My wife's architecture firm has to bid on projects that take several years. If costs increase faster than expected they eat a loss.
Coming out of COVID they were getting a lot of work and couldn't hire enough people. Later, it turned out a lot of that work ended up not being as profitable as they thought, because the input cost on construction went up.
While this did cause them to increase activity temporarily it didn't lead to a more effective allocation of resources (some of those projects shouldn't have been done, some of those employees should have worked somewhere else). In addition it's now becoming more common to build big COLAs into the contracts for protection, and a lot of work that should be going into design and planning goes into COLA prediction and negotiation. Many projects, especially with government or other grants, can't change their COLA rates and so they've wasted a lot of time going after these contracts only to learn that they are underfunded.
*I'm using COLA because I can't think of a better acronym for cost inflation adjustment.
Ultimately seesawing inflation does not lead to more sustainable patterns of trade in their industry and diverts a lot of energy into inflation prediction rather than planning and construction. So the Fed can "succeed" by surprising them but that surprise makes them worse at their jobs.
I like to say that inflation is a supply shock, because of the costs it imposes on people trying to protect themselves, and because of these sorts of distortions. Price controls can serve to worsen the supply shock.
I work for a company that provides outsourced labor services - typical contracts are three years duration. A couple years ago we started asking for contract clauses stipulating annual increases tied to the Consumer Price Index (CPI) for the work location’s Metropolitan (or micropolitan) Statistical Area. And if a client won’t agree to that we ask for a cancellation for convenience clause. Pre-pandemic either of those would have been flatly refused by most of our customer base, but most now are willing at least to enter into a serious discussion.
CPI isn’t perfect, but it has the advantage of objectivity from the standpoint of being an officially published number.
Nice explanation of one of the ways positive deviations from target inflation or too high a target is costly. It does not capture the costs of negative deviations or too low a target. The key lies in the adjustments of relative prices, something that is missing both in Lucas and the models that _he_ was criticizing.
I get that the economy is not single actors but I don't fully understand your complaint of (1).
I think the saltwater economists aren't far from the truth.
I'm baffled why (4) is only about workers. To me it seems true of all players. That might partially or wholly explain why we were in a low inflation environment for so long and more certainly plays a role in making it hard to bring inflation down.
In an earlier post I said that IMO nuclear/ fusion reactors is about our only choice. All of the geothermal projects have failed because of corrosion. Tidal plants have some possibilities. We can't just cover the earth with solar panels.
The Specialization & Trade idea should be turned into a model. It hasn't been because, even tho it is a more truthful description, simplification might reduce its truth amount too much. Tractability of truth discovery shouldn't push truth-seekers into looking for more tractable non-truth simplifications like the GDP factory model.
It's a bit sad that Arnold's HUGE S&T truth describing econ better than others has not resulted in any model. {The "Patterns" is descriptive and, for a name, superfluous. The "sustainable" is false -- most companies come, function for years, decades, centuries, and then are gone. "S&T", Specialization & Trade, are both necessary and are also sufficient for a good, extremely uncertainty filled model.)
I suspect GPT-7 plus Watson/some accurate math package, will do so.
Perhaps starting with the 4 digit SIC codes of industries, each of which is constantly changing. Noah Smith's fine summary of Lucas' push for better micro-foundations, reminds me that firms are inside of industries, like agriculture. See https://www.darcymaulsby.com/blog/when-agriculture-entered-the-long-depression-in-the-early-1920s/ The agro mechanization caused the Great Depression more than any gov't or finance decisions.
The Great Depression was a failure of the economy to successfully transition from agriculture to industry. None of the policy tools used, or available at the time, could have fully prevented it. Recessions, and Depressions, happen when too many business plans fail, with too many mis-skilled people available for work but not ready to work in the new jobs available.
That's the S&T explanation for the Great Depression, and is similar to the Great Recession. Where, in 2006, house construction busted, and it was too many lost construction jobs at the same time that made it so the adjusting economy didn't adjust fast enough.
