 26 July 2012.

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Rowe on retirement

Monday, February 6th, 2012

By saving, and by paying taxes to support government pensions for retirees, we smooth consumption over our lifetime. In striking contrast, we don’t smooth our ‘consumption’ of leisure, taking much of it in one large chunk (known as ‘retirement’) in the last years of life. Nick Rowe asks, Why?

If real interest rates were higher than your subjective rate of time preference, then you would choose a consumption path that is smoothly growing over time. You would consume more when old than when you were young. For all other consumption goods, some people act a bit like that, and others don’t. Some people consume a bit more when old than when young, and others consume a bit less when old than when young. But when it comes to the consumption of leisure, we don’t act at all like that. We consume roughly the same amount of leisure every year. And then we suddenly go on a massive consumption binge for the rest of our lives. Why?

As we have gotten richer over the last two centuries, we have chosen to spend a greater proportion of our lives consuming leisure rather than working. But I think I’m correct in saying that by far the biggest increase in our leisure has been in that big bunch of leisure at the end of our lives. Most people used to work until they died. Now most people stop working and then consume a decade or two of leisure before they die. Proportionately, the growth in leisure taken in retirement massively exceeds the growth of coffee breaks, lunch breaks, evenings, weekends, and holidays. The income elasticity of demand for retirement leisure massively exceeds that of all other forms of leisure. Why?

Nick Rowe, “Retirement and the non-smoothing of consumption of leisure“, Worthwhile Canadian Initiative, 4 February 2012.

Observe and participate in the discussion over at Worthwhile Canadian Initiative.

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Nick Rowe on saving

Friday, January 13th, 2012

Carleton economist Nick Rowe wants to abolish “saving”. He means the concept, not the activity. He develops a tiny macro model that is convincing, even to a microeconomist like myself.

Let’s take a very simple macro model with no exports, imports, government spending, or taxes. There are four goods: a flow of newly-produced consumption goods C; a flow of newly-produced investment goods I; a stock of antique furniture A; and a stock of money M. ….

Saving isn’t a thing, it’s a non-thing. It’s a residual. It’s defined negatively, as not consuming part of your income. So when an individual increases his saving, for a given income, all we know for sure is that he is reducing his consumption. He must be increasing something else, but we don’t know what it is he is increasing. We know (in this model) that he must be: buying more investment; buying more antiques; or hoarding more money. But we don’t know which. And it really matters which. As I shall show. ….

“What is the effect of an increase in desired saving by all individuals?”

What a badly-posed question. We know they all want to buy less consumption goods, but what of those three possible things do they want to do more of? The question does not say. So lets take all three in turn.

1. Investment. Demand for newly-produced consumption goods falls and demand for newly-produced investment goods rises by an equal amount. …. No recession.

2. Antique furniture. Demand for newly-produced consumption goods falls, and demand for a flow of antique furniture increases by an equal amount. What happens? …. [There is a fixed supply of antique furniture, so individuals will have to change their plans and buy more consumption goods (no recession), buy more investment goods (no recession), or hoard money (recession).] ….

3. Money. ….  Money is the medium of exchange in this economy. That makes it very different from antiques. If you want to increase your stock of antiques, you must persuade someone else to sell some of his. It’s not something you can do by yourself. If you want to increase your stock of money, you just buy less. Nobody can stop you buying less. There’s a recession.

Nick Rowe, Why “saving” should be abolished, Worthwhile Canadian Initiative, 11 January 2012.

This abbreviated version does not do justice to Nick’s reasoning. Click on the link above for more.

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Nick Rowe on macroeconomics

Sunday, December 18th, 2011

Nick Rowe is amazing!

There’s something really wrong with the way we do short run macroeconomics. We focus all our attention on the output of newly-produced goods and services. That’s what we call “Y”. We talk about Aggregate Demand and Aggregate Supply, and what we mean by AD and AS is the demand and supply of those same newly-produced goods and services.

Keynesians then go on to divide Y into C+I+G, and C+S+T. Monetarists talk about MV=PY. Both agree that a recession is a fall in Y, caused by a drop in demand for Y.

But a moment’s reflection tells you this is wrong. It’s not just new stuff that is harder to sell in a recession; it’s old stuff too. New cars and old cars. New houses and old houses. New paintings and old paintings. New furniture and antique furniture. New machine tools and old machine tools. New land and old land.

If you want to sell new stuff in a recession, you have to either drop the price, or not sell it. If you want to sell old stuff in a recession, you have to either drop the price, or not sell it. And some people can’t or won’t drop their price, and some stuff doesn’t get sold. That’s true for both new and old. There is absolutely nothing special about new stuff.

[continued at the link below]

Nick Rowe, “Why Y? A disproof of Keynesian macroeconomics?“, Worthwhile Canadian Initiative”, 18 December 2011.

