About Covid-19

Against the “front-load” approach
April 30 2020

Abstract

In this piece written a month ago and published by the Italian daily IL FOGLIO (May 15 2020, Friday, p.VI), I argue against the “front load” approach to the coronavirus crisis. In unusual and infrequent situations “jumping to conclusions” on the basis of limited evidence (fast thinking) becomes very risky, since it is not said, indeed it is very unlikely that “what you see is the only thing there is” (paraphrasing the cognitive bias called WYSIATI -“What You See Is All There Is”). This is an unusual macroeconomic shock, featuring an omnibus of different and heterogeneous supply and demand shocks. This composite collection releases conflicting pressures on price and quantities dynamics and it is not clear what the net effect might be. Disentangling temporary and persistent effects of this composite shock is not obvious. Consequently, it is problematic to identify the predictable adjustment of the economic system to the shock and the possible policies needed to make sustainable this process. The thought effects of CoVid19 crisis on the levers of growth highlighted by the economic theory are scrutinized. What can be derived is a growth-friendly strategy.
Even in adopting targeted stimulus measures, attention should be given to the underlying incentives-scheme so as to make them sustainable (ie, neutral in respect to the government budget). As an example of such short-term measures, I propose a complete temporary tax exemption for all types of domestic expenditure in “tourism services” by Italian citizens. I argue that this kind of measure is expected to be potentially neutral on the government budget. The “front-load cost” of the measure, in terms of the reduced personal income tax receipts, is (or could be) compensated by the overall increase in the government revenues led by the spending stimulus.  

RIVAL MODELS of the BUSINESS CYCLE

A series of posts since 2008 show the interest of this blog on the vexata quaestio of how alternative theories fit the stylized facts of macroeconomy.
Specifically, posts from 1 to 4 are devoted on the comparison between the a priori predictions and the empirical performance of competing macro-models using a set of macro-metrics (the cyclical behavior of key aggregate variables); posts from 5. to 9 are concentrate on a single case, that of labor productivity (post from 10 to 11 are more general).

Comprehensive Sustainability

Put as a slogan, it sounds like this: the sustainability will be comprehensive or it will not be.
My reasoning about sustainability is simple: any micro-specific meaning and scope of this notion is misleading, cause essentially wrong as arbitrary and useless. Sustainability must be comprehensive as much possible: for example, the capital which enters the sustainable trajectory of well-being/consumption that has to be kept constant over time,   must include any type of capital. Physical reproducible capital used as mean of production (like structures and equipment), natural reproducible and irreproducible capital, human, social, institutional capital and so on.

Sustainability, Public Debt and Fiscal Policy

I place here some brief notes on the issue of Sustainability and Public Debt.
I will return on the issue about the notion of comprehensive sustainability in a following post.
For now I start this brief noting that the dynamics of public debt is marked by an inherent instability (represented by the flow of interest payments on a given stock of debt), which may make it unsustainable. Here unsustainability means that a permanently raising debt charges a heavy burden on future generations because taxes will have to rise in the future to pay for it. Unless – as we shall see later – certain conditions were not met.

A failure of governance and management

After an experience lasting more of seven years, the American leadership of the football club AS Roma (Roma for short) has produced very poor results in terms of sports achievements. A failure of both governance and management. The only significant achievement has been the Europe Champions League semi-final, reached last season and lost against Liverpool. But the club has not won any title in these seven years.
A football club is a sport organization and an entertainment company, operating in the rich market of the live sport events with high audiences. Tickets proceeds and TV rights are among the main sources of revenue of this performing companies.
From an economic point of view, the output of such a firm is supposed to be the team’s live performance. Titles won are an objective parameter to evaluate this performance. Subjective indirect parameter is the people appreciation, in turn measured by stadium tickets and TV subscriptions.
Mr. Pallotta, owner and president of the company As Roma, of course bears the most

