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Via Kevin Drum, the BBC has a feature in which some of the worlds “top economists” show their “most telling” charts regarding the financial developments of the last year.
Conspicuously absent is this chart:
Europe is facing what is fundamentally a money demand crisis caused by a passive tightening of ECB monetary policy. This is due to the insane notion that the yard stick of success price stability, come hell or high water. This is the reason that a crisis is manifesting itself in countries whose fiscal position prior to the recession was not particularly bad.
Android app + machine that mixes drinks. As Paul Krugman notes in his “futurism article“, most things that symbolic analysts do can and will be automated. Add to that category (unsurprisingly) repetitive remedial tasks. This, of course, reduces the marginal product of bartenders to zero for people who eschew witty banter and simply want a drink. On the plus side, you would never have to ask a bartender if he knows how to make a particular drink (I’m not creative with drinks…).
However here is a developing point; In any society, people should be able to dream up jobs for other people to do (for example, at one point in history, ironing newspapers was someone’s job). In reality, that may require some changing mores about what is considered paid work. The second part of this point is that I think as specific human interactions become more rare, they become more premium, that is, the marginal product of simply being human and having a particular skill rises (and if economics is any guide, extremely rapidly). That doesn’t bode well for the quantity of jobs, but it does for the quality of reproduction.
Keep in mind, however, that up to this point society has seen it fit to heavily subsidize areas of the economy which have already suffered from this phenomenon (arts, music, farming).
P.S. I think that the future will see the rise of complementary currencies — money with different mechanics than legal tender — which will facilitate this type of human interaction. I think a lot of economists overlook this possibility in their futurist extrapolations. Many try and shoehorn the current rules into their interpretations…but I think that kind of brushes aside fundamental concept in economics: incentives.
I will be traveling to the Scottsdale, AZ area on Sunday and staying through Friday. If any Modeled Behavior readers are familiar with the area, I welcome suggestions on great food and interesting things to see and do. Also, if any readers live or will be in the area and would like to schedule a meetup, let me know in the comments and I will try and fit it into my schedule!
Thanks in advance!
Since economic evolution is right up my alley, I thought I would continue the theme of Karl’s recent post on the subject explaining while a plethora of old, small businesses is a sign of market failure, and specifically respond to a comment left by Jazzbumpa, which includes a common sentiment among the left, that is not at all a feature of a market economy:
So the natural evolution of capitalism is for each business segment to ultimately become a near-monopoly. This is economic growth, and it is a good thing.
And Private Equity funds accelerate this process, making it an even better thing.
http://www.asymptosis.com/ows-how-wall-street-capital-destroys-capitalism.html
I’m starting to get it. Who do think will eventually own the whole world – General Electric or Cerberus?
Cheers!
JzB
Let me ask you; are you afraid of dominance and market power of British-East India Company? If the above were an actual concern, you would be. B-EIC had the mother of all market positions, and not even just in the 17th and 18th centuries — but a position that would make any company today envious. It was largely horizontally integrated in trade goods, and fully vertically integrated (even featuring its own army and navy). B-EIC had a captive market of nearly 1/5th of the entire population on earth, and had was specifically handy at brutal oppression.
However, despite all of the advantages one could hope for, B-EIC went out of business in 1873. Which highlights what should be a fundamental law of economics (but is not):
All competitive advantage is temporary.
Billions of gallons of ink has been spilled chronicling the rise of giant firms, and detailing how their businesses were run to be “in it for the long haul”. However — and ironically — billions of gallons of ink has also been spilled chronicling the same companies’ fall from grace as quickly as a decade later. In fact, of the original Forbes 100 list of largest US companies, only eighteen sustained their performance to the 50 year mark…and if my memory serves me correctly only two are still there (one being Exxon).
In fact, with an increase in the level of competition, economists Robert Wiggins and Timothy Ruefli find that the ability of a single firm to remain in a position of competitive advantage shortens precipitously. This is just another way of saying that he “S-curve” of deductive tinkering/technological innovation has been compressed.
To sum it up: a healthy market is characterized by relatively easy entry to new participants, a healthy level of competition between firms, and the ability for firms to die gracefully. Large firms will come and go, and some may be quite intimidating (like IBM, Microsoft, or Google, for example)…
…their time, too, shall pass.
It seems as if the most famous of economic writers himself is jumping aboard the “market monetarist” train, and advocating a level target for NGDP as a Fed regime shift:
At this point, however, we seem to have a broad convergence. As I read them, the market monetarists have largely moved to an expectations view. And now that we’re almost four years into the Lesser Depression, I’m willing, out of a combination of a sense that support is building for a Fed regime shift and sheer desperation, to support the use of expectations-based monetary policy as our best hope.
And one thing the market monetarists may have been right about is the usefulness of focusing on nominal GDP. As far as I can see,the underlying economics is about expected inflation; but stating the goal in terms of nominal GDP may nonetheless be a good idea, largely as a selling point, since it (a) is easier to make the case that we’ve fallen far below where we should be and (b) doesn’t sound so scary and anti-social.
I whole-heartedly welcome Dr. Krugman aboard, and am happy to have him on our side (although I never really imagined that I was arguing against Krugman, except on an infra-marginal level — his views of the concept of the “liquidity trap” nonwithstanding). Krugman’s 1998 paper outlining an expectation model of monetary policy is a go-to paper for my understanding.
In my opinion, a credible central bank does have nearly unlimited power (in theory, perhaps not legally) to move nominal GDP anywhere it likes regardless of the level of short-term rates. There are points in the actual transferring of assets blurs the line between what would be considered monetary policy and fiscal policy on a technical level…but in my experience, market monetarists have always emphasized the expectations channel (rather than, say, the credit channel, or interest rates) as the primary monetary transmission mechanism[1]. And it has always been the case that market monetarists believed that the expectations of the future path of NGDP drives current NGDP (rather than the size of policy interventions).
In any case, as Scott Sumner recently said, “There is nothing so powerful as an idea whose time has come.”
[1]Nick Rowe has a recent post on this, and David Beckworth has done excellent work on expectations vs size.
P.S. It will likely be a long time before I can regularly blog again. It is the government’s end of fiscal year, and so it is my organization’s as well…and that means reports, audits, presentations, etc…on top of my usually high workload. I do miss blogging, but I’m glad that there are plenty of others out there taking market monetarism (and specifically NGDP level targeting) seriously!
From the Washington Post:
The European Central Bank offered new emergency loans to banks on Thursday to help them through the turmoil of the government debt crisis, but decided to keep interest rates on hold despite fears of an economic slowdown.
Remember what happened last time a central bank failed to let rates fall to zero (nay, failed to let rates fall at all!), failed to commit to an explicit level target, and instead made what were widely understood to be temporary injections into the banking sector? Here’s a hint, it happened in October 2008, in the United States.
Also, this is nearing sadistic:
“Have we delivered price stability? Yes, we have delivered price stability,” he (Trichet) said. “Are we credible in delivering price stability over the next 10 years? Yes. These are not words, these are deeds.”
[h/t Matt Yglesias]
From the depths of the recession which began in 2007, and severely intensified in 2008:Q3, there has been an ever-growing chorus of (minority) opinion in the blogosphere regarding the nature of the recession, the causes, and the proper prescription for returning the economy to growth. The practitioners of this style of macroeconomics have since been dubbed the “quasi-monetarist” school, of which I consider myself a member. “Quasi-monetarism” has always been a somewhat unsatisfactory title for this group of thinkers, but it has stuck — so far.
Lars Christensen, however, seeks to change that in a new working paper entitled “Market Monetarism: The Second Monetarist Counter-Revolution“, in which he lays out the core tenets of the quasi-monetarist market monetarist view. I will lay out some of the quotes from the paper here, also check out his post at Marcus Nunes’ blog.
The Birth of Market Monetarism
Market Monetarists generally describe recessions within a Monetary Disequilibrium Theory framework in line with what has been outlined by orthodox monetarists such as Leland Yeager (1956) and Clark Warburton (1966). David Laidler has also been important in shaping the views of Market Monetarists (particularly Nick Rowe) on the causes of recessions and the general monetary transmission mechanism.
Put simply, the “market monetarist” view of money says that in a monetary exchange economy every market is a n+1 market, and an excess supply of all goods constitutes an excess demand for the medium of exchange. Thus, the market monetarist view of recessions is that recessions are always and everywhere a monetary phenomenon.
Another key feature of Market Monetarists (and probably the feature from which Lars derived the name) is our determination of the stance of monetary policy, for which we look to market indicators of the trend rate of NGDP:
Markets Matter
In a world of monetary disequilibrium, one cannot observe whether monetary conditions are tight or loose. However, one can observe the consequences of tight or loose monetary policy. If money is tight then nominal GDP tends to fall — or growth is slower. Similarly, excess demand for money will also be visible in other markets such as the stock market, the foreign exchange market, commodity markets, and the bond markets. Hence, for Market Monetarists, the dictum is Money and Markets Matter.
