From Any Xie’s post:

An economy ages in many ways. The most common are tied to the exhaustion of factors such as production-labor, capital and resources. When an economy begins to develop, labor is the abundant resource. Hence, it makes sense to develop labor-intensive industries. When labor surplus is exhausted, it makes sense to develop capital intensive industries. When capital stock is high enough, investment cannot drive growth anymore. Economists call it diminishing returns, or more of the same yields less output. This type of aging doesn’t worsen. Economists say a steady state equilibrium emerges when consumption and investment are balanced just right, sort of like permanent middle age.
Moreover, youthfulness is possible for a mature economy. Through innovation, an economy can produce more with the same inputs. This so-called total factor productivity (TFP) is an elixir for a mature economy. It determines how fast a rich economy gets richer. A 1 percent TFP is considered mediocre, 2 percent is good, and 3 percent is super.
Many economists argue for freer and cheaper economic structure to stimulate innovation. But, in the Internet era, innovations rapidly disseminate around the world. It’s not clear if innovation benefits can be contained in any country anymore. For example, even though the United States is more innovative than Europe, it hasn’t outperformed by much. Its celebrated prosperity during the Greenspan era turned out to be an old-fashioned bubble, not a reflection of superior innovation.

Two questions immediately present themselves. First, is Japan’s story the fate of all industrialised democracies? Second, is it possible, using the Debt/Demography criteria, to rank and rate different economies and their growth trajectories? MA/PhD students take note.

Business Cycles and the Macroeconomy

Christina Romer: Business Cycles

CEPA: Business Cycles

NBER: Business Cycle Dating

Here’s Simon Johnson of MIT on the Doom (aka: Minsky) Cycle:

Simon Johnson on the Doom Cycle (MMBM) from Roosevelt Institute on Vimeo.

But today it’s time to look twice.

As usual in Ireland, you have to look a little more closely at these reports for two key factors: changes of tone within the document, and evidence of a cheque-book. Without these, any section in any government report is merely a subsidy to the printers of the report for printing extra blank pages. There may also be multiplier effects in stimulating Coilte employment.

Onto the report itself, the first thing to take issue with is its definition of innovation. Innovation, apparently, is

…investment aimed at producing new knowledge and using it in various applications. Increasing productivity is the key driver of economic performance and sustainability. Innovation, in both the production and use of ideas, technology and processes, is important in this context because it drives productivity. Ireland’s future economic success depends on increasing levels of innovation across all aspects of Irish enterprise.

Students of economics should note first that this definition comes straight from a simple production function-type definition of labour and capital-augmenting technology of the form

Y = AF(K, L)

where is national output, is capital (don’t get into what that means right now, go here if you want to know more), and is labour. That is some measure of technology, and when it goes up, the efficiency of both and go up, and so does national output, . All of which should have students in my class hearing Keynes’ quote about `madmen in authority‘ loud and clear in their ears right about now.

The problem is that this kind of thing isn’t really what people like Joseph Schumpeter had in mind when they were talking about innovation. Schumpeter thought innovation was a destructive force, in that it replaced older forms of production with new ones in a messy and costly transformation. Go into PC World and ask for a typewriter ribbon, and you’ll get the idea. For people like Schumpeter, the innovating entrepreneur could in some cases be bad for the economy in the short run, by forcing inventories to increase and costly retooling to take place. Real innovation is transformational, in that it does lead to growth, but not through a reproduction of the system today–rather through its co-optation and destruction.

But enough of that. Let’s take their definition of innovation, flawed as it is, as given, and assess the taskforce’s report on its own merits.

For me the report and its recommendations (Recs) can be broken down into five distinct areas:

• Pure goddamn waffle: anything proposing to establish a committee/review/scheme (Rec 10.1, 8.2, or the best, Rec 6.3 “Introduce a scheme to ensure greater access by industry to HEI specialist equipment and laboratories”, Rec: 9.8: Launch a marketing campaign to promote Ireland to export-oriented entrepreneurs).
• Processes already in place (eg the big one: Rec 5.1: keep the money flowing).
• Tweaks to existing policies. (eg Rec 5.3, increasing points for maths courses, rollout of project maths, Rec 8.9, fiddle with R&D tax credit )
• `Brand new’ thinking, (eg Rec 6.4, establishing a national IP protocol, Rec 8.3: build an EU accelerator programme, Rec 8.8: make IP tax-efficient,  9.2: new seed capital scheme, 12.1, Innovation services centre, )
• Wishful thinking (eg Rec 10.7,or Rec 8.1: better procurement models, or the best Rec 7.1: “Attracting top-tier venture partners from abroad”, 13.1, Metrics nirvana attainment.)

