[PEN-L:5094] Taking and Giving
This morning's NYTimes carries a couple of articles on the "Property Rights Bill" before Congress, which is designed to require taxpayers to compensate property owners for any reduction in the "fair market value" of their property (of 10% or more) resulting from any government regulation. The point is of course to gut environmental legislation, in particular, by extending the Constitutional protection of property owners against a governmental taking of entire properties (for which private owners have always had to be fully compensated) to the "taking" of just a portion of the market value of such properties (as a consequence of some legislation that restricts its use and thereby reduces its value). My question is this: Has anybody ever suggested that private property owners ought to fully compensate taxpayers for governmental actions which have the effect of *increasing* the value of their property? I know that Newt et al. are not known for the logical consistency of their reasoning; but one might expect that at least a few of their like-minded friends in academia would have wrestled with this question. Waiting to be better informed, Thomas E. WeisskopfE-mail: [EMAIL PROTECTED] Professor of Economics Office\ (313)-763-3037 University of Michigan Phones/ (313)-764-2355 Ann Arbor, MI 48109-1220 Fax:(313)-764-2769
[PEN-L:4468] Trying to create Doug Henwoodski
On Sat, 18 Mar 1995, Doug Henwood wrote: > An interview in the Jan-Feb 95 issue of Transition, the World Bank's > newsletter on "reforming economies," with William Bader, president of the > Eurasia Foundation, explores the matter of "breeding a new generation of > economists in the FSU" [former Soviet Union] > > Where's the PEN-L foundation, to set up truth squads to deprogram the > graduates of these institutes? I think the graduates of the New Economics School and other such institutes of "higher" economics education in the FSU supported by Eurasia are probably undeprogrammable (because they stand an excellent chance to get a scholarship to Economics Ph.D. programs at prestigious mainstream schools in the West), but I am involved in an effort to get to first-year students of Economics in Russia. Neva Goodwin (co-director of the Global Development and Environment Institute at Tufts University) and I have received a modest grant to develop an alternative introductory economics textbook for use in Russia (and, if successful, elsewhere). The source of the grant? The Eurasia Foundation. Thomas E. WeisskopfE-mail: [EMAIL PROTECTED] Professor of Economics Office\ (313)-763-3037 University of Michigan Phones/ (313)-764-2355 Ann Arbor, MI 48109-1220 Fax:(313)-764-2769
Trying to sign off PEN-L
I now understand why we get so many messages over the net involving efforts to sign off, including terse messages like "unsubscribe." For the past two days I have been trying unsuccessfully to sign off (for a few weeks when I'll be out of town), using all the methods mentioned in a recent flurry of correspondence about this, as well as methods that I had stored from earlier messages. None worked. In particular, whenever I write to the address: [EMAIL PROTECTED] my messages get rejected. I know it's a big and thankless job keeping this net going, but anyone who can explain how one can successfully disengage for a period of time would be doing me a big favor and also (I suspect) performing a public service. Thanks very much in advance, P.S.: I'm leaving in 6 hours, so I won't be able to respond to any messages after that.
Chinese vs. Russian state enterprises
Jim Devine recently conveyed the gist of an interesting argument by Wei Li contrasting the behavior of Chinese and Russian enterprises under different strategies of price decontrol: the Chinese decontrolled only at the margins (and kept planned orders and prices on the bulk of productive activity), while the Russians decontrolled everything. The Chinese approach succeeded in avoiding the kind of cascading decline in production that has afflicted Russian state enterprises (as described so well by Leijonhufwud in the New Left Review article cited by Mike Lebowitz). The point is that in a tightly integrated and monopolistic industrial sector, it is folly to decontrol everything and let enterprises operate atomistically -- but there are gains to be made in allowing enterprise autonomy in the context of decontrolled prices at the margins. I would only add that this argument was not advanced to explain the generally superior performance of the Chinese over the Russian economy (which has much to do with agriculture and small enterprises). Rather, it was intended to explain only the superior performance of Chinese large state enterprises. Admittedly, this is the least dynamic sector of the Chinese economy -- but it's doing a whole lot better than its Russian counterpart!
AD/AS redux
To respond to Ellen Frank's latest posting (I'm glad someone is
still interested in the AD/AS brouhaha!), I would say first that
what is needed is a graphical framework in which P-dot is on the
vertical axis and not Y but Y/Y* (or U) is on the horizontal axis;
the latter approach sets the stage for the Phillips Curve.
Why then employ the AD/AS framework at all? In my view, it is
simply in order to build up from the basic Keynesian model to
get to the Phillips Curve. I think the AS curve is actually
a useful construct [I see more controversy coming here!] to
distinguish circumstances in which a demand stimulus leads mainly
to an increase in Y and those in which it leads mainly to an
increase in P; I would draw the AS curve with considerable
curvature, close to a backward L. The analysis could be carried
out plausibly with a perfectly vertical AD curve, but for reasons
that I have expounded on ad nauseam I believe that the AD curve
should be drawn with a bit of a downward-to-the-right slope.
