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There is a discussion going on, on The Corner about abortion that I like. Even though I think it’s a lot less “serious” than I would prefer its much more serious than most takes I read.
By serious I mean: folks attempting to grapple with the issue rationally rather than simply identify themselves with stances that are sentimentally appealing.
Also, before I get started I want to specifically set aside issue related to “what is the scientific consensus” because that draws us into arguments from authority when we actually have lots of observable information to grapple with.
Lets grapple with that information first before making appeals that “smarter people than you think X.”
The debate was in part kicked off by this pair of posts. I am going to quote liberally.
First from David French
At long last — and against the strong headwinds of the anti-science ideologues — the law is finally catching up to biology. Next week, Mississippi voters will determine whether all human beings in the state of Mississippi are also “persons” under the law. Such a vote is a logical — if belated — concession to well-established science. Indeed, scientists are virtually unanimous in declaring that the result of conception is a human child with a distinct DNA different from his or her parents. This unanimity is the essence of “overwhelming consensus.”
Given this biological reality, is it logical, reasonable, or remotely moral to characterize some human beings as “persons” and others not? Are we not long past such outright quackery? I hope and expect that Mississippi voters will decisively reject the deniers in their midst and recognize the reality of personhood. After all, it’s a simple matter of science.
In part this is important because we can clearly make theological arguments about the morality of abortion and the notion of personhood. However, its dicey to know what the law should do about that because we have no official church in the United States and churches disagree on this issue.
So, from a legal standpoint it would be nice if there was some sort of secular means of handling this question. Also, for us agnostics and atheists it would be nice if there was a secular way of handling the fundamental morality of this issue.
French is suggesting that there is. After conception we have “a human child with distinct DNA.”
I think human child is not quite right but I don’t really want to quibble over that because I think David really means human being and that I readily concede.
The question is, are all human beings persons?
Robert VerBruggen returns the obvious reply but with a example I usually don’t think of.
David — it is certainly true, as you write, that the result of conception is an embryo with “distinct DNA.”
What’s not clear to me, however, is why “distinct DNA” should be the criterion by which we judge personhood for moral and legal purposes. As Reason’s Ronald Bailey has pointed out, 60 to 80 percent of human embryos — post-conception, with distinct DNA — are naturally destroyed by the woman’s body. Are we to see this as a large-scale massacre of human beings, develop drugs to prevent it from happening, and require all women who have unprotected sex to take them? Certainly, we would be willing to take measures like this if post-birth infants were dying in comparable numbers.
What Robert is getting at here is what I term “revealed morality.” Which is to say look, David, you certainly don’t act like you believe distinct DNA constitutes a moral person.
Otherwise you would see the prevalence of early miscarriages as one the greatest natural tragedies in the world and probably the single most important issue facing the Developed World, if not humanity itself.
The point here is not to call David French a hypocrite, but to force him – and others – to consider what they actually believe. Do you believe that distinct DNA defines a new moral person and thus the prevalence of miscarriages are the most significant human tragedy in the Developed World.
What proceeds at The Corner is the typical devolution of the discussion once people are made to feel uncomfortable. That is, accusations that Robert is calling people insensitive and qualitatively meaningless undermining of Robert’s data and word choice. However, that’s fine. I am happy that it got this far.
There are other issues that I have with the notion of defining personhood as “distinct DNA.” I treat them lightly and if people are interested we can go into more depth.
First, the obvious issue that once conception is complete we have distinct DNA but we do not know how many people we are going to get. Robert brings up the case in which we get zero born people. This case is nice for highlighting the morality of the post conception loss. However, from a theoretical standpoint there much thornier issues are when we get more than one person and when we get fractional people.
Everyone is aware that it is possible for the egg to divide post conception and produce identical twins. I think most of agree that identical twins are separate people. Thus, there must be at minimum some secondary process of personification, in which the single person becomes multiple people.
How does this take place? Its important because the method in which secondary personification takes place might render the “distinct DNA” theory of personification superfluous.
To be more specific, if something like “secondary personification” always takes place but does not always result in twins, then why are we sure there is some meaning in the “primary personification” that takes place when new human DNA strand is constructed.
