The Ambrosini Critique

People are having a hard time getting into nursing school.

“So many people want to be a nurse now that there’s just not enough room in the classroom and the hospitals to accommodate all those people,” said Bradford.

Her theory is more than personal opinion. Recent data indicates that nursing classrooms are filling up faster, and the fight to get in is tougher than ever.

In the Sacramento region, at least three colleges — American River, Chico State and Yuba — report significant jumps in nursing school applications since 2004.

“We’re hearing of people waiting two years before they get to the top of a (nursing school) waiting list,” said Spetz.

Why not open more schools, hire more teachers, etc. The article says because teachers don’t get paid enough and schools don’t have enough money. Something fishy is going on when demand for a good rises but prices and/or quantities don’t.

[W]hat if the house isn’t even on fire? What if there was just a short circuit and all the electronic devices have gone haywire and are lighting up the place like a spastic Christmas tree. In that case, we need may need electrician, or we may just need to reset the breakers, but we certainly don’t need a bunch of confused firemen with high-powered hoses blasting everything they see because everything they see looks like its on fire.

— Todd

Will Wilkinson says (where to find permalinks for “disqus” comments?) I should take non-behavioral data more seriously. Fine. Here’s a quote from a business owner facing the prospect of Obama’s doubling of income tax on the top 2% of earners:

I own my business and, unlike an employee, I have the option to work as much or as little as I like. At some tax rate, the marginal dollar won’t be worth earning. I’ll fire some employees, scale down the business or retire altogether and stick my money in tax advantaged muni bonds and do all the traveling and relaxing I can’t do now.

Irrefutable damning evidence that people respond to incentives?

Nope. Its not even an anecdote; its just some thing somebody said in a blog comment.

Buiter’s idea to create new banks with bailout funds, seconded by Paul Romer and discussed by David Warsh is endorsed by uber-entrepreneur Marc Andreessen in this great video:

My better half, The Real Scientist, tells me that I should learn to compromise and my analysis should be conditioned on the fact that politicians will feel the need “to do something”. So getting angry about the mess they make (e.g. the disincentive to work created by the mortgage bail-out) when doing nothing would be optimal is like cursing the sun for rising in the morning. If the government feels the need to spend a ton of money fixing the banking system, investing in new banks is a good way to spend that money.

PS – No really. I’m off blogging for the rest of the week.

Went to see all five best picture nominees yesterday. Its something like torture watching five of those kinds of movies in one day.

Benjamin Button was a terrible movie and I have no idea why this badly done Forrest Gump wannabe (which was a crappy movie too) got nominated.

The Reader is an ok movie, but it failed. They wanted us to have sympathy for the woman and be outraged that she got unfair treatment by the court. The Kid as normal-Germans-not-speaking-out thing didn’t work either. Also, I hate when I have to think about what the directors and producers or who ever wanted me to think about.

Slumdog Millionaire was good, but it became very predictable somewhere about 1/2 way through. The best parts were the early scenes in the slums. If this movie wins because of those scenes, then Wall-E should win because its first third was much better.

Milk was great because Sean Penn was great. The story was interesting, but I would have gotten as much from wikipedia.

And the Oscar goes to… Frost/Nixon… it made me feel sympathetic towards Richard Nixon. The closest I came to crying all day was when Frost broke Nixon in the last interview; the look on Nixon’s face. I know this was a good movie because it was the fifth to show, it was the eleventh hour when it started, my neck had a crick and it was still enjoyable.

PS – I’m out of commission for the next week or so.

The more I think about it, the more I think business cycle accounting should be the back-bone of the macro curriculum. Teach the growth models and then use BCA to show how the economy strays from that ideal. Wedges are so much more intuitive than fundamental shocks.

You still have to learn real business cycle models, adding money, the mechanics of sticky prices, credit channel stuff and all that, but I think BCA is a nice way to frame the problem of business cycles.

Couldn’t this even be taught to undergrads? Instead of the theoretical suspect (and outdated) Keynesian model, BCA would introduce business cycles as an empirical problem. Something we have a great deal of data on but not a great deal of understanding. Also, because the BCA stuff points to labor frictions as a major contributor to business cycles¹, they can be a nice segue to unemployment.

Teaching business cycles this way to undergrads — without introducing a causal model — would make business cycle policy discussions hard. Maybe this is ok. Teach policy in the Public class. After all, they don’t teach medicine in physiology class.

1. Certainly not a robust finding because this literature is young. [↩]

As I mentioned in comments below, Casey Mulligan posted a working paper this weekend that argues this recession is consistent with shifts in labor supply. He gives evidence that this shift is due to increases in the labor wedge.

