You are currently browsing the monthly archive for July 2010.
In particular legends Joey Chestnut and Kobayashi are pretty fit guys
But of course its just calories-in minus calories-out. No equilibrium modeling required.
If you haven’t had the chance to visit his blog, Stephen Williamson writes quite technical analysis from a “new monetarist” perspective. He (sometimes) harshly criticizes new Keynesians for their extreme focus on sticky prices and short-term nominal interest rates, and has a recently taken to criticizing
Keynes Krugman’s analysis, sometimes more effectively than others.
In his recent post, he takes Krugman’s recent column in the NYT to task for being very sure about deflation, and what the Fed can do going forward to compensate. I rather like the Krugman column, so I’m not very convinced…but Stephen Williamson is much, much smarter than I am, so I have to tread lightly. Except for one thing:
Now, even if we thought that the threat of deflation were looming, should the Fed be castigated for ignoring this? What could the Fed be doing to produce more inflation? Under the current regime (with positive excess reserves), the relevant policy rate in the US is the interest rate on reserves, which is currently 0.25%. The Fed could go to zero, but obviously that will not produce much inflation, and then we would only get a level effect on the price level.
The only instrument the Fed has currently for affecting the path of the price level is the interest rate on reserves, and that cannot go much lower, as Krugman points out.
I think that the Fed easing the IOR policy to 0 — which as current policy mechanics work would imply dropping the Fed Funds target to zero as well — would be more expansionary than Williamson my think, but that is a debate that we would have to witness to settle for sure, and not really my problem with the statement. What I want to know is what he means when he says “the interest rate on reserves can’t go much lower”. Perhaps he was confusing the IOR with the short-term nominal interest rate…or he mixed up “can’t” with “won’t”…but I don’t see anything besides the will of the FOMC preventing the IOR from going as low as needed, even if that means negative.
The IOR doesn’t correlate to the movement of any underlying ‘real’ interest rate, nor is its target based on an underlying real variable. It is a purely administered rate, and as such, can go anywhere the Fed needs to accommodate its targets. Now it may be too radical a move to actually charge an interest penalty on excess reserves, but that isn’t a situation where the IOR “can’t” go negative, but may be a situation where the interest rate “won’t” go negative.
The reason I comment on this is that Williamson has done some great scholarly work criticizing new Keynesian models for making ridiculous claims like “the short-term nominal interest rate should be -5% right now”, even though that doesn’t reflect anything that can actually happen in reality. He has forcefully made the suggestion that models shouldn’t come up with policy prescriptions that are explicitly impossible. I whole-heartedly agree with this suggestion. However, if Williamson says that IOR cannot go negative, then to remain consistent that can’t be reasonably modeled either, so it robs us of a potentially useful analytical tool that can actually happen in reality.
Weirdly, it seems like Williamson is saying in this post that “monetary policy is out of ammunition, or shouldn’t use the ammunition that it has”, but reaching that conclusion from a distinctly non-new Keynesian perspective. I don’t buy it.
It is really very refreshing to see that Paul Krugman has decided to pull out the stops and implicate monetary policy as (at least) an important tool that is currently stifling recovery:
Not to worry, said Mr. Bernanke: the Fed had the tools required to head off an American version of the Japan syndrome, and it would use them if necessary.
Today, Mr. Bernanke is the Fed’s chairman — and his 2002 speech reads like famous last words. We aren’t literally suffering deflation (yet). But inflation is far below the Fed’s preferred rate of 1.7 to 2 percent, and trending steadily lower; it’s a good bet that by some measures we’ll be seeing deflation by sometime next year. Meanwhile, we already have painfully slow growth, very high joblessness, and intractable financial problems. And what is the Fed’s response? It’s debating — with ponderous slowness — whether maybe, possibly, it should consider trying to do something about the situation, one of these days.
The Fed’s fecklessness is, to be sure, not unique. It has been astonishing and infuriating, as the economic crisis has unfolded, to watch America’s political class defining normalcy down.
See here and here, as well.
At the latter link, Krugman grapples with the idea of “Fed credibility”*, and notes (rightfully so) that instead of credibility meaning that the Fed says things, and people believe what they say, the words (in the minds of many people) simply mean that the Fed will battle inflation always and everywhere — even if it isn’t even a threat, we can rest assured that the Fed will find inflation in it’s own hometown, load up in the trucks, and go give it a severe beating. This is all well and good, as high inflation causes many problems in the macroeconomy under “normal” circumstances…but it poses a very large problem when the economy is faced with deflation!
This brings us to another point; that the concept of inflation is worthless at best, and actively harmful at worst. Read Karl’s post and ask yourself what the problem is? Is the problem actually inflation, or the idea of inflation? I say it’s the latter, and that fear is simply a mental construct that exists (and paralyzes policy) simply because of word-association.
So on one hand, we have (conservative economists, mostly) writing op-eds about the dangers of inflation (that aren’t there), and the Fed “maintaining its credibility”, when throughout this recession the Fed has consistently missed it’s own target, based on it’s own forecasts. That is not credibility. If the Fed is making forecasts of hyperinflation, then we should be experiencing hyperinflation…the Fed has the power to make that happen — and the fact that we can’t get even mild inflation to catch back up to trend is a major problem. On the other side, we have (liberal economist, mostly) finally beginning to acknowledge they we’re going to need some unconventional monetary stimulus (better late than never…right?), and that is only because fiscal policy is ‘paralyzed’.
Monetary stimulus should have been the best and the first-best choice. That is what modern monetary theory says. So of course my idea (which is not original to me**) is to divorce monetary policy from the horrible memories that the word ‘inflation’ conjures…perhaps a nominal target whose incidence is determined (at a base level) by the actions of said central bank. Perhaps NGDP?
*I wonder if under a more conservative Fed, we’d be looking at deflation (or simply lack of inflation) with a probability of 1, as our central bank actually doesn’t want any inflation anyway…like the Bank of Japan.
**Scott Sumner is famous for this idea, and Nick Rowe has a previous post discussing the social construct of inflation and interest rates.
Brad Delong is Puzzled by Richard Campbell
Would you still be conscious if your neurons were replaced by (functionally identical) silicon chips?
. . .
We can similarly wonder whether Block’s "Chinese Nation" (a functional analogue where individual humans communicating via walkie-talkies play the role of neurons) is really conscious. There’s not any physical fact we’re ignorant of here. So if there’s a substantial fact we remain ignorant of, it must concern a matter over and above the physical facts. That is, it must be a matter of non-physical fact.
I don’t know whether Richard Chappell believes that Block’s Chinese Nation is really conscious–I am not sure whether I believe that Block’s Chinese Nation is really conscious–but it’s not because I am uncertain about any matter of non-physical fact. It is because I am uncertain of the meaning and definition of "really conscious."
“Really conscious” doesn’t bother me much. Lets ask this question: When the “Chinese Nation1” finally completes the signals necessary to represent the processing of the color red, is there any being which experiences the color red.
Said another way, is it “like anything” to be a Chinese Nation. It is like something to be person. We are pretty clear on that. I am guessing that its like something to be dog. I don’t know if its like anything to be a worm. I am pretty sure its not like anything to be a rock.
Campbell is asking “is it like anything to be a collection of people with Walkie-Talkies”
That being said, however, I think Campbell is wrong on the physicalist question. We don’t yet have all the answers. There are more experiments we can do.
The most straight forward experiment would be for me to have the part of my brain responsible for processing the color red replaced by chips. I might then be able to tell whether my qualia had disappeared.
Now, immediate problems pop out – I don’t deny. For one thing unless we’ve gotten something wrong I ought not be able to tell anyone that my qualia has disappeared. From the point of view of the outside world all of the processing in my brain is happening the same way and so I should respond in the same way.
However, if it really has disappeared but I can’t express that then I can’t know that. But, if I can’t know that then what does it mean to say its gone. All very interesting questions that lead to only one conclusion – we need to start cutting into some brains because I am dying to see what if, anything actually happens.
More seriously though, even the attempt to answer some of these practical question can yield useful insights. Suppose for example there is a particular mechanisms within the neurons that is hard to model and seems to act really weird.
We say, ok close is good enough NSF grants and we do the implants without that mechanism. Suddenly our patient tells us that his sense of red is gone. He knows that the picture is red, he can even tell you how red. He just isn’t experiencing red. Well, know we know a lot more about qualia than we did before and we know a lot more about the physical processes that lead to consciousness.
It may be that when someone conducts a Chinese Nation thought experiment that involves replicating this particular complex mechanism that the outcome of a “conscious nation” won’t seem counterintuitive at all. “Well of course if you could get 100 billion humans to all do that, the result will be conscious” we will all say.
Now maybe that won’t happen and we’ll completely reduce the process of cognition down to its most basic parts and be left with no more intuition about consciousness. Maybe. But, I don’t know how we can be sure that will happen from where we are standing right now.