One can then move from the AD/AS framework to the Phillips curve
framework by examining what happens when the AD/AS equilibrium is
kept to the left or to the right of Y* ("potential output") for
an extended period of time -- building in adaptive inflationary
expectations.
Cheers,
AD/AS redux
To respond to Ellen Frank's latest posting (I'm glad someone is
still interested in the AD/AS brouhaha!), I would say first that
what is needed is a graphical framework in which P-dot is on the
vertical axis and not Y but Y/Y* (or U) is on the horizontal axis;
the latter approach sets the stage for the Phillips Curve.
Why then employ the AD/AS framework at all? In my view, it is
simply in order to build up from the basic Keynesian model to
get to the Phillips Curve. I think the AS curve is actually
a useful construct [I see more controversy coming here!] to
distinguish circumstances in which a demand stimulus leads mainly
to an increase in Y and those in which it leads mainly to an
increase in P; I would draw the AS curve with considerable
curvature, close to a backward L. The analysis could be carried
out plausibly with a perfectly vertical AD curve, but for reasons
that I have expounded on ad nauseam I believe that the AD curve
should be drawn with a bit of a downward-to-the-right slope.
One can then move from the AD/AS framework to the Phillips curve
framework by examining what happens when the AD/AS equilibrium is
kept to the left or to the right of Y* ("potential output") for
an extended period of time -- building in adaptive inflationary
expectations.
Cheers,
Spinning wheels
To answer Peter D., (1) I misinterpreted his reference to "relative input prices" to mean the relative prices of different inputs; but there remains a substantive difference in my inclusion of productivity changes in the scope of supply shocks. On why (2) I think there is a long-run tendency for actual unemployment to gravitate toward the NAIRU (whatever the latter depends on), please refer to my earlier postings -- and the ceteris paribus assumption (vis-a-vis the money supply in particular) contained therein. One thing I am in full agreement with Peter on is that it is time for others to pick up the pieces of this discussion -- if anyone out there is still interested! Cheers,
Spinning wheels
To answer Peter D., (1) I misinterpreted his reference to "relative input prices" to mean the relative prices of different inputs; but there remains a substantive difference in my inclusion of productivity changes in the scope of supply shocks. On why (2) I think there is a long-run tendency for actual unemployment to gravitate toward the NAIRU (whatever the latter depends on), please refer to my earlier postings -- and the ceteris paribus assumption (vis-a-vis the money supply in particular) contained therein. One thing I am in full agreement with Peter on is that it is time for others to pick up the pieces of this discussion -- if anyone out there is still interested! Cheers,
AS-AD without end
A quick response to Peter Dorman to try to dispel misunderstanding. 1. Of course a curve does not "explain" anything. The issue is whether it points you toward a mechanism that does so. 2. I don't know why a supply shock has to be defined as "a change in one or more relative input prices." I think of a supply shock as a change in a primary input cost (e.g. labor, imported raw materials) relative to the current prices of produced output, or as a change in production conditions (having nothing to do with prices). 3. I don't understand how you have concluded that we are so very far apart on the NAIRU. It sounds like you are attributing to me the conventional view that it represents something that could be called "full employment" in the labor market. This is a view that I have rejected since day 1. But I do think that there is at any given time a rate of unemployment which "offsets other pressures for an acceleration of inflation;" I lean to a conflict-theory bargaining-power explanation of this rate, though other factors are surely also at work. My most recent posting did not endorse a market-force-based NAIRU; at one point I simply observed that -- for the issue at hand -- it made no difference how the NAIRU was determined. 4. Like you, I have no idea "what it means to say that there is any long-run level of Y to which the economy tends in the absence of active economic management." What is the meaning of a long-run level of Y? The issue is whether there is a tendency to move to a long-run rate of unemployment (or aggregate rate of capacity utilization) at which there is no tendency for the rate of inflation to change. Obviously such a point cannot be depicted on an AS/AD diagram; but, to repeat an earlier point, that does not ipso facto render an AS/AD diagram useless as a stepping stone to the required P-dot/U Phillips Curve framework. On the substantive question as to whether there is any "natural" tendency for the economy to adjust to the NAIRU (however defined), I continue to think that there probably is -- but that such a long-run tendency would in any event be swamped by short-run forces, so that it is of virtually no interest in practice (as opposed to theory). I am discouraged by the fact that this discussion seems to be generating more misunderstanding than understanding.