He gives two causes of increased labor market distortions. The first is talk by the IRS and politicians to be more lax in enforce against economically distressed tax payers. Of course, this would give an incentive to be viewed as “economically distressed” by the IRS. The second distortion unique to this recession is caused by the way distressed mortgages are handled. Rational banks and soft-hearted policy makers will decrease mortgage payments for “economically distressed” individuals. At some levels of income and some sizes of mortgage payments, then, there’s a 100% income tax.

Anyway, there are a million models that could generate labor market wedges. The name of the game is to find one that is also consistent with other salient facts. Mulligan’s mortgage story seems like a stretch but there is one testable implication that I can think of: The housing bubble affected different parts of the country differently. Homeowners in areas most bubbly will be more likely to be given incentives to reduce their labor supply because of offers (or expectations of offers) to decrease mortgage payments conditioned on income or employment status. Here’s a scatter plot of the change in the case-shiller index (a measure of the size of the housing bubble) by the change in the unemployment rate. These are year to year changes from November 2007 to November 2008.

Somebody much better than I at econometrics could see if this simple relation holds for reals.

(h/t Everyday Economist)

An old joke about Real Business Cycles is that they assume recessions are caused by technological regress. Without other frictions, the only way for an economy to get lower output given the installed capital and the number of workers is to have a sudden drop in productivity of those inputs.

Well, who in the hell ever heard of a technological regression? What, did people forget how make stuff? lose the blueprint? Ha ha ha… those stupid RBC theorist. What a bunch of mathematical masturbation!

Ahem. Well, here are three examples of technological regress. First, the financial mess can be seen as throwing sand in the works. Its harder to get working capital — if your bank is skittish you have to walk down the street to get your loans from somewhere else — so production is more expensive. Second, here’s Willem Buiter entertainingly complaining about centralization causing technological regress. Third, an increase in distortions in the finance sector where it is harder for some sectors to get financing can *look* like technological regress.

The last point was explained by Prof. Kehoe at the loooooooooooooong session on monetary policy at the AEA meetings (see day two part 1). He shows a simple single sector growth model with plain vanilla productivity shocks (i.e. technological regress) is observational equivalent to a more sophisticated two sector model with sector specific labor costs (e.g. costs in working capital). The more sophisticated model tells a story for why there is “technological regress” but it doesn’t necessarily tell us more about the economy. For that, the model would need to generate other testable predictions.

The RBC literature found “technological shocks” were important for explaining business cycles. Many, perhaps more conservative, economists took this result literally… variation in stuff policy makers have no control over, namely exogenous technology, cause business cycles so policy can’t help smooth cycles. For this literal interpretation of “technology shocks” those economists were rightly ridiculed, but the lesson of RBC models is exactly what it should be: these models identified a fundamental cause of business cycles and they pointed the way to a deeper understanding. To understand business cycles, we need to understand “technological shocks”. RBC models aren’t wrong; they’re just not right enough.

Prof. Clark thinks so. Don’t worry, he’s his usual well-tempered self. And there’s certainly no name calling.

If this economic turmoil shakes the cruft off of economics, I’m happy.

(h/t ssendam)

Prof. Philippon summarizes three reports on financial regulation and reviews proposed changes to regulation. My favorite paragraph:

I very much doubt that we can agree on a set of objective measures of ‘excessive’ credit expansion (let alone bubbles). I think that the best we can expect is a powerful regulator running systemic stress tests based partly on historical data and partly on subjective forward looking scenarios. The critical issue in my view does not lay in the construction of an appropriate cyclical index, but rather in making sure that the regulator is powerful enough to enforce tighter prudential regulations based in part on subjective and debatable interpretations of economic data. The financial industry will not like it, and it has a strong track record of capturing its regulators, so this will not be easy.

He suggest the powerful regulator should be the Fed. He seems frustrated that there’s not more specific policy proposals and the ones that exist are bad: “I would therefore consider any future report that does not include tables, figures, numbers, equations, and specific proposals to be useless rhetoric.” Here are his concluding remarks:

This issue reminds me of the paradox of free trade. The benefits of free trade are widespread and difficult to grasp, while its costs are concentrated and easily publicized. Public support for free trade is therefore structurally weak. Moral hazard created by implicit guarantees is also widespread and difficult to grasp. It shows up in spreads lowered by a few basis points here and there, in slight distortions of comparative advantages, and in overall weaker governance. But the costs of LCFI [wa: firms that are "too-big-to-fail"] failures are large and concentrated. It is therefore tempting for regulators to focus too much on bailouts, and too little on incentives. But this is clearly the wrong policy for the long run. Incentives and accountability must be improved, even if it means fighting a regulatory battle with the industry.
Sir Winston Churchill famously remarked that “Britain and France had to choose between war and dishonour. They chose dishonour. They will have war.” If in the hope of ending the crisis quickly, we choose to bail out the banks without making their managers, shareholders and creditors accountable, then we choose dishonour, and we will have more devastating crises.