The use of market indicators of the stance and expectations of the future path of monetary policy (as opposed to short-term interest rates) is one of the defining features of the Market Monetarist movement, and it is very important from a practical standpoint. Many errors in reasoning in business/economic news stem from one line of reasoning: “low interest rates = easy money”.
Against Neo-Wicksellian Analysis
Mainstream economists and particularly New Keynesian economists place interest rates at the core of monetary policy. Furthermore, central banks mostly formulate monetary policy with an interest rates framework. Market Moentarists — as tradition monetarists — are highly critical of this approach to monetary policy and monetary analysis, which Nick Rowe has termed Neo-Wicksellian analysis (Rowe 2009).
Market Monetarists particularly object to the use of interest rates as the measure of monetary policy “tightness”…
…This view of course is in stark contrast to the prevailing New Keynesian orthodoxy where low interest rates are seen as loose monetary policy and have a significant impact on how monetary policy is analysed.
As Scott Sumner, and I believe Nick Rowe have pointed out, the movement of interest rates is just one of many effects of monetary policy. Though because interest rates are immediate and visible (indeed, the interest rate on reserves is an administered rate), we are often “tricked” into thinking interest rates are the dog, not the tail.
Interest Rates are NOT the Price of Money
A very common fallacy among both economists and layment is to see interest rates as the price of money. however, Market Monetarists object strongly to this perception. As Scott Sumner spells on in capitals: “INTEREST RATES ARE NOT THE PRICE OF MONEY, THEY ARE THE PRICE OF CREDIT” (Sumner 2011C). On the other hand, the price of money or rather the value of money is defined by what money can buy: goods. Hend, the price of money is the inverse of the price of all other goods — approximated by the inverse of for example consumer prices…
…Bill Woolsey: “An increase in the supply of credit isn’t the same thing as an increase in the quantity of money. While it is possible that new money is lent into existence, raising the quantity of money over a period of time while augmenting the supply of credit, it is also possible for the supply of credit to rise without an increase in the quantity of money. Purchases of new corporate bonds by households or firms, for example, add to the supply of credit without adding to the quantity of money”
While there is a relationship between the supply and demand for money and credit, they are not the same thing.
The Liquidity Trap Fallacy
My favorite, since I’ve been a vocal opponent of the concept of the “liquidity trap”:
In line iwth the reasoning on interest rates above is the Market Monetarist’s rejection of the so-called liquidity trap. Almost every day the financial media quot economists claiming that central banks are running out of ammunition because interest rates are close to zero. This is the so-called liquidity trap. Market Monetarists object strongly to perception that monetary policy is ineffective at rates close to zero. If one single issue has dominated Market Monetarist blogs over the last couple of years, it has been that monetary policy is highly efficient in terms of influencing the nominal economic variables such as nominal GDP or the price level. Market Monetarists do not believe there is a liquidity trap [1]. This is consistent with traditional monetarist teaching (see for example Friedman 1997).
[1] This annotation was added by myself in an attempt to explain what is going on with the concept of the liquidity trap, which has a very slippery definition. Being fair, the original concept of the “liquidity trap” — that of Keynes — pertains to the effect of the so-called “conventional monetary policy instrument” (open market purchases of short-term government debt) on raising the “conventional monetary policy indicator” (inflation) [Update: at the zero lower bound].
However, “conventional monetary policy” is a construct, the same way that other “conventional policies” instituted by governments is a construct. The only “trap” involved is the “trap” imposed by conventional thinking.
Market Monetarism rather than Quasi-Monetarism
Throughout this paper I ahve used the term Market Monetarism. However, none of the five main Market Monetarist bloggers uses this term. Instead, they in general use the term Quasi-Monetarist to describe their views. I am critical of this term, as it does not say anything about the school other than it is a sort of monetarism. “Quasi” undoubtedly also makes it sound like a half-baked version of an economic school.
An economic school’s name naturally should represent the key views of the school. The Monetarist part is obvious as there is a very significant overlap with traditional monetarism. The difference between Market Monetarism and traditional monetarism, however, is the rejection of money supply targeting and the assumption about the stability of velocity is at the core of MArket Monetarists’ reformulation of monetarism.
Instead of monetary aggregates and stability of velocity, Market Monetarists advocate the use of markets as an indicator of monetary (dis)equilibrium. Furthermore, Market Monetarists advocate using market instruments such as NGDP futures, and in the case of William Woolsey — free banking — as a tool to stabilize the policy objective (nominal GDP).
Do read the paper, as it is an interest crash-course in the economic dialog and thinking in the “Market Monetarist” corner of the blogosphere, and includes a possible research agenda. Though I am not mentioned at all in the paper (sad face!), I do consider myself of the “Market Monetarist” school, and I think that the name works well enough. What do you guys think of the name?
P.S. If I have any contribution to make, I suppose it would be my suggestion to redefine inflation as celerity.
P.P.S. If the quotes aren’t exact, it is because I had to type them myself. Acrobat, incidentally, is not a very friendly medium. The full paper should be posted as a blog post! I’d be willing to do it here, if Lars gives me the permission!
There has been a lot of praise about Obama’s jobs speech that he delivered last night, both in style and in substance. I thought the style was just fine, and has set Obama up in a position where he can clearly smack Republicans in the general election should they resort to obstructing the American Jobs Act. And they shouldn’t! It’s a very Republican-friendly plan and I do have to say that I admire many of the different projects on merits, but I can’t help by think that the plan and the subsequent cacophony of commentary is fiddling around the edges while dodging what has been the fundamental problem of the last few years — a problem that only the Fed can remedy — and that is abysmal growth in nominal spending.
The plan broadly consists of three classes of measures, the first is cutting the payroll tax on both the employer and employee side. Along with my co-blogger Karl, I am in favor of this proposal as a measure to remove supply side barriers to new hiring. While Karl’s preferred plan is to cut the payroll tax to zero, this plan is none-the-less fairly bold…however, I am skeptical that it will deliver the amount of new hiring that Obama is promising.
The second measure is tax incentives for hiring specific classes of people. In this case, there is an incentive for hiring veterans, the long-term unemployed, and for giving raises to current employees. I am roundly not in favor of this type of policy, especially the incentive to artificially prop up wages. The last time this was tried as a counter-recessionary measure was the 1933 National Industrial Recovery Act (which subsequently choked off the fastest recovery in American history). Now, it is hardly the case that money wages will jump 20% overnight after the passing of this bill, but if you’re in the business of wanting to to jump-start new hiring, incentivizing higher wages (and thus, necessitating higher productivity) is clearly the wrong way to go about it.
The third part of the plan is direct spending on infrastructure — namely schools and transportation. Sure, great, do it! Real rates are at zero or below all the way out to 10 years…that means (as has been pointed out ad nauseam) it’s cheaper to borrow than to tax now, and defer taxation to the future, when there will presumably be robust growth. I don’t know the specifics, but I’ve heard talk about an infrastructure bank that will provide safe, liquid assets to private investors and provide loans to contractors. It is all well and good that the government maintain infrastructure that is already in the public domain…after all, we’ve already built it, and built our lives around it, might as well maintain it until such a time we devise a different arrangement. My problem is with characterizing infrastructure spending as “stimulus” that will “employ millions of people”. There are plenty of hurdles to jump there, and the spending is slow. Worthwhile “shovel-ready” projects, while much talked about, always fail to materialize at the time they are needed.
Whatever the well-meaning intentions of the designers of these plans, I heard nothing from Obama or anyone else regarding the real issue, depressed nominal spending. Imagine a scenario in which the AJA takes effect, and achieves the maximum spending multiplier ever dreamed up in a model. All of this extra nominal spending (demand) would eventually lead to rising prices, most immediately in sensitive commodities such as food and energy. Now, imagine that the monetary authority views sub-2% inflation as optimal…and is internally pressured to begin unwinding their balance sheet (tightening policy). Rapidly rising prices would be a great cover that would allow them to choke off any good created by the miracle supply-side fiddling that you engaged in with your jobs act. I was disappointed by the prospects of further monetary easing in Bernanke’s Jackson Hole speech. However, there has been a lot of clamoring around the blogosphere (even making it to the WSJ) regarding the actions of the Swiss National Bank. Perhaps I’ll be gleefully proven wrong!
Obama’s plan will succeed to the extent that the Fed allows it…and just for reference, here is the Cleveland Fed’s expected inflation yield curve:
[Click Image to Enlarge]
I’m headed off to a conference, but I just wanted to voice my disgust with Ben Bernanke quickly. Here is what I gathered from his speech in Jackson Hole:
1. The Fed has the tools to offset shocks to money demand, but only sees fit to use them in the event that the country is facing actual deflation.
2. The Fed is highly committed to memory-less inflation targeting, and is happy living with inflation below 2%.
3. The Fed will not offset contractionary fiscal policy, handing proponents of active demand management victory on a silver platter, though they don’t deserve it.
We will have to wait until the next Fed meeting to see Bernanke’s “real” intentions on monetary policy. Will he steer the committee into a more aggressive stance? The stock market is very slightly up on the speech, so maybe WAll Street knows something that I don’t…but I just can’t see how an aggressive policy move is in the cards.
