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At the simplest level, optimal intellectual property policy, like copyrights or patents, would ensure that any piece of art, invention, or intellectual property for which the total benefits exceed the total costs would be produced. But by their nature, these products also create monopoly power, and so the inefficient distortions that come along with that must also be weighed when designing optimal copyrights. One often ignored distortion is the wealth effect: if monopoly rents make a creator rich enough, they may create less and instead choose more leisure. If a musician makes enough money on their first few albums, they may choose not to endure the hard work of creating that 5th album.
This wealth effect distortion is not only true with respect to the intellectual property being created, but also complimentary products. For instance, if a band makes enough money on their album sales they may choose to tour less. This brings us to Pavement. In a recent issue of G.Q. Chuck Klosterman interviewed Stephen Malkmus, and it sheds some light on his decision to have Pavement reunite despite the costs and risks:
Why is Pavement reuniting now? Why is the band reuniting at all? I mention that this could actually hurt their legacy, since there’s a certain romantic cachet to never coming back. “Oh yeah, I know,” he says. I also mention, on the upside, that these massive sold-out concerts will allow Pavement to earn some of the money they never made when they were musically peaking. He says, “That’s a consideration.”…
“I think people really want to do it. I… I want to do it. I mean, I don’t want to be the person who only kind of wants to do it.” Malkmus laughs. He knows he is not being particularly convincing. “Our booking agent had a lot to do with it. He’s been pushing for it for a while. If we’re going to do it, everyone says this is a good time.
He is clear that the money is an important determinant, but it’s also clear there’s some hesitance. The rest of the band, in contrast, has been ready to reunite for years. This difference is easily attributable to the fact that the other members have had much less post-Pavement commercial success. For instance, the drummer, Bob Nastanovich, currently works at a racetrack. It is not hard to imagine less generous copyright laws which gives artists, say, $0.50 for every $1.00 they now make, which would have made Malkmus willing to reunite years ago. Instead, his ability to earn sufficient wealth from his solo work has allowed him to postpone reuniting until now.
Now maybe the Pavement story is more about the marginal returns to Malkmus for creating and touring new solo work versus reuniting than it is about the impact of his wealth on his willingness to reunite. But even in this case, this is still a good illustration of how copyrights can distortions in artist behavior and crowd out substitute goods that artists create. These distortions may be efficient (isn’t the existence of Pig Lib clearly worth the delaying of Pavement reunion tour?) but they are considerations rarely given when copyrights are discussed.
Whiskey made from the urine of diabetics, and the inventor that makes it gives it away to make a public health statement. Here is the website of the inventor, James Gilpon. He asks:
“Large amounts of sugar are excreted on a daily basis by type-two diabetic patients especially amongst the upper end of our aging population….Is it plausible to suggest that we start utilizing our water purification systems in order to harvest the biological resources that our elderly already process in abundance?”
One odd empirical regularity is that hard-nosed, pessimistic, realist, free-market guys like myself seem to spend more time agreeing with soggy Liberals than with the Conservatives who supposedly share our worldview.
Part of that has to do with the success of the general Libertarian project, as Scott Sumner outlines here. Many free market ideas have now simply become conventional wisdom among wonks of all stripes.
Partially , however, I think it is that many modern Conservatives intuitively base their analysis of the world on a philosophy is that anathema to my worldview. Their view is that if you take a responsible, measured, well-reasoned approach to the world things will work out. Failure is thus a sign that you have not done that.
My sense is that this is fundamentally crap.
First of all things are not going to work out. You are going to die. Your friends and family are going to die. Everything you care about and everything you ever worked for will be destroyed. This story, our story, only has one ending and it is death and destruction.
If you don’t recognize that, you are living in a fantasy world.
Second, even in the short term your plans almost certainly won’t work out. Most ideas are bad ideas and there are infinitely more ways to fuck something up than to get it right.
To wit, clean living is not some form of salvation. Nor, is prudence assurance that that you and your loved ones will be okay. Suffering is inevitable and the best one can say is that it hasn’t happened to me – yet.