AS-AD without end
A quick response to Peter Dorman to try to dispel misunderstanding. 1. Of course a curve does not "explain" anything. The issue is whether it points you toward a mechanism that does so. 2. I don't know why a supply shock has to be defined as "a change in one or more relative input prices." I think of a supply shock as a change in a primary input cost (e.g. labor, imported raw materials) relative to the current prices of produced output, or as a change in production conditions (having nothing to do with prices). 3. I don't understand how you have concluded that we are so very far apart on the NAIRU. It sounds like you are attributing to me the conventional view that it represents something that could be called "full employment" in the labor market. This is a view that I have rejected since day 1. But I do think that there is at any given time a rate of unemployment which "offsets other pressures for an acceleration of inflation;" I lean to a conflict-theory bargaining-power explanation of this rate, though other factors are surely also at work. My most recent posting did not endorse a market-force-based NAIRU; at one point I simply observed that -- for the issue at hand -- it made no difference how the NAIRU was determined. 4. Like you, I have no idea "what it means to say that there is any long-run level of Y to which the economy tends in the absence of active economic management." What is the meaning of a long-run level of Y? The issue is whether there is a tendency to move to a long-run rate of unemployment (or aggregate rate of capacity utilization) at which there is no tendency for the rate of inflation to change. Obviously such a point cannot be depicted on an AS/AD diagram; but, to repeat an earlier point, that does not ipso facto render an AS/AD diagram useless as a stepping stone to the required P-dot/U Phillips Curve framework. On the substantive question as to whether there is any "natural" tendency for the economy to adjust to the NAIRU (however defined), I continue to think that there probably is -- but that such a long-run tendency would in any event be swamped by short-run forces, so that it is of virtually no interest in practice (as opposed to theory). I am discouraged by the fact that this discussion seems to be generating more misunderstanding than understanding.
To slope or not to slope (yet again)
As Gil Skillman has noted, PEN-L seems to be an ideal medium in which to raise issues, but a very poor one in which to resolve them. So it seems to be with the downward-sloping AD curve: the continuing discussion with Peter Dorman, Barkley Rosser et al. has illuminated many of the relevant factors, but it has not established a clear case one way or the other. With this message I would like to take a slightly different tack on the question, by asking: what would a downward-sloping AD curve help us to explain, and is that plausible in light of what we know about the real world? In macro texts it is typically used to explain: (1) the impact of a supply shock on real GDP (Y) in the short-run and (2) the adjustment of Y and the aggregate price level (P) to an inflationary or deflationary gap in the long run. If there is a downward slope to an AD curve, then (1) an adverse supply shock will reduce Y (not just increase P) and a favorable supply shock will increase Y (not just reduce P); and (2) the macroeconomy will adjust to an inflationary gap with increased P and reduced Y, and it will adjust to a deflationary gap with reduced P and increased Y. The parts of the above stories involving reduced P are of course inapplicable to real-world history (in at least the last 50 years), but they can perhaps be rescued by positing that the action takes place against a background of an adaptive- expectation-fed underlying core rate of inflation (accommodated by a corresponding increase in the money supply) -- in which case we can interpret an upward movement in P as an increase in inflation above the core rate and a downward movement in P as a reduction in inflation below the core rate. Consider the rest of the (1) story: is it plausible that an adverse supply shock would reduce Y? It does appear to have done so in the US economy in 1973 and 1979. Here it seems to me that the most crucial question is whether or not one can expect the money supply to accomodate the increase in P. If *not*, then we would expect aggregate demand to be dampened (via the effect of higher nominal and real interest rates on net foreign and/or domestic expenditure). If *yes*, then we would expect no change in the real variables. After 1973 and 1979 we did see higher real interest rates and lower Y -- though arguably these resulted from deliberate government policy rather than some "natural" reaction to the supply shocks. Still, which is the better assumption: (a) that the money supply will generally expand to accomodate the supply shock, or (b) that the money supply won't accomodate the supply shock, so there will be increased interest rates and dampened demand? If (b), we learn something from a downward- sloping AD curve; if (a), the AD curve might as well be vertical. Is it plausible that a favorable supply shock would increase Y? Arguably this was an element in the US economy's expansion in the 1980s. In this case it would again seem to be most plausible to expect that the money supply would not adjust pari passu with the reduced price pressures, that interest rates would tend to fall, and that aggregate demand would as a result tend to rise. In general, it seems to me that the argument against the downward- sloping AD curve ultimately hinges on a case that either (1) the money supply adjusts endogenously to any changes in prices or (2) interest rates have no effect on aggregate expenditures. And I am not convinced that either of these propositions is reasonable. Turning to the long-run implications of a downward-sloping AD curve, is it plausible that there is a "self-adjusting mechanism" whereby a capitalist macroeconomy tends to eliminate inflationary or deflationary gaps -- i.e., approaches "potential output" (Y*)? In the present context it does not matter whether Y* (and its twin, the NAIRU) are determined in more-or-less free labor markets or by bargaining power. A downward-sloping AD