I noted some time ago that in designing the American Recovery and Reinvestment Act the Obama administration essentially chose to get as much bang-for-their-buck as possible in terms of GDP rather than trying to maximize employment. Alex MacGillis had a good piece over the weekend in the Washington Post that started with the idea of a WPA-style direct employment program and eventually gets into the larger philosophical dispute complete with Lawrence Summers explicitly endorsing the output-over-employment approach:

“I think we got the Recovery Act right,” Larry Summers, the president’s chief economic adviser, said in an interview. “The primary objective of our policy is having more work done, more product produced and more people earning more income. It may be desirable to have a given amount of work shared among more people. But that’s not as desirable as expanding the total amount of work.”

On reflections, I think there are tons of practical problems with anything other than a very limited effort to do something WPAish. But there are alternative ways of doing employment targeting. Ryan Avent points out that European governments, operating in a political context with more of a tradition of active labor market policies, have done more to directly support employment. The Economist did an interesting overview of this action and offers a chart to show it’s largely working:

The question is whether these kind of measures retard needed restructuring in a way that will ultimately create a drag on European economies as we move toward recovery. In a relatively brief or shallow recession, I think Summers would definitely be on the right side of this argument. In a longer recession, though, there’s a case to be made that the loss of job skills and labor market attachment that’s involved in a period of prolonged unemployment will create a bigger drag effect than anything that might be involved in delayed restructuring.

Brad Plumer has an interesting piece about the American right’s strangely passionate love affair with nuclear power and the impact it’s having on the climate debate in congress. What I find especially odd about it is that it’s so at odds with American conservatives’ ardor for the free market. You see this mismatch in a small sense in that their nuclear agenda in congress consists basically of asking for subsidies. But in a larger sense the issue is that the big example one can find of a country living the nuclear dream is . . . France. And it’s not just an irony or a funny coincidence, nuclear power in France is deeply tied to the genuinely socialistic (i.e., not just high taxes and a generous welfare state) aspects of the French economy.

When the French nuclear network was being built out Éléctricité de France was wholly owned by the French state and had a statutory monopoly on the distribution of electrical power. What’s more, of the different kinds of French state-owned companies (yes, there are several) it was an Établissement Public à Charactère Industriels et commercial (EPIC) which meant it was fully guaranteed by the state and could, in effect, raise capital at a sovereign rate. This solves the big economic problem with nuclear power. The projects are so big, so long-term, so risky, and have such high up-front costs that financing the construction of these things is a nightmare. As the MIT interdisciplinary project on the future of nuclear power wrote in its 2009 update:

While the U.S. nuclear industry has continued to demonstrate improved operating performance, there remains significant uncertainty about the capital costs, and the cost of its financing, which are the main components of the cost of electricity from new nuclear plants.

The nuclear industry is eager to find ways for the US government to intervene in the market to resolve these issues, but the easiest way to do that is to actually have it undertaken by a publicly owned company.

These days EDF has been “privatized” in the kind of only-in-France way that many large French firms are private—it’s a standard Société Anonyme with shareholders, but the majority of shares are owned by the state. Areva, the engineering company that does the actual building, is also owned by the state. In Finland, there’s a somewhat problematic big nuclear project underway and the utility doing it Teollisuuden Voima Oy, also involves a hefty share of public ownership. In the United States, too, we used to build nuclear plants back when our economy was much more dirigiste.

At any rate, I have fairly equivocal views as to whether this is a good idea or not. But I think it should be seen for what it is. If you’re interested in reading more on the subject of nuclear power, I recommend the MIT interdisciplinary study on The Future of Nuclear Power.

But suppose we buy into the more common negative current view of finance. There is still a big open question. Beginning in the early 1980s, the developed world and some big players in the developing world experienced a period of extraordinary growth. It’s reasonable to argue that in facilitating the flow of world savings to productive uses around the world, financial markets and financial institutions played a big role in this growth. Despite any role of finance in the current recession, are the market naysayers really ready to argue that worldwide wealth would be higher today if financial markets and financial institutions didn’t develop as they did?

