Grasping Reality on TypePad, by Brad DeLong

Over at Equitable Growth--The Equitablog

• Yuriy Gorodnichenko and Gerard Roland: Ukraine: Emergency Economic Measures
• Reading the Federal Reserve’s 2008 Meeting Transcripts
• Ezra Klein: The Real Reason Nobody Reads Academics
• As a Result of the Lesser Depression, 7.5% of America’s Long-Run Prosperity Has Disappeared, Apparently Forever
• Afternoon Must-Read: Binyamin Appelbaum: Why the Bernanke Fed Was Worse in 2008 than the Greenspan, Volcker, Martin, or Eccles Feds Would Have Been
• Debate: Is There a Substitute for Unions in Achieving Equitable Growth? And Can Unions Be Saved?
• Why Do People Do This? Assessing the Current Macroeconomic Situation Weblogging

Plus:

• Things to Read on the Evening of February 28, 2014

And:

Over at the Washington Center for Equitable Growth: Reading the Federal Reserve’s 2008 Meeting Transcripts: Over at Project Syndicate: Revisiting the Fed’s Crisis: It has been busy days: reading through the transcripts from the 2008 Federal Reserve Open Market Committee meetings in the interstices between pieces of the day job. As I read, I find myself asking the same overarching question: how did the FOMC get into the mindset that it had in 2008?

Oh, there are five voices that seem to me to broadly see and understand the situation.... William Dudley.... Janet Yellen... Eric Rosengren... Rick Mishkin and Don Kohn... get it. But the other members of the FOMC?... The old Federal Reserve had a charismatic, autocratic, bullying, professional central banker at its head: Benjamin Strong, Marriner Eccles, William McChesney Martin, Paul Volcker, Alan Greenspan. When it worked–and it did not always work–the Chair ruled the FOMC with an iron hand and with the near-lockstep voting support of the Governors.... If the Bernanke Fed had been the old Fed–if Rosengren, Yellen, and Mishkin and Kohn on the one hand; and Geithner, Plosser, Fisher, and so forth on the other; had to make their cases to Bernanke in private; and if he had then said “this is what we are going to do” rather than building a within-meeting consensus–would we then have had better monetary policy decisions in 2008? READ MORE

From World War II Today: Primo Levi: Survival in Auschwitz:

We had soon learned that the guests of the Lager are divided into three categories: the criminals, the politicals and the Jews. All are clothed in stripes, all are Haftlinge [detainees], but the criminals wear a green triangle next to the number sewn on the jacket; the politicals wear a red triangle; and the Jews, who form the large majority, wear the Jewish star, red and yellow.

Principles

• Principles [.key] [.pdf] [.m4v] [.html.zip]
• Introduction [.key] [.pdf] [.m4v] [.html.zip]
• Daily Reading [.key] [.pdf] [.m4v] [.html.zip]

Moral Philosophy

• Gift Exchange [.key] [.pdf] [.m4v] [.html.zip]
• The Economic Problem [.key] [.pdf] [.m4v] [.html.zip]
• The High Stalinist Experiment [.key] [.pdf] [.m4v] [.html.zip]
• Essential Principles [.key] [.pdf [.m4v] [.html.zip]
• Commercial for Adam Smith [.key] [.pdf] [.m4v] [.html.zip]

Economics

• Some Intellectual History
• Advantages of Markets
• Scarcity and Choice
• Supply and Demand [.key] [Formats]

How Markets Work

• Supply Curves [.key] [Formats]
• Demand and Equilibrium [.key] [Formats]
• Surplus [.key] [Formats]
• What's Wrong with Surplus? [.key] [Formats]
• Shifting Curves [.key] [Formats]
• Price Ceilings [.key] [Formats]

Distorting and Undistorting Competitive Markets

• Distortions
  • Quotas [.key] [Formats]
  • Taxes [.key] [Formats]
  • Permits [.key] [Formats]
• Undistortions
  • Externalities: Introduction [.pdf] [.key.zip] [.ppt.zip] [.mov] [.html.zip]
  • Externalities: The Puzzle of How to Set the Tax [.key.zip] [.ppt.zip] [.pdf] [.mov] [.html.zip]
  • Externalities: What Would a Planner Do? [.key.zip] [.pdf] [.ppt.zip] [.mov] [.html.zip]
  • Externalities and the Plan
  • Externalities: Mechanics
  • Externalities: Prices vs. Quantities

When We Can't Make the Market Work Optimally

• Non-Rival Commodities [.key.zip] [.mov] [.ppt] [.pdf] [.zip.html]
• Non-Rivalry and Market Power
  • Monopoly [.key.zip] [.mov] [.pdf] [.ppt] [.zip.html]
  • Rate Regulation [.key.zip] [.mov] [.pdf] [.ppt] [.html.zip]
  • Duopoly, Etc. [.key.zip] [.mov] [.pdf] [.ppt] [.html.zip]
• Adverse Selection [.key.zip] [.pdf] [.ppt.zip] [.mov] [.html.zip]
• Non-Excludible Commodities
  • Non-Excludibility: Introduction [html.zip] | [key.zip] | [ppt.zip] | [pdf] | [mov]
  • Non-Excludibility: Public Goods
  • Non-Excludibility: Ancillary Services
  • Non-Excludibility and Market Power
• Modes of Market Failure: Instructor Reality-Check Time… [.html.zip] | [.key.zip] | [.mov] | [.pdf] | [.ppt.zip]