But for me the biggest and most interesting aspect of the report is its recognition that to succeed, entrepreneurs need to be allowed to fail, and fail quickly. 10.7 is common sense, but perhaps it will be listened to when couched in these terms:

10.7 Ireland’s bankruptcy legislation should be modernised following the conclusion of the Law Reform Commission’s current consultation process on Personal Debt Management and Debt Enforcement.

Significantly, on page 98, the task force decides that this recommendation will be cost neutral.

Another problem I have with the report is its treatment of education: apparently everything is fine there. I don’t agree.

So overall the report is still a dud, but there is enough there to work with, and a growing consensus on what is important to do next. Sadly, even the importance of broadband gets long-fingered.

Elsewhere on the web (I’ll update this as more posts come in over the weekend)

Brendan Hughes notes this report is the 6th in a row to call for broadband provision (recommendation 11.1). Nothing to argue with there, and, as my colleague Donal Palcic has pointed out again and again, every single agency who looks at this recommends the same thing: more broadband=nobraineroffrickincourseitdoes.

Frank Gannon, who was on the committee that wrote the report, doesn’t see a contradiction in aspiring to create thousands of new startups while concentrating funding on ‘core’ activities like biotech. Either you allow the thousand flowers to bloom, or you centralise the budget and `concentrate’. You can’t do both with limited resources.

Constantin Gurdgiev isn’t too impressed by the report. Essentially he feels it is just more of the same, and says so.

John McHale over on Ubereconomy is pretty positive on the report, relating it to existing literatures in economics and, essentially, pleads with cynical econonerds to stick with it, lads*

Mícháel ó’Foglú has catalogued the key contributions to the debate leading up the publication of the Innovation Task Force here.

*Yes I am aware that is sexist.

I gather 2nd Year economics majors have been mid-termed and projected out this and last week.

I was aware that the four copies of Macroeconomy of Eurozone were
missing, but we cannot remove the individual record from the catalogue
system

I replaced these four missing items last week.

There are now twelve copies of the book placed in Short Loan (1 day).
Two of these are currently borrowed so at the moment there are ten
residing on the shelf and trolley.

I think the problem could be that the students glanced at the catalogue
saw four were missing and did not go to the end of the record.

I went to the library myself this morning, and books by Mankiw, Macroeconomics, Blanchard, Macroeconomics, and Abel and Bernanke, Macroeconomics, as well as by Krugman and Wells, Macroeconomics, are available, and these are all pretty close substitutes.

Arrive early, the exam will begin on time, usual UL invigilation rules will apply. Time for the exam will be 50 minutes.

Exchange rate determination is extremely important in the theory of monetary economics, and we’ll look at some theories of exchange rates tomorrow. Get the slides here, a mathematica notebook for the lecture is here, and the data I used on exchange rates are here. Play about with it to get a sense of what’s happening. Here’s the Wolfram|Alpha code, too. Messing about with these online toys is a great way to understand CIP and UIP better. Finally, Stockman’s (1978) theory of exchange rate determination is here. The important reading for this lecture is Mishkin, chapter 19. Here’s a recording of the lecture.

Also, the second problem set will now be out on the 9th of March and due the 22nd of March, to give students more time to study for the midterm.

Week 6
Day:Wed/Time:14:00-16:00/Room:S205/

and then from  Weeks 7-13:
Day:Mon/Time:13:00-15:00/Room:SR3008/

Note that this won’t be a weekly tutorial, probably bi-weekly, but now we have the slot.

Readings

Krugman: Currency Crises

A Minsky Meltdown

Hyman Minsky

The Financial Instability Hypothesis

Uncovered Interest rate parity

Abstract. We simulate changes in financial integration between two countries in a stock-flow consistent model. Our model describes two economies that start from virtual autarky, with trade flows opening up gradually, until the countries reach full monetary union. By introducing measures of financial integration into an SFC model, we can explore the effects of fiscal and monetary policies in the presence of financial integration on output, income, wealth and households’ portfolio decisions. We find that monetary union has no significant effect on the real side of the economy, but it has effect on households’ portfolio distributions. On the other hand, the convergence of asset prices and returns leads to a convergence on the households demand for foreign assets.

[Download the Paper]