NPR (National Public Radio in the US) has two excellent podcasts about money and inflationary expectations:

The first is the use of stones as money in the Island of Yap.

The second is about controlling inflationary expectations using a fake currency - A Unit of Real Value.

The labour market and productivity are both supply side constructs and have an impact on the long term growth path of the economy.

Here are two stories from the New York Times: One is a personal story and the other a data story.

Basically as labour markets get tight (or as unemployment declines) wages tend to increase.  Unfortunately they are not.  Not just in the US but also in some other European countries.

The articles put it down to skills and the decline of unions.  Skills are shifting from the middle to the low and high end.  This is a structural problem. Its no wonder Singapore always emphasizes skills upgrading. At the end of the day we should expect inequality to increase. Partly also due to the gig economy.

The other is a scary story from the UK - productivity growth has declined - which means long term growth will decline.  Here is the full report from the The Office for Budget responsibility. But if you don't want to read that, watch this video they posted on twitter.

Venezuela is in bad shape and this is a country with natural resources. A good example of 'government failure'.

Here is a simple example (with a spreadsheet) of the properties of a straight line downward sloping demand curve (monopoly)

Here are two articles on Pigouvian Taxes and The Coase Theorem - I have shown you a picture of the former and will discuss the latter next week. The first article provides various examples of the use of these taxes to deal with externalities. The Coase theorem has applications beyond externalities.

It is the foundation of the transactions cost literature and the literature on contracts. This literature also provides us another way to look at markets and suggests that firms are substitutes for markets. They are both 'governance mechanisms' - they govern the conduct of transactions and the costs of using these two governance mechanisms determines which one is more likely to be used.

It also helps us to understand contracts and vertical integration. For example, we should expect to observe long term contracts or vertical integration in the aluminum value chain. This is because an alumina refinery can only accept a particular grade of bauxite and and aluminum smelter can only accept a particular grade of alumina. This type of exchange cannot be carried out using markets.

Automation and its potential impact on jobs is a much debated issue. A company which makes robots for use in the garment industry and their likely impact. Leather made using biotechnology.

The Adidas "Speedfactory" in Germany which uses 3-D printing and robots and has very few employees.

Here is a video.

Two articles on inequality. One on the role of government and taxes and the other on how employee benefits have changed over the years and how outsourcing cleaning services has contributed to income inequality.

Here is an article from the NYT by Paul Krugman on Europe.  And a slide deck he refers to.  The slide deck shows us a number of things:

• Output and capacity utilization are well below potential
• The crisis reduced Europe's potential GDP
• Investment has tanked
• US productivity is way higher than Europe's
• Interest rates are low
• People do not expect inflation (or expect low inflation)
• Bank lending to the private sector has tanked
  

Krugman is arguing for a Keynesian fiscal response to tackle the demand deficiency.

Here is an article from the NYT on the Phillips Curve. Janet Yellen thinks it's still important ... others don't.

This is a video on coordination games and Keynes.  Slides are here.

Here is an article from the NYT on the legislative battle on the labeling of GM food.

A number of articles on carbon taxes and the environment:

This more recent one by Greg Mankiw and he refers two other articles:  one written by him on carbon taxes and another on the political economy of the implementation of carbon taxes in British Colombia, Canada.

And an ominous opinion piece in the NYT on the impacts of climate change.

It is easy to see why a straight line supply function going through the origin is unit elastic.

And here is a numerical example with some plots.

I had a question about 'classifying' solutions and about the Coase Theorem.

One way to think of solutions is technological vs. market solutions (of course we also spoke about social sanctions/norms and perhaps outright bans). Technological solutions generally reduce or clean-up emissions. Examples include: catalytic converters and scrubbers.

Market solutions seek to create markets.  Markets do not exist because of property rights issues (“air” has public goods characteristics non-rival and non-excludable). Carbon markets create ‘permits’ which can be traded.  Permit to do what? Pollute.  But you have to pay to pollute (so you need to buy permits - and because they cost money - you will take the 'costs' of pollution in your decision making - or 'internalize' - same with carbon taxes)

The Coase Theorem is for ‘small-numbers’ problems – bargaining is costly when you have large numbers. Assignment of property rights – is important for the Coase Theorem (the lack of a no-smoking sign ‘gives the smoker the right to smoke’). Or if the assignment is ambiguous you could go to court and let a judge decide.  But all the assignment of the property rights does - is that - it determines who pays whom.  It has no impact on the outcome.  The outcome will be what it will be and depends on how much the smoker values smoking and how much the non-smoker values smoke-free air.

If there is no ‘sign’ then the non-smoker pays the smoker to stop smoking.  Suppose the value to the smoker of smoking is $10 and the value to the non-smoker of clean air is $20. Then a deal can be struck and the ‘price’ will lie between $10 and $20. The ‘efficient’ outcome will be that the smoker will stub out their cigarette.