The Theory of the Firm

• Prices and Quantities
• The Short Run and the Long Run

Pieces Left Out of Micro

• Labor
• Education
• Cartels
• Finance
• Investment
• Monopolistic competition and variety
• Spite, envy, and network effects in consumption
• Self control, rules-of-thumb, and other behavioral economics topics

Introduction to Macroeconomics

• Introduction
• A Quick Historical Tour of the Past Fifteen Years
• The Obama Stagnation in More Detail

Aggregate Demand

• The Income-Expenditure Framework
• The Income-Expenditure Framework: Examples
• Money, Interest Rates, and Spending
• Summing Up the Income-Expenditure Framework
• Summing Up the Income-Expenditure Framework II
• Aggregate Demand and Aggregate Supply
• Inflation, Unemployment, Output, and Prices
• Origins of the Lesser Depression
• Fiscal Austerity
• Monetary Orthodoxy
• Financial Paralysis
• Employment Hysteresis
• The Euro

Over at Equitable Growth--The Equitablog

• Econ 2: Spring 2014: Sample Midterm I
• Econ 2: Spring 2014: Sample Midterm II
• Econ 2: Spring 2014: UC Berkeley: Week 7: Firms, Missing Micro, and Review
• Course Syllabus: Econ 2: Spring 2014: U.C. Berkeley
• Problem Set 3: Spring 2014: Econ 2: UC Berkeley
• Health Care Policy by Fake Anecdote: Thursday Focus: February 27, 2014
• Morning Must-Read: Matthew O’Brien: Happy Birthday, Stimulus! You Saved the World
• Morning Must-Read: Austin Frakt: Obamacare’s Labor Market Tax Relief
• Jeff Bercovici Interviews Gawker’s Nick Denton About the Dialogue: Wednesday Focus: February 26, 2014
• Evening Must-Read: Matthew O’Brien: How the Fed Let the World Blow Up in 2008
• Carter Price: When Measuring Mobility, Location Still Matters
• Morning Must Read: Jon Hilsenrath Looks at the Fed in 2008

Plus:

• Things to Read on the Morning of February 28, 2014

And:

Week 1: Introduction

Week 2: Supply and Demand

Week 3: Working with Supply and Demand

Week 4: Taxes and Externalities

Week 5: When We Can't Make the Market Work Optimally...

Week 6: When We Can't Make the Market Work Optimally... II

Week 7: Firms, Missing Micro, and Review

Week 8: Introduction to Macroeconomics

Week 9: Aggregate Demand (and a Little Aggregate Supply)

Problem Set 3

Due at lecture, Wednesday, March 5, 2014

If you get badly hung up on 7c and 7d, don't sweat it: we'll cover it in lecture on March 5

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Jon Perr: Georgia Republicans are Killing Hospitals--and People: "By now, millions of Americans--most of them in red states-- are growing familiar with the 'coverage gap'.

Thanks to their rejection of the Affordable Care Act's expansion of Medicaid in states they control, GOP leaders are leaving at least five million people in an insurance "dead zone," earning too much to qualify for Medicaid but too little to obtain federal subsidies to purchase coverage... with as many as 17,000 people forecast to needlessly die each year for lack of health insurance. But GOP obstruction won't just kill people in places like Texas, Mississippi and many more. As the case of Georgia shows--where over 600,000 residents will fall into the coverage gap and as many as 1,175 will die this year--Republican policy is killing hospitals, too.... A fourth rural hospital in Georgia is shutting its doors due to a lack of patients who can pay for their medical expenses:

Where are those who in times past have opposed the decisions of the Group of Seventeen?

• Austin Frakt and Jon Gruber Continue to Push Back Against Casey Mulligan's Misinformation, But There Is a History Here We Should Remember...
• Thursday Idiocy: Scott Lemieux Does the Garbage Cleanup: On the “I Am Outraged That Jan Brewer Would Veto This Meaningless Legislation” Argument
• : Imminent Death of Wonkblog!

1) Identifications (20 minutes—if you are not through after 20 minutes, skip to the next question): Briefly, in one or two sentences, explain the terms set out and how they have been used in the course so far:

a) Supply Curves

b) Producer Surplus

c) Non-rivalry

d) Equilibrium

2) (20 minutes—if you are not through after 20 minutes, skip to the next question): Suppose we have the demand curve: Pd = 1000 x Q-1.5

a) Pick a point on the demand curve. Calculate the elasticity of demand at that point.

b) Go back to the same point you picked in (a). Now pick the point on the demand curve with twice the quantity produced that you originally chose. Which point on the demand curve sees a greater dollar volume of sales?

c) What is the relationship between your answer to (a) and your answer to (b)?

3) (20 minutes—if you are not through after 20 minutes, skip to the next question): Suppose we have a demand curve for Atlantic cod right now this year , in tons of fish and thousands of dollars per ton: Pd = 40 - 0.001Q; and suppose we have a supply curve for Atlantic cod of Ps = 4

a) Draw the supply and demand curves.

b) Calculate the equilibrium price and quantity. Calculate the equilibrium producer and consumer surplus.

c) Suppose we notice that there is an externality cost: the total burden from resource depletion by this year’s fishing is: XC = 10 x Q—each ton of fish landed costs an extra ten thousand dollars in resource depletion. What tax would you impose on the fishing industry, and why?

d) Would you think that fishers would be very upset at this tax, and lobby against it? Why or why not?

