Arnold Kling  

Examples of the PSST Perspective on the Japanese Disaster

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Matt Holzmann writes,

Silicon foundries and specialty materials factories were destroyed or damaged with no real chance yet to determine the extent of that damage. But it is certain there will be severe shortages of a number of critical materials. No silicon = no chips, and so it goes down the manufacturing pipeline.

The rolling power outages are also having their effect. Many major corporations, especially in energy intensive industries such as automotive, have shut down until power supplies can be stabilized. There is another, much smaller, and equally significant sector that is affected, which is the manufacturing base for thin copper foils used primarily in packaging substrates and mobile devices. Most of the global capacity is located in Japan, and until these plants come back on line, there will be a direct impact on the production of components and the entire mobile device industry.

Or, if you insist on sticking with the AS-AD paradigm, the supply-shock effects are global, not just local.

[UPDATE: if a mere blog post is not enough to convince you there is a story here, then perhaps New York Times article will do so.]

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CATEGORIES: Macroeconomics

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Jeff writes:

There was a story on NPR's Marketplace show last night about how Toyota plans to furlough about half the workforce at its assembly plants in Mexico because they won't be able to get parts from suppliers in Japan for a couple of months, at least.

When I heard the story on my drive home, I immediately thought of your post on PSST and the implications for Japan.

Arnold, I just listened to your PSST interview on EconTalk. A mathematical thought that occurred to me is that, if economists are looking for a new paradigm, perhaps it should start by taking the heterogeneity of goods and services more seriously.

A glaring problem with AD is that real demand and supply are so "lumpy" -- of course far beyond lumpy. There are issues of bundling, institutions, norms, as well as the obvious non-interchangeability and temporal stiffness of human capital and of outputs.

For example, I've heard that there will soon be no-one left who knows how to twist neon lights. Perhaps less frivolously, what happens to human capital when nuclear bombs are invented in the 1940's, power plants are built for decades, and then after Chernobyl no more plants are built for a few decades? Or when farming families used to passing land from generation to generation are bought out by intensive farmers who have less than one generation of experience with land management?

=== off-topic quibbles with that show===
Regarding your shirts example, it doesn't sound right that shirts are more complicated today. Like socks in Victorian England, mass production meant cheaper price of a DIFFERENT, less customised good. Now people give away ill-fitting T shirts or use them as rags.

(I also wouldn't conclude that the jobs posted on that T shirt company's website reflect the miracle of modern specialisation. Social media marketing could just be a faddish way of making a gopher job sound flashy. How much do you think that SMM person makes?)

I don't think your high-education types are finding work that easily. What substantiates that claim? More people have college degrees than ever before, so we should expect the wages of educated people to go down. I know one guy who makes more money as a shift manager at Wal-Mart than he made in IT (database stuff, I don't understand it).

=== end off-topic quibbles===

Maybe if models were sufficiently general (using, I don't know, schemes? torsors? instead of the usual objects) then the conclusions drawn from them would be delimited in such a way that model overconfidence would go down.

In another sense, AD is not so problematic. Imagine that demand curves are reaction functions. If it looks like I might be fired or my company might go under, my response to the Ramsey savings problem changes. You could also imagine that demand curves draw from IID random variables. There will be some times when the joint probabilities just happen to overlap on the low side and then AD is low. More likely the RV's are not independent and that's the response function story.

One critique of your reliance on the price mechanism, somewhat lifted from Duncan Foley, is that we need -- and don't really have -- good models that tell us when and why prices adjust, vis-à-vis when quantities adjust.

One more idea, also not very fleshed out, is that maybe macroeconomists ought not to focus on the root causes of wealth as much as the causes and effects of shocks under various institutional settings. Instead of focusing on high-growth economic policies, perhaps we should focus on delta-resistant policies.

(What do you think happened to a dairyman in a small rural community / traditional agrarian economy whose cows fell sick and couldn't produce milk? Both to him and to the community. That's a price (or quantity) shock in milk and a shock to his ability to pay for things.)

All in all, I like the comparative advantage paradigm, especially as you explained it being merely a way of framing the questions. The above are just meant as some things to throw on that bonfire and see if they are good fuel.

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