A banker in Frankfurt put this same point to me, apparently believing it’s a brilliant argumentative trump card. In reality, it’s a bit nuts—it’s relying on a post-1980 boom that didn’t happen. The United States didn’t start growing faster in 1980:

The claim you’re supposed to make on behalf of the post-1980 US economy isn’t that it’s grown faster (it hasn’t!) but that it’s been less variable than was growth in the early postwar decades. That’s why the term “Great Moderation” was termed. Except in the wake of the current bust, it’s clear that no such decrease in variation was actually achieved. Growth has been the same as it was before, and yet median income growth has been substantially slower. In Europe and Japan growth post-1980 has been much worse than growth was in the previous decades.

The place where growth really has been much better since 1980 than it was before is China. This is not a fact to be neglected. Chinese growth has been very rapid, and very consistently maintained. And a very large number of people live in China, people who started this process being very poor. The past 30 years’ worth of economic growth in China have done an enormous amount to improve human welfare.

But the cause of this turnaround pretty clearly wasn’t financial deregulation in the developed world. It was policy shifts in China—the process, commenced by Deng Xiaoping, of moving away from central planning and joining the global economy. This doesn’t strike me as even remotely debatable. When we look at impressive growth over the past 30 years were looking at policy shifts in China, the success of container shipping, and to an extent shifts in developed world trade policy.

I’ve been meaning to recommend Bruce Bartlett’s The New American Economy: The Failure of Reaganomics and a New Way Forward once it hit its official publication date. Consequently, I wound up letting weeks slip by after the publication date had arrived. But you should read this book, it’s a good one. His argument, in a sketch, is that conservatives should understand Ronald Reagan’s policies as a fix for a specific situation (stagflation) and not a Holy Writ to be followed at all times.

Here he is explaining why Europe isn’t a zero growth dystopia:

In America, people tend to think of their federal taxes as money down a rat hole and react accordingly. But in Europe, the people are more apt to feel they are simply paying for services with their taxes that Americans have to pay out of pocket.

This fact is best illustrated by health care. Most Americans get health insurance through their employers. The cost reduced their cash wages by 7.9 percent on average in 2008 according to the Bureau of Labor Statistics. If we had national health insurance and insurers were entirely relieved of this expense, they could afford to pay their workers 7.9 percent more and be no worse off. If the payroll tax went up by 7.9 percent to pay for health insurance, it would all be a wash, but both taxes and government spending would be higher. [...] The second reason why taxes have less of an impact on incentives in Europe than one might expect is because European countries raise much more of their revenue from consumption taxes than the United States does.

Read the whole thing.

Oftentimes, innovation and growth go hand in hand. But is this always the case:

Sustainable economic growth comes from innovation. At The Economist’s Buttonwood conference a few weeks ago, Timothy Geithner spoke of the administration’s commitment to innovation. He claimed you cannot have innovation without growth.

I am not sure that’s true. Often the most desperate economic circumstances spawn some of the best innovation. Nor is the converse true, you can grow without innovation. Putting more capital and labour towards production can yield positive economic growth. But you cannot grow forever this way. Innovation is what allows you to use a finite amount of resources more efficiently, yielding the kind of growth that is sustainable.

As a further thought, note that lots of innovations that are extremely useful don’t have particularly important growth implications. Gregory Clark points out in A Farewell to Alms that there was a huge amount of technical innovation in Europe before the Industrial Revolution, but basically no per capita economic growth. Part of the reason for this is that revolutionizing economically marginal sectors doesn’t really do much to change the overall economic picture. Consider the printing press. Big deal! Important innovation! Changed lots of things. Nevertheless, the books sector of the economy was so tiny that even a drastic increase in the productivity of the books sector didn’t have any macroeconomic impact.

For a contemporary example, you might think of Wikipedia. It’s an impressive technical and social achievement, and certainly counts as innovation. And it’s important—it’s really changed how people look stuff up and live their lives. But it’s not economically important, it’s not driving GDP growth forward, because it’s not a profit-making business and because the encyclopedias sector of the economy has never been large. Similarly, I don’t think instant messaging has really worked as a major profit-generator for anyone, but it’s sure changed how young people keep in touch with our friends.