4) (20 minutes): Go back to our first-run opening-week movie-industry monopoly example: 2000 people in the town; one movie theatre; ample capacity to seat everyone who might want to come to see this week’s first-run movie. Demand Curve: Pd = 20 - .02 Q. No variable or marginal costs of showing the movie to more people: a non-rival good. Suppose that it costs $6000 to make a movie.

a) How many people should see the movie if we are to maximize societal well-being? What price should be charged to moviegoers? How much consumer surplus is there? How much is there in the way of costs that must be covered somehow?

b) Suppose people worry that government bureaucracies will produce lousy movies, so it is decided not to nationalize the movie industry but instead to let a monopoly make and show movies. What happens?

c) Suppose that we do nationalize the movie industry, and pay for it by imposing a $3 a person “movie tax” on everyone in the town. Relative to monopoly, and relative to no movies being shown, who gains and who loses from this scenario?

d) What would you think of a proposal to encourage better movies by doubling the movie tax and giving an annual prize to the best movie as voted by moviegoers as a way of keeping the bureaucracy from leading to low-quality movies?

20140227 Sample Midterm II Econ 2 Spring 2014 UC Berkeley.pdf

1) Identifications (20 minutes—if you are not through after 20 minutes, skip to the next question): Briefly, in one or two sentences, explain the terms set out and how they have been used in the course so far:

a) Demand Curves

b) Producer Surplus

c) Externalities

d) Market Failure

2) (20 minutes—if you are not through after 20 minutes, skip to the next question): Go back to our first-run opening-week movie-industry monopoly example: 4000 people in the town; one movie theatre; ample capacity to seat everyone who might want to come to see this week’s first-run movie. Demand Curve: Pd = 20 - .01 Q. No variable or marginal costs of showing the movie to more people: a non-rival good. Suppose that it costs $1000 to make a movie.

a) How many people should see the movie if we are to maximize societal well-being? What price should be charged to moviegoers? How much consumer surplus is there? How much is there in the way of costs that must be covered somehow?

b) Suppose people worry that government bureaucracies will produce lousy movies, so it is decided not to nationalize the movie industry but instead to let a monopoly make and show movies. What happens?

c) Suppose that other movie companies petition for the right to use the theatre, and get it. Suppose that if N movie companies make movies, each sells 2000/(N+1) tickets, and the price of tickets is the price at which that number of tickets satisfies demand. In equilibrium—where it is not worth another movie company’s while to enter the market—how many movies will be made each week? What will the consumer surplus be? What will the producer surplus be?

3) (20 minutes—if you are not through after 20 minutes, skip to the next question): Let’s go back to our six producers, Arya, Bran, Tegan, Taylor, Sarah, and Zedd, trying to decide whether they should go to work teaching yoga lessons or pulling lattes. In an hour the six workers could each teach at most the following number of yoga students: Arya 10; Bran 6; Tegan 4; Taylor 10; Sarah 2; and Zedd 0. In an hour the six workers could prepare at most the following number of lattes: Arya 60; Bran 10; Tegan 20; Taylor 30; Sarah 30; and Zedd 60. The government sets the vale of its currency, the pound, so that £1 purchases one latte. Call the price paid to the yoga instructor by each yoga student £Y.

a) Suppose that the price £Y of a yoga lesson is £5.50. Who would rather teach yoga? Who would rather draw lattes?

b) Suppose the price of a yoga lesson is £10. Who would rather teach yoga? Who would rather draw lattes?

c) Suppose the price of a yoga lesson is £15. Who would rather teach yoga? Who would rather draw lattes?

d) With the price of yoga lessons along the vertical axis and the quantity of yoga students taught on the horizontal axis, draw the supply curve for yoga lessons for the economy.

4) (20 minutes—if you are not through after 20 minutes, skip to the next question): Suppose that you find yourself the subject of some bizarre psychology experiment. You are seated in a locked room with a sociology or an anthropology major, and you have ten minutes to persuade him or her that it is broadly and on balance a good thing that we here today have a mixed and market-heavy economy rather than a centrally-planned economy like Stalin’s Russia, Mao’s China, Castro’s Cuba, or (shudder) Kim Jong Un’s North Korea. If you succeed, you win $1000. If you fail, you get nothing.

Write down, in order of importance, the things you would say to try to convince your experiment partner that it is broadly and on balance a good thing that we here today have a mixed and market-heavy economy.

20140227 Sample Midterm I Econ 2 Spring 2014 UC Berkeley.pdf

Can we trust our Silicon Valley behemoths, our new "captains of industry" for the twenty-first century? Ben Thompson has an interesting take:

Ben Thompson: Microsoft v Microsoft: "In his first column for the New York Times, Farhood Manjoo advocated relying on Apple, Google, and Amazon:

When you decide what to use, you’ve got to play every tech giant against the other, to make every tech decision as if you were a cad — sample every firm’s best features and never overcommit to any one.

I rather agree with and follow Manjoo’s advice, and my reasoning is all about the incentives that arise from Apple, Google, and Amazon’s business models:

From World War II Today: Charles F Marshall on the Anzio Beachhead:

The greater the butchery, the larger was the capture of documents. I was always a bit repulsed when handed a batch of bloody papers with a buck slip reading, “From good Germans — dead ones.” This was our Third Infantry Division’s trademark. The study of documents was engrossing work, because one never knew what one would find. There was also a tantalizing element: In which batch would we hit the jackpot? Meticulous examination leavened by serendipity and voila! There it could be!

Over at the Washington Center for Equitable Growth: My excerpts of Matthew O'Brien: How the Fed Let the World Blow Up in 2008: "It was the day after Lehman failed, and the Federal Reserve was trying to decide what to do....