Plus the anti-capitalist socialization of risk, so as to protect the super rich whose financial plans for higher profits with MBS (& other finance tricks) failed - and were bailed out rather than going bust. [Bankrupt the Big Failures - and pump money into low interest loans to new companies would have been a better 2008-2009 response - says me. Who, even if this is true, is not an authority that will be trusted. Yet it's true.]
Despite my enjoyment of Arnold Kling's other good insight, Arnold should be looking for colleagues/ disciples to carry on his work, but he's not doing so.
This sound pretty close to what I have in mind. Aggregate unemployment (of whatever kind of resources, not just wage labor) is the sum of markets that do not clear because of inflexibility of relative prices. Monetary policy's job is to facilitate the relative price changes.
This problem of cost over runs is a very big problem in the build out of off-shore wind projects off the NE coast line. It takes years of jumping thru hoops at the state and federal level to get off shore wind lining up all its ducks only to get further blindsided by NIMBYs that fight tooth and nail preventing those electric cables to landfall. Because of cost overrun issues these off shore wind companies have to renag on the contract because the increased cost have made a laudable project unprofitable. So the have to reboot and start the cycle all over again. Meanwhile big oil laughs all the way to the bank while global warming and CO2 levels keep rising.
** We're doomed to the catastrophic effects of global warming because of the paralysis of "the capitalistic system". Too much red tape; too much NIMBYism.**
A warm planet is much more desirable than a cold one. CO2 is greening the planet giving us a steady supply of food and oxygen. As the planet swings from ice age to ice age we as humans are much better off in this interim. When the next ice age rolls around our descendents will be jonesing for the catastrophic global warming we all are enjoying now.
To be on the safe side, just to ensure we don’t overheat til the next ice comes along, we should transition out of fossil fuels energy and into green energy to meet most of our energ needs. It's doable and prudent IMHO.
IMHO it is not currently possible or prudent. You would be looking at such a huge drop in the standard of living. No travel, serious lack of food, humanity all crowded into the temperate zones because it's too hot or too cold to live in the other zones. I suppose if you could gather up all the magic unicorn farts we might hang on to our current standard of living.
My standard of living has not been impeded since buying an EV vehicle, putting solar on my roof, changing HVAC system to mini splits and adding a heat pump hot water system. I'm fortunate to have been able to make these green energy adjustments, which weren't cheap, by having reserve cash but many states incentives with low interest loans are available. The solar pays for itself in 6 years, the EV is very low maintenence and as I do most of my charging using solar on roof no filling up costs. The mini splits and heat pump hot water system are energy efficient much more so than older in use systems. The ICE ( internal combustion engine) is rapidly becoming obsolete and being replaced with electric powered vehicles. You see more of them on the road every day. No magic unicorn required. The tech is here now. Use it or not. Your choice.
You seem completely clueless to the fact that we do not have enough generation capacity to supply electricity for an all electric trans industry. Let alone all the heat pumps. Or that solar and wind will never make enough power to run an industrial society. They are fine as addendum to our current supply but do you also realize that in 20 to 25 years all your panels will have to be replaced? That the landfills which are already filling up with windmill blades will be overwhelmed with useless panels? We need a better answer. Dilithium chrystals maybe. Beam me up Scotty!
I agree that we should not push wind and solar farther than necessary, but I think you underestimate the potentials of nuclear and geothermal added to the mix.
Dr. Kling's project seems to address epistemological puzzles in a similar fashion of the philosophy of the later Wittgenstein. Description over models. Patterns over theoretic monoliths. Relentlessly tapping on the shoulder and saying, "This is simply meaningless. It's not doing any work. Nothing here applies to anything under discussion. Nothing is being said so there is nothing to understand."
My wife's architecture firm has to bid on projects that take several years. If costs increase faster than expected they eat a loss.
