Friday, September 18, 2009

A Brander & Spencer Style Strategic Trade Prisoner's Dilemma

From the Economist:
Elsewhere, the story points out that not a single manufacturer of any
significant size has gone under during the recession. There is a serious problem
here. No government wants its national champion (or champions) to be the one
that goes under, and so governments provide such support as is needed to pull
companies through tough periods.

Oligopoly, subsidies and trade. I question, however whether subsidies are the best strategic policy. If the nature of competition is Bertrand-style price competition, then export subsidies can improve domestic welfare (assuming no retaliation - heroic!). If the nature of competition is Cournot-style quantity competition, then tariffs and/or export taxes are appropriate in the absence of retaliation. Export taxes have the same proportional impact on relative prices as import tariffs; subsidies do the opposite, and worsen the terms of trade (price ratio of exports to imports) of the country offering them.

Thursday, September 17, 2009

Does this Recession Make the World Look Fat?

In 2005 Thomas Friedman declared the world flat, but I always liked Ed Leamer's review in JEL, which points out the fact that it's a strange, and perhaps inapt analogy (he also makes pokes fun with some very esoteric "jokes" about different notions of what "flat" might mean, but that's besides the point). A new historical view by David Jacks (HT: Economix) shows us how the late 20th century decline in trade costs (and increases in trade) pales in comparison to those of the late 19th century (something I've observed in my undergrad classes already by the way!). Anyway, trade is down by greater proportions than those observed during the Great Depression and everyone has their culprit of choice. Some talk about oil prices (although I'm not sure that in real terms oil and fuel is all that much more expensive now than it was in the late 1990s); some blame a general downturn (although I'm pretty sure the downturn in the G.D. was much greater, without even checking the data); and others put it on governments and protectionism (although this too has been tame compared with the Depression Era).
The answer to me is twofold: (1) 1990s globalization centered on growth in components; and (2) trade is not a value-added concept like output is. For the first, the basic idea is that instead of countries specializing and producing all of certain finished goods that are consumed by end users, the recent explosion in trade was in components - countries specialized in a particular part of the finished good. Since trade is not a value-added concept, so within this integrated supply chain, you can have the value-added of a 20,000 dollar auto counted many times - the steel ($5,000) gets shipped from China to 3 other countries where components are made (at, say, $2,000 of value added in GDP per country), then to Mexico for assembly (another $4,000), then managerial, transportation marketing services by the US (for about another $3,000), and sold in Canada for $20,000 (the retailer's value-added is $1,000). If this car disappears from world trade, it amounts to a reduction of world GDP of exactly $20,000 because GDP only counts value-added. However, trade (imports plus exports is a common measure) is reduced by $(5,000 + 11,000 + 15,000 + 19,000)x2 = $80,000 due to the multiple counting of the total value at each stage of shipping instead of only counting each country's value-added.
So, the world is not getting fat (it's approximately as flat as it was last year) and I'm neither shocked nor alarmed at the decline in trade (at least, no more shocked or alarmed than I am about the decline in output generally).

Grad School?


So, why did I go through all that again? Oh yeah. The "job satisfaction."

Tuesday, September 15, 2009

Do Deficits Matter

Today, Becker writes:
To the extent that the source of the rise in a deficit is increased government
spending, then whether that rise is justified depends on how socially valuable
are these government expenditures. By that I mean the social rates of return on
these expenditures, such as longer lives for the elderly, relative to the
interest cost of raising the required funds, and relative to the returns on
other investments in the economy.

So, on this principle, if you have a trillion dollars to spend, would you spend it on 5 years of war in Iraq or 10 years of universal health care?

Economists' Views

Things Economists Agree on according to this article:
Agree Strongly Agree
NeutralDisagree Strongly Disagree
Hetero-geneity Index
The U.S. should allow payments to organ donors
15.60%14.10%70.30%0.5384
A Wal-Mart store generates more benefits than costs.14.60%13.10%72.30%0.5612
Employers should be rq'd to provide all employees health insurance71.70%7.90%20.40%0.5619
The U.S. should ban genetically modified crops.
82.10%10.90%7.00%0.6908
The U.S. should eliminate remaining barriers to trade.9.80%6.80%83.30%0.7081
Economic growth in developed countries increases well-being2.30%9.80%87.80%0.7810

What they don't agree on:
Sarbanes-Oxley should be repealed.
47.40%27.60%25.00%0.3634
U.S. should eliminate the mortgage interest deduction. 38.00%16.30%45.70%0.3798
U.S. should increase benefits to workers who lose jobs due to int'l comp.
27.70%20.80%51.50%0.3852
Health insurance benefits should be taxed the same as income. 44.50%13.50%42.10%0.3935
The U.S. should place more stringent caps on medical malpractice awards.32.10%16.40%51.60%0.3962
States should eliminate mandates about what health insurance must cover. 45.60%12.00%42.40%0.4021

On the Probability of Acceptance

There was a certain professor at Illinois (who is no longer there) who once claimed, "Adding an integral sign to a paper will unambiguously increase the probability of acceptance." This confession of an economist offers more proof. The author revised a clear and simple paper (which, by the way, had been rejected) into an incomprehensible mathematical maze of equations and proofs (which, of course, was accepted by the very same journal that had rejected the clearer, simpler version). Sad, but true.