curve implies that gaps will lead to price changes that interact with a constant money supply to produce an adjustment of Y toward Y*. If the money supply adjusts only partially, the adjustment process takes longer. As long as there is not complete money supply accomodation to price changes, the logic seems to me reasonable; the fact that so many other things change over time, however, makes it somewhat absurd to think that we would ever be able to see the self-adjustment process work itself out in real- world history. As a long-run tendency, however, I don't see a problem. Note that the same issue arises if we operate in P-dot/U space rather than in P/Y space. In the former we have a sloping short- run Phillips Curve corresponding to the AS curve in P/Y space, but there is no counterpart to the sloping AD curve. Such a curve could be drawn, however, on the basis of a "neutral" assumption of constant money-supply growth (indeed, I think I remember Bob Rowthorn doing so
To slope or not to slope (yet again)
As Gil Skillman has noted, PEN-L seems to be an ideal medium in which to raise issues, but a very poor one in which to resolve them. So it seems to be with the downward-sloping AD curve: the continuing discussion with Peter Dorman, Barkley Rosser et al. has illuminated many of the relevant factors, but it has not established a clear case one way or the other. With this message I would like to take a slightly different tack on the question, by asking: what would a downward-sloping AD curve help us to explain, and is that plausible in light of what we know about the real world? In macro texts it is typically used to explain: (1) the impact of a supply shock on real GDP (Y) in the short-run and (2) the adjustment of Y and the aggregate price level (P) to an inflationary or deflationary gap in the long run. If there is a downward slope to an AD curve, then (1) an adverse supply shock will reduce Y (not just increase P) and a favorable supply shock will increase Y (not just reduce P); and (2) the macroeconomy will adjust to an inflationary gap with increased P and reduced Y, and it will adjust to a deflationary gap with reduced P and increased Y. The parts of the above stories involving reduced P are of course inapplicable to real-world history (in at least the last 50 years), but they can perhaps be rescued by positing that the action takes place against a background of an adaptive- expectation-fed underlying core rate of inflation (accommodated by a corresponding increase in the money supply) -- in which case we can interpret an upward movement in P as an increase in inflation above the core rate and a downward movement in P as a reduction in inflation below the core rate. Consider the rest of the (1) story: is it plausible that an adverse supply shock would reduce Y? It does appear to have done so in the US economy in 1973 and 1979. Here it seems to me that the most crucial question is whether or not one can expect the money supply to accomodate the increase in P. If *not*, then we would expect aggregate demand to be dampened (via the effect of higher nominal and real interest rates on net foreign and/or domestic expenditure). If *yes*, then we would expect no change in the real variables. After 1973 and 1979 we did see higher real interest rates and lower Y -- though arguably these resulted from deliberate government policy rather than some "natural" reaction to the supply shocks. Still, which is the better assumption: (a) that the money supply will generally expand to accomodate the supply shock, or (b) that the money supply won't accomodate the supply shock, so there will be increased interest rates and dampened demand? If (b), we learn something from a downward- sloping AD curve; if (a), the AD curve might as well be vertical. Is it plausible that a favorable supply shock would increase Y? Arguably this was an element in the US economy's expansion in the 1980s. In this case it would again seem to be most plausible to expect that the money supply would not adjust pari passu with the reduced price pressures, that interest rates would tend to fall, and that aggregate demand would as a result tend to rise. In general, it seems to me that the argument against the downward- sloping AD curve ultimately hinges on a case that either (1) the money supply adjusts endogenously to any changes in prices or (2) interest rates have no effect on aggregate expenditures. And I am not convinced that either of these propositions is reasonable. Turning to the long-run implications of a downward-sloping AD curve, is it plausible that there is a "self-adjusting mechanism" whereby a capitalist macroeconomy tends to eliminate inflationary or deflationary gaps -- i.e., approaches "potential output" (Y*)? In the present context it does not matter whether Y* (and its twin, the NAIRU) are determined in more-or-less free labor markets or by bargaining power. A downward-sloping AD curve implies that gaps will lead to price changes that interact with a constant money supply to produce an adjustment of Y toward Y*. If the money supply adjusts only partially, the adjustment process takes longer. As long as there is not complete money supply accomodation to price changes, the logic seems to me reasonable; the fact that so many other things change over time, however, makes it somewhat absurd to think that we would ever be able to see the self-adjustment process work itself out in real- world history. As a long-run tendency, however, I don't see a problem. Note that the same issue arises if we operate in P-dot/U space rather than in P/Y space. In the former we have a sloping short- run Phillips Curve corresponding to the AS curve in P/Y space, but there is no counterpart to the sloping AD curve. Such a curve could be drawn, however, on the basis of a "neutral" assumption of constant money-supply growth (indeed, I think I remember Bob Rowthorn doing so
PNP and PIP
Yes, Jim Devine is quite right that Marty's dichotomy is much the same
as between my PNP ("progressive nationalist position") and PIP ("progressive
internationalist position") of last year. Acronymically,
PNP and PIP
Yes, Jim Devine is quite right that Marty's dichotomy is much the same
as between my PNP ("progressive nationalist position") and PIP ("progressive