Bad things happen because badness is the natural state of the world. If something good ever happens count yourself lucky and be aware that this too shall pass.
Thus, I see our proper mission as easing pain, where we can, to the extent we can, the best we can. This is best done up close and personal where you are mostly likely to quickly notice if your efforts to help are actually doing harm.
It is best done with a respect and reverence for the power of self-organizing systems, spontaneous order and the resilience of natural equilibria.
Its best done slowly, and in baby steps, building upon the wisdom of the past.
And, most importantly it is best done with humility, knowing that in all cases that, “but for the grace of God pure heartless luck, there would go I”
Its this last part that I think many modern Conservatives miss in their conviction that everything would be okay if it were for those meddling Liberals. Everything would not be okay. It never will be. If we do our best it might, and I mean might, be a little bit better.
A propos recent discussions on the utility of existence, Robin Hanson has some ideas about how non-existent creatures could be forced to compensate for the costs of bringing them into existence. He suggests slavery, debt, owning stock in the creature, contracts, producing creatures that have gratitude towards creators, producing creatures with shared goals as creators, and if creators have a preference for reproduction, then producing creatures like themselves which can reproduce may be incentive enough.
Gary Becker and Kevin Murphy have an old paper called “The Family and the State” where they discuss, among other things, how children can compensate their parents, which provides another means to add to Robin’s list. Their idea is that if parents are altruistic and would leave bequests to their children, then they can in effect force children to compensate them by decreasing bequests. They argue that this means that families that leave bequests do have the pareto efficient number of children.
The argument goes like this: imagine if potential children could compensate their parents for having them. In this world the number of children would be pareto efficient, since any child not born must not be willing or able to compensate parents more than the cost of having them. But parents with non-zero bequests can in effect compensate themselves for having more children by consuming their wealth instead of bequeathing it. This means that even if potential children could compensate parents for having them, then parents with bequests would be made worse off by such compensation because they can already set their optimal level of compensation by reducing bequests. Thus those with bequests do not need compensation from the unborn to produce the optimal amount of children. All of this, of course, requires that parents know utility of existing versus non-existing, since that would clearly be a part of altruistic parents’ utility functions. As I’ve argued before, this is problematic.
The implication that Becker and Murphy draw from this is that parents who do not leave bequests have no mechanism to compensate themselves for having more children, and thus they are under-producing children. They therefore conclude that poor people have too few children, and rich people have just the right amount. Go ahead, read that last sentence again.
Arguing for more generous mandatory vacation laws, Ezra Klein writes:
Which goes to the reality of the situation, which is not that workers and employers “flexibly choose an arrangement that works for them.” Employer-employee relations are rarely so idyllic. Broadly speaking, employees with the power to demand more paid vacation do so, and employees without the power to demand more paid vacation get less — or in some cases, no — paid vacation. A law guaranteeing paid vacation would primarily tilt the playing field toward low-income workers, rather than against them, as is the case now.
The problem with this is defining the employer/employee “power” in terms of vacation setting only. If an employer has the bargaining power negotiate a deal where the employees total compensation is less than their marginal product of labor , then they will have the power to negotiate lower wages when laws mandate less days of work. Or they can just take those hours back by negotiating longer work weeks, shorter breaks, working harder, or something like that. Unfortunately you can’t write a law mandates wages be equal to marginal product of labor, and there will be unintended consequences of any law that attempts to restrict hours whereby employers cash in their bargaining power in some other form.
UPDATE: And if you think only zany libertarians believe that labor markets work, here is Yglesias arguing basically the same thing several years ago.
Krugman, Delong and myself have taken to dragging up old posts from when this crisis began. In part, this is because as professors we have less free time to write new posts as the semester begins. In part, its because its fun to say “I told you so.” I would be lying if I denied that.
However, importantly its also because there were and still are multiple theories floating around about what happened. Those theories made different predictions about how the financial crisis would play out and by matching our predictions to reality we build evidence for or against individual theories.