(1) The string of references is long but this has nothing to do with the nation of China. Start here
Your answer to our economic situation is that we need to ramp up government spending to stimulate consumer demand to increase employment. It’s not important to be efficient in how we deploy our stimulus money . . .
Your answer to the problem of climate change is that we need to substantially increase the price of carbon so that consumption patterns change . . . The government should do what it can to ease the economic pain of the transition, but some short-term economic pain is a reasonable price to pay for saving the planet.
I think the tension between these two positions should be obvious.
I am not sure how Matt would reconcile these positions, but there is no tension that I see.
The case for stimulus isn’t that creating jobs is more important than economic efficiency. The case is that cyclical unemployment is massively inefficient. The old macro quip is that it takes a heap of Harberger triangles to fill an Okun’s gap.
Here is the thing that must be understood and I increasingly see is not understood. A recession is a period of time where we have rising unemployment AND falling capacity utilization.
That is we have capital without labor and labor with capital. From an efficiency standpoint it just doesn’t get any worse than that. Its as if you have a man trying to dig a ditch and shovel sitting in the shed, but the man can’t get to the shovel. It scarcely matters at all what type of ditch design you have to agree to in order to get him the shovel. Virtually anything is better than scratching at the dirt with your fingernails.
And, this is point which confuses even a lot of economists: When workers lose jobs labor is not lost from the economy. There may be just as much work going on in an economy with high unemployment as an economy with low unemployment. It is simply that the work is vastly less efficient.
A man who weeds his garden, searches through the newspaper for coupons, fixes his squeaking floorboard himself or even searches through the trash for food is supplying labor. Its just massively inefficient labor.
Getting him a job doesn’t add labor to the economy. It doesn’t necessarily cause more work necessarily to be done. (If you have seen some of the job sites I have, it might lead to less.) However, it vastly raises the efficiency of the work.
The enormous efficiency loss associated with divorcing men from tools, with having labor in need of capital and capital in need of labor, is what makes a recession so economically devastating. Curing that is an efficiency problem of the highest order.
My title is tongue-in-cheek but my policy suggestion is serious. The Federal Reserve must take dramatic actions to change market expectations. It needs to strike a little fear of hyperinflation into the hearts of financial markets.
Though 80 years old, memories of the hyperinflation of the Weimer Republic are fresh in the minds of pundits and policymakers alike. Images of citizens in an industrialized Western democracy reduced to barter and using money for fuel are likely haunt Central Bankers for eternity.
In response to the current crisis more extreme policy suggestions have been floated: quantitative easing, qualitative easing through long term bond purchases, third or fourth rounds of fiscal stimulus, etc. Each time, concerns are raised that the Treasury and the Federal Reserve are putting their credibility at risk; that the government may be giving in to the temptation to support the state on the back of money creation.
Those fears have encouraged policy makers to pull back, to do less than they otherwise would. However, is that the correct response?
We all agree that traditional Fed policy is impotent because short term interest rates are already zero. Pure economic theory tells us that the way to handle that is for the Federal Reserve to make a long term commitment to higher inflation. Real interest rates (the kind financial mangers care about) are determined by the difference between market rates and the rate of inflation. Market rates can’t go any lower but inflation can go higher. The result is a lower real rate.
The problem academic economists say, is that the Fed can’t make such a commitment. As soon as the economy recovered the Fed would once again begin obsessing about inflation and raise interest rates. Knowing that consumers and businesses are unwilling to undertake the spending that would bring about such a recovery.
In short, the Federal Reserve is hamstring by its own tradition of responsible monetary management. The way out then, perhaps the only way out, is to embrace irresponsible monetary management. In particular, the Fed should pursue aggressive quantitative easing and purchases of long term bonds and let the hyperinflationists be damned.
They will bray and wail that the US is on the road to massive inflation. It won’t be true, and the financial markets won’t believe it – not in total, at least. But, it will raise concerns. In super nerd terms, such brazen actions by the Fed can’t help but raise the posterior probability of hyperinflation by a small amount.
Pricing in of inflation risk performs largely the same macroeconomic function as true expectations of future inflation. That is, if money managers think that there is a tiny chance that there might be significant inflation this works through their profit analysis in the same was as knowing there will be a little inflation.
Yet, a little inflation is precisely the cure that we need. We might not be able to get at it directly, but we can get it at indirectly by purposefully allowing hyperinflation fears to flare.
This policy is typical of the way the federal government does business. In case after case, Washington’s web of subsidies and tax breaks effectively takes money from the middle class and hands it out to speculators and have-mores. We subsidize drug companies, oil companies, agribusinesses disguised as “family farms” and “clean energy” firms that aren’t energy-efficient at all. We give tax breaks to immensely profitable corporations that don’t need the money and boondoggles that wouldn’t exist without government favoritism.
He forgets the other group that fits best among those other interest groups: small businesses. But I am receptive overall to his point that the bigger redistribution problem in America isn’t downward via social welfare programs, but upward via corporate welfare and the mortgage interest tax deduction. I think a phasing out of these programs would be a good way to bring long-term austerity.
In addition, by leveling the energy playing field by removing existing distortions, this would seem to be an even more efficient first step towards fixing global warming than a carbon tax. Perhaps liberals should focus first on removing subsidies, and then on a carbon tax. The former has the benefit of being able to be framed as populist like Douthat has.
Reading Kerry Howley’s wonderful piece on cryogenics has me thinking about the conflicts and tensions between life-extending science and religion. It occurs to me that if the progress of science and the treatment of disease and aging ever advances to the point where humans can live forever, it will create a paradox whereby heaven is an impossibility for most believers.
The problem is that in most religions suicide is a very serious sin, and life saving medical treatments should not be refused unless they present undue suffering or burden. See Catechism 2278, for instance. This presents the paradox for believers: the only way to go to heaven is to die, but the only way to die is to commit a sin that prevents you from going to heaven.
How can you die without sinning in a world where immortality is an option? It’s likely that some forms of death would be untreatable, like being exploded so badly that only dust remains. You could simply increase your odds of dying by taking extremely dangerous careers or hobbies that puts you in a high probability of sudden, irreversible, and perhaps explosive, death. The subsequent large supply of labor and low wages in risky industries will mean it’s even easier for non-believers to avoid death.
Maybe the future will see a rise in religious terrorists who target science in an attempt to prevent us from ever achieving immortality. These martyrs would prevent the paradox from occurring, and thus save billions of souls from being locked out of heaven. From the believers perspective, that is a much greater thing to achieve for God than anything todays terrorists seek to accomplish.
Another potential outcome is that people will abandon religion altogether. After all, without the possibility of the reward of a heavenly afterlife, much of the promise of religion goes away. Immortality also allows the avoidance of hell, and so much of the threat of religion goes away as well.
Or perhaps the option of immortality will lead to a rise in the popularity of religions like Christian Science and Jehovah’s Witnesses for whom medical treatments are themselves the sins.
This is one good reason for believers to avoid cryogenics: die now, while you still can.
It is a question I have previously entertained, with disagreement from Karl. I would say subsequent developments are increasing rather than decreasing the still slim probability that BP will get, or seek, a bailout. This is from the New York Times today, emphasis mine:
Kenneth R. Feinberg, the administrator of the $20 billion fund to address economic losses from the spill, recently said in an interview on Fox News that a BP bankruptcy would be a “disaster for the people in the gulf” and is “not an option.”
Ian Williams, a bankruptcy lawyer at the firm Bryan Cave in Britain, was adamant that bankruptcy was out of the question.
“BP does not need to reorganize its business because it is solvent,” he said, adding that the global importance of the company and its stock made it “too big to fail.”
I recognize that phrase. If they seek a bailout and don’t get one, will the reason be cost benefit or emotion? I bet the latter.
I’m not going to be the one to do it, but it seems like it might be time to do a round 2 on that whole unit root debate. Here’s Yglesias setting the stage:
To catch-up by the end of 2012, you need GDP (i.e., output times the price level) to grow at almost 8.7 percent per years starting in Q2 of 2010. Even to achieve the catchup by the end of 2016, you need it to grow at over 6.7 percent. The pre-crisis trend was more like 5.2 percent.
You remember the unit root debate, right? Let me try and sum up the various parties positions. Greg Mankiw begin the debate with this:
In the CEA document, Table 2 shows growth rates immediately after recessions end. It demonstrates that growth is higher than normal in most of the recoveries. Is this evidence against the hypothesis that Campbell and I advanced?
I don’t think so. The problem is that those numbers start at the end of the recessions, and we do not know when the recession will end. In other words, if God came down and told us the exact date the current recession was going to end, my forecast subsequent to that date would be for higher than normal growth. But absent that divine intervention, there is always some chance the recession will linger (remember the Great Depression), and an optimal forecast has to give some positive probability weight to that scenario as well. The forecast should be an unconditional expectation, not an expectation conditional on a particular end date for the recession.