The US, and world economy needs the Fed to act today, and markets seem to be indicating that they believe that the Fed will act. This is the same situation we found ourselves in during the fall of ’08. Growth is barely even anemic, and markets are indicating that they expect future NGDP growth to slow. Headline inflation has subsided, and the recent “major” blip in core inflation has turned out to to be a fluke — inflation is still running below the Fed’s implicit target. Combined with that, markets have roundly given the finger to S&P, and world troubles are pushing people into dollar assets, exacerbating the problems that we are experiencing with elevated money demand.
[Click Image to Enlarge]
The Fed needs to do something bold today, before we fall off the cliff again, just like in October/November 2008…we’ve seen when happens when passively tight monetary policy causes the economy to limp along…once the buildup of balance sheet problems, falling asset prices, and increased demand for money reaches a head, the tipping point comes quickly and painfully. However, this time we’ll likely experience actual deflation, which will likely become a deflationary trend due to the timidity of our central bank.
So Bernanke, please give the hawks the finger for now, and do the right thing. The future of the US economy desperately needs it.
Kevin Warsh, an exiting Fed governor, has a recent interview in The International Economy in which I want to highlight his views on the anemic recovery:
TIE: The current recovery has produced less than half the growth rates achieved during the recovery after the 1981–82 recession. For example, for most of 1983, growth stayed consistently above 8 percent and for a time exceeded 9 percent. Why do you think the current recovery has been so modest? Some would argue it’s a Ricardo equivalence effect—the size of the public and private debt is inhibiting consumption. Others say the stimulus wasn’t large enough. Others argue there’s never been a major recovery without housing leading the way, yet housing is still in the basement. If you bought a house within two or three years of the peak, for example, negative equity makes it difficult to refinance even if interest rates are low. Banks still have a lot of inventory on their balance sheets, particularly with the level of foreclosures. Maybe banks don’t want to write off bad assets until there are profits. Would removing inventory from balance sheets and putting it back in the market help clear this process and make housing more affordable—and thereby improve the prospects for a healthier recovery? Why has this recovery been so modest? Is the answer simply that recovery after financial crises is always difficult?
Warsh: Only by the standard of the deepest, darkest day of the crisis is this economic recovery even plausibly satisfactory. On a historical basis, the economic recovery is modest, and unacceptably so. Some describe this recovery as the “new normal” and suggest we should just get used to it. Others suggest that recoveries from global financial crises are inevitably weak, and so we should lower our standards. I call this the new malaise. Instead of lowering our standards, we should improve our policies and raise our expectations.
So why is the recovery weak? First, the symptoms have been confused with the disease. Some policymakers have tried to steer a housing recovery without an economic recovery. So there have been a dozen or so programs to “fix” the housing crisis on the theory that once that’s repaired, the broader economy will come roaring back. These housing programs, however wellintended, have done little, in my view, to help the housing markets or the real economy. A housing recovery will begin when real household incomes improve, not before.
Second, intentions aside, the broad suite of macroeconomic policies has tended to favor the big over the small—big banks have been advantaged over small banks; big businesses have been favored versus small businesses; and those big multinationals with access to the global economy and global financial markets have benefitted more than those on the front lines of job creation.
Third, macroeconomic policies, in my view, have been preoccupied with the here and now, not the long term. So going back several years, Washington has compensated for a faltering economy with temporary programs that plug quarterly GDP arithmetic, but do far less to support longrun growth. Massive stimulus has proven not to be as efficacious as many academic models would suggest.
I, personally, have never bought into the notion that financial crises produce slow recoveries. The problem is confusing near-zero interest rates with “easy money”. It isn’t the financial crisis that causes anemic recovery, it is inadequate monetary accommodation. This holds unless you happen to believe in infinitely elastic money demand over a significant period of time; which I doubt even Keynes actually believed, and in any case, has never existed in the real world. The Great Contraction of the 1929-32 caused an extreme financial crisis, however monetary devaluation of 1932-33 caused the highest rate of growth in industrial production in the history of the US, even with a severely damaged banking system. Warsh is correct that we shouldn’t be complacent, we should improve our policies, and raise our expectations…more importantly, doing so should be mechanical. Elsewhere in the article Warsh says that we need to focus on the trajectory of inflation, and not where inflation has been. I think he should be even more creative, and call for a NGDP level target. Not only would this be a policy improvement, but given a credible central bank promise to a target path for NGDP (with a commitment to compensate for slack or overshoots) expectations of future Fed policy would become more or less automatic. This is what we should strive for.
To me, there is no mystery as to why we are experiencing an anemic recovery.1 In the deepest, darkest days of the crisis, there was literally no focus on monetary policy. Indeed, people were idly claiming that the Fed was being accommodative, even as it held the Fed Funds Rate well above zero while the TIPS spread collapsed, real rates soared, and various markets were in free-fall. There may, indeed, be a new normal, in which instead of raising nominal wages and prices (the easy way out), we grind through dis-inflation/deflation in order to bring real wages and prices into line with the new output trajectory (the hard way out)…but everyone needs to realize that is not a cruel fate, it is a choice.
1H/T Macus Nunes
George Selgin is now blogging at a group blog called Free Banking!
Selgin has been lurking around the comments of different blogs around the ‘sphere (including my old blog, where I was delightfully surprised to see a comment from him on a post denouncing the concept of ‘currency competition’), so it was only a matter of time before he got bit by the “blogging bug”…which how it happened to me, and I’m assuming that is the road many new bloggers take.
Here is Selgin’s excellent book, Less than Zero. And here is The Theory of Free Banking: Money Supply Under Competitive Note Issue.
The econ blogosphere welcomes you, Dr. Selgin!
[H/T Don Boudreaux]
…Brad Delong has it:
In 20 years, historians will interview the then-aged monetary, banking, and fiscal policymakers of the 2000’s. They will ask them why they did not take more aggressive steps to return nominal incomes and demand to trend levels when they were sitting in the hot seats. I already wonder what their excuses will be.
I don’t care much for what the fiscal policymakers will have to say…I’ll be largely interested in the state of monetary policy-making in 20 years, and how our crisis will look through that future lens. Will this chart haunt our current monetary policymakers’ future nightmares?
Aaron Carol, at The Incidental Economist, has a post showing that disease prevalence (including obesity) in the United States is a very, very small portion of what is driving health care costs:
Before you start in on me about how obesity is linked to other things and such, you should know that the overall McKinsey & Company analysis showed that the prevalences of disease in the US could account for perhaps an extra $25 billion in health care spending. Let me make a new chart for you:
Yes, obesity is more prevalent in the US, and yes, caring for it costs real money. But even if we get obesity down to the levels in other countries, it’s not going to magically erase the problem. We are spending two to three times per person what they are. There is no simple fix here. There is no one, and no thing, we can easily blame.
Everyone, always will look for a scapegoat. It is in our genes. The good vs. evil story is the oldest trope in existence. Look at the current outcry against “evil speculators” in oil markets (I wonder why Krugman doesn’t make a post about that?). Humans live through stories, humans respond strongly to in-group loyalty, humans have value preferences that lead them to view the world radically differently. I’ve often stated in debate that those who think that a single-payer health care system would somehow reduce our expenditures to a level consistent with other OECD countries are dreaming, at best, or delusional, at worst. And every single data point that passes by in the health care debate does nothing but strengthen the position that Robin Hanson articulated: health care altruism is a permutation of our evolutionary drive to “show we care”; or rather, make infrequent, and very large expenditures to show our loyalty to an alliance. The frequency has gotten greater as our society has gotten richer, but the underlying motive is still linked to our evolutionary roots.
Against this strain of thinking is the hypothesis that Matthew Yglesias articulated in his Bloggingheads diavlog with Karl, that people are stingy in the voting booth, but acquiescent in the doctor’s office. So separating payment and service would act as a brake on health care expenditure. I’m very skeptical of this argument. After all, health care expenditures have risen at a higher rate than GDP/per capita in many countries around the world.
A more interesting question, though, is why is the US different? My crude outline of a hypothesis is that people in the US have only recently come to “share a heritage” that is the United States. It’s only been around 100-ish years that people have really come to view themselves as “Americans”. In the absence of a shared heritage (which provides a built-in in-group), it has been especially important to engage in acts that show inter-tribal loyalty. The US spent a greater amount of money/life/time ending slavery, securing women’s right to vote, and ending segregation than a lot of other countries. We’ve also spent more money/ink/time securing a the minimal welfare state that we have, that is exceedingly expensive (relatively speaking). Not surprisingly, we also spend a ton of money/ink/time on health care that is of extremely dubious effectiveness. A cynic might say that this represents the greater wealth of the United States…but that doesn’t really provide an satisfactory explanation. We have low taxes, so we get away with a lot of inefficiency, but I don’t think that is the underlying driver of our proclivity to expend a lot of resources doing different things.