Even more gnarly, however, is the case of fractional people. It is possible for two fertilized eggs, each with their own Distinct DNA, to merge into a single born human. The result is a human chimera.
What do we believe is happening here?
Are there two persons in the same body? Are the persons “merged?” Is one person killed in the process? If the later then which one? Again, answering these issues makes the question of primary personification at distinct DNA difficult.
If we believe that there are two persons then how are we to morally deal with what seems to be a single adult. Are the cells descended from one fertilization event morally responsible for the actions of the cells descended from another fertilization event? And, what to make of the fact that the adult seems to insist that he or she is in fact and integrated person?
If the persons are merged then how does the process of “personifactional integration” take place? Like secondary personification, is this an event that always happens irrespective of whether there are two persons? If not how does the mixture of cells induce “personificational integration”? The DNAs are not joined in anyway. The cells are, at a basic level, simply in close proximity to one another.
If one person is killed then which one? How could we tell?
The reason all of these questions are really gnarly is because perhaps a natural response is to give some sort of “preference” to the person represented by the mind of the adult human and/or to say that twins become separate persons because they have separate minds.
However, obviously if we are going there then having a mind is key point in personification. At a minimum “mindness” induces secondary personification or personficational integration.
Yet, we strongly believe that there is a mind-brain connection.
We can talk more about this but I think even leaving aside any scientific consensus on the issue there are specific observations we can make that should strongly suggest to everyone that the mind and the brain are dually linked.
That is, it is not simply that the brain is the organ through which the mind manifests itself, but that the structure and chemical composition of the brain can be manipulated in ways that influence the mind. Thus the mind-brain connection must go both ways.
The most obvious of these observation is the influence that chemicals introduced into the brain seem to have on the mind of the person. If you ingest even, alcohol for instance, there is the strong sensation that the alcohol is affecting your mind.
Not just weakening the mind brain connection like a paralytic. Ones actual though processes and emotions seem to change. This is an easy experiment to do and almost everyone reports the same results.
Second, there is the problem of mutation. The distinct DNA of conception will mutate over time as cell divide. I am not sure anyone thinks of this as creating new persons. How are we to make the distinction.?
While that issue could probably be patched fairly easily, the need to patch it raises questions over whether or not we should be put particular emphasis on the generation of distinct DNA in the first place.
There are many other issues but the last one that I want to touch on is the connection between humanness and personhood in the first place. Is humanness necessary to being a person?
If we meet sentient aliens are they by definition not persons? If we develop intelligent machines, machines derived from human minds are they not persons? What if they can remember being a person?
Even if you are inclined to answer no to all of these on the grounds that humans are fundamentally specially then the silly sounding but important question arises: how do you know the people you are interacting with are actually humans and not aliens or machines?
This is important because if you can’t tell the difference between a human and an alien who can perfectly impersonate a human then we have to ask whether there is a moral difference between the two. What does it mean to be “really human” if we have no fundamental way of knowing that we are not being fooled.
There are obviously many other issues related to abortion and miscarriage. And, I know for some people’s taste I gave a very generous touch to the Distinct DNA dividing line.
However, I think the personification issue is an important question and a gentle touch is our best hope of coming to some consensus over an issue that naturally spawns strong emotional reactions.
There are some unfortunately unsurprising economics lessons to be seen in what is starting to result from interchange regulations. First, is that there when the government sets prices there are often unintended consequences:
…McDonald’s and other U.S. retailers that rely on a high volume of small dollar transactions could see an increase in their debit card processing costs, because prior debit costs for smaller purchases had lower fees….
…Richard Peck, 7-Eleven’s senior director for corporate finance, said the company’s gas stations and convenience stores will likely see a mixed impact from the capped fees… But for smaller, everyday purchases, executives said those costs will likely lead to price increases for consumers.
Oops, I don’t think that was supposed to happen. Another lesson is that regulation is often a slippery slope. Walmart seems to think that is the case anyway:
Michael Cook, treasurer for Wal-Mart, said the discounter viewed the debit fee overhaul as a precursor to overhauling credit card processing fees.
Just a minute a go I posted on Virginia Postrel and the Hotel Room problem. There might be serious data issues but from a conceptual level it doesn’t seem that bad to me.
On the other hand the Super Walmart Problem is a big deal.