Paul Krugman said this:
“…to invoke the unit root thing to disparage growth forecasts now involves more than a bit of deliberate obtuseness. How can you fail to acknowledge that there’s huge slack capacity in the economy right now? And yes, we can expect fast growth if and when that capacity comes back into use.”
Brad Delong said this:
Mankiw is here arguing that the Obama administration’s forecast is too high, and so forecasts future deficits that are smaller than the deficits are in fact likely to be. Mankiw is arguing that future economic growth is likely to be just average–that there will be no post-recession catch-up during which growth is faster than average….
That an unemployment rate higher than normal is likely to be followed by a period when unemployment falls sharply is sure. On average, we expect half of deviations of unemployment from its average value to be erased over the next two years:
And those post-recession periods of falling unemployment are also times of rapid output growth. On average, we expect cumulative growth over the next two years to be higher by three-quarters of a percentage point for each one percentage point of higher unemployment now.
Plosser and Nelson said this… well I guess we don’t have to go that far back in the debate. That is where the unit root debate left off many quarters ago. My question is has subsequent economic activity vindicated any of the quarreling parties?
Adam picks up on Felix’s big post on the current employment situation. I don’t have a lot to add to Adam’s commentary but I want to address some of the fundamental issues Felix raises. There are a lot of things here and we are really getting to the heart of what ails America. This is a long conversation and I hope to produce a series of posts on this.
However, in the interest of getting the conversation going I will start with my most controversial opinions.
Middle Class Fetishism
I think quite simply that too many make too big of a deal out of the middle class. Chrystia Freeland paraphrases and quotes Arianna Huffington as saying
But, as Huffington pointed out, the political consequences of a two-speed America might not be pretty: “America cannot be America without a middle class … we will become Brazil and all live behind gates to protect our children.”
Well yes, the consequences might not be pretty. However, I don’t think they need to be un-pretty. Contrary to many on the both the left and the right I don’t think that most Americans care that much about the rich, either demonizing them or becoming them. They mainly enjoy gawking at them.
The average American might dream of being a Hollywood Star or Sports Legend. Primarily for the fame but also in part for the riches. They might also be jealous of the lifestyles of such superstars. However, its an ephemeral jealousy and a distant dream. They basically see this as another world. Fodder for reality shows and the like.
The same is largely true of high income professionals like Surgeons, Software Architects, Fashion Designers, Celebrity Chefs, etc. The reason its not true of CEOs, Hedge Fund Mangers and Oil Executives is not because of the income gap. Its because the average American perceives these people as having done something to make their lives worse. And, in many cases the average American is right about that.
The point then, is that to quell the anger of the people, to prevent the unlovely situation of Brazil, we don’t need to minimize the income gap between the rich and the poor. We need to make sure that the rich aren’t running roughshod over the poor.
Ultimately I think that’s a question that’s much better dealt with by reforming administration of the law than fighting the gigantic tide of globalism. In part what it means is a class of regulators and public defenders that is cut from the same economic and educational cloth as those that protect the wealthy.
If bank executives are paid 500K a year but bank regulators are paid 100K a year then its pretty clear which direction the bright young finance majors are going to gravitate towards. That type of pay disparity matters because you are attracting competing talent in adversarial role. When one side as that much of pay advantage regulatory capture is inevitable.
If public defenders are paid 40K a year while private defenders make 250K a year, then its understandable that the average citizen is going to feel that the law doesn’t apply to the rich.
However, this doesn’t mean that we have to duct tape the entire economy in such a way that the average high school graduate is making a salary that is X percent of what bank executive makes. So long as the average high school graduate can live his life without fear that he is being expressly screwed over by the bank executive or that the bank executive can literally get away with murder, I think he will feel alright.
Moreover, what is important to a lot people in their daily lives is that they are able to feel productive, that they have some job. This is why I am highly adverse to policies that might raise the average wage at the expense of shrinking the ranks of the employed. A society where virtually everyone has some job even if the average wage is low is going to be happier than a society in which people regularly fear being left with no job.
If we wind up with a two tier society that is fine, so long as the institutions of that society dutifully protect the rights of those in the bottom tier. This is not a trivial problem, no. But, I think its solvable and I certainly think its easier than trying to stop the basic forces of technological change and globalization.
I want to start this discussion by saying that I have absolutely no training in law of any sort and in particular nothing more than a pop education in constitutional law or history. I come seeking knowledge.
My sister just graduated from Harvard Law and Justice Souter gave an address at commencement. I came into the address not knowing too much about the debate between originalism and the living constitution other than what one might gather from cable news and New York Times.
Souter, in his statements, seemingly sat out to convince me that originalism was naive and untenable. He gave two examples. First, the Pentagon Papers. He argued that the originalist interpretation of the constitution would have required that Congress be forbidden from preventing the press from printing military secrets. After all, to an originalist “no law” must mean “no law.”
He did not bother to state the absurdity of this claim but one was left with the sense that Souter felt that no court in its right mind could hold to such a view. I leave wide open the possibility that I am missing something here, but I was not convinced. More on that later.
The second example he brought up, which I gather is a common one, was Brown vs. Board. He pointed out that under Plessy vs. Ferguson the court ruled that separate but equal accommodations were allowed under the 14th amendment. Yet, Brown vs. Board ruled that separate was inherently unequal.
Now, he said it was not reasonable to suspect that somehow in the intervening years the intent of the 14th amendment had changed. No, what must have changed is the society which interprets that amendment. Thus orginalism made no sense. I found this argument to be even less compelling than the first.
In the end I was left with the feeling that if this was the best the living constitution school had to offer I was likely an originalist. Though, this being my virgin experience I leaned on the possibility that I just wasn’t getting it.
Fast forward to this bloggingheads with Glenn Loury, where he expresses much the same frustration. Glenn says and I am paraphrasing
From the point of view of a mathematician and an economist all of these legal arguments seem ridiculous and woefully lacking in rigor. It seems that what is primarily being debated here is whether or not the other side can be made to look foolish. What should be debated is whether or not there are some basic principles from which we can formally derive a consistent understanding of the law. But, maybe there is something I am missing.
Emboldened by this kindred spirit I am here to ask. What am I missing?
To provide some jumping off point, lets return to Souter.
In the case of the Pentagon Papers it seems to me that the worst that can be said is that the First Amendment as written was foolish. If the government cannot keep secrets then the government cannot establish military control over the nation and so the constitution itself will topple. Thus the First Amendment is self-defeating.
Perhaps, someone wants to argue as a general principle that when the constitution says something foolish we should ignore it. I might, might have some sympathy here but sympathy seems unnecessary.
When the constitution was framed presumably the military had secrets? No? If the First Amendment was intended to outlaw the forceful keeping of secrets then this would have been a big deal even at the time. I find it hard to believe that no one would have mentioned this.
If they did mention it and I am unaware then this seems like crucial evidence. If they did not mention it then that leads me to believe that everyone at the time assumed that the First Amendment would not have this consequence. Thus absent any other evidence I am lead to believe that the framers intended the military to be able to forcefully keep secrets and so there is no conflict here. For this particular case, we do not even need to bring up the foolishness-implies-we-ignore principle, though we might want to address this more generally anyway.
In the Brown vs Board example, I see even less of a problem. It is my understanding that in Plessy vs. Ferguson the court found
Legislation is powerless to eradicate racial instincts or to abolish distinctions based on physical differences, and the attempt to do so can only result in accentuating the differences of the present situation. If the civil and political rights of both races be equal, one cannot be inferior to the other civilly or politically. If one race be inferior to the other socially, the Constitution of the United States cannot put them on the same plane.
Which says to me. Look, all the law can do is make sure people have the same rights. If black people really want to hang out with white but white people don’t want to hang out with black people then that is not the government’s problem.
Ok fair enough. But then we have 50 years of Jim Crow in which the rights of blacks are systematically oppressed. In Brown the court came back with
Segregation of white and colored children in public schools has a detrimental effect upon the colored children. The impact is greater when it has the sanction of the law, for the policy of separating the races is usually interpreted as denoting the inferiority of the negro group. A sense of inferiority affects the motivation of a child to learn. Segregation with the sanction of law, therefore, has a tendency to [retard] the educational and mental development of negro children and to deprive them of some of the benefits they would receive in a racial[ly] integrated school system…
We conclude that, in the field of public education, the doctrine of "separate but equal" has no place. Separate educational facilities are inherently unequal. Therefore, we hold that the plaintiffs and others similarly situated for whom the actions have been brought are, by reason of the segregation complained of, deprived of the equal protection of the laws guaranteed by the Fourteenth Amendment.
