One thing I find frustrating about the whole health care debate, on both sides, is the presumption that more doctors and hospitals and technologies (either paid by the private or public sector) is the lowest cost way of improving the health of the population. But given how many illnesses are caused by lifestyle (overeating, excessive drinking, smoking) or environmental (pollution) factors, we need to be considering other solutions to improve health. A Pigovian tax on sources of air pollution offset by lower income taxes would improve the health of the population, be a net benefit to the economy (by replacing an economically damaging tax with a less damaging one) and come at zero financial cost. Why do I feel like I am the only economist, on either the left or the right, talking about these things?

More here: One Economist's Thoughts On the Health Care Debate.

It is a common topic in first year microeconomics courses that often confuses students. I hope this walkthrough helps - Price Elasticity - How to Use Cross Price and Own Price Elasticity.

A reader has a question about the role expansionary monetary policy plays in the AD/AS model. See my response here: Expansionary Monetary Policy, Aggregate Demand, and Inflation Adjusted Wages.

If you buy this argument, they do:

It seems to me that the best way to instantly raise your standard of living is to live in the past. If you subsist entirely on two-year-old entertainment, and the corresponding two-year-old technology used to power it, you're cutting your fun budget in half, freeing up that money for more exciting expenditures like parking meters and postage.

This makes sense to me. I don't mean used goods here, rather new goods that are 2-year old technology. They are way, way cheaper than what they cost when they were originally launched. Mind you, you can only take this so far - you cannot, for instance, buy a brand new Commodore 64 at Best Buy. But you can for a number of goods. I find it difficult to find 1980's style wood hockey sticks, but when they are in a store I can get them for cheaper than I could have in the 1980s.

However, when we measure inflation, we compare the year 2007 price of a DVD of a movie released in 2007, with the 2009 price of a DVD of a movie released in 2009. But what if we instead compared it to the 2009 price of a DVD of a movie released in 2007. If we did, we would see much lower levels of inflation than the statistics indicate.

His new blog here - The Big Questions. One of the real joys I had as a University of Rochester Ph.D. student in Economics is discussing various ideas with Prof. Landsburg. I can't tell you how many times I found a new way of looking at things after a discussion, even if I did not totally agree with him (and I rarely did). I suspect and hope his blog will provide similar insights.

I love it when Paul Krugman posts on international trade and exchange rates - it reminds me why he is a 'first ballot Hall of Famer' economist. His post Adjustment and the dollar is a must read. A few points:

So something has to give -- specifically, the relative price of US output, and along with it such things as US relative wages, has to fall.

There are three ways this could happen: (1) deflation in the United States (2) inflation in the rest of the world (3) a depreciation of the dollar against other currencies. Leave (2) aside, on the grounds that central banks will fight it. Then the choice is between (1) and (3)...

And here's the thing: deflation is hard (ask Spain), because prices are sticky in nominal terms. How do we know that? Lots of evidence. See, for example, A Sticky Price Manifesto by Larry Ball and some guy named Mankiw. But the most compelling evidence -- familiar to international macro people, but oddly uncited by most domestic macroeconomists -- comes from exchange rates...

So, the bottom line: to narrow international imbalances, we need a lower relative price of US output. Because prices are sticky, by far the easiest way to get there is dollar depreciation.

Terrific stuff - I wish we would see more of this from Krugman.

More on exchange rates:

• Purchasing Power Parity: Link Between Exchange Rates and Inflation
• A Beginner's Guide to Exchange Rates and the Foreign Exchange Market
• Exchange Rates: What to Use as the Base?
• Analyzing the Value of the Canadian Dollar - Introducing MERT
• How Markets Use Information To Set Prices

Economic wisdom suggests no - that higher interest rates lead to a reduction in expected inflation and, ceteris paribus, an appreciation of the currency. Nick Rowe has a rather bizarre thought experiment that gives a scenario where an interest rate hike could cause a depreciation. I do not think I buy Rowe's argument, but I really need to think about it more. I would love to hear your insights.

As an aside, Rowe adds:

But were those words unexpected enough to cause the Loonie to drop by 2% Tuesday morning against the US dollar and the Euro? Then recover it all before dropping back again? Dunno. Like Stephen, I can't make sense of the forex market sometimes. The intraday oil price blip doesn't seem big enough to explain it.