I think that history will show that Robin Hanson is right, and that whatever health care arrangement we devise, it will continue to be significantly more expensive than the world norm. That it has relatively little to do with the structure of the market (though I stand firmly behind a completely free market in primary care/pharmaceuticals [except antibiotics/microbials]), and a lot to do with our evolutionary drive as a “multi-tribal” society.
Karl has a fairly passionate defense of “muddling through”. The defense of this position is unquestionable. Any pundit who is actually serious realizes that, based on respectable projections, muddling through is not only a viable strategy, but can represent an optimal strategy (from a continuity perspective). Grand bargains are messy, and they usually mess up more than they fix, and (most devastatingly), they often reflect an overarching philosophy, rather than a solution to “problems on the ground”. Naive lefties and righties wish for grand bargains that destroy capitalism or entrench it…the ultimate in “uncertainty”. Muddling through seems to have actual welfare gains.
It is hard to avoid these ideological fights, and it is really (really) annoying to a utilitarian like me, who understands that if you give an inch in security, you could probably take a mile in uncertainty. Or to put the rubber to the road, if you provide a robust social safety net, you could get away with a vast array of socially-beneficial, free-market reforms that you couldn’t under a regime of uncertainty (in markets). Running off on a tangent here, a lot of right-leaning idiots pundits like to talk about uncertainty without recognizing that the government as an institution is a market-maker in the “certainty game”. Whoever thinks that deregulation would lead to some level of certainty is kidding themselves, and killing their argument. People are certain that agricultural subsidies will be around, and make plans based on that…if all of a sudden you remove them, they will be left to the decidedly uncertain whims of consumer demand. A more poignant example is environmental regulation, which has been a tried-and-true part of Federal legislation, and has had a more-or-less predictable path for the last 70 years. When was the last time you were “surprised” (not astonished, or discouraged) by environmental legislation? However, if you remove all environmental restrictions at the Federal level immediately, you create an entire world of uncertainty. To be honest, Ron Paul’s vision acted out on a quick timeline, relative to baseline (and that is ignoring his monetary proclivities), would introduce so much “uncertainty” into the world that we’d probably experience a really terrible “real business cycle”.
More to the point, the growth and evolution of “social technologies”, of which government is a prime example. Government institutions have not always had an eye toward efficiency, but they do have continuity, and it isn’t efficiency that creates “certainty”…after all, it’s not the most efficient for your mother to cook you breakfast, but if you’re used to it, a change to your breakfast habits represents a major shock (also, the macro assumption of monopolistic competition plays to this tune). The “uncertainty” canard is the imposition of a one-way street, in which the Federal government (in the popular debate, local governments are really good at turning as the wind blows) does nothing but create uncertainty. But the point is that the Federal government (no matter how misguided) shapes markets, and if the rules aren’t changing every “five minutes”, they create certainty…and even if they change laws in a way that is anticipated, they don’t move the dial of uncertainty…they just force the hand of efficiency (in their best days). There are thousands of regulations in the Federal Register. Most of them are probably welfare-reducing, but they aren’t “uncertainty” inducing. Federal law evolves along a fairly predictable path. Decimating Federal law, whether its welfare gains in the long run, would demolish the certainty in the short run.
Matthew Yglesias has a post today, riffing off of Kevin Drum’s muted anger, calling for reviving the now defunct (in the United States) “postal savings system“. This system, which began in 1911, was designed to get money out from under mattresses, and encourage banking by immigrants (where postal banking was a common practice). The bank payed a flat 2% interest rate on deposits, which it then re-deposited in local banks at a rate of 2.5%. Upon deposit, customers were given certificates of deposit in $1, $2, $5, $10, $20, $50, and $100 increments. Minimum deposit was one dollar, and deposits were limited (by the end of the system) to $2,500. The system was slow on the pick-up, but really ballooned after 1929 (spiking to $1.2bn in the 30′s), for obvious reasons. However, during the 30′s, with local banking systems in shambles, the practical effect of postal banking was nearly the same as privately hoarding gold.
The draw of the postal banking system, of course, was the “full faith and credit of the United States government”, a guarantee that didn’t exist for private sector banks. Coincidentally, with the passage of FDIC, and after WWII (when it payed an astronomical interest rate relative to the “market” rate), interest in postal banking severely waned, and by 1967, the system was absolved by an Act of Congress. Mildly interestingly, at the time of its dissolution, there was around $50 million unclaimed on deposit, which individuals could claim up until 1985, when payment of any claims were stopped by law. Long before then, however, the system stopped paying interest on deposits.
Now, I’m on the record somewhere (though I can’t find it at the moment?) claiming that the FDIC nearly single-handedly killed financial architecture. By that I mean, banks are ugly now, and the FDIC made them so. Apparently the FDIC also had a hand in killing off the postal banking system. But I still have a lingering question about why it was so unpopular in the US to begin with, and no convincing answers really come to mind at the moment. Many countries (including Germany and Japan) still operate a public postal bank, although many are in the midst of being privatized (along with postal delivery in many countries!).
I think postal banks in the current era would be a magnet for small and very short-term demand deposits, and not much more. Those types of deposits are, of course, the type that people have trouble with (as far as ‘vanilla banking’ goes). Thus, the bank would likely be relatively costly, as I’m assuming that “we” would be subsidizing smaller explicit fees. This would undoubtedly help people who don’t manage their accounts very well (or don’t even have an account, as many poorer people don’t), but doesn’t do much by way of preventing that from happening. Pair it with a savings lottery, and you have a nice idea to help poor people build intergenerational wealth (a bigger problem). And of course the “payday lending” industry is ever-unpopular, so it’s an easy political solution.
Finally, you have a question of what is done with the deposits. Direct loans (of course to ‘small business’)? T-bills? Muni’s? Redeposit in other lending institutions? I would, of course, warn that a public savings bank given a broad enough mandate would be a nearly irresistible vehicle for highly subsidized (and politically directed) lending. I don’t think that we’re headed this way; but the history is not exciting, nor are the possibilities — so it is a natural subject for me to think about.
On Twitter tonight, in reaction to recent metric modeling I have been doing (for free, for a college lab), I mused about the vast hypocrisy surrounding our societal views on employment, and asked about the signaling model that would produce them. Robin Hanson has asked the same question. The basic thrust of my Tweet was this:
If you are a student working for a lab, you pay for the ability to work. If you are an intern working for free, then you are selling your labor at less than marginal cost. If you are volunteering for charity, then you are selling your labor for nothing. How do each of these fit into a model of signalling?
The reason I ask about signalling is because you can’t assume such drastic asymmetric information that an unpaid internship (or a PhD in a school lab) has simply been hoodwinked by the cost…and charity is completely voluntary. But so is employment. Why is there a dichotomy in the choices offered?
Soon after, I was responded to by @nuveendhingra:
@cheapseatsecon Under CA law, unpaid internships must be educational and can’t give immediate benefits for the employer http://bit.ly/kVpqfW
And it turns out, he is right, but the law in California is actually worse than he describes:
- The training, even though it includes actual operation of the employer’s facilities, is similar to that which would be given in a vocational school.
- The training is for the benefit of the trainees or students.
- The trainees or students do not displace regular employees, but work under their close observation.
- The employer derives no immediate advantage from the activities of the trainees or students, and, on occasion, the employer’s operations actually may be impeded.
- The trainees or students are not necessarily entitled to a job at the conclusion of the training period.
- The employer and the trainees or students understand that the latter are not entitled to wages for the time spent in training.
This seems patently ridiculous to me. IF you are looking for training that is “like a vocational school”, then go to a vocational school. If you can’t afford it, then let the government give you cash. If you can’t hack it, then too bad. Training is always to the benefit of the trainee. The regular employees thing is an obvious rent-seeking attempt…but is unnecessary. The fourth criterion is the most baffling to me. The employer should be impeded by instructing someone? At this point, are we in second grade? Do we really not understand the theory of firms? Does anyone engaging in an unpaid internship expect their “deep theoretical insight” to be compensated? And if it should be, then why are the selling it at a zero price? Is there such a deep-seated asymmetry that we need to protect people from their own decisions?
No.
The impetus for these type of laws (making their rounds around the country!) comes from the fact that unpaid internships are highly valued, thus those who can pay for them, will pay lavishly. As evidenced by blogging. You better believe that I put that I’ve been quoted in Atlantic, and linked to by the NYT and Financial Times on my resume, not to mention linked to by economic professors from George Mason to UC Berkeley. It’s all there (and yes, “costly”).
Robin Hanson didn’t really “get it” when he posted the his first inquiry on Facebook in regards to Girl Scouts selling cookies outside a (say) WalMart. My response was, “Do the girls not need the money, or do they not get the money?” But we seem to be blurring that line for “formal work”.
Girls probably get something out of Girl Scouts. Being a guy, I have no idea what…but Cub Scouts is a status game among parents (even if it teaches you rudimentary skills). I assume that Girl Scouts is the same. But again, this is an echo-chamber where middle-class people reaffirm their middle-class-ness among other middle-classers. Rich people don’t do ‘scouts, and poor people can’t afford it.