As a logical argument this seems a little bit reaching to me. However, I like the basic argument that: Look, you had your chance to do separate but equal. Clearly you consistently, and we think deliberately, screwed it up. You have a policy which aims to psychologically subjugate blacks and quite frankly seems to be successful in doing so. We told you the first time that the government was not supposed to go around messing with people’s psyches. This is clearly not in keeping with 14th amendment and so we are striking it down.
The difference here my mind is that the state showed itself to be unwilling or unable to achieve the prior aim. The intent didn’t change but the reality of nature was revealed by the accumulation of evidence.
Here is a comparable example in my mind. Suppose that someone sued the state saying that police officers should not carry guns because that violates the 5th amendment assurance to due process.
The court could rightfully rule that this is not sensible because police officers carried weapons when the 5th amendment was passed.
However, suppose that during the next 50 years every time a police officer was given a gun he or she used that gun to terrorize neighborhoods; to rape, steal and murder; to act as judge, jury and executioner on the populace. Then a court could rationally come back and say: Look, we tried the letting you have guns thing. You consistently showed that you were unwilling or unable to use them in a manner consistent with the 5th amendment. So we are taking them back.
We don’t think the 5th amendment has changed, but evidence has revealed that the state of nature makes having police officers carrying guns inconsistent with due process. If somehow that changed. If somehow the police were able to get their act together then we could reconsider. But, as long as it remains an empirical fact that police with guns will invariably violate due process then we cannot honor the 5th amendment and allow the police to carry guns.
So, to my mind neither case seems to compel me that there is something deeply wrong with the principle. “The court should rule such that the result will be the closest to the original intent of the authors of the law”
Further I would argue that there exists some “intent value” That is, within the minds of the authors there was either some thought as to how this would be applied or there was no thought. If there was some thought then that is the intent target. If there was no thought then the intent is void. Under, the void case we would need to develop a separate rule. My first guess would be to suggest a median citizen interpretation at the time of passage as the intent target.
Then I argue there will exist some “result.” That is, once the court rules something will happen. We would compare the result with the intent target to see how closely they match. We should, it seems, be able to formalize all of this.
The judicial rule can be defined as min d(I,R) where I is the intent target, R is the result and d is a distance function mapping result-space into the real numbers.
There is obviously some question about how d will be defined. Whether result-space is homomorphic to some Cartesian Product of real numbers, etc
However, at first glance this appears to be a rigorously definable question and thus has some logically correct answer.
Ok, now edumacate me.
Felix Salmon has a rundown of the proposals to help lower unemployment, and he finds them mostly unsatisfactory. So he has a proposal of his own; increase minimum wage and strengthen unions:
Without unions and minimum-wage laws, corporations compete on who can pay the least. With them, they compete on who has the best employees and they invest significantly in those employees. Which is exactly what we want, especially since raising the minimum wage is unlikely in and of itself to increase unemployment visibly.
I think this is a bad idea. First, increasing the price you pay for a worker does not on it’s own increase the marginal productivity of that worker or the marginal return of investing in their human capital. The only way this happens is if increasing wages lures higher skilled workers into the labor pool and pushes lower skilled workers out. This is not, I’m sure, what Felix has in mind.
It’s also worth noting that despite the common assertions to the opposite, there is still a consensus among labor economists that increasing minimum wage causes disemployment. And equally important, a strong consensus of labor economists believe that the EITC is a better way to increase income for low income workers. According to the EPI survey of labor economists linked to above, 71% believe that EITC is the best policy to address the income needs of poor families, while 21% send general welfare grants, and only 6% said a higher minimum wage. A lot of this probably has to do with employment effects. In contrast to a higher minimum wage, 64% of economists said an EITC will increase employment, and 34% said it will lead to no change.
Now you can believe that the parameter that relates the minimum wage to employment changes over time and space, for instance you might think that the parameter was actually positive in the fast food industry in New Jersey at one point in time. But the fact remains that a strong academic consensus finds that EITC is a more efficient and effective way to improve the incomes of poor people. Rather than take a gamble that the outside of consensus position is correct, and that it won’t cause unemployment, why not support the policy that is actually more likely than not to increase employment?
There is no Dark Age of Microeconomics, so there’s no reason to doubt economists on this one.
Unlike a lot of my associates I really enjoyed Jonah Goldberg’s Liberal Fascism. It was hard headed sure, but once you accepted it as a polemic piece, I found its central case well argued. Just because you know a lawyer is slanting everything he says to defend his client doesn’t mean that his general thesis isn’t correct or interesting.
All of that having been said, I wonder what Jonah’s reaction is to this
Which pretty much pushes all of Jonah’s Fascism Alert Buttons
- Identity Politics
- Action over Ideas
- Will to Power
- Cult of Personality
The liberal media asks Sarah Palin what her policy is? Her policy is to relegate the liberal media to irrelevance. And the sooner, the better.
I wanted to get something out quick about the USDA’s soda report and its implication that a modest soda tax could cause children to loose 4.5 lbs.
I assumed that the 4.5 number came from an equilibrium METs analysis. Basically to do that you note that living one’s life requires burning some number of calories per pound of body weight. The units we use are Metabolic Equivalent Tasks (METs).
Then the embarrassingly simply model says that if we reduce calories by X we will get weight loss. However, as the body looses weight it will burn fewer calories in daily activities. Thus calories-out will be reduced. This rate is determined by your METs assumption.
At some point calories-in and calories-out will re-equilibrate and we think of that as net equilibrium weight reduction. Now setting aside all of the endogeneity / partial equilibrium problems with this simplistic analysis, the USDA report doesn’t even go that far.
No what it does reads to me as unthinkable. They multiply 43 calories per day times 365 days a year and divide by 3500 calories per pound of fat to suggest that children will loose 4.48 ~ 4.5lbs of fat per year!
Per year my friends. Per year!
I often sense from the comments that the extremity of these types of claims fails to sink in. Lets just do a little abstraction.
So, child is loosing 4.5lbs per year. Mind you child’s weight is nowhere in this analysis even implicitly. 4.5lbs a year – that sounds pretty good. Indeed at that rate an eight year old formerly soda guzzling kid could loose 45lbs of fat by her 18th birthday.
But wait a second. What if our child only has 15 lbs of excess body fat. What then. Does she become gymnast level ripped, incapable of menstruating?
Does she fail to grow? We know that mass balance is a fundamental law of nature not a social convention. The laws of physics don’t know if she’s “too thin.” If the calories don’t come from fat, of which she only has 15 lbs, they have to come from somewhere. Perhaps, her growth is permanently stunted? Perhaps, her brain development is impaired? Perhaps she suffers all of the maladies associated with underweight childhood development?
All of these thing are possible from persistent caloric restriction but they seem a bit strong as a result of a soda tax?
“Well that’s taking it to extremes.” you say. This analysis doesn’t work at the extremes. Its just about averages and point estimates.
Here is the important point, however: this analysis makes no distinction between moderate and extreme extrapolation. There is no “distance from baseline” component.
The fact that you know this analysis doesn’t work in extremes means that at minimum the model is imprecisely constructed with relation to scale. Further, I would add, there is simply no reason to assume that the model works over “reasonable” scales but simply fails over extreme ones.
The model can, I would argue does, begin to breakdown as soon as the first gram of fat is lost.
This is a large part of why weight loss science looks and acts like voodoo.
Someone takes a really complex equilibrium system. They indentify a property or set of properties. Re-inserting that property into the entire system is mathematically intractable and indeed, we don’t completely understand the system anyway.
So the analyst linearizes the assumption. If all else is held equal they say. Yet, the scale over which the human metabolism will match a linear approximation is tiny. The body immediately acts to undue whatever effect you tried to create.
So maybe, maybe if you are lucky and you hit the body with the equivalent of sledge hammer’s worth of adjustment you can temporarily squeeze out five, ten maybe even 20 lbs of pure adipose tissue. However, the metabolism soon adjusts and acts to overcome even that enormous effort.
This is the core of the problem we face. Any effort to address this problem that does not recognize this difficulty is doomed to failure.
I cannot beat this drum enough, because people continue to try these types of methods, continue to fail and continue to be shocked at that failure. And, even if that type of hamster wheel insanity was ok as a private choice, if definitely shouldn’t form the basis of public policy.
Let me say will all the force I can: We must not pick winners and losers based on analysis that fails to recognize key elements of the public problem.
It is deeply, deeply irresponsible to do so.
Note: A previous version of this post attributed the report to the FDA when in fact it was from the USDA
I think it is clear to all but the most dogmatic of anarcho-capitalists that unemployment insurance is something that is worth having around for (if anything) humanitarian purposes. We also know that there fairly well-understood moral hazard and adverse selection problems preventing the private sector from providing this service (on a comprehensive basis).
However, governments are not immune to these problems, and must take care to build unemployment in a way that minimizes these problems. According to modern economics*, the US’ system of unemployment fails in two (major) ways:
- Principal budget constraint. Since states are the entities that administer regular unemployment, and they are unable to run persistent deficits, this creates a (relatively small, as we know the Federal government will bail out states) problem of uncertainty…and also forces states to operate in a decidedly pro-cyclical manner in other areas of policy.