Coming out of COVID they were getting a lot of work and couldn't hire enough people. Later, it turned out a lot of that work ended up not being as profitable as they thought, because the input cost on construction went up.
While this did cause them to increase activity temporarily it didn't lead to a more effective allocation of resources (some of those projects shouldn't have been done, some of those employees should have worked somewhere else). In addition it's now becoming more common to build big COLAs into the contracts for protection, and a lot of work that should be going into design and planning goes into COLA prediction and negotiation. Many projects, especially with government or other grants, can't change their COLA rates and so they've wasted a lot of time going after these contracts only to learn that they are underfunded.
*I'm using COLA because I can't think of a better acronym for cost inflation adjustment.
Ultimately seesawing inflation does not lead to more sustainable patterns of trade in their industry and diverts a lot of energy into inflation prediction rather than planning and construction. So the Fed can "succeed" by surprising them but that surprise makes them worse at their jobs.
I like to say that inflation is a supply shock, because of the costs it imposes on people trying to protect themselves, and because of these sorts of distortions. Price controls can serve to worsen the supply shock.
I work for a company that provides outsourced labor services - typical contracts are three years duration. A couple years ago we started asking for contract clauses stipulating annual increases tied to the Consumer Price Index (CPI) for the work location’s Metropolitan (or micropolitan) Statistical Area. And if a client won’t agree to that we ask for a cancellation for convenience clause. Pre-pandemic either of those would have been flatly refused by most of our customer base, but most now are willing at least to enter into a serious discussion.
CPI isn’t perfect, but it has the advantage of objectivity from the standpoint of being an officially published number.
Nice explanation of one of the ways positive deviations from target inflation or too high a target is costly. It does not capture the costs of negative deviations or too low a target. The key lies in the adjustments of relative prices, something that is missing both in Lucas and the models that _he_ was criticizing.
Wonderful post, one of the better appreciations of Robert Lucas. Thank you.
I get that the economy is not single actors but I don't fully understand your complaint of (1).
I think the saltwater economists aren't far from the truth.
I'm baffled why (4) is only about workers. To me it seems true of all players. That might partially or wholly explain why we were in a low inflation environment for so long and more certainly plays a role in making it hard to bring inflation down.
In an earlier post I said that IMO nuclear/ fusion reactors is about our only choice. All of the geothermal projects have failed because of corrosion. Tidal plants have some possibilities. We can't just cover the earth with solar panels.
The Specialization & Trade idea should be turned into a model. It hasn't been because, even tho it is a more truthful description, simplification might reduce its truth amount too much. Tractability of truth discovery shouldn't push truth-seekers into looking for more tractable non-truth simplifications like the GDP factory model.
It's a bit sad that Arnold's HUGE S&T truth describing econ better than others has not resulted in any model. {The "Patterns" is descriptive and, for a name, superfluous. The "sustainable" is false -- most companies come, function for years, decades, centuries, and then are gone. "S&T", Specialization & Trade, are both necessary and are also sufficient for a good, extremely uncertainty filled model.)
I suspect GPT-7 plus Watson/some accurate math package, will do so.
Perhaps starting with the 4 digit SIC codes of industries, each of which is constantly changing. Noah Smith's fine summary of Lucas' push for better micro-foundations, reminds me that firms are inside of industries, like agriculture. See https://www.darcymaulsby.com/blog/when-agriculture-entered-the-long-depression-in-the-early-1920s/ The agro mechanization caused the Great Depression more than any gov't or finance decisions.
The Great Depression was a failure of the economy to successfully transition from agriculture to industry. None of the policy tools used, or available at the time, could have fully prevented it. Recessions, and Depressions, happen when too many business plans fail, with too many mis-skilled people available for work but not ready to work in the new jobs available.
That's the S&T explanation for the Great Depression, and is similar to the Great Recession. Where, in 2006, house construction busted, and it was too many lost construction jobs at the same time that made it so the adjusting economy didn't adjust fast enough.