The MERT relationship suggests that a $1 rise in oil should coincide with a 0.62 cents rise in the Canadian dollar. On Wednesday the Canadian dollar rose 0.43 cents (from 95.17 to 95.60), but WTI cushing rose $1.95 - suggesting the Canadian dollar should have rose by 1.21 cents. On Tuesday the Canadian dollar dropped about 2 cents, but oil prices dropped only 60 cents (from $79.47 to $78.87). On both days the dollar 'went down' relative to where it should have gone given oil prices.

A must read from Paul Romer. Here's a sample, but the entire thing needs to be read:

Most economists think that they are building cranes that suspend important theoretical structures from a base that is firmly grounded in first principles. In fact, they almost always invoke a skyhook, some unexplained result without which the entire structure collapses. Elinor Ostrom won the Nobel Prize in Economics because she works from the ground up, building a crane that can support the full range of economic behavior...

Economists who have become addicted to skyhooks, who think that they are doing deep theory but are really just assuming their conclusions, find it hard to even understand what it would mean to make the rules that humans follow the object of scientific inquiry. If we fail to explore rules in greater depth, economists will have little to say about the most pressing issues facing humans today - how to improve the quality of bad rules that cause needless waste, harm, and suffering.

Cheers to the Nobel committee for recognizing work on one of the deepest issues in economics. Bravo to the political scientist who showed that she was a better economist than the economic imperialists who can't tell the difference between assuming and understanding.

I wish I had something clever to add to that. All I can say is:

1. I agree with every word.
   
   
2. A question I have asked before - if the vast majority of economic research is of little-to-no value (which I believe it is), how did that happen and how can we prevent it from happening in the future? What are the institutional factors that cause the outcomes we are seeing?

A great New York Times piece on the selection here - Two Americans Share Nobel in Economics. My thoughts - I was pretty certain that the committee would not pick any of the macroeconomists being mentioned, for the reasons outlined here. I agree with Don Bodreaux that Williamson's The Economic Institutions of Capitalism remains a must read - it is one of the books that convinced me to continue studying economics.

I must admit that I am not as familar with the work of Elinor Ostrom, though I recognize the name and am certain I must have read a paper or two in my travels. Good summaries of her work available at Env-econ.net and Marginal Revolution. In fact, when I heard the annoucement I got her confused with economist Sylvia Ostry with whom I am much more familiar.

All in all, Williamson is a fine choice. I will have to get more familiar with the work of Prof. Ostrom before I can make an informed opinion.

Brian Kearsey is not a fan of my definition of inflation:

Saying inflation is rising prices is akin to saying rain is wet streets. The wet streets are the result of the rain; the rising prices are a result of the inflation of the money supply.

Read the first paragraph of this NY Times article where they acknowledge that the inflation under Carter was created by the Fed printing money: http://www.nytimes.com/2009/05/04/opinion/04meltzer.html?th&emc=th

I have loads of other articles from just the NY Times acknowledging the same thing. Read this long article explaining how the Fed created the inflation by flooded the economy with easy money and cheap credit to swing the 72 election for Nixon: "President Nixon, concerned that high unemployment could cost him re-election in 1972, told (Fed Chairman Arthur) Burns to concentrate on revving up the economy. 'No one ever lost an election on account of inflation,' Nixon confidently told him. Burns did as he was directed. An eventual result was runaway inflation..." http://www.nytimes.com/2008/01/20/magazine/20Ben-Bernanke-t.html?th&emc=th

The evidence goes on and on. From the Roaring 20's to the Housing Bubble, the expansion of the money and credit supply is the inflation, both across the board and, at times, more specifically in one segment of the economy (stocks in the 90's; houses in the 00's).

I do not disagree with Mr. Kearsey. However, I tend to emphasize the price definition, not because I am trying to establish a causal relationship, rather it is the general rise in prices that the average person cares about. In other words, what is inflation, not what causes inflation. So I will stick with the definition that "inflation is an increase in the price of a basket of goods and services that is representative of the economy as a whole."

For the causal relationship between price changes and the money supply (which is naturally very important), see What Is Inflation? and Why Does Money Have Value?