internationalist position") of last year. Acronymically,
AD: it ain't over 'til it's over
Recent exchanges on the AD curve have helped to clarify issues further, and I am moving ever closer to rejecting the whole apparatus. Yet I am not quite to that point, and -- at the risk of boring most PENners -- I would like to appeal to those who are still interested in this question to pursue the exchanges just a bit longer. Peter Dorman's argument that we can't expect exchange rates to adjust to balance the current account seems to me unassailable; there are too many factors (other than exports and imports) which affect the demand for and supply of foreign currency. To the extent that comparative advantage theory depends on the equilibration of exports and imports, it is simply not valid. But I am not yet convinced by Peter's claim that there is no meaningful "international substitution effect," i.e., that a change in the domestic price level will not have an effect (with the opposite sign) on net foreign demand for domestic products, thus contributing to a downward slope in the AD curve. He argues that a change in the domestic price level (let's say an increase in the US GDP deflator P, to make the argument more concrete) should be expected to induce an offsetting movement in the exchange rate (i.e., a fall in the value of the dollar V), so that there is no change in the relative prices of US and foreign goods and hence no change in the net foreign demand for US products. Others have responded that so many factors buffet exchange rates that one shouldn't expect a precise offsetting movement in the exchange rate along the above lines. But, as Peter points out, the addition of noise -- as long as it is superimposed on the offsetting movement that Peter is discussing -- does not invalidate his argument. Only a logical connection between the increase of P and the failure of V to fall would constitute a strike against his home team. It does seem to me, however, that there may be such a logical connection, as follows. An increase in P -- by increasing money demand -- will lead to an increase in domestic interest rates (assuming, reasonably, that the outward shift of the money demand curve will not be fully offset by an outward shift of the money supply curve). The increase in domestic interest rates will increase the demand for US assets relative to foreign assets. This latter shift will push up the demand for dollars relative to foreign currencies, causing an *upward* movement in V. This upward movement will systematically interfere with the offsetting adjustment process on which Peter 's argument relies. The new equilibrium toward which the domestic economy will tend is one of higher P relative to foreign prices (not fully offset by a decline in V), higher interest rates relative to foreign rates, higher net capital inflow on capital account and lower net exports on current account. In other word, an international substitution effect. For there not to be an international substitution effect, the final equilibrium would have to be one in which no international interest rate differential resulted from the initial increase in domestic P. Is that possible without an increase in domestic M in the same proportion as the increase in P? I don't think one can appeal here to the difference between real and nominal interest rates, since prices change only temporarily -- with the initial increase in P and possibly with the subsequent transition from disequilibrium to a new equilibrium. Perhaps my scenario does not survive conversion to an analytical framework dealing with rates of change rather than levels, but I would like to see this demonstrated. In particular, such conversion would have to address the question of what should be assumed about the money supply in a dynamic framework. This said, I do accept Peter's points about international shocks and the J-curve. If the source of the increase in domestic P is international rather than national, then it should affect prices in all countries; my point applies only to price shocks that disproportionately affect the country in question. And the J- curve argument is surely valid: the negative effect of a rise in P on net foreign demand for domestic products (and of course also the positive effect on net capital inflows) will take some time to be felt, and the initial effect is likely to be in the opposite direction. I'm not sure where Peter's estimate of 6 quarters comes from, but I do concede that the analysis must be stretched over at least a year before it becomes compelling. Is this really an unreasonable stretch for such analysis?. Dialectically,
AD: it ain't over 'til it's over
Recent exchanges on the AD curve have helped to clarify issues further, and I am moving ever closer to rejecting the whole apparatus. Yet I am not quite to that point, and -- at the risk of boring most PENners -- I would like to appeal to those who are still interested in this question to pursue the exchanges just a bit longer. Peter Dorman's argument that we can't expect exchange rates to adjust to balance the current account seems to me unassailable; there are too many factors (other than exports and imports) which affect the demand for and supply of foreign currency. To the extent that comparative advantage theory depends on the equilibration of exports and imports, it is simply not valid. But I am not yet convinced by Peter's claim that there is no meaningful "international substitution effect," i.e., that a change in the domestic price level will not have an effect (with the opposite sign) on net foreign demand for domestic products, thus contributing to a downward slope in the AD curve. He argues that a change in the domestic price level (let's say an increase in the US GDP deflator P, to make the argument more concrete) should be expected to induce an offsetting movement in the exchange rate (i.e., a fall in the value of the dollar V), so that there is no change in the relative prices of US and foreign goods and hence no change in the net foreign demand for US products. Others have responded that so many factors buffet exchange rates that one shouldn't expect a precise offsetting movement in the exchange rate along the above lines. But, as Peter points out, the addition of