Via Brad DeLong you won’t want to miss Keith Chen, Laurie Santos, and Venkat Lakshminarayanan, “How Basic Are Behavioral Biases?: Evidence from Capuchin Monkey Trading Behavior.”

Basically they cooked up an ingenuous experiment to see if capuchin monkeys exhibited the same kind of irrational reference effects and loss aversion that Kahneman & Tversky have demonstrated in humans. The answer is, in short, yes. This suggests that these kind of behavioral biases are very deeply rooted since the last common ancestor between humans and monkeys was many millions of years ago. It’s not really a terribly surprising result once you think about it, but definitely a clever line of inquiry.

You can also learn here the perhaps-surprising fact that sales revenue dwarfs donations as a source of nonprofit financing:

Figure 2shows that fees for services and sales of goods account for a huge percentage (71 percent) of the revenues for reporting public charities. These include patient revenues for hospitals (including Medicare and Medicaid reimbursements) and tuition at colleges and universities. They also include items such as the revenue from theater tickets, rental fees for providers of low-income housing, and—much less significant for most organizations—sales of goods such as merchandise sold at thrift or museum shops.

Which is just to say that the economics of the non-profit sector isn’t the same as saying the economics of giving money away. American nonprofits are primarily in the business of charging customers money in exchange for medical or educational services.

My sense is that in the near future a larger-and-larger portion of news media is going to be produced by non-profits, and we may need to start adding advertising revenue to the list of major sources of non-profit funding. After all, a great newspaper whose advertisers covered 85% of the costs of gathering news would be (a) totally non-viable as a business proposition, (b) a great bargain as a charitable endeavor, and (c) still primarily in the business of selling readers to advertisers rather than attracting donors.

A non-artificial tree

Will Wilkinson and Ryan Avent further bat around the geo-engineering subject, with Wilkinson in comments mentioning super-carbon-eating trees as the kind of technological fix to which he thinks environmentalists are giving short shrift. For basically Popperian reasons I don’t think it makes sense for political pundits to spend a lot of time debating the relative difficulty of developing different hypothetical future technologies. Instead, I would just say that the best way to find out whether human ingenuity is better at keeping atmospheric CO2 concentrations at a sustainable level by developing artificial trees or by developing better windmills is to . . . implement a binding emissions reduction scheme that puts a price on CO2 emissions.

This isn’t, in other words, an either/or choice. If you had a cap-and-trade system in place, that would put a range of modalities—better efficiency, more clean energy production, more trees & algae, and carbon-scrubbing machines—in a competitive framework. One assumes we’d be looking at some kind of mix. But defining the correct mix in advance seems very hard. Hence the appeal of a basically market-esque mechanism that creates incentives to work on these various ideas without unduly prejudging the appropriate level of investment in speculative technology.

What I think is remarkable is the extent to which people on the right, in their zeal to avoid a market mechanism that the business establishment happens to hate, have a tendency to talk up what instead amounts to a kind of Five Year Plan approach. Instead of regulating carbon, let’s just direct scientists of invent miracle trees! Let’s turn the sky red! The greenhouse gas problem is one of the largest political crises the liberal/democratic/capitalist order has ever faced, but unlike something like Hitler the basic shape of the problem is something we’ve seen and dealt with before. The whole “sometimes there are negative externalities and you need to charge people for them” thing is in basic textbooks. Maybe the result of such a scheme will be a technological miracle, or maybe not but the shape of the policy environment that will let us find out isn’t mysterious.

For an example, check out this recent paper “Professionals Do Not Play Minimax: Evidence from Major League Baseball and the National Football League”:

In the perfect world of game theory, two players locked in a zero-sum contest always make rational choices. They opt for the “minimax” solution — the set of plays that minimizes their maximum possible loss – and their play selection does not follow a predictable pattern that might give their opponent an edge. But minimax predictions typically have not fared well in lab experiments. And real-world studies, while more supportive, have often used small samples.

Now a new study, Professionals Do Not Play Minimax: Evidence from Major League Baseball and the National Football League (NBER Working Paper No. 15347), looks at two of the biggest high-stakes examples of zero-sum contests: pitch selection in Major League Baseball and play-calling in the National Football League. Authors Kenneth Kovash and Steven Levitt find that: “Pitchers appear to throw too many fastballs; football teams pass less than they should.” They also find that the selection of pitches or plays is too predictable. The researchers conclude that “correcting these decisionmaking errors could be worth as many as two additional victories a year to a Major League Baseball franchise and more than a half win per season for a professional football team.”