Why couldn’t I have had a macro professor like Nick Rowe? With that good fortune, I might have become a macroeconomist. Instead, since graduating, I have done my best to avoid macroeconomics. The truth is, my macroeconomics classes were incredibly boring. (Sorry, if I offend any of my macro professors who might be reading this blog. But I speak truthfully.)

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DeLong defends Stiglitz

Saturday, December 17th, 2011

Berkeley economist Brad DeLong defends Joseph Stiglitz  – but only his coherence, not his relevance – writing that Stiglitz, in the Vanity Fair essay, must be assuming that consumers who benefit from lower prices have a low propensity to spend compared to the stressed producers:

Rapid technological progress in a very large economic sector (agriculture then, manufacturing now) leads to oversupply and steep declines in the sector’s prices. Poorer producers have less income. They come under pressure to cut back their spending. Others–consumers–are now richer because they are paying less for their food (or their manufactures), but their propensity to spend is lower than that of the stressed farmers or ex-manufacturing workers.

Brad DeLong, “I Don’t Fully Buy Stiglitz’s Argument That Our Macro Problems Have Deep Structural Roots. But I Do See Its Coherence“, Brad.DeLong, 16 December 2011.

Nick Rowe, commenting on DeLong’s post (December 16, 2011 at 03:17 PM), asks:

Where does Stiglitz say that? Suppose his argument is that: (1930) farmers had a higher marginal propensity to spend than manufacturers; (2008) manufacturers had a higher marginal propensity to spend than people in the service sector. Wouldn’t he have made that assumption explicit, and spent some time defending that assumption? In my reading, he totally ignored the increase in real income of those in the sector with rising terms of trade. He jumped straight from a decline in farm incomes into multiplier analysis.

A reader (“jeff”) responds (at 04:32 PM):

Nick, on your thread someone pointed out that in another paper published this year he wrote a sketch of this argument where he says that “But more generally, distribution matters: if prices of agricultural goods fall rapidly, farmers reduce their spending by more than urban workers and rentiers increase their spending. Aggregate demand thus falls. More generally, with both supply and demand concave functions of firm equity, there are real, and potentially large, consequences to such redistributions.” It is easier to believe that this was left out(or mistakenly cut out) of this vf article than that he was unaware of this.

Nick’s response (at 05:47 PM) was:

Hmmm. OK. Fair point. But, well, it is absolutely central to his argument though, if that’s what his argument is. It’s a really big editing glitch. It’s a bit like forgetting to mention you are assuming MV is constant, when arguing that fiscal policy can’t work. ;-)

Update: Scott Sumner has much more here. Oh dear! This does not look good for Joe Stiglitz!

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reaction to Joseph Stiglitz’s views on how to avert a depression

Friday, December 16th, 2011

Columbia University economist Joseph Stiglitz:

Forget monetary policy. Re-examining the cause of the Great Depression—the revolution in agriculture that threw millions out of work—the author argues that the U.S. is now facing and must manage a similar shift in the “real” economy, from industry to service, or risk a tragic replay of 80 years ago.

Joseph E. Stiglitz , “The Book of Jobs“, Vanity Fair, January 2012.

Carleton University economist Nick Rowe’s reaction:

Joseph Stiglitz is a great economist. A great microeconomist. But this  is really bad macroeconomics. God it’s depressing.

[O]ne thing that has become clear to me over the past few years is that very smart economists can sometimes say very foolish things, even about topics in which they’re supposed to have expertise. This would appear to be one of those cases.

Nick Rowe, “The gizmo theory of the recession“, Worthwhile Canadian Initiative, 13 December 2011.

Bentley University economist Scott Sumner is also puzzled by Stiglitz’s macroeconomic model:

Stiglitz is a distinguished Nobel Prize winner.  But he didn’t win for business cycle theory.  I doubt even his fellow progressive Paul Krugman could make heads or tails out of Stiglitz’s essay.  ….

Back in the 1930s many people thought the Great Depression was caused by too much output.  This led FDR to adopt programs aimed at reducing output (such as the AAA and the NIRA.)  They “worked.”  Today economists tend to scoff at such ideas, as falling output is essentially the definition of a depression.  But not Stiglitz.

Scott Sumner, “No Mr. Stiglitz, Ben Bernanke does not agree with you“,  The Money Illusion, 13 December 2011.

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Nick Rowe on the euro

Friday, November 18th, 2011

Carleton University economist Nick Rowe finds eurozone news “really depressing” and thinks “things are going to be very bad very soon”.

Given the current ECB [European Central Bank] policy, what will be the value of the Euro, in terms of goods and services, in (say) two years time? What is the likelihood that it will be anywhere close to 4% (2 years x 2% inflation) less than it is today? Very small, in my opinion. If the crisis continues, but by some miracle the Eurozone hangs together, the most likely result will be deflation. If the Eurozone breaks up, many existing Euros will be converted into successor currencies that will depreciate. If the breakup is total, the Euro might even become worthless.