Here is the problem: Super Wal-Mart sells the “same” stuff as Harris Teeter but at a much lower price.
Classic price premium problem. We expect nicer amenities to be at the root. We walk into Harris Teeter and low-and-behold its nicer. Problem solved, our work is done here fellas.
Not so fast. A few years ago Super-Walmart didn’t exist and some of its customers were forced to shop at Harris Teeter for groceries. It would ludicrous not to include the expansion in low price choice. It would be like not account for the creation of the Iphone.
So Wal-Mart did lower inflation. How much?
Well maybe we can try to track home much Wal-Mart impacted the prices at Harris Teeter. So, before Harris Teeter had some sort of quasi monopoly. Wal-Mart broke that monopoly and offered more choice. Harris Teeter then must have responded to that. Maybe we can measure it?
Lets look.
Whoops!
Prices at Harris Teeter went up after the introduction of the Super Wal-Mart?
Why?
Because super Wal-Mart sucked away all the low income patrons. No need to worry about keeping prices low to attract them anymore. You aren’t going to beat Wal-Mart. You might as well raise prices.
That’s bad, but it gets worse my friends.
See in part the story of Harris Teeter is that Wal-Mart swept away the “elastic demanders” those who are sensitive to price. Allowing Harris Teeter to raise prices. However, we might be able to get a handle on what’s going on by looking at relative growth rates in sales.
Presumably Wal-Mart cost Harris Teeter sales and we might be able to back out some sort of cross-price elasticity of demand from that.
Here is the further problem. The very existence of Super Wal-Mart likely increased the amenity value of Harris Teeter.
Why?
Well lets be frank. One thing that Harris Teeter shopper dislike is shopping next to lower income people. We might not approve of these preferences but they are real. Super Wal-Mart drew away the poorer customers thus improving the shopping experience for those customers left at Harris Teeter.
Get a statistical handle on that problem.
All of this is to say that indexes are really, really hard and my sense is that the further we move towards a society that consumes amenities rather than tangible goods the worse the problem is going to get.
Virginia Postrel argues
“Maybe the average hotel guest wouldn’t care whether there are 300-count or 200-count sheets. Maybe they just want a bed that’s not caved in,” says Dan Ginsburg, a supervisory economist at the Bureau of Labor Statistics.
If the guests do not see the difference as more valuable, then the higher charge should be factored into inflation measures. If the redesigned room costs $15 a night more, the bureau’s statistics should count the whole $15 toward an increase in the index.
If, on the other hand, guests care as much about aesthetics as hoteliers believe they do, it would be irresponsible to treat the $15 as a true price increase.
The index problem is gnarly. Much more complicated than most people realize. For one thing it attempts to measure something that theoretically doesn’t exist compiled from market transactions we cannot observe.
For the more technically inclined this is an attempt to aggregate over the expenditure functions of multiple folks. Problem is interpersonal utility cannot meaningfully be aggregated and expenditure functions and their market analog, Hicksian Demand, cannot be observed.
That having been said, back when I thought about this a lot, numerous squeezes seemed promising. That is, there is no way you can get the “right” amount of inflation.
However, you can calculate an amount of inflation that is definitely too high. And, you can calculate an amount of inflation that is definitely too low. Then you refine those estimates until you can squeeze the range into something that is less than measurement error.
So in the end you say, if our measurements are correct (which they are not) then inflation is somewhere between 2.06 per year and 2.09 per year. At that point you have practically speaking, beaten the problem
As it relates to hotel rooms – and I working from memory – the question isn’t simply in “how do customers feel about improved rooms.” It is do improved rooms sell at a premium to non-improved rooms. If they do not then at the margin we can conclude the customer does not prefer them.
If they do, then this places an upper bound on the quality value of the improvement. Something can’t be worth more to the marginal consumer than the market value.
So carefully applying this steps we ought to be able to get some sense of what 300 thread count sheets were worth.
As a side note, if hotel managers chose to go out in the market and by 300 count thread sheets and then could not charge a premium for rooms with them then that would count as a negative shock to Total Factor Productivity.
The manager just decided to do something that destroys value in the economy. To integrate it into a macro-models, it creates inflation by ever-so-slightly pulling back on aggregate supply.