- Replacement rates are too low. In the US, for credit-constrained agents, UI only replaces around 50% of previous income on average. Of course, contracts don’t automatically reset at the onset of recession, so bills still come in at 100% of the previous income expectation…which is of course a problem that is exacerbated by the credit constraint. There is also a case to be made that duration is too short, and the phase-out is too abrupt.
The answers to these dilemmas are rather obvious: build a better mouse trap. Unfortunately somewhere along the way, the idea that unemployment is a great ‘counter-cyclical tool’ was popularized (can’t imagine by whom)…which then, of course, made the whole concept of unemployment insurance part of the political game. The last thing you want to do if you wish to spend any money is to tie your concept to the concept of counter-cyclical fiscal policy.
It is rather dubious whether UI (as it exists in the US) is actually a good counter-cyclical measure, but one thing is certain…separating the concept of unemployment insurance from the concept of “recession-fighting fiscal policy” would be better than the alternative. Making UI longer-lasting, more automatic, means-tested, and gradually fading in tiers would be better as well.
Kevin Drum points us to a column in the Washington Post discussing options available to the Fed should the risk of a dip into a second recession become clear(er?). Unfortunately, he doesn’t seem to have a solid grasp on the role of expectations in the monetary transmission mechanism…nor does he understand what a grave mistake the decision to pay interest on reserves was:
They might strengthen the language in their policy statements! That oughta do it! In fairness, there are a couple of other ideas under consideration that are a bit more concrete, but not, unfortunately, much more ambitious.
The Fed operates almost entirely on the expectations of its future actions. This is one of the major arguments against the Fed pricking asset bubbles. While I do agree that equating low interest rates “for an extended period” with accommodative monetary policy (which I don’t believe is Drum’s argument) — explicit commitment has been something that the Fed has been lacking throughout the recession. The problem is that the dual mandate creates a moving target that allows the Fed to do nothing and still have justification for its decisions…
Say the Fed decides to reverse it’s current confusion, and explicitly commit to an NGDP target. In doing so, the language of that commitment is the key to orchestrating the policy successfully.
Further into the article, and brushed aside by Drum, is this:
Another possibility would be to cut the interest rate paid to banks for extra money they keep on reserve at the Fed from 0.25 percent to zero.
An excellent idea. The monetary base has more than doubled, most of that extra cash takes the form of excess reserves that are being held at the Fed because of the interest rate policy.
Fairly bare-bones monetary theory (MV=PY) tells us that a doubling of M will cause hyperinflation for nearly any given V. Taking expectations into account, then you would have to add the “permanent” qualifier, but the result would be the same. This would happen despite a broken baking system (see Zimbabwe). Unless, of course, the Fed explicitly incentivizes banks to hold reserve balances, which it has…and has even admitted that their interests in doing so are to control inflation. Well, Fed…could we have a little bit of inflation now?
The third possibility is basically to reopen TALFs to buy mortgage securities to attempt to keep long-term rates low…which is the “QE” that we’ve seen so far. How about buying bonds off the public (i.e. You and I) and paying for them with cash?
In summation, the article actually does highlight some important things that have been absent. Could this be a sign of the doves at the Fed winning? Something else to think about: fiscal policy is paralyzed, is this bolder language a result of the acknowledgement of that fact?
In other news, seasonally adjusted unemployment claims fell by 21,000 last week.
Sullivan points us to an USDA study suggesting that a 20% soda tax could cause the average child to loose 4.5 lbs. In particular the study suggests that such a tax would work by reducing caloric intake by 43 calories a day.
Now before we get into the details of the study lets run this by the well established “Hooey Limit Test.” I say to you, “hey looking to loose that last stubborn five pounds, just consume 1/3 less of a soda per day. Not a whole soda mind you, that’s worth a full 15 lbs. Just leave the bottom third in the can.”
Does that sound reasonable or like a bunch of Hooey to you?
If that’s the world we live in then how are we to make sense of the endless struggles that millions of women (and men) go through to loose five pounds, say nothing of a greater battle against obesity.
As a side note, this is what makes me skeptical of explanations like “sugary drinks” for obesity. Wouldn’t someone have noticed by now that people who don’t like sugary drinks are never fat? Wouldn’t that be everywhere? Its not a hard observation to make.
Whatever the secret to weight loss is, it must be elusive. It must be something that is either difficult to find or difficult to execute. Otherwise people would have succeeded by now.
Now, on to the study. What it does is pretty straight forward. They look at consumer behavior. They then estimate the change in consumer purchasing behavior that would come from a change in soda prices. How less soda would consumers buy. How much more bottled water, milk and juice.
They then net out the calories. Since, soda is more calorie dense on average, substituting away will cause a reduction in calories. They then turn caloric reduction into a equilibrium reduction in weight.
Regular readers will note that the immediate problem is that they assume consumption is exogenous. That humans choose their caloric intake for some set reasons unrelated to body composition. They then independently choose their caloric expenditure. We subtract one from the other and composition pops out as the residual.
Now, obviously no one, not even the authors of the study believe that this is accurate in real life. At a bear minimum humans are both aware of and care about their body composition. Getting fatter is costly and so, as we observe, will cause people to take actions to loose weight.
Indeed the FDA waives all these concerns away in typical academic fashion
Assuming that everything else remains equal (e.g., constant physical activity level and no shift to foods other than beverages), a reduction of 3,500 calories leads to a 1-pound loss in body weight
Which is akin to saying that assuming no insurgency the wars in Iraq and Afghanistan should go swimmingly.
Personal attempts to control body composition obviously affect the results in a feedback mechanism that is familiar to economists. However, even deeper than that body composition is critical to the survival of all animals from nematode worms to Blue Whales. In response animals have evolved mechanisms for regulating that composition. One of the most powerful we are all familiar with, its called hunger.
But hunger is not the only one. There is satiation or fullness, restlessness, exhaustion, and all the variants there of. These emotions are balanced through a complex set of hormones which in a healthy adult causes calories-in to be matched to calories-out with a less than .5% error.
When we see obesity, something must have gone wrong with that mechanism. Now Bob Lustig suggests that drinking soda is what goes wrong, but because of the effect of sugar on insulin levels. Gary Taubes says carbs generally. Seth Roberts says our physiological association of calories with taste. David Kessler says food industry generated hyper-palatability. Until repeated large scale studies showed otherwise the official government line was high percentage intake of fat.
My readers know that while I am sympathetic to the carb, read insulin, based theories I am not even convinced that the culprit is nutritional. Every possibility from endocrine disrupters to biological agents to autoimmunity needs to be taken seriously.
What we do know, however, is that something has gone wrong metabolically. And the key to ending obesity is finding out what that something is and fixing it.
In any case its not as simple as adding up beverage changes and then netting out calories as if a change in beverage calories has no feedback mechanism against composition or calories expended.
Note: A previous version of this post attributed the report to the FDA when in fact it was from the USDA
Curt Doolittle does me the honor of offering an essay eviscerating my post on atheism. I thought I owed at least a bit of a reply. Curt, I am not pretending to respond to all your points. There are, however, a few I want to say something about
The question [Ron Rosenbaum is] really asking is “what are the implications for my anthropomorphic anthropocentric view of the universe. In other words, how can I make this universe about the creature man rather than a universe in which man is not central, and in fact, may be an improbable accident? That’s the question he’s asking and the problem he’s seeking, becaus that is the comfort that religion brings to man: anthropocentrism. But that anthropocentrism also adds value to political discourse. Because ANY ANSWER includes a proscription for human behavior. I think we forget too often that the purpose of religion is to provide an inexpensive means of proscribing behavior for humans who must coexist in large numbers. Externalizing requirements as scriptural is simply an inexpensive means of lawmaking.
So it’s important to note that Ron is arguing not from the religious point of view but from the Agnostic point of view. In my response to Ron I wasn’t arguing about whether or not religion is right or wrong. I was arguing that one can meaningfully be an atheist. That atheism is not, as Ron suggests, a faith in disguise.
So religion might do all sorts of things but none of those things are germane to our particular disagreement.
“Gods exist like numbers exist”.
They exist because people act like they exist. People use them in the same way: to calculate. To reason. To estimate. To judge. We lack the knowledge, the experience, the perception, the time and computational ability to exist as a polity in a market, in a division of labor, without them. The question is the form of their existence.
Right, so I am not exactly sure what’s being argued here. Numbers are a logical construct. They exist as a logical construct independent of whether they have any impact on the real world.
Now, it’s a very interesting question why the Unique Complete Ordered Field seems to have such a tight analog to the relationship between measurable quantities but the Real Numbers would be the Real Numbers whether or not we could use them for anything. In the same way the Cyclic Group of Order 4 is the Cyclic Group of Order 4, whether or not it’s useful for anything.