This is how many, if not most, big scientific theories work. We are not performing repeated experiments to see if all life on earth evolved from single celled organisms. As far as I know no one has done a randomized controlled trial of Big Bangs to see if one produces a universe just like ours.
No, instead different theories yield different predictions for the evolution of observational data. By examining that data we build a case for a theory.
All of that is prelude to the following: My co-blogger Niklas quotes Brian Westbury in February of 2008
So I would say that today we have very low interest rates, we have low tax rates, and we are not moving in a protectionist direction. As a result, those conditions that have led to recessions in the past don’t exist. One last point: I know of no point in history where we have ever scared ourselves into a recession. It just has never happened before and I don’t think it will happen this time, either.
This was clearly a mistaken theory of how recessions come about. Others have spent time and energy dismantling this market-clearing fully supply-side theory of macroeconomics. I don’t need to do that here.
Niklas, however, sticks up for Westbury to some extent by saying
By late 2008, in hindsight, Wesbury looks like a fool…but how would he have possibly known that the Fed would let NGDP fall at the fastest rate since 1938 later in the year? As a counterfactual, had the Fed kept up expectations that it would hit its 5% NGDP growth target, Wesbury’s statement wouldn’t look so bad today.
Not to put too fine a point on it but Niklas – using the monetary based Scott Sumner theory of recessions – is saying: Hoocoodanode?!
Well, quite frankly, I could of knowed. I did know. And I tried to tell my fellow economists. At the exact same time Westbury was arguing his case, I said
Inflation is here, yes. Commodity prices in general and agricultural prices are skyrocketing. This is something that we talked about here last year. However, the Japanese Scenario is becoming more salient everyday.
As I say regularly to my colleagues, “This is not just sub-prime, this is not just housing. This will get much worse before it gets better”
[ . . . ]
[The Japanese] scenario must be avoided. The Fed should acknowledge that inflation is a problem but should begin to brace the nation for a policy designed to beat back a Japanese style depression without regard for the immediate implications for inflation.
In other words, my fear was that we were headed for a Japanese style depression and that the Fed needed to immediately abandon traditional monetary policy and rapidly loosen the money supply.
The fact that I was able to make these predictions, this early on, points out an important difference, perhaps the only significant difference, between how I see the world and how Scott Sumner sees the world.
Scott and I both agree that the real price of money increased rapidly during 2008 and this triggered the recession.
What I saw in late 2007 and accelerating into early 2008 was an unprecedented surge in Money Demand. That surge was unlike anything I had ever seen, heard of, or even imagined to that date. It was frightening beyond all measure and I thought that the Fed needed to move immediately into an extremely accommodative posture in order to avoid a liquidity trap and a crushing recession.
The Fed did not do that, we did in fact fall into a liquidity trap and the result was a crushing recession.
The story Scott tells is somewhat different. He speaks as if somehow the Fed either purposely or through causal indifference decreased the Money Supply – or to be more general, tightened monetary policy – in 2008. If this is how you see the world, then the ultimate cause of the crisis was the Fed and no one could have known in early 2008 that the Fed was going to behave in such a nonsensical way.
On the other hand, my contention was that the collapse of major financial firms and wide spread uncertainty about the price of important financial assets was creating an enormous upsurge in Money Demand. It was then obvious that either the Fed was going to have to act in a highly unusual way or the result would be an enormous recession and the possibility of a liquidity trap.
I think history bears out my view.
Settling this issue is important for how we think about handling future crises and how we work our way out of this one.
My view is that we stared into the abyss and to a large extent froze. The monetary authorities did not respond with sufficient speed and power to what was a clear and present danger to the financial security of the entire world.
In my view TARP was crucial but it came far too late and probably should not have been entrusted to Congress to begin with. The Federal Reserve should have moved immediately and unilaterally to prevent the failure of major institutions and runs on any part of the shadow banking sector. There are worse things in the world than moral hazard, we are experiencing them right now and it seems likely we will continue to experience them for near future.