The economics of populism

The current irresistible wave of nationalism/populism which took place in Europe and USA has of course an economic dimension, among several other distinctive factors (cultural, historical, geographic, etc.).
Let us call “globalization” this economic dimension. Globalization itself has a long history, as it is well known, but here I refer to the developments occurred in the last 30 years – even if a narrative in terms of courses and re-courses could be applied with some justification to the topic.
I propose here that the AD-AS model, and its elementary geometry consisting of two curves, can be employed to shed some light on the basics of this economic dimension. It is sufficient to add to this popular framework another curve expressing the world supply of tradeable goods & services (WAS) at given price levels and exchange rates. In this integrated framework, the short run aggregate supply curve (SAS) refers to the domestic production (of tradeable goods) of a given country, and the short run aggregate demand curve (SAD) refers to the country expenditure in both domestic and foreign tradeable goods. The long run aggregate supply (LAS) is vertical at the potential level of domestic output. The WAS curve is horizontal because I suppose that foreign producers are ready to offer whatever amount they can at the current equalized world price (I assume the law of one price: equivalent goods sell for equivalent prices on international markets).

Supply&Demand and Market Power

The 2018 Spring semester is going to start at the Roma3 University, and thus a new beginning for the courses of Political Economy and Economic Policy is expected.

In the meanwhile, I like to post some remarks regarding two fundamental economic issues: 1) supply and demand; 2) market power.

1 – Consider this sentence:
«Teach a parrot the terms supply and demand and you’ve got an economist».
It may seems a malicious caricature of economists, but his author, Thomas Carlyle, is not completely wrong. Simply, he doesn’t understand the usefulness of a conceptual framework like that of supply & demand (S&D).

Are there real troubles with macro? (I can’t get no satisfaction)

The dissatisfaction with Macroeconomics is a bit like that with philosophy or modern novel or string theory: a recurrent topic, a constantly revived affliction. As such, it deals with feelings.
The question is: it is also about facts?
My answer is: it depends. It depends from the side you look at the question.
On a purely theoretic ground, recent facts as the financial crisis and the subsequent Global Macroeconomic Recession that sorely tried mainstream explanations and models didn’t ignite a noteworthy reflection and least of all any significant change.
The policy field is intrinsically more pragmatic than the academic one – ie, models built for policy and forecasting purposes reflect cum grano salis a given dominant paradigm with its usual theoretic purity.

COBOTS. COllaborative or COnflictual Robots

Some people are optimist about the current wave of technological change, other pessimists. The truth is that there is a lot of uncertainty about the prospective effects of this change. The current wave of technological change is mainly AI, artificial intelligence, and its spectrum of enhanced capabilities, particularly those based on machine learning. The optimists mainly belong to the fields of managers, technologists and, to a lesser extent, physicists. For example, Stephen Hawking, talking recently at the Web Summit Technology Conference in Lisbon, claimed that “success in creating effective AI, could be the biggest event in the history of our civilization. Or the worst. We just don’t know. So we cannot know if we will be infinitely helped by AI, or ignored by it and side-lined, or conceivably destroyed by it”. The “fact” we certainly know is that systems using AI can emulate and in theory exceed human intelligence, matching or surpassing human level performance in more and more domains. Even if it is largely recognized the potential of AI to help undo damage done to the natural world, or eradicate poverty and disease, with every aspect of society being transformed, the outcome is not granted. “Unless – in the words of Hawking – we learn how to prepare for, and avoid, the potential risks”. In a certain sense, economists are among the pessimists about the virtues of AI and robotics.

Stand up for your efficiency (and forget body language)

From a lot of time I stopped looking at the tests and the natural experiments of social or cognitive psychology. The evidence of false “positive” is overwhelming in this field, and in truth embarrassing. For example, the hypothesis of power posing is a well-documented case of replication failure in psychology: initially charming theories that cannot be replicated in follow-up experiments. The research on power posing quickly became famous after a 2012 TED talk of Amy Cuddy (viewed more than 40 million times) but was definitively discredited by a number of subsequent studies. Amy Cuddy (Harvard Business School) carried out an experiment with Dana Carney and Andy Yap (Columbia University) – “Power Posing: Brief Nonverbal Displays Affect Neuroendocrine Levels and Risk Tolerance”, Psychological Science I-6 2010 – on how nonverbal expressions of power (i.e., open, expansive postures) affect people’s feelings, behaviors, and hormone levels. In particular, they claimed that adopting body postures associated with dominance and power (power posing) for as little as two minutes can increase appetite for risk and testosterone, causing better performance in job interviews.

Now a research by David Rosembaum (Tel Aviv University), Yaniv Mama (Ariel University) and Daniel Algom (Tel Aviv University)