noise -- as long as it is superimposed on the offsetting movement that Peter is discussing -- does not invalidate his argument. Only a logical connection between the increase of P and the failure of V to fall would constitute a strike against his home team. It does seem to me, however, that there may be such a logical connection, as follows. An increase in P -- by increasing money demand -- will lead to an increase in domestic interest rates (assuming, reasonably, that the outward shift of the money demand curve will not be fully offset by an outward shift of the money supply curve). The increase in domestic interest rates will increase the demand for US assets relative to foreign assets. This latter shift will push up the demand for dollars relative to foreign currencies, causing an *upward* movement in V. This upward movement will systematically interfere with the offsetting adjustment process on which Peter 's argument relies. The new equilibrium toward which the domestic economy will tend is one of higher P relative to foreign prices (not fully offset by a decline in V), higher interest rates relative to foreign rates, higher net capital inflow on capital account and lower net exports on current account. In other word, an international substitution effect. For there not to be an international substitution effect, the final equilibrium would have to be one in which no international interest rate differential resulted from the initial increase in domestic P. Is that possible without an increase in domestic M in the same proportion as the increase in P? I don't think one can appeal here to the difference between real and nominal interest rates, since prices change only temporarily -- with the initial increase in P and possibly with the subsequent transition from disequilibrium to a new equilibrium. Perhaps my scenario does not survive conversion to an analytical framework dealing with rates of change rather than levels, but I would like to see this demonstrated. In particular, such conversion would have to address the question of what should be assumed about the money supply in a dynamic framework. This said, I do accept Peter's points about international shocks and the J-curve. If the source of the increase in domestic P is international rather than national, then it should affect prices in all countries; my point applies only to price shocks that disproportionately affect the country in question. And the J- curve argument is surely valid: the negative effect of a rise in P on net foreign demand for domestic products (and of course also the positive effect on net capital inflows) will take some time to be felt, and the initial effect is likely to be in the opposite direction. I'm not sure where Peter's estimate of 6 quarters comes from, but I do concede that the analysis must be stretched over at least a year before it becomes compelling. Is this really an unreasonable stretch for such analysis?. Dialectically,
AD-AS again
I have found the latest flurry of exchanges on the AD-AS question very interesting, and would have jumped in sooner if I only had more time. Now that my name has been mentioned, I can no longer restrain myself -- though time constraints still limit me to one small point. Peter Dorman referred back to an earlier exchange with me in which I suggested that the international substitution effect constituted the strongest case for a downward-sloping AD curve. Peter's argument against this case is that international exchange rates will offset differential trends in national inflation rates, so as to undercut any effect of national price changes on national net exports. But ia such an argument consistent with another argument made by Peter (in the context of a discussion of Daly & Cobb's analysis of international capital mobility), to the effect that it is precisely the failure of international exchange rate adjustment to offset changes in national price-and-cost conditions that is at the heart of the transnational capital mobility phenomenon that undercuts comparative advantage theory? Perhaps I have misunderstood things -- but it seems to me that the same convincing argument that Peter made to undergird the critique of comparative advantage should actually support the downward slope of the AD curve -- namely, international exchange rates are buffeted by all sorts of influences that prevent them from simply offsetting differential inflation rates. P.S.: By the way, PEN-L messages coming to me still identify PEN-L as the "sender," as well as indicating from which PEN-L person the message has come; so Doug Henwood' concern doesn't arise.
AD-AS again
I have found the latest flurry of exchanges on the AD-AS question very interesting, and would have jumped in sooner if I only had more time. Now that my name has been mentioned, I can no longer restrain myself -- though time constraints still limit me to one small point. Peter Dorman referred back to an earlier exchange with me in which I suggested that the international substitution effect constituted the strongest case for a downward-sloping AD curve. Peter's argument against this case is that international exchange rates will offset differential trends in national inflation rates, so as to undercut any effect of national price changes on national net exports. But ia such an argument consistent with another argument made by Peter (in the context of a discussion of Daly & Cobb's analysis of international capital mobility), to the effect that it is precisely the failure of international exchange rate adjustment to offset changes in national price-and-cost conditions that is at the heart of the transnational capital mobility phenomenon that undercuts comparative advantage theory? Perhaps I have misunderstood things -- but it seems to me that the same convincing argument that Peter made to undergird the critique of comparative advantage should actually support the downward slope of the AD curve -- namely, international exchange rates are buffeted by all sorts of influences that prevent them from simply offsetting differential inflation rates. P.S.: By the way, PEN-L messages coming to me still identify PEN-L as the "sender," as well as indicating from which PEN-L person the message has come; so Doug Henwood' concern doesn't arise.