Kovash and Levitt examine all Major League pitches – more than 3 million of them — during the regular seasons from 2002 to 2006 (excluding extra innings). They categorize them as fastballs, curveballs, sliders, or changeups. They measure the outcome of each pitch using the sum of the batter’s on-base percentage and slugging percentage (a measure they label OPS) and they determine that fastballs lead to a slightly higher OPS than other types of pitches.

That’s interesting! With the world mired in the most serious recession in decades, arguably not the most important subject for economists to be focused on. But still interesting. And it suggests additional research issues. Are pitchers and managers just making a mistake in throwing too many fastballs? Or is it maybe that for biomechanical reasons most pitchers can’t throw the optimal number of breaking balls without wrecking their arms?

Still, this does go to show the power that sustained inflation holds on our imaginations. Technical arguments about CPI calculations aside, the fact is that seniors haven’t gotten a benefit increase for decades. It’s just not the way the program works. But the fact that their checks keep going up makes it seem like they have. So now, despite the fact that the huge benefit increase of last January combined with the deflation of the past 12 months means seniors really are getting higher benefits for the first time in recent memory, it doesn’t seem like it. So adjustments must be made and appearances kept up.

It is quite striking, the one year congress will intervene to give seniors a real increase in benefits is the year in which they were getting a real increase anyway. At any rate, the one-off bonus is pretty silly but even Tyler Cowen agrees that on net it’s probably fine public policy.

This is a reminder, however, that technical determinations about the inflation rate play a large role in budgetary issues. There are any number of ways of calculating the inflation rate, and even though people sometimes debate them as being better or worse, I think if you examine the issue for a little while you’ll swiftly reach the conclusion that there’s no such thing as a “true” inflation rate that different formulae are doing a better or worse job of calculating. From a hedonic point of view, relative price shifts inherently impact different individuals differently. What you really have is a range of credible approaches that make the inflation rate look higher or lower. And you can alter the long-run budget situation by switching various programs from one formula to another.

In recent years the most common proposal along these lines has tended to come from the right. You could start indexing the Social Security COLAs to a formula that shows a lower inflation rate (by accounting for substitutions—if the price of pork skyrockets but the price of chicken stays flat, most people just eat more chicken they don’t see skyrocketing food costs) and this would reduce Social Security expenditures. At the same time, Social Security benefits aren’t the only thing the federal government does that’s indexed to inflation. The cut-off points for the income tax brackets are also inflation adjusted. Before Ronald Reagan, that didn’t use to be the case. Consequently, there was a strong tendency for real tax rates to just go up over time. That allowed congress to regularly appropriate nominal tax cuts even while, objectively speaking, public revenue was growing. Since people are easily confused by inflation that was a boon to progressive policy. Congress changed that in the early 1980s. But if we shifted the tax indexing to one of the versions of the CPI that shows a lower inflation rate—for example, the aggressive C-CPI-U formula—we’d recapture some of that dynamic.

Tim Lee argues that it’s appropriate that the burden of enforcing copyrights is on the rights-holder. I agree with what he says. As a further consideration, it’s also worth recalling that the socially optimal level of copyright enforcement is higher than zero. A rights-holder is going to price access to his works at the profit-maximizing level. But there will always be people for whom access to the work is worth more than $0 but less than the profit-maximizing price. When those people infringe they gain a real benefit, but the rights-holder incurs no real loss.

Yesterday, for example, I linked to what I take to be a pirate copy of Michael Dummett’s article “Bringing About the Past” and I’m fairly certain that none of the people who clinked the link and downloaded the paper yesterday (myself included) would have done so had there been no alternative to paying the copyright holder for the privilege. Completely eliminating copyright infringement in the digital age would not only be difficult, it would represent a massive loss of social welfare. Forcing the burdens of enforcement onto rightsholders has, among other things, the impact of ensuring that copyright enforcement remains imperfect. In particular, it makes it relatively likely that instances of infringement that aren’t really costing copyright owners significant revenue will go unpunished. This is a good thing.