The Fed was blinded. It had been all summer. That's when high oil prices started distracting it from the slow-burning financial crisis. They kept distracting it in September, even though oil had fallen far below its July highs. And they're the reason that the Fed decided to do nothing on September 16th... and said that "the downside risks to growth and the upside risks to inflation are both significant concerns." In other words, the Fed was just as worried about an inflation scare that was already passing as it was about a once-in-three-generations crisis.... The world changed on August 9, 2007. That's when French bank BNP Paribas announced that it wouldn't let investors withdraw money.... You can see this credit crunch in the chart... [that] shows the TED spread... during a financial crisis, it blows up: banks charge each other punitively high interest rates, and pile into government bonds they know are safe.... We might [have] muddle[d] through with something like the 1990 recession.... This is the three-chapter story of why that didn't happen, the story of the three Fed meetings that took place during the summer of 2008.... READ MORE

Over at the Washington Center for Equitable Growth: Carter Price: When Measuring Mobility, Location Still Matters: "When the Equality of Opportunity Project released new data on mobility at the end of January the initial headlines focused on the authors’ overarching finding that mobility at the national level had basically stayed the same while inequality had risen over the past half century.

Most... coverage... missed the nuances.... So we decided to... pull those nuances out... [with] five maps that examine changes in local and regional mobility measured by income mobility, college mobility, and a composite mobility measure.... Intergenerational mobility over this period of time in the United States has changed substantially by region.... By several measures... the South and West experienced the highest gains... much of New England, the Rust Belt and upper Midwest saw declines in mobility.  But... the South has remained among the lowest... while most of the West started with fairly high mobility and has generally gotten better. READ MORE

A Better Class of Critics of Jared Diamond, Please...:

C. Northcote Parkinson was the first to identify the phenomenon of "injelitance"--the jealousy that the less-than-competent feel for the capable.

Here we have a classic case from the anthropologists at Savage Mind, who are both positively green with envy at Jared Diamond's ability to make interesting arguments in a striking and comprehensible way, and also remarkably incompetent at critique.

• M Feb 24
  • Administrivia
  • Duopoly
  • Adverse Selection
• W Feb 26
  • Hand in Problem Set 2 http://tinyurl.com/dl20140224
  • Modes of Market Failure: Instructor Reality-Check Time…
  • Non-Excludible Commodities
    • Non-Excludibility: Introduction
    • Non-Excludibility: Public Goods
    • Non-Excludibility: Ancillary Services
    • Non-Excludibility and Market Power
  • The Theory of the Firm
• Sections
  • Discuss: Friedman and Director Friedman, Slee
  • Further Reading:
    • Coase, The Nature of the Firm
    • Weitzman, Prices and Quantities
  • Start Problem Set 3
  • Look at Sample Midterm

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Over at Equitable Growth--The Equitablog

• Washington Center for Equitable Growth | Mt.Gox Site Disappears, Bitcoin Future in Doubt
• Washington Center for Equitable Growth | Afternoon Must-Read: Evan Soltas: To Say Unions Are Essential to Reduce Inequality Is a Counsel of Despair
• Washington Center for Equitable Growth | Yes, Christina Romer and Jared Bernstein Were Far on the Pessimistic (and Correct) Side of Forecast Consensus in December 2008. Why Do You Ask?
• Washington Center for Equitable Growth | Department of: “We Stand Ready to Help the Chinese Leadership with Their North Korea Problem”
• Washington Center for Equitable Growth | Department of “Huh?!”: How You Play Your Hand Determines What Hand You Hold Weblogging
• Washington Center for Equitable Growth | Morning Must-Read: Elizabeth Nolan Brown: Weak Government Regulations Made Me Do It, Legal Sea Foods CEO Claims
• Washington Center for Equitable Growth | Morning Must-Read: Daniel Kuehn: Bryan Caplan on the College Premium
• Washington Center for Equitable Growth | Morning Must-Read: Joe Deaux: The Story of the Federal Reserve the Day After Lehman Brothers Collapsed

Plus:

• Washington Center for Equitable Growth | Things to Read on the Morning of February 26, 2014

And:

*Lise Kristensen: * The Blue Door: A little girl’s incredible story of survival in the Japanese POW camps of Java:

One day we were having a lesson on England when the Japanese guards burst through the doors on the opposite side of the church. We had drawn the shape of the map of the British Isles, and had separated the outline into the countries of Scotland, England, Ireland and Wales. I was beginning to colour in Wales with a deep-red crayon when I heard a commotion behind me.

Michael Mazerov: More Evidence That You Can’t Lure Entrepreneurs With Tax Cuts: "Cutting state taxes to attract entrepreneurs is likely futile at best and self-defeating at worst, a new survey of founders of some of the country’s fastest-growing companies suggests....

The 150 executives surveyed by Endeavor Insight... said a skilled workforce and high quality of life were the main reasons why they founded their companies where they did.... This suggests that states that cut taxes and then address the revenue loss by letting their schools, parks, roads, and public safety deteriorate will become less attractive to the kinds of people who found high-growth companies.  (Hat tip to urbanologist Richard Florida for calling attention to the study.) As I wrote last year on why studies show state income tax cuts aren’t an effective way to boost small-business job creation:

Nascent entrepreneurs are not particularly mobile.  Rather, they tend to create their businesses where they are, where they are familiar with local market conditions and have ties to local sources of finance, key employees, and other essential business inputs....

The new survey... found that:

The most common reason cited by entrepreneurs for launching their business in a given city was that it was where they lived at the time... personal connections... specific quality of life factors... access to nature or local cultural attractions.... 31% of founders cited access to talent as a factor... the link between the ability to attract talented employees and a city’s quality of life.... 5% of entrepreneurs cited low tax rates as a factor... [2% mentioned] business-friendly regulations....