Progressive Economics on TV
Barring a last-minute change in programming plans (always a possibility in today's powderkeg world), the PBS McNeil-Lehrer news show tomorrow -- Friday evening, March 4 -- will include a discussion with PEN-L's own David Gordon and his brother Robert on the state and medium-term trajectory of the US economy. The PBS people recorded an hour's worth of discussion and exchange between David and Robert; what they will actually air tomorrow is anybody's guess, but it should be interesting. And maybe it will stimulate a lively PEN-L debate! Cheers,
Progressive Economics on TV
Barring a last-minute change in programming plans (always a possibility in today's powderkeg world), the PBS McNeil-Lehrer news show tomorrow -- Friday evening, March 4 -- will include a discussion with PEN-L's own David Gordon and his brother Robert on the state and medium-term trajectory of the US economy. The PBS people recorded an hour's worth of discussion and exchange between David and Robert; what they will actually air tomorrow is anybody's guess, but it should be interesting. And maybe it will stimulate a lively PEN-L debate! Cheers,
Running shoes back and forth
Dear PENners: I am circulating the following exchange to enter it into the current running shoe controversy.Cheers, Message: 32005750, 27 lines Posted: 5:08pm EST, Tue Mar 1/94, imported: 4:23pm EST, Tue Mar 1/94 Subject: RE: Running further with those shoes To: Tom Weisskopf From: [EMAIL PROTECTED] Sender: [EMAIL PROTECTED] Dear New Balance Tom, Wouldn't post Keynesian theory hold that perhaps for large companies to survive in this globally competitive market, there is a need for these companies to maintain growth at some specified rate, and in order to grow they need to generate internal funds to finance their expected investment or retained earning needs. Perhaps prices are set at higher rates because its an oligopolistic pricing strategy which allows firms to retain power (keeping other companies out). Other strategies to change quantity, advertising, etc may not work because they would be countered by rival firms, so prices remain high. I don't know if I explained this too well, but I find this theory (by Eichner) to be very interesting and convincing. Plus it provides a needed prescription for controlling inflation: get "megacorporations" under some social control. Indeed Clinton was able to do this by "jawboning" pharm. companies. Prices immediately dropped 30 percent with no apparent consequences for research and development. Kennedy did the same thing with steel prices. It essentially forces all companies to lower prices. So get Bill to lower prices of shoes for us running grad students. (Personally I prefer the low end Asics and have for 10 years. Even though I'm sure they are made with cheap labor, I'm a rather loyal customer. Each pair has probably weathered over 500 miles and they're cheaper.) Does you know if all that "gel" stuff in the shoes actually works? I've been thinking of getting a new pair. (New Balance didn't work for me). In pen-l solidarity, Heather Grob Message: 32039240, Reply to: 32005750, 10 lines Posted: 9:33am EST, Wed Mar 2/94 Subject: RE: Running further with those shoes To: [EMAIL PROTECTED] From: Tom Weisskopf Heather -- thanks for your comments. The post-Keynesian theory does have a certain appeal, I agree; but to apply it in this case wouldn't we have to show that the need of firms for internal funds has risen sharply upward, so that now they need the much higher mark-ups over cost that they can realize by reducing labor costs substantially while holding the line on output prices? What would have raised their need for internal funds so much? In solidarity,
Running shoes back and forth
Dear PENners: I am circulating the following exchange to enter it into the current running shoe controversy.Cheers, Message: 32005750, 27 lines Posted: 5:08pm EST, Tue Mar 1/94, imported: 4:23pm EST, Tue Mar 1/94 Subject: RE: Running further with those shoes To: Tom Weisskopf From: [EMAIL PROTECTED] Sender: [EMAIL PROTECTED] Dear New Balance Tom, Wouldn't post Keynesian theory hold that perhaps for large companies to survive in this globally competitive market, there is a need for these companies to maintain growth at some specified rate, and in order to grow they need to generate internal funds to finance their expected investment or retained earning needs. Perhaps prices are set at higher rates because its an oligopolistic pricing strategy which allows firms to retain power (keeping other companies out). Other strategies to change quantity, advertising, etc may not work because they would be countered by rival firms, so prices remain high. I don't know if I explained this too well, but I find this theory (by Eichner) to be very interesting and convincing. Plus it provides a needed prescription for controlling inflation: get "megacorporations" under some social control. Indeed Clinton was able to do this by "jawboning" pharm. companies. Prices immediately dropped 30 percent with no apparent consequences for research and development. Kennedy did the same thing with steel prices. It essentially forces all companies to lower prices. So get Bill to lower prices of shoes for us running grad students. (Personally I prefer the low end Asics and have for 10 years. Even though I'm sure they are made with cheap labor, I'm a rather loyal customer. Each