Friday, September 10, 2010

From Slack Wire to CEA Chair

... in four steps.

Here to here to here to here. That doesn't happen every day.

Quick, find more interesting things to write!


  1. Awesome, Josh.
    So, what do you make of his response?

  2. Josh, thanks for all the links. It’s amazing that these posts got Goolsbee’s attention. I was just looking at his paper you initially quoted from and based on what I understand his response still doesn't surprise me. Let me know if you think I’m missing something.

    I think, with its theoretical vision his approach is very much in line with supply-side. He says: “Investment demand is actually very responsive to investment tax policy but in the short run the increased demand for investment mainly increases capital goods prices rather than quantities.” What I understand from this is that theoretically, investment should respond to cost, but things (elasticities) change the outcome in the short run. This is not a fundamental disagreement with the user cost of capital approach and it doesn’t substitute “demand expectations” for “user cost of capital” in an investment demand equation. Instead his idea is that investment demand would have been responsive to tax credits but the hike in prices of investment goods counteracts this kind of response. At this point the reasonable explanation for a steep supply of investment goods would be mark-up pricing and imperfect competition though he doesn’t do that in this paper. Instead he refers to high subsidy use, low import competition, high capacity constraints as the main reasons of why capital good prices would jump up with investment subsidies. And then he lists computers, machinery, electrical distribution equipment, communications, cars, and instruments among the assets for which the supply is flatter. The assets with significant price increases are listed as fabricated metals, heavy machinery, and large transportation equipment. So I think, by his empirics, as long as the government tax credits don’t go construction and heavy machinery, there is room for increasing investment demand by offering R&D subsidies. No?

    Do I believe that? No. In this context I think investment demand should be all about expectations of demand.

  3. Armagan,

    All that makes sense. It seems strange to suggest, as Goolsbee does, that excess capacity in some capital-goods industries will dampen price effects, but excess capacity in other industries will *not* limit investment demand. But it;s not strictly inconsistent.

    Seems to me a bigger problem for him is how well established the non-responsiveness of subsidies to tax changes is empirically. The 1960s and 1970s and 1980s included periods of slack demand too. So if subsidies work then, why didn't that show up in the data?

  4. I agree, they should show up during the times of idle capacity and low demand. His reasons for counteracting price effect are really the weak part of the paper. He's very insistent on keeping the framework as a short run one, as he says statistical inference on long run effects are particuarly problematic. He also says, empirically it's not possible to indetify how long these short run price effects last. And I'm not even sure his empirical specification (fixed-effect panel) is the best to capture that kind of short run effects anyway.