Under the existing ECB policy, I’m very uncertain about the future value of the Euro. I’m not even exactly sure how to define the question, when we start talking about successor currencies. If the ECB loosened monetary policy, and also acted as lender of last resort by making a public conditional commitment, the future value of the Euro would be much more predictable, and much closer to the inflation target.

Nick Rowe, “The ECB’s internal contradictions“, Worthwhile Canadian Initiative, 17 November 2011.

This is an excellent post, but I initially disagreed with one point. If the breakup is total, I thought, there is no possibility that the euro will become worthless. It will simply cease to exist as euros are converted into national currencies. Some successor currencies (Greece, Spain, Italy, Ireland) will depreciate, but others (Germany, Austria, Finland, Netherlands) will probably appreciate. I couldn’t imagine all successor currencies depreciating together.

Then I thought, suppose the breakup is so messy that there are bank runs, with a flood of euros flowing, for example, from Greece to Germany. With this scenario, depreciation of all successor currencies might be possible.

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saving the euro

Friday, November 11th, 2011

The euro project will fail unless the European Central Bank (ECB) acts as a lender of last resort to member countries. The ECB is the only institution that can perform this function, because only the ECB can print an unlimited supply of euros. But won’t this send the wrong message to deadbeat governments? Not necessarily, explains Carleton University economist Nick Rowe.

[N]obody would want to act as lender of last resort to a deadbeat, and the ECB wouldn’t want to act as lender of last resort to a fiscal deadbeat. With the guarantee of unlimited loans from the ECB, the fiscal deadbeat would have every incentive to keep on borrowing and spending unlimited amounts. It’s a mix of: the free-rider problem (because they are only one in 17, and even less than that for a small country); and the Samaritan’s dilemma (if they know you are going to help them get out of trouble, they are not going to stay out of trouble).

The Eurozone lacks a central fiscal authority to match the central monetary authority. And it seems to lack the ability to create a central fiscal authority in the normal way. Nobody seems to have the power to exert that central fiscal authority, and force the 17 governments to do what they are told.

But the ECB does have that power. It can say to each of the 17 governments: “We will act as your lender of last resort if and only if you do what we say. If you don’t do what we say, we will loudly announce that we will no longer act as your lender of last resort, and the bond markets will make mincemeat of your bonds, and there will be runs on all your banks.” ….

Is this democratic? Of course not. Might it happen? I don’t know.

Nick Rowe, “Could the ECB become the central fiscal authority?“, Worthwhile Canadian Initiative, 10 November 2011.

Nick is saying that the ECB could – and should – violate the “no bail out” rule of monetary union provided it attaches harsh conditions to the loans. It is somewhat like placing a bankrupt financial institution into receivership. Or sending an IMF mission to a third world country.

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Scott Sumner on Martin Feldstein on mortgage debt

Monday, October 17th, 2011

During the Great Depression prices fell by about 25%.  You might think that a deflation that bad would convince even the most hard-hearted conservative that monetary stimulus was needed.  Not so, conservatives were horrified by FDR’s attempt to reflate, even though the price level remained far below 1929 levels for the rest of the 1930s. ….

If we’ve got a demand problem, why not simply have a bit more demand, and leave the free market system in place?  I just don’t get it.  What is it about demand deficiencies that makes people become unglued? ….

I thought of the Great Depression when I read this essay by Martin Feldstein:

HOMES are the primary form of wealth for most Americans. Since the housing bubble burst in 2006, the wealth of American homeowners has fallen by some $9 trillion, or nearly 40 percent. In the 12 months ending in June, house values fell by more than $1 trillion, or 8 percent. That sharp fall in wealth means less consumer spending, leading to less business production and fewer jobs.

But for political reasons, both the Obama administration and Republican leaders in Congress have resisted the only real solution: permanently reducing the mortgage debt hanging over America. The resistance is understandable. Voters don’t want their tax dollars used to help some homeowners who could afford to pay their mortgages but choose not to because they can default instead, and simply walk away.

Gee, I can’t imagine why someone who lives frugally would be resentful of seeing an affluent neighbor with a good job use his house like an ATM machine, with one re-fi after another to buy boats and fancy vacations, and then dump his mortgage on the taxpayer, even though he could afford to pay it, just because his house was underwater.  Why would anyone have a problem with that?

Scott Sumner, “Martin Feldstein and Francisco de Goya“, The Money Illusion, 13 October 2011.

Scott Sumner, a political conservative and ‘market monetarist’, teaches economics at Bentley University in Waltham, Massachusetts. Harvard economist Martin Feldstein was chairman of the Council of Economic Advisers and chief economic advisor to President Ronald Reagan from 1982 to 1984.

Update: See the excellent exchange of views between Nick Rowe and ‘John’ on this post at The Money Illusion.

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