Moreover, I think most theists are not making a mere logical claim but an empirical one. That is, that God or Gods have some identifiable impact on the world that we inhabit. If all you want to claim is that God is a useful construct for solving some sorts of problems and then you proceed to show that usefulness, then I am satisfied. I don’t think that clashes with my belief set in anyway. I would submit though that this is not the claim being made by most theists.
Science is a formal process for discovering patterns and replicating them. It is a process. That is all. What we know from science is that which is falsifiable – the negatives, not what’s ‘probable’ – the positives. Science is largely eliminative. But scientific knowledge is constantly open to further revision, greater explanatory power, and the elucidation of error. It is constantly being disproven. Contrary to our religious wisdom, science is egregiously more perishable. In economics in particular, vast swaths of our knowledge is patently false. THe entire DSEM model appears to be false.
Not to get too, too fancy town as some might say but this is a sort Popperian perspective that I do not hold. I take a Bayesian view that says that we have evidence which allows us to predict future evidence. That’s it.
We are not whittling away down to some fundamental truth nor are we evolving along a path to greater and greater truths. We are refining probabilistic estimates.
Does there exists some truth beyond this. Is the computer in front of me in some sense “really there.” I don’t know. I am not even sure its a meaningful question. What I do know is that when I hit the keys I expect something to happen and if that something doesn’t happen I am confused.
Further, if we were able to build a system of “knowledge” such that we were never confused. If everything always happened as predicted. If no matter how deep or how wide we looked we always got the picture we expected, then I would conclude that the scientific enterprise was done.
I am glad to see that Felix Salmon likes my idea to let Google, Walmart, and other non-banks into the banking game. He has a couple of follow up questions that I’d like to answer though. First he wonders about the details of the 100% reserve requirements:
It’s also worth asking exactly what Ozimek means by “100% reserves on deposits.” What counts as “reserves”? Would uninsured deposits at banks count? How about money market funds? Would they all need to be available on demand at par? And would the reserves count as the cash reserves of the parent company for accounting purposes? If so, could these banks ramp up against their current cash reserves without having to make any extra reserving actions at all, happily lending out everything they take in as deposits?
My general answer to detailed questions like this is that we should do whatever needs to be done to ensure that in a worst case scenario the money is there at par on demand. This probably means that deposits have to be put in some sort of a lock box that means it can’t be replaced with the companies existing cash, and in a bankruptcy event goes to the depositors and not creditors or shareholders, and can’t it be lent out… or maybe just money markets, I don’t know.
Felix also wonders whether the necessary failure that comes with an innovative system would be a bad thing:
But the problem is that if you want to encourage innovation, you also have to encourage failure. So the question I have for Ozimek is this: do you want to see a payments system fail? And how do you build a system which can cope with such a failure, if you’re not keeping a close regulatory eye on it?
I think failure is a bad thing in a financial system based on borrowing short and lending long, because that is the mechanism whereby self-fulfilling panics lead to bank runs. In other industries I don’t think failures are a problem. Think about other network industries where incumbents die or new entrants fail, like internet providers for instance. AOL was a dominant firm in a network industry who saw it’s share of the market slowly whither away, and other big players have gone the same path. Upstarts have likewise come and gone quickly. There were no panics, and the failures here were a good thing.
Because of the economies of scale in network effects, these battles will be fought slowly as upstarts slowly gain market share. You can’t put duopolists like Visa/Mastercard out of business overnight, and there won’t be a sudden unexpected Wile E. Coyote moment where they look healthy one day and everyone realizes they’re insolvent the next. The only reason failure are bad is if they can lead to panics, and I don’t think that is the case here. Thus I don’t see the need to regulate the system to ensure that it can cope with failure any more than we do in other industries.
What’s most important is to carve out a set of rules for these institutions which are not primarily in the business of borrowing short and lending long that makes banking so prone to runs. I think there is a potential for new model of banking where profits come from advertisements for companies like Google, and bringing people into the store for companies like Walmart, and other ways I’m sure we can’t even imagine right now. I see no reason these institutions should be held to the same standards as banks which are susceptible to financial panics. The rules should allow innovation, as Felix points out, and also market entry. The Walmart example shows that they don’t.
I hate to quibble with the esteemed Calculated Risk but this just doesn’t sit well with me. His reader Ann crunches so BLS data:
The first finding is not too surprising for the longer term unemployed:
the average length of unemployment is always higher for the older cohort (45+) regardless of the level of education.
The 2nd finding is a more surprising:
Generally the more education an individual has, the higher the average length of unemployment.
For the long term unemployed, it is better to be younger – and have less education.
Ann adds these comments:
More education = longer unemployment if the job is lost. The upside is the more educated the worker, the less likely they are to lose their job, but the downside of being more educated is that once they hit 45 if they lose their job, they are toast.
So what does one do with the over-45s with a BA or higher? … The current mantra is ‘more education is good for you’ but this shows that it can, in the long run, hurt you.
It is tough to find a job, especially if you are older and better educated.
I don’t know if its tougher to find a job. Its just makes sense to keep looking longer.
Older and more educated workers will tend to be higher skilled. They will command higher wages if those skills match up with the right job.
If you are young and uneducated then you are essentially raw labor. You are likely as good at one thing as the next and it makes sense to take whatever comes your way.
Its important to understand these two facts are not mutually exclusive
1) The duration of one’s unemployment is largely determined by personal choices
2) One’s economic situation during a recession is mostly determined by macro-economic factors.
This is because a job is not a job. If the pool of available jobs shrinks dramatically then you as a worker are unambiguously worse off and there is absolutely nothing you can do to change that.
However, given the small pool of jobs one can be more or less picky and that will make a sharp difference in the length of your unemployment. It may or may not make much difference in your net material well-being.
I have the urge to use this as an opportunity to launch into an extended discourse on “what is a job,” but out of mercy I will hold back.
This has made the rounds a bit but I think the core message has yet to sink in. Despite, the supposedly dire fiscal situation the US finds itself — the long-term entitlement problems, an aging population, etc – doing absolutely nothing would close the long run fiscal gap.
Now of course no one believes that we are going to do absolutely nothing. Some form of both Obama and Bush tax cuts will be extended. The Alternative Minimum Tax will be “fixed.” The reimbursement caps to Medicare docs will expanded.
However, understand this: a problem cannot be worse than its cure.
If these things: ending tax cuts and holding to reimbursements caps are a cure for our budgetary ailments then they represents the absolute worst that our problem could be.
Said another way, add up the pain from these few measures, that’s the maximum pain it would take to fix the long term budget outlook. I say maximum because its conceivable that we could come up with less painful solutions.
A VAT for example, might cause less pain than cutting Medicare reimbursements. It might not. But, in any case if the problem can be fixed by cutting reimbursements then the problem cannot be worse than cutting reimbursements.
Not to go all Robin Hanson but the core issue is that ruminating over the debt makes people feel very responsible and signals their depth and long term outlook to others. You see I am very intelligent and responsible because I don’t just think of the immediate impact, I think of where America will be in 75 years.
Notwithstanding the inanity of 75 year projections of things like “excess cost growth” solutions are much more palpable if you can frame them in terms of things that are right in front of your face.
I.E. what would it take right now, here, today, to fix this problem. Elmendorf says it would take just about nothing. Then just about nothing is how bad this problem is.*
I realize its nothing plus interest but as long as the nominal US growth rate exceeds the Treasury interest rates then the debt to GDP ratio will stabilize.
During the debate over interchange fees Felix Salmon expressed skepticism that market entrants and disruptive technologies could ever provide serious competition to the Visa/MasterCard duopoly. We already know Walmart wanted into the banking game, and now we have another potential entrant: Google.
They have recently put out a Chrome browser extension that allows brick-and-mortar retailers to use Google Checkout, their online payment system, with customers using Android phones. This still uses a standard credit card, debit card, or other Paypal type account for funding, but it is not hard to picture Google becoming a depositor or issuing their own credit accounts. Of course regulatory barriers would prevent this, like they did with Walmart.
So here is my proposal: allow any company to become a bank with a very minimal regulatory barrier if they do 100% reserves on deposits. This means people will know their money is there whenever they want it, which will make the “bank” safe from runs, which will eliminate the need for FDIC insurance or heavy handed regulation.
It is easy to imagine Google offering the service for free and making a profit by selling ad space that loads onto customer and merchant screens while the transaction loads. Is there anything going on here more costly than Google maps? If they can profitably give that away, than profiting on this should be a cinch.
This reenforces my optimism that we could deregulate our way to a better and more competitive banking system, and that technology and competition are the best option for reducing interchange fees.