I would note that one of several reasons to resist the effort to analogize copyright infringement to piracy is that it completely collapses this fact. The socially optimal level of robberies undertaken with violence and the threat of violence is zero. There are practical questions about the feasibility of perfectly enforcing laws against robbery, and also questions about enforcement costs. But in principle, the less robbery the better. This is not the case with copyright infringement. Some instances of infringement represent genuine losses to copyright owners and there’s a debate to be had about the extent to which such transactions are socially harmful. But over and above those instances, there are many instances of infringement such that non-infringement would represent deadweight loss rather than a benefit to the copyright owner.

Burning methane gas is a relatively clean way of generating power compared to other fossil fuel options. But directly releasing methane gas into the atmosphere is a climate catastrophe. Methane packs far more greenhouse punch per unit than does the better known carbon dioxide. Thus, as Andrew Revkin and Clifford Kraus write in The New York Times plugging various kinds of leaks in our infrastructure for storing and transportation methane is a highly effective way of mitigating climate change. What’s interesting, as they also observe, is that in many cases this isn’t just cost-effective, it directly saves money. The cost of the leaks, in other words, is higher than the cost of plugging them.

In addition to illustrating the specific point, that kind of thing highlights the efficacy of so-called “complementary policies” alongside a hoped-for basic mechanism of putting a price on greenhouse gas pollution. In a kind of black box rational agent model, the price mechanism alone should provide all the incentive people need. In practice, agents with a limited amount of time and attention can often find themselves neglecting small problems with large cumulative impact. Methane leakage is a striking example, but home insulation is probably a more broadly applicable one. Normal people simply don’t take the time to do a cost-benefit analysis on investing in better-insulating their homes and the problem of attenuated attention to this issue gets even worse when you consider things like rental apartments and office space. Under the circumstances it makes a lot of sense to try to push the level of evaluation up to a more macro scale and then hand down new building codes and direct financial incentives for retrofitting. Over the long term, there’s no substitute for carbon pricing to create incentives for both efficiency, innovation, and investment in existing clean energy technology. But in the short-term, our best bet is almost certainly the efficiency-enhancing properties of these kind of complementary policies.

At any rate, today is Blog Action Day and the issue is climate change. Tell your friends! When people look back one or two hundred years from now on American politics in the early 21st century, they’re probably not going to care about the ups-and-downs of health care policy or derivatives regulatives. They are going to care about what we did or didn’t do to forestall an ecological catastrophe.

My bottom line: If I could replace our current tax system (including the personal income tax, corporate income tax, payroll tax, and estate tax) with a VAT, I would gladly do it.

As long as we’re talking about hypothetical scenarios, I would join him if we’re allowed to throw state and local taxes into the mix as well. The thing of it is that once you consider state and local taxes, the US tax code is barely progressive at all:

In theory, I think the tradeoff between tax efficiency and tax progressivity could be quite the difficult dilemma. But what we’ve got, when considered overall, is a system with lots of inefficiency and almost no progressive impact. That, I think, makes the tradeoff easy. The VAT-only system wouldn’t be my first choice tax system by any means, but the case that it would be an improvement over the status quo seems very strong to me.

I’ve seen a fair amount of commentary on the part of Ryan Lizza’s profile of the Obama economic team where Christina Romer recommends a $1.2 trillion stimulus proposal and they wind up with just a bit more than half of that out of deference to the tender sensibilities of the United States Senate. I’ve seen less commentary on this other part, where basically the same thing happen on financial system policy:

Romer believed that the banks wouldn’t lend again until they were well capitalized. For banks in severe stress, she favored creating a government-backed “bad bank” to take the toxic assets off the banks’ books and then recapitalize them with government funds—essentially a version of nationalization, and what the Swedish government had done during that nation’s financial crisis of the early nineties. This argument was quickly rendered moot because of the cost. There wasn’t much money left in the TARP kitty, and any chance of getting more from Congress had ended with that morning’s news: A.I.G., which had received a hundred and seventy billion dollars in federal money, had handed out multimillion-dollar bonuses to the executives responsible for the company’s demise. Axelrod said, “The one thing that was absolutely clear was, we were not in a position to go back to Congress.”