In addition, the Fed should have rapidly and intensely expanded the money supply early in 2008, driving down rates across the yield curve.
Scott’s view is that if we just had the good sense not to tighten monetary policy none of this would have happened. Further, Scott thinks that solving this crisis centers around doing what he always thought should be done: adopting an NGDP target.
I am not fundamentally opposed to an NGDP target. However, I am a small “c” conservative by nature and am not fond of throwing in additional policy mechanisms, which no one can be sure will function how the designers intend for them to function.
Instead, I see the problem as a failure to recognize the enormous surge in money demand that was coming and thereby failing to accommodate it. Further, now that we have hit the zero lower bound I see a higher inflation target as the only simple and sure way out.
I think people understand what inflation is. Bankers and businesses get the basic idea of how inflation works and if the Fed says: look we are committing to a new inflation regime, then everyone will know exactly what that means.
This will allow the Fed to provide the monetary accommodation that should have been provided at the beginning of the crisis. It will also give the Fed more room to apply monetary accommodation in the face of future crises.
All of this I see as more fundamental than stimulus, financial reform or any of the like. I argue that we should have, and indeed many of us did, see the crisis coming in real time. The appropriate response was clear. The consequences of not taking the appropriate response were equally clear.
The Fed chose not to take the appropriate response and we are living with those consequences: a economy eerily reminiscent of Japan in the 90s, falling inflation, falling long term interest rates, rising unemployment, rising national debt, weak asset prices and the prospect of a generation of pain and poor economic growth.
And yes, we could of knowed.
It used to be that daily mental activity was seen as a free lunch in terms of helping to delay dementia. This certainly has an intuitive appeal: exercising your brain will keep it healthy. It also sort of seems fair, in a way, that those who use their brains the most are less likely to lose the capacity to, well, use their brains, just as those who have a more physical lifestyle maintain their physical strength longer in life. However, new research suggests that things may not be so simple, nor so rosy for the thinking man:
According to Wilson, mentally stimulating activities may somehow enhance the brain’s ability to function relatively normally despite the buildup of lesions in the brain associated with dementia. However, once they are diagnosed with dementia, people who have a more mentally active lifestyle are likely to have more brain changes related to dementia compared to those without a lot of mental activity. As a result, those with more mentally active lifestyles may experience a faster rate of decline once dementia begins.
Before you replace Marginal Revolution with TMZ on your RSS feed and commit yourself to a life of not thinking, keep in mind that mental exercises do still appear to delay dementia, it’s just that once onset occurs it comes quicker.
Some time ago there was a blogospheric debate about whether a house should be considered an investment. I contended that almost necessarily it has a large investment component, and should be thought of as such. In addition, for many people -although I don’t know how many- housing can be a good investment. Felix Salmon and Ryan Avent disagreed, with Ryan arguing housing was an investment, but rarely a good one, and Felix arguing that it was not an investment at all. Today, esteemed economist Karl E. Case of Case/Shiller fame weighs in on the housing as an investment debate:
But for people with a more realistic version of the American dream, buying a house now can make a lot of sense. Think of it as an investment. The return or yield on that investment comes in two forms. First, it provides what is called “net imputed rent from owner-occupied housing.” You live in the house and so it provides you with a real flow of valuable services. This part of the yield is counted as part of national income by the Commerce Department. It is the equivalent of about a 6 percent return on your investment after maintenance and repair, and it is constant over time in real terms. Consider it this way: when Enron went belly up, shareholders ended up with nothing, but when the housing market drops, homeowners still have a house. And this benefit is tax-free…
…This financial crisis has made us all too aware that we live in a Catch-22 world: the performance of the housing market drives the economy, and the performance of the economy drives the housing market. But housing has perhaps never been a better bargain, and sooner or later buyers will regain faith, inventories will shrink to reasonable levels, prices will rise and we’ll even start building again. The American dream is not dead — it’s just taking a well-deserved rest.