Ron Rosenbaum launches a long and varied attack on the New Atheism. His complaints are many and his tone heavy, but I don’t think I do him much injustice by saying his central claim is this:
Atheists have no evidence—and certainly no proof!—that science will ever solve the question of why there is something rather than nothing. Just because other difficult-seeming problems have been solved does not mean all difficult problems will always be solved. And so atheists really exist on the same superstitious plane as Thomas Aquinas, who tried to prove by logic the possibility of creation "ex nihilo" (from nothing). . .
In fact, I challenge any atheist, New or old, to send me their answer to the question: "Why is there something rather than nothing?" I can’t wait for the evasions to pour forth. Or even the evidence that this question ever could be answered by science and logic.
I hate to be overly coy here but this really does depend on what Rosenbaum means by “why” and “something rather than nothing.”
When we seek to explain we typically engage in two things
1) We model. We lay down a set of rules or principles such that given facts A and B, fact C must be true.
2) We narrate. We tell a story about how Event X lead to Event Y and then on to Event Z.
If Rosenbaum means that he wishes us to explain the “universe” then we should talk about the properties of high density energy and the creation of bubble universes.
Or, we can tell a story about 11-dimensional membranes which may have collided and produced everything that we could ever see.
However, I think the Rosenbaum wants more than that. I think he doesn’t want to stop at our universe but wants to ask – from the outside of everything in the moment before the first event – why did it become so?
This, however, is a question that makes no sense in the context of our standard system of explanations. Outside of everything there is no A and B which could necessitate C. Before the first event there is no X and Y that could have lead to Z.
This is not, as Rosenbaum suggests, a mystery. It is a bad question. It asks in effect “what is the structure of a structure-less thing.”
Now I don’t doubt that Rosenbaum feels “mystery” and “wonder” when he contemplates the ultimate why of existence. The lack of a model or story generates a thirst within the curious that begs to be slaked.
It does not, however, suggest that such a thirst is slakable. A child might feel that there is some sense to be made of the statement “This sentence is a lie” A budding mathematician might feel that she ought to be able to determine whether Russell’s self-referencing set is really a member of itself.
However, there simply is no sense to be made of these propositions. Equally, there is no sense to be made of the question “why is there something” that is unless Rosenbaum is using different definitions of “why” and “something.”
Now, if I don’t believe that science, reason or logic can answer “why something as opposed to nothing.” Then what do I mean when I say that I am an atheist?
I mean that I believe all answerable questions can be answered with science, reason and logic. Said slightly more formally, there exists no question which can be meaningfully answered that cannot be answered by science, reason and logic.
Lets return to Rosenbaum’s query to see how that works. He asks “why is there something” The theist might answer that God created the something. But, then the theist must be referring to a limited set of something. Indeed, typically we imagine the theist as referring to the physical universe, space, time, etc.
In this is the case the God hypothesis is matched by a number of scientific hypotheses including membrane collision.
However, if Rosenbaum really means an all-inclusive something, then he is referring also to God himself. The answer, however, that God created God is self-referencing and as nonsensical as “This statement is a lie”
So, science, reason and logic cannot answer the deep “why something” question but then neither can theism and this is because the question is itself nonsensical.
Now, does my belief in science, reason and logic constitute a faith?
First, I have evidence for the belief. Predictions based on science, reason and logic tend to come true.
Indeed, I am not currently aware of a case where they have failed to come true and no subsequent reasoned explanation was found. So the trio of science, reason and logic carry with them an incredible track record.
However, this track record could plausibly come to a halt. A pillar of fire could appear before me and declare that he is the lord. He could then go on to predict the violation of the laws of physics and subsequently show them to be false.
He could show me that despite all of my reasoning to the contrary that 2 + 2 = 5, that the logic I depend on explains nothing and that my confusion of this moment tells me nothing about my confusion in the next. Every prediction I make would have results no better than chance but every prediction the pillar makes would come true.
If the pillar then told me that it was God, that it stood outside of reason and time and that it was the prime mover unmoved, I would be persuaded.
Needless to say, I do not expect any of this to happen. Indeed, I would bet my life against fairly small sums that it will not. And, that is what it means to be an atheist. I can imagine evidence that could convince me that I am wrong but I am confident that this evidence will not be forthcoming.
Hat Markedly Tipped to Julian Sanchez
This article by Andy Grove calling for industrial policy to revitalize our economy has been making the rounds in the econ blogs. I am surprised that so many bloggers haven’t taken their kid gloves off with this article. Here’s Rajiv Sethi:
I am not entirely convinced myself, and suspect that he may be underestimating the likelihood (and consequences) of cascading retaliatory actions and a collapse in international trade. But the argument must be taken seriously, and anyone opposed to his proposals really ought to come up with some alternatives of their own.
And here’s Mark Thoma:
I am not convinced either, but the problem of where good jobs will come from in the future is an important concern. If the new jobs that are created are not as good, on average, as the jobs being lost, anything could happen.
These are extremely mild semi-rebukes, and ideas like Groves has offered deserve stronger denunciation than that. To get a sample of the weakness of his argument look no further than how seriously he deals with the possibility that the tariffs he calls for will lead to a trade war (emphasis mine):
The first task is to rebuild our industrial commons. We should develop a system of financial incentives: Levy an extra tax on the product of offshored labor. (If the result is a trade war, treat it like other wars — fight to win.)
This a serious problem with his proposed policy and his defense amounts to glib sloganeering. What does it mean to fight a trade war to win? To impose tariffs so economically damaging to our trade partners that they kowtow and agree to accept a status quo where we have more protectionist policies than they do? This certainly doesn’t sound like a recipe for getting out of a global economic slump.
With all do respect to Sethi and Thoma, “I am not convinced” does not sufficiently convey the obvious wrongheadedness of Grove’s proposal, and they should call out this thoughtless defense of protectionism for what it is: a really terrible idea that is wrong and dangerous.
In the spirit of the fourth of July, I’m going to take some time to draw attention to a local (Omaha, NE) matter stemming from the holiday.
“The fireworks being sold were over three times the legal size,” Heine said. “We are investigating whether the employee was acting on his own or with the knowledge of the stand’s owner.”
Heine said the fireworks stand was authorized to sell Class C fireworks, which are labeled with the number 1.4.
However, the fireworks in question were more like Class B fireworks, which are used for large shows and have a 1.3 label.
“Part of the problem is that it appears the fireworks were repackaged with a 1.4 label to look as if they were legal consumer fireworks,” Heine said. “These illegal fireworks could have done some terrible damage.”
The illegal fireworks were sold “under the table,” Heine said. The employee would ask people if they were looking for something more powerful.
Fireworks are, of course, illegal in a very, very confusing way in Nebraska. Each city has it’s own ordinances, which have to comply with a myriad of restrictive county laws and also state laws. I’m not exactly sure how it all works; but the gist of it is that most places you go in Nebraska only sell weak fireworks.
Now, as illustrated by the great Joe Dirt at the link above, there is obviously great consumer demand for more powerful fireworks. Unfortunately, this bust is being interpreted as a reason to “step up enforcement”. Why? Because the status quo has inertia, no matter how misguided the framework may be.
The current laws in Nebraska (and Iowa) incentivize people to do one of two things. Either people travel to a surrounding state with no ban on firework sales, or they sell them anyway, packaged as legal fireworks. The former requires a lot of man-hours and energy to enforce (not to mention is highly inefficient in the economic, and literal sense), and the latter makes a dangerous product even more dangerous.
What would be an relatively cheap, effective, efficient, and safety-enhancing way of remedying this situation? How about a legal market?
Preventing a tax on carbon will not get you a free market energy industry. Instead, it will get you inefficiencies like this:
Abengoa SA was offered a $1.45 billion loan guarantee by the U.S. Department of Energy to build a 250-megawatt solar plant in Arizona, and Abound Solar Manufacturing was offered a $400 million loan guarantee toward two plants where thin-solar panels will be manufactured.
The guarantees through the Recovery Act and other measures are expected by the awardees to create more than 5,000 jobs, according to a statement from the White House.
Obama during his weekly address said the investments will help the country establish leadership in “cutting-edge” solar technology, and create jobs to aid economic recovery efforts.
A transition to a clean-energy economy and doubling use of renewable-energy sources including wind and solar power “have the potential to create whole new industries and hundreds of thousands of new jobs in America,” said Obama in the address.
H/T Arnold Kling
Do read Brink Lindsay’s review of Arthur Brooks in the American Prospect. His criticism is similar to the case Jon Stewart made in his interview with Brooks: there is no us vs them, and everyday Americans largely get the government they want. I think Brink and his forthcoming coauthor Will Wilkinson are laying the groundwork for a vast libertarian co-optation of liberals, and what you see here is Brink setting the tone. My secret suspicion is that Brink and Will are working on Free to Choose or Capitalism and Freedom for liberals. That is a book that needs to be written and I am excited to see the result (what’s the due date, Will?). I would be interested to see the result of a similar project that had Yglesias or other like-minded liberal as a co-author.