Axelrod’s argument seems absolutely sound. And Rahm Emannuel’s argument on the stimulus that congress wouldn’t appropriate $1.2 trillion also seems absolutely sound. But of course Romer’s arguments weren’t arguments about feasible legislative strategies. Of all the senior members of the Obama administration, Romer has by far the least experience with practical legislative politics and also has the job that’s the least concerned with practical legislative politics. And I think that it was in a lot of ways a masterstroke to appoint a very policy-focused academic with no practical legislative experience to the CEA job. When people work too long in Washington, their notions of what would be good policy in principle tend to become unduly corrupted by their knowledge of what’s possible in practice.

But what Lizza is telling us is that on the two biggest pieces of macroeconomic management, the Obama administration is pursuing policies that its in-house expert on macroeconomic crisis management believed were far too timid. He’s also telling us that this was done primarily not because people disagreed with her analysis, but because they felt it wasn’t possible, legislatively speaking, to do what was objectively necessary. It’s a bit of a scary situation.

It’s true, of course, that the people complaining that Google is somehow “stealing” revenue from newspapers are being deeply dishonest or deeply uninformed. There is literally nothing stopping any news organization on the planet from taking its material off Google. Nor, indeed, is there anything stopping anyone from making online material only readable by paid subscribers. The problem most news producers have is simply that they don’t do that stuff because they couldn’t make money that way and they know it.

That said, I don’t think it helps anyone to pretend that the source of the complaints is completely mysterious. The intuition driving them is that if news aggregation websites disappeared from the planet, there would still be newspaper websites and people would still read them. But if the news organizations all vanished, there would be know news aggregation sites. Therefore it seems “unfair” that Google, essentially the world’s most successful aggregator, is making all the money. To a newspaperman, this is as if the paper boy were getting all the credit for the reporting happening in his town.

The trouble is that when journalists talk about journalism, they talk about it from the producer point of view. What Google does, from the media-as-production point of view really isn’t much better than what the paper boy does. But from the consumer point of view, having a paper boy who will fetch any paper you want in the world, for free, at any time, and open the paper to the page you were looking for is a massive improvement. For example, from a producer point of view essentially every newspaper in the United States has gotten worse at covering European news. Foreign bureaus have been closing, and resources have been redirected to the Middle East. But as a consumer, suppose I want to follow up on my notion that Jan Peter Balkenende would be a good candidate for the new office of EU President?

Thanks to Google, I read in the Guardian that the main alternatives to Tony Blair are considered Balkenende from the center-right and Finland’s Paavo Lipponen from the center-left. But Balkenende is thought to have a better chance than Lipponen in part because the new head of NATO is from the Nordic region and in part because there are more center-right governments in Europe. The Independent says Angela Merkel prefers Balkenende to Blair. And a Balkenende candidacy is popular among Dutch voters. We also learn in the Telegraph that there’s a political controversy in the Netherlands over the Crown Prince’s plan to build a lavish villa in Mozambique and “almost 50 per cent of people want Jan Peter Balkenende, the Dutch prime minister, to demand that the Prince withdraw from the project.”

Without Google, I never would have seen any of that. There’s been basically no coverage of this issue in the American press. And, fine, most Americans aren’t interested in it. But I am interested, and thanks to Google it’s easy for me to follow the issue.

I think it’s interesting that journalists seem to have no problem following this dynamic when it comes to the car industry. This has been a terrible 12 months to be in the business of building cars, either as a worker or an owner or a manager. But it’s been a fine time to buy a car. There’s no car shortage. And there’s not going to be a car shortage. Drivers are in great shape. And it’s about the same with the news. Has there ever been a better time to be a news junkie?

One way or another, surveys indicate that people massively overrate the proportion of their energy usage that goes to appliances and gadgets and underrate the amount going to heating and cooling the home. Mandates and incentives for better insulation can save tons of energy and tons of money to boot.