Karl wants you to think of housing as an investment, and he wants you to invest. I’ll agree with him on the first point, and remain agnostic on the second.
He also makes an important point about how housing lacks any true fundamentals like financial investments do:
Real estate sales are unlike other financial transactions. You can place a rough inherent value on a stock or bond by looking at fundamentals: a company’s profits, price-to-earnings ratios, quality of its products and management, and so forth. But a house is worth what someone is willing to pay for it. That’s a very personal, emotional decision….
This lack of solid fundamentals is an important problem with identifying housing bubbles. It is entirely possible for there to be an exogenous increase in the preference for home ownership that will drive up the prices of housing, as well as the price to rent ratio. Capitalization rates, which determine how an individual translates a flow of housing services into a house price, differ among individuals. Demographics can shift in ways that will affect cap rates, for instance average income or age can increase, but so too can the raw preference for home ownership. So house prices went up 15% while rental rates remained constant; what just happened? Is this irrational speculation, or did preferences for home ownership increase?
UPDATE: Felix does some real reporting and gets Case on the phone. I am apparently interpreting his use of “investment” too literally.
I’ve never really written about a large-scale report before, but I was recently sent a report from The Economists’ Intelligence Unit entitled “Women’s Economic Opportunity”. I’m not sure if it is online, so I don’t have a direct link to it…but I will update with a link when I find it.
The report was written by Leila Butt, with Leo Abruzzese, William Shallcross, and Mike Kenny. It uses a model developed in-house to analyze the economic opportunity afforded to women in multiple countries across the globe. It is a truly interesting study, and I’ll highlight some interesting findings.
There are four categories which the authors use to gauge the economic opportunity women have in various countries:
- Labour Policy and Practice.
- Access to Finance.
- Education and Training.
- Women’s Legal and Social Status
The index breaks new ground by focusing specifi cally on a country-by-country comparison of economic opportunities for women, going beyond a measurement of gender gaps. For that reason it includes an assessment of the national business environments in which women must function. The index also builds on well-established legal codes, such as the ILO’s annual evaluation of equal-pay conventions; in this case, the project team created a scoring scheme based on the ILO’s written assessments. Entirely new qualitative measures were also created, including an Economist Intelligence Unit assessment of whether customary practice overrides statutory law in matters of gender equality, specifi cally in property ownership. Owning property can increase a woman’s access to credit, and may confer broader social and economic benefi ts, including enhanced food security, wealth, authority and a greater propensity to make investments in land or property.
Using their model, the EIU finds (perhaps unsurprisingly to some) that the Nordic region tops the list, with nearly every country in the region appearing in the top 20 overall, and most in the top 10. I recently had a Twitter conversation with Matthew Yglesias about this issue. Matthew attributes the higher prioritization of feminine values in these countries to the fact that they have strong feminist movements. However, I take the (probably unpopular) view that a formal “feminist movement” is the effect of a deeper cause, and the relative strength of the feminist movements in these countries (which are all strong welfare states) is a function of the relief of the extreme masculine values inherent in the money system we use (strongly competitive, positive interest rates, fostering concentration).
In any case, here are a few things that popped out at me:
In Lebanon, for example, women cannot be employed in sectors involving metal work, alcohol production, tanning, butchering and mining. Thailand prohibits women from work that entails driving or operating a vehicle, using vibrating machinery and engines, and working on a boat, among other limitations. In Morocco, women cannot hold posts in certain ministries (the Ministries of Interior, Civil Protection, National Defence and National Security).
Also among significant labor market restrictions (which may be seen as compassion, but almost surely come down to protectionism on the part of men):
- 33% of total restrictions in all countries are restrictions on the lifting of heavy weights, arduous work or labour beyond a woman’s strength.
- 24% of total restrictions were restrictions on working in mines, quarries, underground or in water.
- 4% of total restrictions were restrictions on working with hazardous materials.
Also, Europe, and northern Europe in particular, are especially generous when it comes to maternity leave. Interestingly enough, there is a popular trend among start-ups (especially social media) in the United States (which doesn’t seem to be true in Europe, but I don’t know) of offering unlimited vacation. Something that codification may hamper.