Plus the anti-capitalist socialization of risk, so as to protect the super rich whose financial plans for higher profits with MBS (& other finance tricks) failed - and were bailed out rather than going bust. [Bankrupt the Big Failures - and pump money into low interest loans to new companies would have been a better 2008-2009 response - says me. Who, even if this is true, is not an authority that will be trusted. Yet it's true.]
Despite my enjoyment of Arnold Kling's other good insight, Arnold should be looking for colleagues/ disciples to carry on his work, but he's not doing so.
This sound pretty close to what I have in mind. Aggregate unemployment (of whatever kind of resources, not just wage labor) is the sum of markets that do not clear because of inflexibility of relative prices. Monetary policy's job is to facilitate the relative price changes.
This problem of cost over runs is a very big problem in the build out of off-shore wind projects off the NE coast line. It takes years of jumping thru hoops at the state and federal level to get off shore wind lining up all its ducks only to get further blindsided by NIMBYs that fight tooth and nail preventing those electric cables to landfall. Because of cost overrun issues these off shore wind companies have to renag on the contract because the increased cost have made a laudable project unprofitable. So the have to reboot and start the cycle all over again. Meanwhile big oil laughs all the way to the bank while global warming and CO2 levels keep rising.
** We're doomed to the catastrophic effects of global warming because of the paralysis of "the capitalistic system". Too much red tape; too much NIMBYism.**
Cheers
A warm planet is much more desirable than a cold one. CO2 is greening the planet giving us a steady supply of food and oxygen. As the planet swings from ice age to ice age we as humans are much better off in this interim. When the next ice age rolls around our descendents will be jonesing for the catastrophic global warming we all are enjoying now.
To be on the safe side, just to ensure we don’t overheat til the next ice comes along, we should transition out of fossil fuels energy and into green energy to meet most of our energ needs. It's doable and prudent IMHO.
IMHO it is not currently possible or prudent. You would be looking at such a huge drop in the standard of living. No travel, serious lack of food, humanity all crowded into the temperate zones because it's too hot or too cold to live in the other zones. I suppose if you could gather up all the magic unicorn farts we might hang on to our current standard of living.
You are assuming that it will not be possible to replace the energy supplied by burning carbon atoms with something cheaper.
My standard of living has not been impeded since buying an EV vehicle, putting solar on my roof, changing HVAC system to mini splits and adding a heat pump hot water system. I'm fortunate to have been able to make these green energy adjustments, which weren't cheap, by having reserve cash but many states incentives with low interest loans are available. The solar pays for itself in 6 years, the EV is very low maintenence and as I do most of my charging using solar on roof no filling up costs. The mini splits and heat pump hot water system are energy efficient much more so than older in use systems. The ICE ( internal combustion engine) is rapidly becoming obsolete and being replaced with electric powered vehicles. You see more of them on the road every day. No magic unicorn required. The tech is here now. Use it or not. Your choice.
Cheers
You seem completely clueless to the fact that we do not have enough generation capacity to supply electricity for an all electric trans industry. Let alone all the heat pumps. Or that solar and wind will never make enough power to run an industrial society. They are fine as addendum to our current supply but do you also realize that in 20 to 25 years all your panels will have to be replaced? That the landfills which are already filling up with windmill blades will be overwhelmed with useless panels? We need a better answer. Dilithium chrystals maybe. Beam me up Scotty!
I agree that we should not push wind and solar farther than necessary, but I think you underestimate the potentials of nuclear and geothermal added to the mix.
Dr. Kling's project seems to address epistemological puzzles in a similar fashion of the philosophy of the later Wittgenstein. Description over models. Patterns over theoretic monoliths. Relentlessly tapping on the shoulder and saying, "This is simply meaningless. It's not doing any work. Nothing here applies to anything under discussion. Nothing is being said so there is nothing to understand."