That said, the presentation also brought home to me the vital importance of pricing. Rockwool says a form of mineral wool—it’s something they make by melting rocks at extremely high temperatures and then “spinning” the molten rock into wool-like substances of various density. This is a pretty energy intensive process. And there are other kinds of insulators out there. But energy is involved in producing all of them as well. And then you also need to factor in transportation of raw materials, the lifespan of the product, and a million other things. In fact, you probably need to factor in more things than anyone really can factor in. But if you put a price on carbon emissions, then that price will be reflected in the end-price of the product. If the result is some large relative change in the price of fiberglass versus mineral wool, that will tell us something important. Alternatively, it might remain the case that both products cost a similar amount, in which case people will choose on the basis of other things.

If what you mean by relative economic power is America’s share of global output, then it’s important to recognize that we’ve been in a state of decline ever since the mid-1940s. In 1946, almost every industrialized nation on earth lay in a state of rubble and the US was something like half of world output. We’ve been declining, in relative terms, ever since. The other thing that’s happened is that countries have split and recombined in different ways. The Soviet Union was a much larger country than Russia, dividing it up into pieces made us look relatively bigger. At the same time, Western European countries have started to agglomerate. If you think that alongside the US, Japan, and China the world’s other major economy is Germany then we look a lot bigger than Germany. But if you think that it should be the European Union, the US, Japan, and China then we’re quite a bit smaller than the EU. Or if you want to make it the Eurozone, rather than the EU as a whole, then we’re slightly smaller. But of course in terms of political power the EU doesn’t have the kind of decision-making mechanism that can transform the large scope of its economy into strategic influence.

That leaves you with Japan, relative to whom we’re getting stronger, and China. China is important, but it’s still basically a country full of impoverished people. And even when you lump them all together, the total is much, much smaller than ours. In other words, insofar as we’re losing relative economic power this is mainly a result of already-rich European countries becoming more coordinated in their activities. Where they’re very coordinated, they’re very powerful—their central bank probably matters more than ours at this point. But where they’re not coordinated, things are much as they’ve been for decades and the US is by far the world’s leading power.

Empirical studies consistently report that labour productivity and TFP [total factor productivity] rise with city size. The reason is that cities attract the most productive agents, select the best of them, and make the selected ones even more productive via various agglomeration economies. This paper provides a microeconomically founded model of vertical city differentiation in which the latter two mechanisms (`agglomeration’ and `selection’) operate simultaneously. Our model is both rich and tractable enough to allow for a detailed investigation of when cities emerge, what determines their size, and how they interact through the channels of trade. We then uncover stylised facts and suggestive econometric evidence that are consistent with the most distinctive equilibrium features of our model. We show, in particular, that larger cities are both more productive and more unequal (`polarised’), that inter-city trade is associated with higher income inequalities, and that the proximity of large urban centres inhibits the development of nearby cities.

All sounds to me like a region to encourage bigger cities and have higher taxes to finance a greater quantity and quality of public services.

Something I was surprised I didn’t hear more of, but which I think I may take up as my own line on this subject, is that European integration has reached a point where it’s misleading to look at any one country’s balance-of-payments situation in isolation. I assume that there are some American states which, if looked at as individual states, would seem to be in a situation of perpetual imbalance. Washington State, for example, with Microsoft is probably a huge “exporter.” If you look at the Eurozone as a whole, things are perfectly balanced:

Of course at times the Eurozone will be running a surplus and at times a deficit, but looking at that line as a whole nothing whatsoever seems out of order. The next step in the analysis would be to see what happens if you break the United States or China or Japan down into sub-regions and look at their trade balances in isolation. My intuition is that you’d see wild differences from place-to-place comparable to the intra-European differences. But the correct way to look at these four is as two giant markets and two big ones, not as a whole array of medium-sized ones.

No Royale With Cheese for the Swedes, they’ve got the QP Cheese. And it’s expensive! That’s about eight dollars for the burger, a medium fries, and a soda. Presumably Sweden’s high taxes and relatively high-wages for low-end workers accounts for the costly fast food. Of course from a social point of view, expensive fast food probably has public health benefits.

My other first impression is that there seem to be an awful lot of bookstores and 7/11s in this city. Or, I guess I should say, that I’ve seen an aweful lot of bookstores and 7/11s within a very limited range of exposure to the city.