So why the rules on unpaid internships? Well, because unpaid internships are the providence of rich people. They are a status symbol, not so much a learning experience (although if you view it differently, you reveal just where you stand)…the problem is that now “middle class” and poorer people are more and more sacrificing to (maybe) swallow the loss in wages. In response to the growing demand, the law is trying to turn the experience into a rote learning experience. The law can’t do that, because the value of an unpaid internship is (nearly) strictly status. If you dilute that, then rich people will just devise another plan to show status. After all, way back in the day ‘apprentice’ was a status symbol.
The model seems to be: When rich people have their own status game, it’s fine. When middle class people break into that status game, they need an upper hand through transfers. But when poor people enter, they need explicit protection.
Thoughts?
P.S. I’m sure that Robin Hanson understood the situation perfectly well, he just asked the question so idiots like me could write meandering posts like the one I just wrote.
P.P.S. “Idiots like me” is code for “making me think, but I don’t do it as well”.
Today, Barney Frank introduced legislation in committee to remove regional Fed presidents from the FOMC:
U.S. Rep. Barney Frank (D., Mass) Tuesday introduced a bill that would let interest rates be set only by Federal Reserve officials picked by the government, a new attempt to move power away from regional Fed officials chosen by the private sector.
The bill would remove from the 12-member policy-setting Federal Open Market Committee the five members who represent regional Fed banks. Only the seven-member board in Washington, which currently has two vacant seats, would get to vote on interest rates. The congressman said this would make the Fed more democratic and increase “transparency and accountability on the FOMC” by eliminating those officials who are effectively picked by business executives
Now, I have never been a fan of Barney Frank, but I do see merits in this legislation. However, first a contrary opinion, courtesy of Mark Thoma:
I can support – and have advocated — reforming the way in which regional bank presidents are selected. But this proposal, which removes geographical representation even though recessions do not hit each area of the country equally, is a bad idea (the Board of Governors can already veto the appointment of a regional bank president, though I don’t know of any instances where this power has been used). It takes us further away from the populist roots of the Fed’s structure, a structure that tried hard to represent all interests in policy. It also furthers the concentration of power in Washington that has been occurring slowly but surely ever since the Bank Reform Acts in the wake of the recession established the Fed’s current structure. In addition, it takes another step toward increasing the power of Congress over day to day monetary policy…I hate to even imagine how bad things would be if Congress had been in charge of monetary policy.
…reform the selection process for regional bank presidents, but don’t increase the concentration of power in Washington…I would like to see, at a minimum, less representation of business so that the public interest generally can take center stage.
While I can stand broadly stand behind the anti-concentration of power sentiment, if you have regions of a country which fluctuate so wildly from baseline that their performance creates a necessity for special accommodation from monetary policy in general, that is an OCA argument against having a single currency area. David Beckworth has argued that the “rust belt” in the US could have possibly benefited from its own currency over the last decade, and I agree!
Do we need regional Fed presidents at the table? After all, in the Great Contraction of 2008, and the ensuing recession, it has been the regional presidents that have provided the voice of hawkishness, even through tumultuous 2009! So when the chips are down, and adequate monetary policymaking is at its highest stakes, these guys were wrong…and being that they largely represent banking interests, they are likely biased against inflation at all costs. This certainly hasn’t been any help to our recovery!
Thoma is worried about Congressional power eroding sound monetary policy decision-making…but our current Fed structure doesn’t prevent that, indeed, it probably enhances it!* After all, Bernanke held the first press conference amid rising populist fears stoking an encroaching Congress’ ire regarding monetary policy. When Mark hopes that public interest would take center stage — and I do as well — but I don’t see how reforming the Fed presidents’ selection process is superior to having a board that is wholly selected by the President, and approved by Congress. If you want to do 12 members that way, so be it!
However, while Barney Frank’s motivation is mostly suspect, sometimes even then you stumble upon a good idea…but this idea isn’t good enough. If you are in a position where your legislation has little chance of making it out of committee, my play would be to lay all of my cards on the table: rewrite the Fed charter such that it requires the Fed to set one nominal target, and keep it on a level growth path. I would prefer NGDP, as I believe that targeting nominal spending is far superior to targeting inflation. This is obviously not Frank’s goal, and it would likely go against Franks (poor) instincts as it removes the unemployment portion of the mandate…but the level of employment in an economy is a real variable.
So what if trend NGDP was perfectly on target, but unemployment remained uncomfortably high. Is that a reason for monetary policy to act? Well, it could be…but there are other questions to ask of other policymakers. What are the structural problems? If there are supply side rigidities, look at removing them (not just removing specific laws, but increasing education, etc.). If you are uncomfortable with removing them, then live with higher joblessness. If there happened to have been an extremely productivity-enhancing technological development (like mass teleportation?) that is causing persistent unemployment because it significantly increases the return on capital investment vs labor investment, then perhaps the long-run growth potential of the economy has been increased — if that is the case, monetary policy may need to target a higher growth path for NGDP.
So, to sum it up, I think removing regional Presidents does make the board more accountable, and it would probably also improve the decision-making process. And if you really wanted to reform the Fed with an eye toward independence, remove the dual mandate and institute a explicit nominal target.
*Imagine a Congressional hearing under an NGDP targeting rule. What would it consist of?
Congressman: “Is NGDP on target”?
Fed Chair: “Yeop”.
Congressman: “Lets get lunch”.
That is obviously a joke, but it is the wiggle room created by the confusing dual mandate that allows Congress to leverage nearly all of its power against the bank.
On May 11th, 2011, my original blogging location, CheapSeatsEcon, will go offline, as I have decided not to renew the domain. It’s been quite an exciting ride from my humble beginnings as a free WordPress blog, to having my own domain, to writing for ModeledBehavior. I have been blogging for a little over a year now, and in that short amount of time I’ve made new friends, interacted with some of the most intelligent people in the econ/political blogosphere, done a couple QA’s for bigger sites, gotten quite a few e-mails from people asking various questions, and got some freelance work doing research locally. In short, it’s been much more eventful than I had ever dreamed!
One of the craziest things that ever happened to me was Tyler Cowen linking to my third post ever. I told literally everyone who would listen to me! The funny thing is, though, that I still get pretty excited when people link to my articles…it just never seems to fade (or maybe I’m just weird). I’ve gotten many compliments (and links) from people I greatly respect, and it’s been wonderful debating with everyone (I don’t want to name names, because you inevitably leave someone out)!
In any case, I’d like to thank all of the readers of the blogs for which I’ve written. You certainly are the reason that I write, and your support is the reason I am where I am today in the blogosphere!
P.S. If anyone is interested in the subject, and I get more time, I may start doing more posts about “complexity economic” theory; including implications and applications, and its relationship to the current state of the economy. I did a couple series’ on my old blog, but they weren’t very popular, and were very wordy (one of them was very math-y as well). If anyone else as any other suggestions (and I’m at the very least competent in the subject matter), you can comment or e-mail me and I’d be happy to write about them.
David Frum, commenting on the Keynes vs Hayek rap video released last week, makes a point that I noticed throughout the video as well:
The economic question we have faced since 2008 is not: “Shall the government of the United States dictate prices and production throughout the US economy?” Who advocates that? Not Larry Summers. Not Tim Geithner. Not Ben Bernanke. And if there’s any tiny remaining sliver of Barack Obama’s being that wishes for central planning, it to this day remains profoundly hidden beneath all his contrary appointments, policies, and pronouncements.
Throughout the video, “Keynes” asserts that in a depression, we need to start the flow of spending, to boost aggregate demand to a level in which the economy can sustain itself. Keynes, and modern Keynesians, believe(d) that fiscal policy could take up the torch of private spending while household balance sheets were mended, and that the boost in GDP would help us recover more quickly. And, while “Hayek” had some really brilliant lines throughout the video (“…if every worker was staffed in the army and fleet/we’d have full employment and nothing to eat…“, and my favorites: “…jobs are a means, not the ends in themselves/people work to live better, to put food on the shelves/real growth means production of what people demand/that’s entrepreneurship not your central plan…” and “…the economy’s not a car, there’s no engine to stall no expert can fix it, there’s no “it” at all…“), you’ll notice that through nearly all of the video, he is making a generalized argument against central planning. They’re talking past each other, or at the very least perceiving themselves as having two different conversations.
However, Frum runs into trouble with this:
The Hayek character says, “I feel for the suffering, I’m not some kind of jerk.” The Keynes character answers, “Now my old friend, I’d never reject you as if you were heartless, you know I respect you.”
But the suffering want more than “feeling.” They want a policy response. And it is precisely a policy response that our modern self-described Hayekians preclude. Monetary policy? No can’t do that – it only leads to inflation and more bubbles. Stimulative government spending then? No that’s out, it leads to inflation, bubbles, etc. Tax cuts for the ordinary working person such as the payroll tax holiday? No way – we must balance the budget. So that leaves only supply-side tax cuts aimed at the upper-income brackets. balanced by large immediate budget cuts in Medicaid, food stamps, unemployment insurance. Does anybody believe that such a policy mix will lead to rapid employment growth? The Heritage Foundation claimed so, for approximately 48 hours, but now even they have abandoned that assertion.