In the wake of MF Global’s collapse Russ Robert asks
And what “didn’t have to be this way?” That’s a question for the investors and creditors to answer for themselves. Why is it a question for the rest of us? Why do we want the government to protect naive or greedy investors from their own shortcomings? Let’s them learn a lesson for a change. Why won’t that work?
…
There are two ways to restrain imprudent leverage. The first just got imposed on Corzine. His creditors lost most or all of their money. They’ve learned a lesson. If they were overly optimistic about a bailout, they have adjusted their expectations somewhat for the next time. If they were just overly greedy or optimistic or naive they’ve had some prudence and sense knocked into them in a very expensive fashion. If we can avoid the temptation to bail out firms leverage will shrink as lenders learn its risks or at least lose their money. Both make it harder to keep leverage high in the future.
I need to work out the math on this to be sure my intuition is right but let me see if I can explain why I think that won’t work.
In this particular case we don’t know whether or not MF Global’s creditors lost most or all of their money. However, there is no particular reason why they had to.
Russ notes earlier in his piece that perhaps the equity partners in MF Global were hedged. However, one can hedge credit risk as well. The obvious instrument to do so is the Credit Default swap.
There is certainly some combination of loans to MF Global and Credit Default Swaps on Greek Bonds that leave the creditor with limited exposure. Of course, one could also purchase CDS on MF Global bonds themselves.
However, the first case could leave you with more upside open, including the possibility that an MF Global creditor makes money on an MF Global default that resulted from over exposure to Greece.
Generally speaking market participants can hedge away an arbitrary amount of idiosyncratic risk. That is, to say there is no amount of recklessness that is so reckless it does not make sense for anyone to back you.
However, in hedging away this risk they increase systemic risk in global financial system. This in turn drives up demand for assets with low exposure to systemic risk. Yet, the primary means for creating a “low systemic risk” asset is to push the risk into the tails of the distribution.
What you wind up with is a market in which everything is works for everyone, unless it doesn’t, in which case it goes wrong for everyone all at the same time.
My sense just pondering over it is that this is individually optimal for every single participant. I actually suspect it would be socially optimal as well if it were not for the fact that macro-economic effects caused the distribution of economic shocks to fall unevenly and to persist longer that they otherwise would.
Therefore everyone acting completely unrestrictedly in accordance with their own best interest will slowly construct a doomsday device in which everything goes absolutely swimmingly, until it doesn’t and then whole world bursts into flames.
Arnold Kling says
Also, I am in the process of re-reading the Converse issue of Critical Review, which I first blogged about five years ago. In Jeffrey Friedman’s essay, he raises the issue of how Rush Limbaugh and Paul Krugman could each be sure that he is right.
I think one can model this metaphorically as the outcome of a hill-climbing algorithm where you can get stuck at a local maximum. I will explain this below the fold.
A hill-climbing algorithm is a way to solve for the maximum of a function. Imagine that you were plopped down in the middle of some topographically varied terrain and were trying to find the highest mountain peak. Using a hill-climbing algorithm, you would send out small probes in all directions and move in the direction where altitude is increasing. Then repeat, until you get to a point where altitude is declining in every direction.
If there is only one peak in the terrain, this method will find it. But if there are many hills, it is also possible to get stuck at the top of a small hill and never find the peak of the highest mountain.
Think of Limbaugh and Krugman as being stuck on their own hills. Based on where they started, and the paths that their experiences took them, each is at a point where he cannot see any way to improve his understanding of the world by changing his mind. Even though their views are incompatible
What occurs to me is that the conviction that one can persuade is key. A necessary condition of feeling comfortable I am right and some other folks are wrong is that I believe that I can persuade them that I am correct.
If not then I have to concede that no evidence exists which could convince a person of any origin of the truth. If that is the case then no evidence exists which could convince me of the truth irrespective of my origin. Thus my knowledge of the truth depends crucially on my origin, which is presumably orthogonal to the truth about most issues.
David Henderson makes a bet
I offered him a $100 bet, at even odds, that he accepted: in 2018, the inflation-adjusted price of oil will be lower than an $80 average for the year. He’s saying it will be higher. I tried to tilt it a little in his favor by naming the benchmark oil–West Texas Intermediate–which is sweet (low-sulfur) and, therefore, higher-priced. I hadn’t realized how big a premium when I made the offer. But, oh well, a deal is a deal.
