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“But not all those elasticities are the same…”

Summary:
That has been one common response to my recent post asking people to be consistent across assumptions about elasticities.  And that is true, those differing elasticities are not all exactly the same.  Yet a few points remain relevant: 1. If you see the world as dynamic, full of entrepreneurship, and solving problems fairly rapidly and effectively, you should tend to think that a wide variety of elasticities will be high.  Conversely, if you think we are all sluggish, overregulated, creatures of routine boobs, you will tend to see a wide variety of elasticities as being pretty low. That doesn’t have to follow, but if you instead have your own Rube Goldberg approach, well let’s please hear about it in more detail. 2. The elasticities that “most people on Twitter want” are “long run labor

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That has been one common response to my recent post asking people to be consistent across assumptions about elasticities.  And that is true, those differing elasticities are not all exactly the same.  Yet a few points remain relevant:

1. If you see the world as dynamic, full of entrepreneurship, and solving problems fairly rapidly and effectively, you should tend to think that a wide variety of elasticities will be high.  Conversely, if you think we are all sluggish, overregulated, creatures of routine boobs, you will tend to see a wide variety of elasticities as being pretty low.

That doesn’t have to follow, but if you instead have your own Rube Goldberg approach, well let’s please hear about it in more detail.

2. The elasticities that “most people on Twitter want” are “long run labor demand inelastic” (minimum wage hike good!) and “short run industry supply curve elastic” (stimulus is good!).  In other words, they want the short-run elasticity to be higher than the long-run elasticity.  By insisting that not all elasticities are the same, they actually have made the problem more difficult for themselves.

3. Individual firm and aggregate supply curves of course can differ.  To get the aggregate curve to be more dynamic and responsive than individual curves, typically you would invoke some notion of increasing returns.  But a pandemic is exactly when increasing returns are least likely.

Plausibly there are increasing returns to greater vaccine use.  But nominal stimulus?  Nope.  We are not living in a world of “my pet shop is doing so well I am going to spend money on your movie theater.”  Apart from the high multiplier associated with public health improvements, we right now live in a world of bottlenecks and sectorally specific problems.  Trying to get increasing returns on your side isn’t going to help, in fact it will work against you.

In sum, I am not saying there is no way you can get all of your elasticities to fit together in the preferred manner.  After all, if nanotechnology works, alchemy may work too.  I am just asking you to…show your work.  And in the meantime be less moralizing and dogmatic.  Perhaps you cannot in fact, right now, have all of the things you want.

The post “But not all those elasticities are the same…” appeared first on Marginal REVOLUTION.

Tyler Cowen
Tyler Cowen is an American economist, academic, and writer. He occupies the Holbert C. Harris Chair of economics as a professor at George Mason University and is co-author, with Alex Tabarrok, of the popular economics blog Marginal Revolution. Cowen and Tabarrok have also ventured into online education by starting Marginal Revolution University. He currently writes the "Economic Scene" column for the New York Times, and he also writes for such publications as The New Republic, the Wall Street Journal, Forbes, Newsweek, and the Wilson Quarterly.

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