To the question: What do you do in a deflation, Keynes offered an answer. He intended his answer as a means to preserve exactly the kind of spontaneous order praised by Hayek. Keynes lived and died a liberal in the old sense of the term. There are many criticisms of the Keynesian answer, mostly having to do with that long term that he so famously shrugged off. But some answer is better than no answer – and much better than the answer offered by the modern self-described Hayekians.
I don’t know about “modern, self described Hayekians” (actually I do, but I don’t want to speak for them), but this wasn’t Hayek’s position at all. As Larry White has pointed out in a JMCB article:
The Hayek-Robbins (“Austrian”) theory of the business cycle did not in fact prescribe a monetary policy of “liquidationism” in the sense of doing nothing to prevent a sharp deflation. Hayek and Robbins did question the wisdom of re-inflating the price level after it had fallen from what they regarded as anunsustainable level (given a fixed gold parity) to a sustainable level. They did denounce, as counterproductive, attempts to bring prosperity through cheap credit. But such warnings against what they regarded as monetary over-expansion did not imply indifference to severe income contraction driven by a shrinking money stock and falling velocity. Hayek’s theory viewed the recession as an unavoidable period of allocative corrections, following an unsustainable boom period driven by credit expansion and characterized by distorted relative prices. General price and income deflation driven by monetary contraction was neither necessary nor desirable for those corrections. Hayek’s monetary policy norm in fact prescribed stabilization of nominal income rather than passivity in the face of its contraction.
The bolded line is important, because if you take the Sumnerian theory of the Great Recession seriously, or even the most common explanation of events leading to the Great Contraction (’29-’32), the problem is that the monetary authority (the Federal Reserve) allowed NGDP expectations to fall off a cliff in late 2008 by passively tightening monetary policy…and that is exactly the opposite of what Hayek would have considered proper macroeconomic stabilization policy. As I understand Hayek’s NGDP rule, the central bank should stabilize M for any given V, consistent with zero aggregate growth in in the price level (PY), which would result in the type of deflationary growth that Hayek (and George Selgin) advocated.
No need to take White’s interpretation, though, here’s Hayek himself, agreeing with Keynes on the matter of deflation (though not the prescription of government expenditure, which is redundant with a NGDP level target):
On the first issue — whether to use one’s money or whether to hoard it — there is no important difference between us. It is agreed that hording money, whether in cash or in idle balances, is deflationary in its effects. No one thinks that deflation is in itself desirable.
Really, on the issue of monetary policy, I see Keynes and Hayek arguing together against the ever-popular real-bills doctrine
The debate about central planning was indeed contemporary in the 30′s, and today I think many libertarians don’t recognize or appreciate the extent to which we’ve won on that point…Hayek, indeed had a good (and I believe superior) answer to Keynesian fiscal policy…but you unfortunately won’t find it in the Keynes/Hayek video.
Note: I’m not foremost expert on Hayek, but I’m sure that if Greg Ransom (and others!) reads this blog, he will correct my errors in the comments!
Update: Tyler Cowen makes the same point in a single sentence…bet you wish I had put this update at the top ;].
“A slow sort of country!” said the Queen. “Now, here, you see, it takes all the running you can do, to keep in the same place. If you want to get somewhere else, you must run at least twice as fast as that!” -Lewis Carroll, Through the Looking Glass
I have constructed a chart extrapolating the trend growth in nominal GDP* through 2013, along with the FOMC’s forecast of nominal growth through 2013.** Have a look:
[Click Image to Enlarge]
As you can see, by the Fed’s own forecast, we will remain under trend growth in NGDP through 2013. Indeed, by the fourth quarter, we will be 10.2% below the trend. That is roughly $1.7 trillion in potential output! I regard this as the “one chart to rule them all”, and it is what I point to when people ask me why we are experiencing a sluggish “jobless” recovery.
Always keep in mind, though, prediction is a fools errand over anything but the shortest of time spans. The key here is that there is only one way the prediction can be off such that it would benefit the economy. Those aren’t good odds to take.
*FRED
**Average of the central tendency.
I, for the life of me, can not understand where Stephen Williamson is coming from in the recent posts he’s done claiming that Quantitative Easing is ineffective, and that the Fed is completely out of tools which it can use to boost the economy. Here are the points he made from his most recent post, entitled “Mark, Brad, and Ben“:
- Accommodative monetary policy causes inflation, but with a lag. I think Brad’s inflation forecast is on the low side, as maybe Ben does as well. The policy rate has been at essentially zero since fall 2008. Sooner or later (and maybe Ben is thinking sooner) we’re going to see the higher inflation in core measures.
- Maybe Ben is more worried about headline inflation (as I think he should be) than he lets on.
- Maybe in his press conference Ben did not want to spend his time explaining why the Fed spends its time focusing on core inflation. What every consumer sees is headline inflation, and they are much more aware of the food and energy component than the rest of it.
- As with my comments on Thoma, there is really no current action that the Fed can take to increase the inflation rate. More quantitative easing won’t do anything, so the Fed is stuck with saying things about extended periods with zero nominal interest rates in order to have some influence through anticipated future inflation on inflation today.
Most of the list simply baffles me. First of all, accommodative monetary policy can cause inflation. And of course in the long run, a stable monetary policy only affects prices…but the blanket statement that monetary policy causes inflation is misleading, and highlights a problem with even talking about inflation. In a standard AS/AD model, the determinant of the composition of NGDP growth is the slope of the SRAS curve. In recessions, it is generally understood that the SRAS curve is relatively flat. In that case (arguably the case we are dealing with right now), an accommodative monetary policy which shifts the AD curve to the right would result in much higher output growth than inflation. As for the lag part, monetary policy has an almost immediate (< one quarter) impact on many markets; including interest rates, stock/commodity prices, inflation expectations, etc. Here is a chart of those market reactions to both QE's courtesy of Marcus Nunes:
[Click Image to Enlarge]
In each case, you can see that asset prices had a quite immediate response to quantitative easing. QE2 performing poorly doesn’t indicate that QE doesn’t work, it highlights problems with how the policy was implemented. Specifically, the Fed structured the policy around purchasing a specific quantity of Treasuries ($600bn) instead of setting a target level of nominal spending, or even a price level target, and then commit to purchases until that target has been reached.
Second, why would Ben Bernanke be worried about headline inflation when nearly every forecast from the Federal Reserve views the current rise in headline as temporary? Here is the SF Fed, which I posted earlier:
[Click Image to Enlarge]
Indeed, the FOMC’s own report states as much. Furthermore, we have a good idea of what is causing the bump in headline inflation, and that is the energy prices. We also have good reason to believe that this is due to rising demand in the briskly growing emerging markets, and the inability to ramp up supply. What in the world is monetary policy supposed to do about that? Is Williamson advocating tightening policy while NGDP is still FAR below trend, and we are not experiencing enough growth to catch up to the previous trend?
I don’t have many quibbles with the third point, but the fourth point is the one that floored me the most. I’ll outsource commentary to David Beckworth in a comment on Williamson’s post:
Steve,
Why do you keep saying there is nothing the Fed can do? You acknowledged in the comment section in your last post that the Fed could do something more via a price level or ngdp level target. By more forcefully shaping nominal expectations with such a rule the Fed could do a lot.
It is worth remembering that folks were saying the same thing about monetary policy in the early 1930s. They were certain there was nothing more the Fed could do and as a consequence of this consensus we get tight monetary policy and the Great Depression. Then FDR came along and change expectations by devaluing the gold content of the dollar and by not sterilizing gold inflows. His “unconventional” monetary policy packed quite a punch.
And here is my comment:
I’m with David on NGDP targeting. But even if the Fed didn’t do that, it has its interest on reserves policy, and the last I checked, it hasn’t set an explicit inflation level target, and there is ~$14 trillion in outstanding Treasury debt held by the public that the Fed does not yet own…something Andy Harless has pointed out on numerous occasions.
Here is a word cloud of words used by Bernanke during the press conference which was held today:
[Click Image to Enlarge]
As you notice, inflation was mentioned quite a bit, which, really, is something that you should expect from a QA with a monetary policymaker. Many are lamenting the fact that unemployment took a back seat, and Reuter’s itself challenges us to find the word “jobs” in the word cloud. Personally, I enjoyed the fact that Bernanke basically said jobs are someone else’s policy purview — which I view as the right response. However, the fact remains that monetary policy is not on target, and that is a problem for Bernanke. A bigger problem may be that 2% inflation isn’t a target at all! Could the US be following Japan’s lead into self-induced paralysis?