More unfortunate for David is that the world price of oil is right now better measured by the Brent Crude price. It usually trades in a pretty tight band with WTI but because of infrastructure issues in the US the markets have been severed.
This state of affairs should be fixed in part by Keystone XL which should send the WTI price up to where Brent is now.
Nonetheless I would be inclined to bet with David as the marginal cost of extraction is well below $80 and this is a classic adjustment cost of investment issue.
Steven Landsburg suggested that those who want to tax the rich should voluntarily pay more taxes themselves. I disagreed. Tyler Cowen responds
Karl Smith is irritated by the argument, but I don’t see that he offers a good response. In general the responses I read or hear to this argument show a lot of emotion and not a lot of recognition of the strongest versions of the claim. Even if this argument has a chance of truth of only 20 percent, that still should have force to alter behavior at the margin. “There is a twenty percent chance I am morally compelled to give” is a real nudge toward “I should give more now,” if only, say, giving a fifth of what the full argument requires. So “downgrade and dismiss” — a common rhetorical strategy — won’t work here. If the argument has any life at all, it should hang like a millstone around the neck of egalitarians.
The best response is to accept the argument and admit one’s partial moral inferiority: “The people who give more, yes, in some important ways they are better people than I am.”
I think Tyler is more or less correct here though I don’t know that we need the probabilistic language.
If you believe there is a moral duty to contribute towards helping the poor and you do not do so, then you bear moral responsibility.
My argument was less powerful than that. I suggest that a rich person can consistently favor taxes on the rich without volunteering to pay such taxes him or herself. The argument is simply that the world in which every rich person pays is preferable to me to the world in which no rich person pays which is preferable to me to the world in which only I pay.
Bryan Caplan pushes further asking under what conditions could someone suggest that there is a moral duty to tax the rich but not a moral duty for each individual rich person to volunteer taxes.
The simplest moral theory I can imagine that would justify Karl’s position says: (a) you’re morally obligated to obey the law, (b) morally obligated to support utility-maximizing laws, but (c) not morally obligated to unilaterally maximize utility. But just imagine making a populist protest sign consistent with this position. An egalitarian who defers to the law, does cost-benefit policy analysis, and refuses to go above and beyond the call of duty has become everything he hates.
So the obvious response – though I am not necessarily endorsing it – is that one has the following moral obligations:
A moral obligation to follow the law.
A moral obligation to advocate for laws one would have chosen in the Original Position.
A moral obligation to maximize the health and welfare of one’s family consistent with the law.
This would represent – I think - the revealed morality of most egalitarians. Is this what they hate?
80 thousand in September, 104 thousands private.
Everyone will say this is a weak report and not enough to keep up with population growth. This is all true.
Lets be good Bayesians though and ask how this report changes our priors about the movement of the economy.
From that perspective the internals look pretty good
Construction lost 20K but we have copious real time information on construction and the fundamentals tell us it is at a very low level but will be picking up. Also I slightly suspect this will be revised up as Non-residential specialty lost 22K but we know that power lines are going up across the country.
Manufacturing gained only 5K and motor vehicle parts only 6.5K .Yet we know that real time sales in vehicles is on the rise.
Some weakness across the board in non-durable manufacturing which IS bad news cause I don’t have a better real-time series for that stuff. Will check against the industrial production data. Perhaps, worst I don’t have sales broken down in this way in real time and so this is the best information we have.
Government lost 24K jobs. However, we understand what’s going on here and its not cyclical. That is to say it is not related to monetary policy per se. So it tells us nothing about the general state of the economy.
The private service economy added 114K which is well on pace with the last recovery. There is more to be said, that maybe I will get to later today. But, here is the long-run trend on private sector service sector employment.
Notice that its just as strong as the last recovery though coming sooner. Not quite as strong as the 80 and 90s.
On the other hand goods and government over that period look like this
To the extent there is a structural transformation afoot in the US economy, this is it.