My only disagreement with Brink’s review is a minor quibble:
“ordinary voters are more likely to say a price increase was caused by intentional gouging rather than the interaction of supply and demand”
There isn’t any distinction between these two concepts: intentional price gouging is the interaction of supply and demand. Price gouging is a rapid rise in prices in response to a shock to supply, demand, or both, which seems unfair to many people. I don’t think ordinary voters and more economic literate types largely disagree about causality, but rather about desirability.
Like I said, minor quibble. Go read Brink’s piece.
I find myself very much in agreement with Paul Krugman‘s op-ed yesterday*. I think the case for short term stimulus, or rather short-term anti-contractionary spending, and long-term austerity is fairly solid. I do think we should be concerned about confidence, and that the small risk of sudden flight from treasuries should be a variable in our optimal policy function, but don’t think these make for a credible case against short-term stimulus.
Here is something I don’t understand about austerity now proponents: is cutting short term spending a second best alternative to fixing the long-term budget problem? Or does the optimal policy response include BOTH short-term spending cuts and a long-term budget fix? If the answer is the latter, than I want to know what problems aren’t solved by fixing the long-term budget problems that also require short term cuts?
As near as I can tell, you need to be against all stimulus all the time in order to support short term spending cuts. Russ Roberts is one of these, and Kevin Murphy made a good case some time ago as well. I think it’s an intellectually defensible position, and I understand it. But if we don’t fix the long-term problems, then as far as confidence and bond vigilantes are concerned, short term spending is completely beside the point. The damages to a worst case scenario of stimulus spending pales in comparison with the worst case scenario if we don’t fix the long-term budget, so even the biggest stimulus critic should agree that stimulus plus long-term budget fix is a second best policy to a long-term budget fix alone, and either should be preferred to doing nothing.
I think the best case against short term stimulus is to say that the government can’t be trusted to combine a serious long-term budget fix with a short term stimulus package. This means that no matter what they promise they will really pass a stimulus package without long-term cuts, which it will signal to the market that they are even more cowardly with respect to addressing the long-term problems than we first thought, and thus the fiscal position just got worse vis-a-vis politicians ability to handle it.
I think this is wrong though. If stimulus critics were to settle for a second best policy and use their political capital to haggle for serious long-term budget fix I think they could be successful. Like Krugman, Ezra Klein, and Brad Delong, most liberals already seem to agree on the need for long-term budget fix, and so conservatives should be able to get a good deal on a long-term fix that they like.
*I promise you I’m not just saying this in a weak attempt to win back some credibility in the eyes of Brad Delong
Scott Sumner has a recent post about two types of economists; economists that predict with models, and economists that infer predictions from markets. Tim Fernholtz picked up on it, but I don’t think that he grasps the gravity of what Scott was trying to say. Here is Tim’s conclusion:
But more than that, I think that when stimulus proponents cite these market indicators, is less an attempt to promote their strategy than to undercut the arguments of deficit hawks. Every time interest rates have bumped up at all, breathless fear-mongering ensues, but challenging those claims by pointing out the trending historic rate lows (and deflation) isn’t so much an endorsement of the indicators as a challenge to deficit hawks: Come up with serious arguments to justify your calls for austerity, since the human price we pay for waiting is to high for arguments that don’t even work in your own model.
This conclusion is kind of convoluted, but that is no matter. The point Scott was trying to make is that when Krugman makes correct predictions, they come from current market indicators…which means that policy lags don’t matter. In that respect, the $787 billion stimulus bill was never going to be successful, because it didn’t have any impact on inflation expectations within the first few days after it passed. You don’t need a fancy new Keynesian model for this — the information is contained in asset prices. Read that again: the $787 billion stimulus would have been just as effective if it had not passed as it was in the reality in which it did pass.
Krugman knows that fiscal and monetary policy “work” by changing expectations of future NGDP. Using this knowledge, he (correctly) predicted that fiscal stimulus would be less-than-effective, even though everyone else was making predictions based on when the money is going to be spent, how it’s going to be spent, etc. Yes, quite a few people were saying that it was going to be too small, and then making numeric predictions — like “it should be $2tn”. I bet that if expectations didn’t change in the immediate trading days of a $2tn stimulus, Krugman would have still been saying that the it was too small. I have much less faith in fiscal stimulus than Krugman does, but the thing is that Krugman’s models weren’t giving him any more intuition that markets were giving me (and I infer market predictions).
Scott Sumner is clearly looking for trouble.
P.S. See this post for my views on fiscal stimulus.
Matt Yglesias reminds us that government spending as a percent of GDP is a problematic measure of the real amount of government intervention:
…government spending share of GDP is a highly imperfect measure of the government’s role in the economy. For example, we could raise taxes by some gigantic amount and then use the funds to provide everyone with a basic health insurance policy. Alternatively, we could have a regulatory agency define “basic health insurance policy” and then make a rule that everyone who fails to purchase a basic health insurance policy has to pay a fine, and then raise taxes a modest amount and subsidize the purchase of basic health insurance policies for people who can’t afford it. There are pros and cons to each approach, but these are basic similar policies, despite the fact that they’ll lead to wildly different levels of government spending as a percent of GDP.
This I think highlights what will be a growing theme in governance: how can elected officials get done what needs to get done while hiding the costs. With respect to global warming, they have plenty of options. A recent piece by Vinod Khosia is a great example. The title promises a “simpler path to cutting carbon emissions”, in contrast to cap-and-trade or carbon pricing. I’ll let you be the judge of whether what Vinod delivers is more heavy handed than a carbon price:
Efficiency is another big lever. Why not set up a “fee-bate system” in which rebates go to those who purchase items that are among the most energy-efficient, be they refrigerators, cars or lighting, while the most inefficient pay fees to fund the rebates? Efficiency standards could update automatically every few years based on the top-tier performers, whose economics and consumer acceptance have been demonstrated.
And yet in the very next sentence he implores that “Most important, Washington must stop ‘picking winners’.” That’s a fairly stunning contrast there. We should stop picking winners, except of course for when we try and measure the efficiency of every consumer product and subsidize the “winners” of our efficiency contest. So just subsidize the winners, but don’t pick them?
Like Matt’s health care example, a carbon tax will show up as government taxing and spending, but energy mandates will not. For instance a proposal from Sen. Jeff Bingaman, which Vinod supports, mandates that utilities use a minimum amount of energy from low-carbon sources. No government spending or taxing there, and yet much more inefficiency. Somehow Vinod concludes that this is a “market-based” approach. This is about as market based as CAFE standards, which by the way are also “technology neutral”.
It should be more understood that the policies that have the lowest taxes or government spending per GDP are not the most efficient or market friendly ways to do things. Examples that show this are not hard to find; they are everywhere you look.
I, for one, am happy that the Fed has begun taking heat over its unwillingness to act in the face of strong evidence pointing toward a double-dip recession.
A few commentators are now pointing to the Fed’s erroneous policy action of increasing reserve requirements in 1937, which is quite refreshing, but unfortunately this error has already been made in our modern times — in October 2008, the Fed instituted a policy of paying interest on reserves. This has the exact same effect as increasing reserve requirements: it raises the demand for reserves, and significantly depresses velocity (V). This is, of course, self-evident from the ongoing inflated state of excess reserves, which has seen a recent rise. It is also evident in the recent fall in MZM. Just as well, market expectations of inflation are well under trend, and the interest rate on 10yr nominal bonds is 2.97.
I would like to think that these statistics, as well as the anticipation of a disastrous jobs report would calm the Fed hawks down, and I do hold onto the belief that the Fed wouldn’t let us free-fall off of a cliff. But one has to ask, will the Fed get the memo this time?
Update: Turns out procyclical behavior is everywhere!
Stories like this always make me think that in hindsight we will wonder how a growth bubble in China wasn’t obvious to everyone:
This is not how things were supposed to be when the $57-million airport opened in late 2007. Local officials were so confident that tourists would flock to this beautiful, mountainous county in southwestern China that they made the terminal big enough to accommodate 220,000 passengers annually, and built a runway capable of handling a 140-seat Boeing 737.
But only a few charters and budget carriers have established service here. A grand total of 151 people flew in and out of Libo last year.
Todays oversimplified recession narrative is one of the limitations of the free market and deregulation. This is inappropriate for a bubble that emerged in the highly regulated, highly subsidized, and highly government manipulated housing market. And yet it retains some aspect of truth in that many agents acted on what looks an awful lot like irrational beliefs, and governmental intervention was neither a necessary nor sufficient condition for the housing bubble. Here is my prediction: When the Chinese growth bubble bursts the oversimplified recession narrative will be one of the limitations of public works projects. Again, there will be some truth to this, but the lessons will be inaccurately applied to developed countries with governments that can be a) be held accountable by democracy, and b) have a lot more experience doing effective public works. And the narrative fallacy will have stuck again.