In any case, here is the question (and rest of the e-mail, references removed) that I sent to be asked, which did not get asked:
First, thank you for sending me your e-mail address. I’m tepidly excited about Bernanke’s press conference tomorrow…but I have a lot of reservations. You could probably call me old-fashioned, but I’m always leery of public policy “rock stars”, like the “Committee to Save the World”, and Ben Bernanke being “Man of the Year”. In any case, I think there is going to be a strong focus on grilling Bernanke on employment levels (I see that David Leonhardt wrote a column urging that to be so). I view this as very counter-productive.
But I did tweet you my question, which was this:
“As recently as 2003, Bernanke [You] championed price level targeting as a remedy for the ‘liquidty trap’. Many other economists also endorse this idea. Given the failure of monetary policy in preventing a sharp fall in GDP in Oct 2008 w/ inflation targeting, what are your thoughts on NGDP lvl targeting? Implementation challenges? Benefits or costs that you see?”
I wanted to provide some background for this question, because it can seem like it is kind of out of left-field, given a “mainstream” interpretation of events. As you may know, many prominent economists (Krugman, DeLong, Blanchard) have publicly advocated an explicit inflation of greater than 2%. A subset of this work was done by Lars Svensson[1] and Ben Bernanke himself[2], only instead of using inflation targeting, both economists have advocated setting an explict price level target in order to escape the “liquidity trap”. Another strain of this work that has been popularized recently by Scott Sumner, David Beckworth, Marcus Nunes, Josh Hendricksen, and myself, (among others!) involves monetary policy targeting nominal cash expenditures in the economy, or NGDP. More “academically”, Robert Hetzel[3] and Michael Belognia[4] have advocated that cash grow at a steady pace.
A common theme among those who push the “NGDP level targeting” view and others is that we tend to believe that causality in this recession runs (roughly) this course: mild supply shock (subprime) > tight money (Jun – Nov 2008) > large crash (Oct 2008) > inadequate Fed accommodation (2009/2010) > sluggish and “jobless” recovery. Indeed, even Christina Romer seems to be on board with something like this interpretation[5]. In my opinion, the Fed should target like a laser on the long-run growth path of NGDP, and keep it growing on a stable path (5% was the trend of the Great Moderation, but some economists advocate a transition to 3% nominal growth), making up for slack and overshooting when it happens by loosening or tightening money (respectively) such that the market forecast and the Fed’s forecast are basically one-in-the-same. This leaves little room for paying much attention to the level or rate of employment in the economy. The only time that should concern the Fed is if there is a large enough structural change that they should revise their NGDP target based on a sustainable increase (or decrease) in productivity (be it labor, capital, or TFP).
As an aside, David Beckworth has urged the Fed to target the cause of macroeconomic instability, and not symptoms of it[6]. Unemployment is one symptom, as is inflation/disinflation/deflation. From this perspective, NGDP level targeting is far superior to price level (and inflation) targeting.
I hope that gave you a brief (but adequate) overview to acquaint yourself with the NGDP level targeting position if you were unfamiliar, so you’re not shooting in the dark. I know you probably won’t get to the references. As a tactical request, if you see it fit to use my question, I’d work hard to get an answer out of Bernanke regarding NGDP targeting rather than price level targeting. The reason I bring this up is that if you mention “price level targeting” in the question, while you make the question more likely to get answered (price level targeting is more mainstream), you also give Bernanke an out in that he can simply muse about price level targeting and avoid the NGDP targeting question altogether, even though they’re different concepts. It’s a tricky pole to balance.
Thanks for allowing me to participate!
Niklas Blanchard
http://www.modeledbehavior.com
[1] http://papers.ssrn.com/
[2] http://www.federalreserve.gov/ and http://people.su.se/
[3] http://www.richmondfed.org
[4] http://mpra.ub.uni-muenchen.de/
[5] http://emlab.berkeley.edu/
[6] http://macromarketmusings.blogspot.com/ and http://macromarketmusings.blogspot.com/
Sadly, there were no intrepid reporters in the audience venturing these grounds.
[h/t Paul Krugman]
I didn’t do anything cool, or come up with any neat, contrarian, controversial, or interesting points to tell you about Earth Day (luckily there is always Mark Perry). So an old postcard that I designed will have to do.
[Click Image to Enlarge]
The picture of earth was a bump and shadow map, and the text was custom (and quite time consuming to make), the postcard was a stock image, but the postage stamp and ink stamp were added =].
If you have any such points about earth day, share them in the comments!
Because I didn’t want to register with the UK government site on which Leigh Caldwell posted his ideas for behavioral analysis in the structure and deployment of services, I’ll comment here.
The rationale for Leigh’s wild and irresponsible proposals*:
While some behavioural interventions are being explored through the Cabinet Office’s Behavioural Insight Team (with some success) these tend to be relatively simple adjustments to framing of specific choices available to citizens. A deeper re-examination of the economic assumptions used in public service contracting and forecasting could lead to real improvements in outcomes and efficiency.
Some specific sectors that Leigh targets:
- Health care, where behavioral modelling of the consumption of health services may lead to more efficient deployment and use of resources.
- Education, where behavioral analysis could help bring incentives and signalling in line with cost savings in order to reduce spending while maintaining quality.
- Welfare and social security, where structuring incentives could help raise people out of poverty by building productivity, and encouraging formation of savings. Thus, reducing dependence on the state in the long run.
Now, I’m only a smidgen a behavior economist (having read varied works from the Santa Fe institute), but I’ve always been at least cautiously optimistic about the prospect of what Richard Thaler refers to as “libertarian paternalism“. Leigh is a crazy lefty*, but I trust that he believes in choice, and understands that choice is often not the problem in and of itself. Choice sets often are given various cognitive biases. Thus, choice architecture can preserve the ability of the individual to make a choice, but incentivize choices that are in the best interest of the decision maker.
I’m not too familiar with the first two categories Leigh lists, but I am broadly familiar with the third (which is the most “popular”). There are several ways in which the government could better structure incentives to produce superior long-run results, but I want to focus on one real-world example. The Oportunidades program, an the anti-poverty program in Mexico. The program is centered around providing cash transfers that are linked to incentive goals:
Oportunidades is the principal anti-poverty program of the Mexican government. (The original name of the program was Progresa; the name was changed in 2002.) Oportunidades focuses on helping poor families in rural and urban communities invest in human capital—improving the education, health, and nutrition of their children—leading to the long-term improvement of their economic future and the consequent reduction of poverty in Mexico. By providing cash transfers to households (linked to regular school attendance and health clinic visits), the program also fulfills the aim of alleviating current poverty.
The Oportunidades program has by many measures been very successful in reducing extreme poverty in Mexico. In the long run, these types of behavioral-influenced programs can lead to considerable long-run gain in productivity, health, and personal finance.
I think that the British government would do well to invest in research of this type. While I doubt that behavioral economics will revolutionize the field of economics as a whole (at least until highly useful simulations are commonplace, right now we have variants of sugarscape and the game of life/prisoner’s dilemma), behavioral analysis can be extremely useful at the margin.
As an aside, I am curious whether this web interaction between the government and private citizens/businesses is a Conservative thing, or just something the British government does?
*Just kidding. I consider Leigh a good friend.
Here’s a problem:
You’re a member of a large industrial union. Your employer has a large project in the works, which will involve a new plant, new employees, and a lot of new revenue. However, you have previously priced yourself out of the market in negotiations. Now, the company is planning on building the plant on foreign soil, where productivity is probably close to parity, but the unit cost of labor is much cheaper. What do you do?
Well, you petition the government to restrict the flow of capital across borders. That’s what. Who is this evil corporation, and who are these nefarious foreigners stealing our jobs?! Boeing, and South Carolina.
In 2009 Boeing announced plans to build a new plant to meet demand for its new 787 Dreamliner. Though its union contract didn’t require it, Boeing executives negotiated with the International Association of Machinists and Aerospace Workers to build the plane at its existing plant in Washington state. The talks broke down because the union wanted, among other things, a seat on Boeing’s board and a promise that Boeing would build all future airplanes in Puget Sound.
So Boeing management did what it judged to be best for its shareholders and customers and looked elsewhere. In October 2009, the company settled on South Carolina, which, like the 21 other right-to-work states, has friendlier labor laws than Washington. As Boeing chief Jim McNerney noted on a conference call at the time, the company couldn’t have “strikes happening every three to four years.” The union has shut down Boeing’s commercial aircraft production line four times since 1989, and a 58-day strike in 2008 cost the company $1.8 billion.
The NLRB has obliged union requests to halt Boeing’s production of the plant while the decision is under investigation for “anti-union animus”. I tweeted that this was blatant union over-reach, and it is! Now, I’m on the record somewhere on the internet making the claim that if you support free markets, you should naturally support unions. That is very counter-intuitive, but the fact is that unions would be much more prevalent in almost every aspect of life in a totally free market. In Max Barry’s book, Jennifer Government, which is a story about a corporatist dystopia, the plot-line revolves around two consumers unions, US Alliance and Team Advantage. Unions would simply be a market-oriented way of organizing against monopolistic competition — and maybe not be the most efficient.