I’ve heard a lot about it but is there a straight forward explanation for why it doesn’t appear in the aggregate data.
from 1890 until at least 2008 its not clear that GDP per capita altered its long term growth path. If you put your hand over the Great Depression and the War Boom would you suspect that anything special had happened during this period?
It was clearly a rough period for those who lived through it but by all appearances once the storm had long passed the seas were calm once again.
Indeed, in terms of affecting the long run trend in living standards it seems like the small, brief, but lasting speed-up of the 1960s was the bigger deal.
A commenter asks about this graph
I don’t know that this kind of data tells us anything about whether Capitalism has failed, but it is worth looking at real stock values
and real per capita stock prices
Though there is no real trend growth here. We can do logs for those who prefer
and to relate to a long standing point of mine here are stock values as a fraction of US wage and salary disbursements
This graph
Might be a useful complement to Tim Lee’s piece on Niskanen and the Market Monetarist.
Note: I styled the graph to match Niskanen’s
A while back Scott Sumner said
A few weeks ago there was some discussion about the prospects of a double dip. I try to stay out of the fortune-telling business, as I don’t believe I or anyone else can predict the cycle better than markets. But one line of reasoning that I found less than convincing was the argument that monthly car sales and monthly housing sales are already quite low. And other parts of GDP aren’t that cyclical. We know from the 1930s that things can get a lot worse. If NGDP falls sharply, RGDP will also fall sharply.
But it’s only fair to point out that a month or two later those making the optimistic case (for avoiding the double dip) seem vindicated (knock on wood.) If so, I’d point to another factor—monetary policy.
This deserves a more thorough reply than I am going to give it, but since I was one of/the one who pushed this line of reasons I thought I should say something.
So, I think looking at important aggregates and basic models gives us strong intuition into how the economy should be have. How, the results of these models have to manifest themselves in actual markets and the choices of actual consumers, producers, etc.
So what does it mean when we say the public possess excess money balances?
In part, we mean that for some families the extra sense of security they have from having a larger buffer in their checking account is not worth quite as much as having an additional car in the driveway. We should expect more families to feel this way as the vehicle fleet ages and their cars become less reliable and quite frankly as more and more just crap out.
When this happens families are much less likely to be selling an existing used cars and more likely to look for an additional used car. We should see the price of used cars rise.
This in turn means that a potential new car purchaser gets more for her trade-in. That buyer has also been driving her car for a while and is really ready for a trade. She can get good financing (as a result of excess cash balances elsewhere) and the net cost of the car is less than it would have been. So she buys a car.
A similar phenomenon happens with young adults and their parents. They might move back when money is tight (and they need a higher real balance) but things have improved a bit. They have more cash in the checking account. Maybe its time they got their own place. Not a new home of course but a rental. So we see rents rise.
When we write this on the black board we say a couple of things
We say the marginal product of capital is rising because the capital-to-labor ratio is falling due to deprecation (craped out 97 Mazda) and spreading over a larger N (kids back in with their parents). At the same time as real money balances rise (that checking account buffer) the marginal utility of cash is falling (I think I can afford to strike out on my own now).
As a result Aggregate Demand rises (lets trade in this old car; I think I’ll get my own place.) This slides out along Aggregate Supply, increasing output (sales were strong this month lets re-up our order; vacancies are declining rapidly we may want to consider breaking ground on that Lake Front project we had on hold.)
So along with every move in NGDP, RDGP, expected inflation, etc, there is a human story. We can look at the world sometimes and see whether or not that human story is unfolding.
How old is the vehicle stock? What’s happening to used car prices? What’s the household to population ratio? What happening to vacancy rates.
From this we can see the actual process of monetary policy working and we can predict near term effects that we might not be able to see if we just thought about the Aggregate Curves.
From Bloomberg
The European Central Bank unexpectedly cut interest rates at President Mario Draghi’s first meeting in charge after euro-area leaders raised the prospect of Greece exiting the monetary union, sending bond yields soaring in Italy and Spain.
ECB officials lowered the benchmark interest rate by 25 basis points to 1.25 percent, confounding 51 of 55 economists in a Bloomberg News survey. Four predicted a quarter-point move and two expected a half-point reduction.
Here is the important point. Even in Greece the primary budget deficit is not that large. The issue is rolling over debt. This is something the ECB could facilitate trivially if it wanted to. It has chosen not to.