pair has probably weathered over 500 miles and they're cheaper.) Does you know if all that "gel" stuff in the shoes actually works? I've been thinking of getting a new pair. (New Balance didn't work for me). In pen-l solidarity, Heather Grob Message: 32039240, Reply to: 32005750, 10 lines Posted: 9:33am EST, Wed Mar 2/94 Subject: RE: Running further with those shoes To: [EMAIL PROTECTED] From: Tom Weisskopf Heather -- thanks for your comments. The post-Keynesian theory does have a certain appeal, I agree; but to apply it in this case wouldn't we have to show that the need of firms for internal funds has risen sharply upward, so that now they need the much higher mark-ups over cost that they can realize by reducing labor costs substantially while holding the line on output prices? What would have raised their need for internal funds so much? In solidarity,
Running further with those shoes
Thanks to numerous PENners who have responded to my query about price-setting by running shoe firms who have dramatically lowered their labor costs by moving operations to low-wage countries. Perhaps I did not pose it very well, but my basic question has still not been answered. Advertising, product differentiation, barriers to entry, inelastic demand, mergers, etc., all help to explain why there are substantial monopoly profits to be made in the industry -- but they don't explain why firms maintain output prices when costs fall sharply (thereby, as Jim Devine observed, increasing their mark-up correspondingly sharply). Profit- maximizing behavior even by highly monopolistic firms would ordinarily call for some price reduction when costs are lowered. Why isn't this happening in the running shoe industry (or, indeed, as Doug Henwood pointed out, in quite a number of other industries that have gone global in a similar way)? I can think of some possible explanations, but I'm not at all sure if they're adequate: 1. Labor costs are in fact only a small proportion of total costs, so their dramatic reduction has little effect on overall unit costs. 2. Prices are very sticky downward (why?), so that real price reductions can and will happen only as general price inflation takes place -- and the product prices in question are not raised. 3. The relevant firms (Nike, Reebok et al.) are in fact bringing out new lines of shoes and selling them at much lower prices, while holding prices on their top-of-the-line products. What do you all think? Still puzzled, P.S.: Like Nathan Newman, I am a New Balance customer myself!
Running further with those shoes
Thanks to numerous PENners who have responded to my query about price-setting by running shoe firms who have dramatically lowered their labor costs by moving operations to low-wage countries. Perhaps I did not pose it very well, but my basic question has still not been answered. Advertising, product differentiation, barriers to entry, inelastic demand, mergers, etc., all help to explain why there are substantial monopoly profits to be made in the industry -- but they don't explain why firms maintain output prices when costs fall sharply (thereby, as Jim Devine observed, increasing their mark-up correspondingly sharply). Profit- maximizing behavior even by highly monopolistic firms would ordinarily call for some price reduction when costs are lowered. Why isn't this happening in the running shoe industry (or, indeed, as Doug Henwood pointed out, in quite a number of other industries that have gone global in a similar way)? I can think of some possible explanations, but I'm not at all sure if they're adequate: 1. Labor costs are in fact only a small proportion of total costs, so their dramatic reduction has little effect on overall unit costs. 2. Prices are very sticky downward (why?), so that real price reductions can and will happen only as general price inflation takes place -- and the product prices in question are not raised. 3. The relevant firms (Nike, Reebok et al.) are in fact bringing out new lines of shoes and selling them at much lower prices, while holding prices on their top-of-the-line products. What do you all think? Still puzzled, P.S.: Like Nathan Newman, I am a New Balance customer myself!
The New World Order/Running Shoes of Capitalism
Michael Perelman's recent postings on Nike in the world economy have been as fascinating as they are revolting. One question that is bound to pop into the mind of anyone trained in economics in this country is how sales prices are holding up in what seems to be a rather competitive industry. In other words, what prevents one of these firms from gaining huge market share by cutting prices in half (at a higher volume they could still afford to pay Michael Jordan!). It seems to me that the answer to this question is a very important part of the story.
The New World Order/Running Shoes of Capitalism
Michael Perelman's recent postings on Nike in the world economy have been as fascinating as they are revolting. One question that is bound to pop into the mind of anyone trained in economics in this country is how sales prices are holding up in what seems to be a rather competitive industry. In other words, what prevents one of these firms from gaining huge market share by cutting prices in half (at a higher volume they could still afford to pay Michael Jordan!). It seems to me that the answer to this question is a very important part of the story.