Another very interesting fact is that access to credit in Europe is comparatively poor, the graph is of the entire population, but obviously the total amount of credit coverage will affect women as well — and perhaps even more. There is a lot of data out there regarding credit and the poor, and restricting access to credit (as is common in Europe, through indirect means) restricts opportunity.
However, there is large disparity in the amount of private financial services offered a post offices between the Americas and Europe, with about 5% of countries in the Americas offering such services vs nearly 68% in Europe. The United States is not among those countries. However, initiatives to this effect are popular in South America:
In Brazil, the federal postal system has forged an agreement with Banco Bradesco—one of the four largest banks in Brazil—to set up and operate banking branches in post offi ces. In an effort to tap the large portion of the population that does not have bank accounts—estimated at some 40m Brazilians—Bradesco launched its Postal Bank project in 2002. It had set up 6,067 outlets in post-offi ce branches by end-2009, up from 5,946 outlets at end-2008.
Egypt Post is one of the country’s major savings institutions. Postal savings accounts can be opened for just E£10, making these accounts an attractive savings method for low-income citizens. Interest on money deposited with the postal authority is exempt from tax. Each post offi ce holds an account at the National Investment Bank (NIB), where customers’ savings are placed. In recent years, Egypt Post has started offering services in competition with the banking sector, such as high-yield deposit accounts, ATMs and payment systems for fi rms. Additionally, Egypt Post has expanded its physical presence, with around 3,700 locations.
In contrast, the United States actively restricts financial service competition.
The study is very thorough and well done, although I’m not the most comfortable with the de facto implication that public policy specifically targeting women is the answer. However, it will be interesting to follow this index, and see how it evolves throughout the world. There are plenty of places that are very discriminatory toward women in the world…and they happen to be disproportionately poor. As they gain in wealth, women will obviously have a better chance at equality with men — and perhaps studying countries on this list from a more microscopic point of view will lead to better public policy, and thus outcomes for women…which, of course, benefits everyone.*
Thanks to the authors for sending me a copy of the report, and I apologize that this write-up took so long!
*Except the unborn.
P.S. Flickr’s new interface is the height of annoyance.
Karl has a post today arguing that Brian Wesbury is wrong for taking the view that fiscal stimulus is not effective (indeed harmful!) for two reasons: 1) that it pushes up interest rates through government borrowing (crowding out), and 2) people will expect future taxes to pay for the stimulus.
Unfortunately these are annoying arguments that get conservatives in a lot of trouble with smart commentators on the other side, and then tend to discredit their entire enterprise. Paul Krugman has made a cottage industry out of sniping these crude arguments from otherwise distinguished economists (see Robert Barro via flexible-price models).
However, while Googling Mr. Wesbury, I came across an article that I want to dredge up from February 2008. I want to do this not to point out that Wesbury has no credibility (like some commentators *ahem*), but to show how thinking in terms of interest rates screws people up, and how uncertainty is very dangerous to reputations. The title of the article is “Brian Wesbury Sees No Recession Ahead“.
Q: You say we are not in a recession and we are not even headed for one, right?
A (Wesbury): That is correct. Every single recession in the United States for the last 80 years has been preceded by a tight Federal Reserve policy — in other words, excessively high interest rates. And we clearly don’t have that today. Recessions are also preceded frequently by tax hikes or protectionism. So I would say that today we have very low interest rates, we have low tax rates, and we are not moving in a protectionist direction. As a result, those conditions that have led to recessions in the past don’t exist. One last point: I know of no point in history where we have ever scared ourselves into a recession. It just has never happened before and I don’t think it will happen this time, either.
This is a bombshell of a quote. My main point is that given the events that had happened up until then, saying that we won’t experience a terrible-horrible recession was not an unreasonable position to take. The problem is equating the setting of interest rates with the stance of monetary policy. I also know of no correlation between taxes and recession, and I’m sure he had in mind Smoot-Hawley when he was talking about protectionism…but that tariff was a drop in the bucket of what the actual problem was (then and today): falling NGDP.