Like so many, the ECB over-estimates the role of moral hazard in politics and policy. But, that is a deeper question and a longer conversation.
However, even short of that they could recognize that when much of your currency area is suffer from double-digit unemployment, that a small rise in inflation is not your primary concern.
Afraid to lose creditability?
Credibility of what? That you are ready to rule over a pile of bones if necessary?
The point of credibility is to achieve optimum outcomes, not to show the world what a stiff upper lip you have.
I can’t say that I would have advised Greece to call the ECBs bluff. I am almost everywhere and always a stability advocate. However, I can’t say that I am unhappy that someone has forced the ECB back down to earth.
Someone has finally –if only briefly – halted the Morality Carousel that German Central bankers love to ride on and that Trichet was eager to identify with.
It may seem like creditors and debtors both have each other over a barrel. Indeed, some people wildly think that creditors have power over debtors. But, it only seems that way. Debtors can always walk away. And, creditors can do nothing about it that force alone would not have allowed them to do in the first place.
Never forget that.
Tyler Cowen asks
In the comments I also would like to hear Keynesian accounts, New or Old, of why gdp growth was suddenly 2.5%, not a great number for a recovery in absolute terms, but was it the predicted number or direction, given that the stimulus was finally exhausted? I am comfortable citing “noise,” but does a liquidity trap model offer this same freedom? Doesn’t the model itself imply that one margin is what matters and you are truly “trapped”?
The result was not surprising to me. Indeed, it came in a little low. Part of the strength was simply that a few service components that typically jump around all jumped together. However, a significant part was that autos, construction and government stopped dragging. This makes sense.
The marginal return to capital is rising as housing and transportation capital run thin. Rents and used car prices are both finally starting to rise as young consumers look for places to live and vehicles to drive. And, critically bank lending is available to support them.
In fact, I thought autos would be a positive contribution for PCE and I am still not convinced the revision won’t show them to be.
Government shrinkage looked about to run its course. State and local budgets run behind the business cycle. The next couple of months are when the bleeding should stop.
Via Tyler Cowen am article on infrastructure in China
[The vast overbuilding] relates to the problem of current demand versus long-term demand. Over the past few years, some medium- and long-term plans drafted by national and regional authorities have touched on the long-term. But in terms of implementation in recent years, many projects have been running far in advance of demand.
In fact, most of our medium- and long-term plans are very backward because they do not take into account the regional particularities of passenger traffic concentration. In provinces that are exporting manpower, transportation planning and construction can’t keep up.
When you think about a place and time in which the core premises of Austrian Business Cycle Theory might hold its hard to come up with a better example than China.
Monetary policy and banking policy are deliberately suppressing domestic consumption in an effort to fund vast increases in investment. The pace of building is astronomical, the inflation pressures tremendous, and the proliferation of unprofitable projects enormous.
Yet, its not stopping.
Its been going on for decades and by the looks of it will go on for at least a few decades more. What happens at the end might wind up being very ugly but my case is not about the wisdom of market distortion, its about the dynamics.
Here I see a state that is able to maintain artificially low levels of consumption for may wind-up being half-a-century. Realizations of bad loans and bad ventures do nothing to stop this juggernaut. It just keeps on keeping on, even in the face of a global recession – which I predicted would bring China to its knees.
It did this not by accepting reality but by doubling down and replacing export driven growth with infrastructure driven growth. The economy barely skipped a beat.
I bring this up because I have never been satisfied with the inevitability argument behind Austrian Business Cycle Theory. I understand why a continuous money-fueled boom would actually lower present discounted living standards. I just don’t know why it has to all come crashing down.
Isn’t it conceivable that you suppress consumption, forever?
Aren’t there always more nowheres to which one can build bridges?
Again, this isn’t to say that this is advisable, simply that it is possible.
What we should see in the end is a country where eventually the marginal return to investment turns negative and already low consumption rates begin to fall further. An increasing share of income is spent simply maintaining a massive capital stock that no one uses.