Kansas, North Carolina, and Ohio have cut personal income taxes significantly in the last two years, and in each case the governor argued that it would give a big boost to creating or attracting new firms.  This new study provides more compelling evidence that that’s the wrong approach.  Let’s hope other states don’t start down the same dead-end path.

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I have never before dared give a lecture on adverse selection to any of my Principles classes. Now I have: Principles of Economics * When Markets Cannot Work Optimally * Adverse Selection

Available in lots of versions--[.key.zip], [.mov], and [.html.zip] have audio. [.pdf] and [.ppt.zip] do not...

Four years ago:

Arnold Kling, March 2010:

The Keynesians are certain that deficit spending is contributing much to short-term economic performance, and they are uncertain that it is contributing much to long-term fiscal instability. The Rogoffians are certain that deficit spending is contributing much to long-term fiscal instability, and they are uncertain that it is contributing much to short-term economic performance. I am to the right of the Rogoffians. That is, the U.S. fiscal stimulus is so poorly designed that I doubt that it is contributing anything positive to short-term economic performance. And, given the outlook for Medicare (stare at the table), we cannot afford to be casual about deficits.... Part of me wishes that folks like Brad DeLong and Paul Krugman could be forced to put their money where their mouths are and sell credit default swaps on U.S. government debt. My advice to everyone else would be to take the other side of that trade.

How is that working out for him?

Note: no policy changes since 2010 with any long-run spending and tax oomph except for the Arnold Kling-hated ACA.

And note that the Rogoffians never said that current deficit spending is contributing much to long-term fiscal instability--the Rogoffians were, IIRC, on balance opposed to short-run fiscal contraction, although much in favor (as was I) of putting long-run policies of fiscal restraint in stone...

Over at the Washington Center for Equitable Growth: One of the many, many interesting things in the Federal Reserve's 2008 transcripts is the staff briefing materials for the mid-December FOMC meeting, which include:

Over at Equitable Growth--The Equitablog

• What Effect Will a Minimum Wage Increase Have?: Tuesday Focus: February 25, 2014
• Morning Must-Read: James Surowiecki: Assessing the American Dream : The New Yorker
• Morning Must-Read: Larry Mishel: Misdirection on Assortative Mating and Income Inequality
• Ryan Avent on Tim Geithner: Fed 2008 Transcript weblogging
• Janet Yellen Looks Extremely Good in the 2008 Federal Reserve FOMC Transcripts
• Say’s Law: Theory, Practice, and History: A Virtual Debate Made Up of Five Somewhat-Related Posts Worth Reading
• Federal Reserve Fretting About Inflation in 2008: Monday Focus: February 24, 2014
• Evening Must-Read: Kevin Drum: Walmart’s Core Customer Base Is Doing Poorly
• Morning Must-Read: Paul Krugman: 2008 Federal Reserve Decision Making: The Urge To Tighten

Plus:

• Things to Read on the Morning of February 25, 2014

And:

What Effect Will a Minimum Wage Increase Have?: Tuesday Focus: February 25, 2014: First of all, it seems very clear to me that whatever disemployment effects a minimum wage increase would have are swamped for any reasonable greatest-good-of-the-greatest number calculation by the positive effects on income distribution and on the effectiveness of the EITC as an anti-poverty program that the minimum wage increase would have.

Second, I agree with my colleague Michael Reich that the CBO’s relatively high–but still low in both absolute and relative to the size of the economy terms, for it is high only relative to other studies and to the consensus view around here–estimate of the disemployment effect of the minimum wage increase is puzzling. READ MORE

Omar Bradley: "Of all the invasion plans, and there were plans for each echelon in the chain of command, none were more intricate, more detailed, and weightier than those of the assault Armies.

When on February 25, 1944, we completed the First Army plan for OVERLORD and called for the corps to come into the picture, we stitched together a huge mimeographed volume with more words than Gone with the Wind. In all, 324 complete copies of this limited edition were published by First Army.

Outsourced to Blue Girl: They gave us a republic...:: What's the Worst that Could Happen?: "Al Gore... spoke to a packed Grand Ballroom at the Westin Crown Center for about an hour, and the audience could not have been more receptive or friendlier.

He was clearly a man at ease, who knew he was among friends, and this was conveyed by a warm, engaging and easy manner. It was enough to make me wonder "Where was this guy in 2000? This guy would have carried his home state, or at least most of those Nader voters and that would have been enough."... What is within our power to change, as he pointed out, is the future, and then he made the people... responsible for making sure we each and every one understood that we are integral to making sure that we, as a society, choose the right pathways as we move forward....

It is delightful:

And the "alert" is that there will come soft rains:

SPECIAL WEATHER STATEMENT NATIONAL WEATHER SERVICE SAN FRANCISCO BAY AREA 152 PM PST MON FEB 24 2014

CAZ006-505>513-516>518-528>530-251000- SAN FRANCISCO- COASTAL NORTH BAY...INCLUDING POINT REYES NATIONAL SEASHORE- NORTH BAY INTERIOR VALLEYS-NORTH BAY MOUNTAINS- SAN FRANCISCO BAY SHORELINE-SAN FRANCISCO PENINSULA COAST- EAST BAY INTERIOR VALLEYS-EAST BAY HILLS AND DIABLO RANGE- SANTA CRUZ MOUNTAINS-SANTA CLARA VALLEY...INCLUDING SAN JOSE- SOUTHERN SALINAS VALLEY...ARROYO SECO...AND LAKE SAN ANTONIO- SANTA LUCIA MOUNTAINS AND LOS PADRES NATIONAL FOREST- MOUNTAINS OF SAN BENITO AND INTERIOR MONTEREY COUNTY INCLUDING PINNACLES NATIONAL PARK- NORTHERN SALINAS VALLEY...HOLLISTER VALLEY...AND CARMEL VALLEY- NORTHERN MONTEREY BAY-SOUTHERN MONTEREY BAY AND BIG SUR COAST- 152 PM PST MON FEB 24 2014

...A CHANGE IN THE WEATHER WITH MUCH NEEDED RAINFALL ON THE WAY...