But it the value to the smoker of smoking is $50 and the value to the non-smoker of clean air is $20. There will be no deal. The ‘efficient’ outcome will be that the smoker will continue smoking. Bargaining solutions depend on costs/benefits (max willingness to pay vs. minimum the other person is willing to accept)

Of course the Coase theorem has other assumptions (bargaining costs must be zero (or very low). If they are not then of course bargaining solutions won’t be feasible.

Another question about what should be included in transactions costs: Everything: time costs (search costs), legal costs, contracting, monitoring and bonding costs – bonding means making sure people stick to their bargain – or to the contract they signed.

The last question was about the river with a laundry upstream and a beer producer downstream - and I used the term vertical integration. The question was if this is an appropriate term. It could be because 'clean' water is an input for the beer producer and the laundry is polluting the water. But even if you don't want to think of this as a vertical relationship, it's fine.  What it is  - is joint profit maximization - that helps to 'internalize'. So either firm can buy up the other in order to get to that solution. Of course there could be other solutions - they could go to court.  The beer producer could install a water filtration system - all depends on costs and benefits.

The textbook shows us 'typical' cost curves and we now know (from our first case discussion) that actual shapes may vary by industry as shapes are driven by technology (or engineering).  We have also seen that 'data' can come in different forms - a spreadsheet for example or as in this case an equation for total cost, from which we can derive average and marginal costs and plot the function.

This is for a power plant.  And it is an engineering cost function since I was told it's from the design manual.  So we see declining average costs (at all levels of output) which makes this like a 'natural monopoly' and we also see the marginal is below the average, since the average is declining.

Here is an article from The Economist on emerging markets - Brazil and Russia are in trouble.  And another, another which is about the high levels of corporate debt in these countries - this debt is issued in places like the Cayman Islands, partly to get around capital controls.

This is a recap of our discussion on Brazil.

Here is the recap for this week (last week)

We are discussing Brazil for the next two weeks so I am posting some articles from The Economist.

A special report on Brazil: September 2013

Some more recent articles

Custo Brasil

And the IMF's change of heart about Capital Controls ... although it would appear they still are no substitute for good macro policies and a sound financial system.

Bottom line is that many governments look to demand side policies to fix business environment or supply side problems - it just does not work. This is funny because fixing the supply side is 'in the hands of the government' as it were - the issues are purely domestic, yet they appear to make little progress on infrastructure, education, taxes, institutions, corruption ....  instead they call for 'global regulation' and 'international coordination' of demand side issues.

In 2016-17 things are looking up for Brazil (at some point things are so bad, that they do have to get better) and the government has tried to do something about the labour market and pensions.

Here are two articles from the NYT on QE.  QE may be coming to an end but interest rates are likely to remain low for some time.

Here are a couple of articles from the New York Times.  The China piece is about using PPP versus nominal exchange rates to compare economic size - an issue which IMHO does not deserve the kind of attention it seems to be getting in 'policy circles'.  The average person does not care about size - they care about the amount of money in their pocket.

The India piece is more intriguing.  It compares the downturn in the US and some European countries to the deindustrialization of India in the 18th and 19th centuries (the background academic piece on the deindustrialization in India is here).  Although the NYT article mentions Italy and France and some southern European countries.  The argument probably also applies to Spain which we discussed recently.  France and Italy have been in the news lately because they have been lagging on reforms.  Generally the story goes something like this ... Agriculture is not a huge contributor to the economy anymore in terms of its share of output and employment (and as we discussed earlier, it is highly subsidized and distorted). Manufacturing in Europe has been hit by China - Germany is really the only country which still does manufacturing really well. Meanwhile, Europeans now acknowledge that Lisbon Agenda has been a failure - so in essence, Europe has not managed to catch up to the US in IT.  So really there are no productive outlets available.  Add to this the poor business environment and the inflexibilities in the labour market - and you are going to get stagnation. It's no wonder all the money went to construction and real estate (and therefore Finance) during the boom.  It still is - look at the UK - the economy is on an upturn, but in the last couple of years a lot of money has gone back into real estate because interest rates are low. Of course the British government likes to pretend that this is because there is a shortage of housing. There may be, but real estate is still driving London, and London is driving the rest of Britain. Sure there is some IT happening in London but not nearly as much as the Brits would like or have us believe - the problem it appears, is a shortage of venture capital - for that, they need to head to America.

Just in case you are optimistic about the world economy.  Don't be.  There are risks of deflation in Europe.  This article explains why positive inflation is a good thing.

Here are some articles from the NYT and The Economist on Spain and an interesting podcast from Planet Money (NPR) on one Caja in Spain.

This article explains the different types of unemployment: Frictional, Cyclical, Structural.

And then I have a series of articles on Spain from 2009 to 2014.  The 2009 article is explaining the dual labour market in Spain (something we talked about).  The more recent articles (2012-2014) are about reforms.

This is a recent article on the Spanish recovery from the NYT, apparently things are finally back to where they were before the crisis.  So it has taken a decade.

And a podcast from NPR on Cajasur in Cordoba

Here is the article I mentioned in class about the decline in Argentina.

Here is an interesting video and article from the New York Times on solar and wind energy sources in Germany and the impact on utilities such as RWE