People are worked to the bone, but have little to show for it. Their roadways and office complexes are massive, but rice takes up half of the family paycheck. Everyone has a job, but no one can afford new clothes. Kids drop out of school at 14 because being a day laborer pays nearly as much as being a doctor. Besides, they’ll have to save for a decade before they can afford a new car and then work double shifts to pay for the gasoline.
That’s the world of massive overinvestment. Its not pretty, but it doesn’t look like ours.
Greg posted this question
The answer seemed obvious to me but I may be missing some deeper point. My answer under the fold.
This is a much belated reply* to a claim Matt Yglesias made a little while ago about buying a home to live in and as an investment. Matt wrote:
If you own a first house in the DC area, and plan to eventually sell it and replace it with a larger house in the DC area, then overall trends in DC area real estate prices are irrelevant to you. Your investment will “pay off” if prices go up, but you’ll end up needing to spend more on your second house anyway. It all washes out. If you’re speculating in real estate you don’t intent to live in, things look different. But in terms of a place you inhabit, the relevant consideration is how its price evolves relative to the market average and your odds of doing better than average are 50 percent at all times.
The problem here is failure to consider the proper counterfactual opportunity cost. Say you’re the hypothetical current DC resident Matt is discussing, and in the future you plan on owning a house bigger house than you can currently afford. Matt says if prices go up then the future house you’re going to buy is more expensive so it’s a wash. But if prices go up and you don’t buy a house now than you still have to face those higher prices, but you won’t have the profits from your more valuable older home to offset the costs.
In fact, this is true even if you plan on renting in the future. This is because if prices go up you will incur higher housing costs regardless of whether or not you bought a house early on. If you’re going to live in DC in the future, then buying a house now is a hedge against rising house prices. When prices go up that investment can pay off, and the profit certainly doesn’t need to be a wash.
*Why am I replying to a short, old post on something of a minor point? Because Matt is writing a book about urban economics, and if correct a misunderstanding in the book before it gets published then Matt will have to credit me in his book. And then I’ll be in a book.
I have been invited to speak on a panel about the European Debt Crisis. I just got the questions. This could get ugly. Lots of open ended questions and the final one is
In the end, who is to blame?
Now you know I don’t do “blame.” But, I can and will note when an institution’s objective function is remarkably similar to:
arg max humanSuffering(policy instrument)
Brad Delong relays a benefit of NGDP level target that I have tried to layout, though less eloquently:
At lunch today Christina Romer reminded me of–or rather drove into my thick head a point that I had missed during the seminar, even though he was standing only six feet in front of me at the time–Ivan Werning’s point that level nominal GDP targeting is a good policy in a liquidity trap not just or not primarily because it promises future inflation but also and (for his parameter values) primarily because it promises a future boom.
The hard thing for so many economists to remember – because they have been trained to forget – is that the real world is nominal.
I think this is important and so I want to spell it out in careful statements
1) At any period in time your command over goods and services is determined by your access to liquid assets. That is, to say “how much money you have.”
2) The nominal interest rate measures your ability to transfer command over goods and services into the future.
3) Only by through investment – which entails risk – can you possibly transfer command over goods and services into the future at a rate other than the nominal interest rate.
These are the only relevant facts available to economic agents: households, businesses, governments, etc.
The real interest rate, the inflation rate, the real growth rate, the real return on capital. These are all theoretical constructs. They can help clarify thinking on some matters, but can get folks tangled in knots when thinking about otherwise simple propositions.
How does that work here?
Because if the Fed pushes down the nominal interest rate and up the nominal return on investment this encourages investment.
If I say that look, by holding cash you can only transfer command over goods and services into the future at a low rate, however I promise that at some point there will be an enormous volume of sales for your business, what are you going to want to do?
You want to take that basically free cash and put into work getting ready to catch those big sales.
Indeed, this is a difficult to lose proposition. Either sales go up or the carrying cost of cash stays low. Either way you are in the clear.
The only way this whole thing goes bad is by a sharp enough rise in raw materials cost. This can happen. It has happened with oil. The question is, how likely is it to happen?
We can talk through this but the net effect from the Fed is almost certain to be weaker than the increase in sales. Something else could happen – a war in the Middle East for example – to cause raw material prices to rise. However, this is not Fed induced.
More importantly, from my view of the world. The promise of cheap money or big spending makes lending a no lose proposition.