DRY AND TRANQUIL WEATHER WILL CONTINUE THROUGH TUESDAY AFTERNOON ACROSS THE BAY AREA AND CENTRAL COAST. BY WEDNESDAY MORNING THE FIRST IN A SERIES OF PACIFIC STORM SYSTEMS WILL BEGIN TO BRING RAINFALL TO THE REGION. LIGHT RAIN MAY BEGIN AS EARLY AS WEDNESDAY MORNING WITH RAINFALL INCREASING THROUGH THE AFTERNOON HOURS OF WEDNESDAY AND IMPACTING THE WEDNESDAY EVENING COMMUTE. IN ADDITION THERE WILL A CHANCE OF THUNDERSTORMS...FIRST OVER THE OCEAN WATERS AND THEN SPREADING INLAND WEDNESDAY NIGHT AS THE MAIN FRONTAL BAND MOVES ONSHORE. LIGHTNING...BRIEF HEAVY RAIN AND GUSTY SOUTHERLY WINDS WILL BE LIKELY AS THE FRONTAL BAND MOVES ONSHORE WEDNESDAY NIGHT. RAINFALL TOTALS BY THURSDAY MORNING SHOULD AVERAGE 1 TO 2 INCHES IN THE COASTAL HILLS WITH A QUARTER TO THREE QUARTERS OF AN INCH ON AVERAGE FOR THE VALLEYS.

SHOWERS WILL LINGER ON THURSDAY BUT A GENERAL DRYING TREND IS FORECAST FOR THURSDAY AFTERNOON AS THE REGION WILL BE IN-BETWEEN STORMS.

THE NEXT STORM WILL ARRIVE LATE THURSDAY NIGHT INTO FRIDAY. THIS SYSTEM APPEARS STRONGER BUT SOME OF THE HEAVIEST RAIN MAY BE FOCUSED MORE OVER SOUTHERN CALIFORNIA. NONETHELESS THE ENTIRE BAY AREA IS EXPECTED RECEIVE RAINFALL WITH THE FRIDAY SYSTEM...WITH THE LIGHTEST AMOUNTS IN THE NORTH BAY AND HEAVIEST AMOUNTS IN THE SANTA CRUZ AND SANTA LUCIA MOUNTAINS. A STRONG SURFACE LOW OFF THE COAST WILL LIKELY PRODUCE STRONG SOUTHERLY WINDS OVER THE OCEAN...ALONG THE COAST AND IN THE HILLS. WEEKLY RAIN TOTALS BY SATURDAY MORNING SHOULD RANGE FROM ONE TO TWO INCHES IN THE VALLEYS WITH TWO TO FIVE INCHES IN THE WETTEST COASTAL HILLS.

COLD RAIN SHOWERS WILL LIKELY CONTINUE INTO SATURDAY WITH SOME LONG RANGE MODELS HINTING AT MORE POSSIBLE STORM SYSTEMS LATER SUNDAY AND THEN AGAIN NEXT TUESDAY.

AFTER A PROLONGED PERIOD OF MAINLY DRY WEATHER NOW IS THE TIME TO PLAN ACCORDINGLY FOR THE WET AND WINDY WEATHER THAT WILL ARRIVE LATER THIS WEEK.

Modes of Market Failure

Six modes of market failure:

• Maldistribution
• Miscalculation—which we will not cover
• Externality
• Non-rivalry
  • Market power
• Adverse selection
• Non-excludibility

Today We Are Going To Do...

Market Power

Adverse Selection

Problem Set 2

Errors in…

• Updated version at: http://tinyurl.com/dl20140224
• Do either…

Due on Wednesday at start of lecture

Problem Set 3

Out tomorrow

Due on Wednesday March 5 at start of lecture

Sample Midterm

Out on Wednesday

Midterm will be Monday March 10

• Bring blue books!
• Bring pens!
• Bring calculators!
• Open book-open notes!

Further Reading

Ronald Coase, "The Nature of the Firm”

• http://tinyurl.com/dl20140224b

Martin Weitzman, "Prices vs. Quantities”

• http://tinyurl.com/dl20140224c

Books

Milton Friedman and Rose Director Friedman, Free to Choose

Tom Slee, Nobody Makes You Shop at WalMart

What We Do This Week

M Feb 24

• Administrivia
• Duopoly
• Adverse Selection

W Feb 26

• Hand in Problem Set 2 http://tinyurl.com/dl20140224
• Administrivia
• Firms
• Non-Excludibility
• Start Problem Set 3
• Look at Sample Midterm

Sections

• Discuss: Friedman and Director Friedman, Slee
• Further Reading:
  • Coase, The Nature of the Firm
  • Weitzman, Prices and Quantities

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Problem Set 2a CORRECTED

"Merrill's Marauders":

In August 1942, President Franklin D. Roosevelt and Prime Minister Winston Churchill agreed to create an American ground unit whose sole purpose would be to engage in a "long-range penetration mission" in Japanese-occupied Burma. This mission would consist of cutting Japanese communications and supply lines and otherwise throwing the enemy's positions into chaos. It was hoped that this commando force could thus prepare the way for Gen. Joseph Stillwell's Chinese American Force to reopen the Burma Road, which was closed in April 1942 by the Japanese invaders, and once again allow supplies and war material into China through this route.