By late 2008, in hindsight, Wesbury looks like a fool…but how would he have possibly known that the Fed would let NGDP fall at the fastest rate since 1938 later in the year? As a counterfactual, had the Fed kept up expectations that it would hit its 5% NGDP growth target, Wesbury’s statement wouldn’t look so bad today.
Arthur Laffer was (YouTube) famously in the same boat while talking with Peter Schiff, and of course made to look like a moron. My first piece of advice would be to not attempt to make public predictions. Since that is impossible, my second piece of advice would be to err on the side of caution when making predictions based on models (that is also true with NK multiplier models)…especially when facing strong headwinds.
P.S: I’m happy about the “Babble” tag.
Really quickly, this Brian Westbury quote is brilliant because it is so perfectly, delectably wrong. Its the kind of thing you dream a student will say so that you correct the entire class’s misunderstandings in one fell swoop.
Money for stimulus programs has to come from somewhere and he argues that stimulus spending is similar to the old adage: “borrowing from Peter to Paul.”
“They (the government) either had to tax it from somewhere or borrow it from somewhere," says Wesbury and “by moving resources out of one sector into another you have now messed up the natural order of things and you’ve influenced it in a negative way."
Wesbury says THAT is the mistaken belief about government stimulus.
Different professors will approach this different ways but I prefer to go at it like this:
You’re exactly right Brian. The money has to come from somewhere. However, remember money and production are not the same thing. In the case of money, we have a technology known as the printing press which allows us to print money as much money as we want. So creating money is no problem.
Won’t that cause inflation?
Yes, but we are below inflation targets right now, not above. We want more inflation. Right now the Fed is trying to get more inflation but is having trouble. Stimulus spending will help them out with that.
But, you can’t get something from nothing, can you?
No, you most certainly can’t. However, we aren’t getting something from nothing. We are getting something by combining together unemployed workers and idle factories. Remember a recession is a time when we have increasing unemployment and declining capacity utilization.
We have factories without workers and workers without factories. Those are resources that could be used to produce things but are not being used. If we can get those resources to work will be able to make more things.
Unfortunately, we can’t and ultimately its because the economy doesn’t have enough money. Luckily we can print as much of that as we need.
More old stuff for you to read, while I work on beginning of the semester duties
FRIDAY, MARCH 14, 2008
Some of my fellow bloggers have been looking at inflation expectations and are worried that the Fed is pumping too much cash.
I am skeptical.
Inflation ultimately has to come through the interaction of supply and demand. Money creation may be the source of surging demand and hence higher prices but demand has to in fact surge. It is difficult to have Fed driven inflation in an environment of falling retail sales.
If consumers contract then businesses loose pricing power. Commodities ultimately have to follow business demand.
POSTED BY KARL SMITH AT 8:06 AM
and
FRIDAY, MARCH 14, 2008
Liquidity Trap, Deflation, ZLB
Lots of people have said to me both on and off line that we don’t have to worry about the Japan Scenario because we have a solid inflation buffer in the US.
While the inflation buffer gives us more room in a sense, it is important to remember that it is not deflation per se that causes a liquidity trap. It is that the equilibrium interest rate is below zero.
It is possible that the equilibrium risk free interest rate is a real negative 3% in this crisis, which implies that we still won’t be able to get there with 2.7% inflation.
Exploding risk premiums could drive the equilibrium real rate that low because what matters is credit availability to firms and consumers.
So we are not in a position were we can ignore the liquidity trap possibility. On top of that is the issue that there are increasing deflation pressures in the decline collateral values, falling consumption and the potential for dramatically slower global growth. While ultimately they might not override inflationary effects of recent Fed policy, they are not to be ignored.In short deflation cannot be ruled out and the liquidity trap remains a threat even in a moderately inflationary environment.
POSTED BY KARL SMITH AT 9:33 AM