Daniel Kuehn: Facts & other stubborn things: Krugman back in 2009 on the downturn: "Recently Bob [Murphy] claimed that Krugman is 'rewriting' his stimulus history....

Now DeLong actually said that he trusted the CEA forecast at the time (more on that a little later), but Krugman didn't. His post stuck pretty closely simply to what we think about the properties of different time series with respect to unit roots. It's not even like he left his view about the possibility of extended crisis unstated - he said that we can expect output to grow "if and when" slack capacity was used again. "When", sure - but "if and when"!?!?

Operation Lentil (Caucasus) - Wikipedia, the free encyclopedia:

Operation Lentil (Russian: Чечевица, Chechevitsa; Chechen: Aardax, Ardakh) was the Soviet expulsion of the whole of the Vainakh (Chechen and Ingush) populations of the North Caucasus to Central Asia during World War II. The expulsion, preceded by the 1940–1944 insurgency in Chechnya, was ordered on 23 February 1944 by NKVD chief Lavrentiy Beria after approval by Soviet Premier Joseph Stalin, as a part of Soviet forced settlement program and population transfer that affected several million members of non-Russian Soviet ethnic minorities between the 1930s and the 1950s.

Over at the Washington Center for Equitable Growth: I Am Sorry. What Was Tim Geithner Looking at in January 2008?: Saturday Focus: February 22, 2014: "Steven Perlberg:

Tim Geithner January 2008 FOMC Minutes: “The World Is Still Looking Pretty Good”: “In January 2008–right as the U.S. economy entered a recession–the former Federal Reserve Vice Chairman (and later Treasury Secretary) was still very optimistic….

Here’s Geithner:

You know, we have the implausible kind of Goldilocks view of the world, which is it’s going to be a little slower, taking some of the edge off inflation risk, without being so slow that it’s going to amplify downside risks to growth in the United States. That may be too optimistic, but the world still is looking pretty good. Central banks in a lot of places are starting to soften their link to the dollar so that they can get more freedom to direct monetary policy to respond to inflation pressure. That’s a good thing. U.S. external imbalances are adjusting at a pace well ahead of expectations. That’s all good, I think. As many people pointed out, the fact that we don’t have a lot of imbalances outside of housing coming into this slowdown is helpful. There’s a little sign of incipient optimism on the productivity outlook or maybe a little less pessimism that we’re in a much slower structural productivity growth outlook than before. The market is building an expectation for housing prices that is very, very steep. That could be a source of darkness or strength, but some people are starting to call the bottom ahead, and that’s the first time. It has been a long time since we’ve seen any sense that maybe the turn is ahead. It seems unlikely, but maybe they’re right. In the financial markets, I think it is true that there is some sign that the process of repair is starting. Having said that, though, I think it is quite dark still out there…. Like everyone else, we have revised down our growth forecast. We expect very little growth, if any, in the first half of the year before policy starts to bring growth back up to potential....

What was he looking at in January 2008 to say that? READ MORE

Over at Equitable Growth--The Equitablog

• Lunchtime Must-Read: Nathaniel Popper: As 2008 Crisis Loomed, Yellen Made Wry and Forceful Calls for Action
• I Am Sorry. What Was Tim Geithner Looking at in January 2008?: Saturday Focus: February 22, 2014
• Morning Must-Read: Uki Goñi: Peso Panic Shakes the throne of Argentina’s Queen Cristina Fernandez de Kirchner
• Morning Must-Read: Richard Mayhew: Who Loses from ObamaCare?
• Afternoon Must-Read: Federal Reserve 2008 Transcripts
• Afternoon Must Read: Sahil Kapur: How Tea Party Absolutism Cost The GOP A Huge Win On Entitlements

Plus:

• Things to Read on the Afternoon of February 22, 2014

And:

George Orwell: 1984: Chapter 29: "Winston was gelatinous with fatigue.

Gelatinous was the right word. It had come into his head spontaneously. His body seemed to have not only the weakness of a jelly, but its translucency. He felt that if he held up his hand he would be able to see the light through it. All the blood and lymph had been drained out of him by an enormous debauch of work, leaving only a frail structure of nerves, bones, and skin. All sensations seemed to be magnified. His overalls fretted his shoulders, the pavement tickled his feet, even the opening and closing of a hand was an effort that made his joints ache.

This has always struck me as a very bad translation of what Marx is trying to say--that in the German it is infinitely more powerful and effective than what we have here.

Does anybody know of--has anybody made--a better translation?

Karl Marx: Capital I:6: The Buying and Selling of Labour-Power:

This sphere that we are deserting, within whose boundaries the sale and purchase of labour-power goes on, is in fact a very Eden of the innate rights of man. There alone rule Freedom, Equality, Property and Bentham. Freedom, because both buyer and seller of a commodity, say of labour-power, are constrained only by their own free will. They contract as free agents, and the agreement they come to, is but the form in which they give legal expression to their common will. Equality, because each enters into relation with the other, as with a simple owner of commodities, and they exchange equivalent for equivalent. Property, because each disposes only of what is his own. And Bentham, because each looks only to himself. The only force that brings them together and puts them in relation with each other, is the selfishness, the gain and the private interests of each. Each looks to himself only, and no one troubles himself about the rest, and just because they do so, do they all, in accordance with the pre-established harmony of things, or under the auspices of an all-shrewd providence, work together to their mutual advantage, for the common weal and in the interest of all.

On leaving this sphere of simple circulation or of exchange of commodities, which furnishes the “Free-trader Vulgaris” with his views and ideas, and with the standard by which he judges a society based on capital and wages, we think we can perceive a change in the physiognomy of our dramatis personae. He, who before was the money-owner, now strides in front as capitalist; the possessor of labour-power follows as his labourer. The one with an air of importance, smirking, intent on business; the other, timid and holding back, like one who is bringing his own hide to market and has nothing to expect but--a hiding.

Jessica Sequeira: Political Hatred in Argentina: An Interview with Uki Goñi: "Two days before I met with Uki Goñi, his analysis of president Cristina Fernández de Kirchner and the crisis in Argentina was the top article on the Guardian website. Goñi is a correspondent for British newspapers, covering events in Argentina, but his professional experiences before this are enough for a number of lives.

He arrived in the city in his early twenties and began work as a journalist at the Buenos Aires Herald, an English language daily and the city’s only newspaper reporting on missing people during the dictatorship. Over the next decade he focused on his band Los Helicópteros, and then wrote three books: El Infiltrado. La verdadera historia de Alfredo Astiz, on the activities of the ESMA, an illegal detention center during the country's National Reorganization Process (1976-1983) responsible for disappearances, tortures, and illegal executions; Perón y los Alemanes, on Perón's involvement with Nazi spies in the country; and The Real Odessa, on Nazi criminals' escapes to Argentina. I spoke with Goñi on February 4, 2014 at Oui Oui Café in the Palermo Hollywood neighborhood of Buenos Aires, on a sunny summer morning. READ MORE

Henry Farber: Memories of World War II in the Russian Army:

The Instruction of Dua-Khety:

The beginning of the teaching which the man of Tjel named Dua-Khety made for his son named Pepy, while he sailed southwards to the Residence to place him in the school of writings among the children of the magistrates, the most eminent men of the Residence.

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Over at Equitable Growth--The Equitablog

• The Value of Choosing the Right Parents: Creg Clark: Friday Focus: February 21, 2014
• Macroeconomics’s “Faustian Bargain”?: Thursday Focus: February 20, 2014
• Evening Must-Read: Jason Furman and Betsey Stevenson: Congressional Budget Office Report Finds Minimum Wage Lifts Wages for 16.5 Million Workers
• Afternoon Must-Read: Judy Feder: The Inevitability of Disruption in Health Reform
• Lunchtime Must-Read: Does Anyone Else Realize The Federal Debt Ceiling Was ELIMINATED?
• Economists’ Amicus Brief on the ACA Federal-Exchange Subsidies Case: Tuesday Focus
• FDR’s “Four Freedoms” Speech
• Afternoon Must-Read: Bill McBride: Calculated Risk: The Stimulus Success
• Perhaps the Single Most Puzzling Thing Published Over the Weekend: The Peculiar Blindness of Nick Kristof: Monday Focus: February 17, 2014
• Evening Must-Read: The Epicurean Dealmaker: Occupy Galt’s Gulch
• Washington Center for Equitable Growth | Afternoon Must-Read: Paul Krugman: Fighting the Last Macro War?
• Lunchtime Must-Read: Sven Jari Stehn and Jan Hatzius: Fed Should Target Wage Growth

Plus:

• Things to Read at Lunchtime on February 21, 2014

And:

Over at the Washington Center for Equitable Growth: : The Value of Choosing the Right Parents: Creg Clark: Friday Focus: February 21, 2014:

It was Samuel Bowles and Herb Gintis who first taught me that very strange things are going on in the inheritance of inequality in America. They found that although measures of cognitive performance like IQ are strongly inherited, “the genetic transmission of IQ appears to be relatively unimportant”: high IQ-parents do have higher-than-average IQ-children, but that is now why the children of rich parents are richer than average. Moreover, “the combined inheritance processes operating through superior cognitive performance and educational attainments of those with well-off parents… explain at most half” of the intergenerational inheritance of inequality.

And Greg Clark has been doing a lot of work on this, so let me turn the microphone over to him:

Greg Clark: Your Fate? Thank Your Ancestors: Mobility has always been slow: When you look across centuries… social mobility is much slower than many of us believe, or want to believe. This is true in Sweden, a social welfare state; England, where industrial capitalism was born; the United States, one of the most heterogeneous societies in history; and India, a fairly new democracy hobbled by the legacy of caste. Capitalism has not led to pervasive, rapid mobility. Nor have democratization, mass public education, the decline of nepotism, redistributive taxation, the emancipation of women, or even, as in China, socialist revolution.... The fortunes of high-status families inexorably fall, and those of low-status families rise, toward the average… but the process can take 10 to 15 generations…. We came to these conclusions after examining reams of data on surnames... in eight countries–Chile, China, England, India, Japan, South Korea, Sweden and the United States–going back centuries….

As the political theorist John Rawls suggested in his landmark work “A Theory of Justice” (1971), innate differences in talent and drive mean that, to create a fair society, the disadvantages of low social status should be limited. We are not suggesting that the fact of slow mobility means that policies to lift up the lives of the disadvantaged are for naught–quite the opposite. Sweden is, for the less well off, a better place to live than the United States, and that is a good thing…. What governments can do is ameliorate the effects of life’s inherent unfairness. Where we will fall within the social spectrum is largely fated at birth. Given that fact, we have to decide how much reward, or punishment, should be attached to what is ultimately fickle and arbitrary, the lottery of your lineage. READ MORE