However, while I don’t begrudge the right for unions to form and attempt to bargain, I also don’t begrudge the right of management the say, “FU, we’re going somewhere else”. In an ideal world, they would do this free of government playing for either side. But in this case, we have the government contemplating restricting capital flows between states! The United States, as understood properly, is the largest free trade area in the world. That has been a huge comparative advantage for the US historically, and arguably the reason that we are at the top of the world economic pyramid today. Restricting the flow of capital makes us poorer by reducing productive employment, and increasing prices. It’s a very poor precedent to set.
P.S. I do have to hand it to labor, though…they certainly don’t seem to be afraid of taking their protectionism to its logical conclusion.
“If the coin be locked up in chests, it is the same thing with regard to prices, as if it were annihilated.” David Hume — Of Money
One more post on Steven Landsburg’s taxation problem. My previous post is here.
As I had stated before, as a matter of simple accounting, you make the math work out fairly easily to where consumption would have to fall a cumulative total of $84 million dollars. But introduce savings vehicles, which you can not assume away. How is this idle money being horded? There are a quite a few options, I’ll detail three:
Money Market Account: What if our idle millionaire holds his money in an MMA, earning (say) the 10yr Treasury rate of interest, which is then reinvested in Treasuries? The IRS takes his money, and the government spends it on goods and services. Does this reduce consumption future consumption while not affecting idle millionaire’s position? Yes-ish, but only to the extent that the risk-free real interest rate rises, and causes a fall in investment. You could get to a wash in this situation, though…if the government is investing the money at a higher ROI (i.e. it takes the money and invests in a project that cures all cancers with a single pill*).
An Index Fund: Now say our idle millionaire has his money in broad index fund, earing the average rate of return (5%), which is then reinvested back into the fund. The IRS takes his $84 million, and spends it. What the IRS has done here is to reduce the long-run stock of capital in the economy by some amount. IF the government can find a higher ROI than the entire basket of companies that idle millionaire held, then in the long run, there is no fall in consumption. However, that is a tall order, and unlikely to happen. Thus, I falls, and over a period C falls by ~G. Giving an answer that could be close to Landsburg’s result. This is because at the margin S ≘ I.
Mattress: Finally, lets say that our idle millionaire stuffs his mattress full of $84 million. His preference for sleeping on mattresses full of money non-withstanding, what our millionaire has done is reduce the stock of currency. This is the assumption that leads to the phrase “money is not wealth”. Indeed, money is not wealth! But the key is that our guy has already reduced long-run consumption by at least $84 million! This is because S ≠ I in this scenario. Hume explains this in the above quote. So, say the IRS steals his money, and simply keeps it in the mattress for IRS agent Joe to sleep on during lunch? The net effect is nothing happens, because consumption has already been reduced. What if the government spends it on stocks of a company which immediately goes bankrupt? Then society has lost. But if the government simply transfers $1 to 84 million people, then consumption will rise by…~$84 million.
However, this is not optimal. The optimal solution, given that the monetary authority is aware of our guy’s mattress, is to increase the money supply by $84 million. As Leigh Caldwell said in a Twitter conversation (the question was “What Would [Scott] Sumner Do?”):
@leighblue: well, I think he’d say that first the Fed should be printing a new $84m if it knows about the mattress; to be withdrawn when the guy takes his money out of the mattress. NGDP futures in theory would make this happen automatically.
In the real world, our millionaire, Mr. Kendrick, probably owns a basket of assets that includes Treasuries, stocks, corporate bonds, real assets, and currency. In the real world, the government may be hard pressed to tax Mr. Kendrick in a way that is welfare enhancing in the aggregate (even at less than full employment). Not saying that it couldn’t, just saying that it would be uphill battle.
P.S. I still firmly stand behind my “club goods” critique of this problem, although I’m assuming that Landsburg would disagree.
P.P.S. You can object that I’m overestimating the investment efficiency of the private sector over the public sector.
P.P.P.S. You’ll notice that I used investment above quite liberally. It is extremely hard to think of situations where the government is strictly consuming income, besides deadweight loss of transfer. It is also very hard to think of situations where individuals are strictly consuming income, which is a technical point that caused Garett Jones a lot of flack recently. Hence, money does not equal wealth.
The FINAL P.S. (I swear!): Paul Krugman posted a rebuttal to Landsburg’s problem that I think is misunderstood by many looking for contradictions (including my favorite blogger). PK’s hypothetical model assumes that government > no government. So if G is at 0, then any other state of affairs is welfare enhancing. Take your stand on the political spectrum on this one (mine is far to the…I guess right?…from Krugman’s, if you were wondering), but this is the model. The idea is that C (and I) in a world without a financed government would be drastically lower than C (and I) in a world where government steals Kendrick’s money, so by taxing Kendrick, the government (as an institution) is providing a higher level of C (and I) and would otherwise prevail under a situation where G = 0.
Extreme, I know. But the point is that government starts from the disadvantage of a priori deadweight loss. More realistically, you could say that government takes $84 million and invests in a technology which is capable of educating children and young adults much more efficiently than our current arrangement. As an aside, in this scenario, the Treasury issuing $84 million in new Treasury notes, and the Fed buying them with $84 million in newly minted currency would make this situation a wash.
Here is a data point given by Glenn Rudebusch (h/t Mark Thoma), vice president of the San Francisco Fed, in the recent FedView:
A simple rule of thumb that summarizes the Fed’s policy response over the past two decades recommends lowering the federal funds rate by 1.4 percentage points if inflation falls by 1 percentage point and by 1.8 percentage points if the unemployment rate rises by 1 percentage point. Either headline inflation or core inflation can be used with this rule to construct policy recommendations. Relative to a core inflation formulation, a policy rule using headline inflation would have called for a higher fed funds rate in 2005-2006 before the recession and in 2008 in the midst of a deepening recession. Currently, both formulations call for substantial monetary accommodation.
The Fed, in it’s October meeting (after Lehman had failed on Sept. 16th) lowered their target fed funds rate only 50 basis points to 1.50. That week (Dec. 6th-10th), the DJIA fell 18%, but it wasn’t until Oct. 29th that the Fed met hastily in an emergency meeting to cut rates…50 basis points, to 1.00. What metric could they have been watching that would suggest (in a historical sense) that inflation was the problem, and not deflation? It could only have been headline inflation!
[Click Image to Enlarge]
Core inflation has closely tracked a median ever since the Fed concerned itself with keeping inflation low (and stable). But what you really have to ask yourself is; what good is having a target when you are able to move between whatever measure suits your inclination at the moment? There is, of course, a mechanism by which inflation in energy prices (and thus broad inputs) can translate into a higher trend in core inflation (60′s-80′s), but this hasn’t been the case for thirty years.
The key here is that monetary policy should not be engaged in inflation targeting. Inflation is a symptom of an underlying problem (AD or AS shock), for which the Fed can only react to AD. If the Fed concerns itself with reacting to AS shocks, then we end up where we were in late 2008, with plummeting NGDP. The Fed should target the variable that it has control over, and keep it growing at a stable long-run rate.
Update: Accidentally hit the “Publish” button instead of preview. In any case, the SF Fed’s forecast is that the rise in commodity prices is unsustainable given the level of depressed aggregate demand in much of the world economy. Here is the chart:
The SF Fed also predicts a persistent (and rather large) output gap through 2012! That is a monumental failure of monetary policy.
[Click Image to Enlarge]
For the record: I understand that the severe disconnect starting in 2007 is a product of cyclical spending during the recession, and shrinking wage growth. However, since 2000, we’ve had a large and growing disconnect between the amount the government is spending and the ability of the median household to pay for that growth. And so, as Karl likes to say, there will be taxes.
Government Spending source.
Median Income source.
There is a lot of talk about health care in terms of giving consumers of medical services choice in a marketplace. The basic cost-control measure that the Ryan Plan hopes for is that a market in health insurance will lower prices. Well, it likely won’t. The mechanism that will control prices is the willingness of people to make up the difference between Medicare vouchers and the actual costs. But brushing that aside, Paul Krugman takes ultimate offense to the characterization of “patients as consumers“:
Medical care is an area in which crucial decisions — life and death decisions — must be made; yet making those decisions intelligently requires a vast amount of specialized knowledge; and often those decisions must also be made under conditions in which the patient is incapacitated, under severe stress, or needs action immediately, with no time for discussion, let alone comparison shopping.
[...]
The idea that all this can be reduced to money — that doctors are just people selling services to consumers of health care — is, well, sickening. And the prevalence of this kind of language is a sign that something has gone very wrong not just with this discussion, but with our society’s values.
Of course it is very true that life and death situations are made in the field of medicine…probably every day if not at a single hospital, at hospitals as a whole. But the actual truth of the matter is that the bulk of medical spending of the average person does not involve death at all…just nagging, often temporary, quality of life issues. In fact, outpatient care (which includes routine and sick visits to the doctor and same-day hospital visits), drugs and non-durables (which includes things like wheelchairs and other medical supplies), and administration account for ~2/3rds of all medical spending in the US.*
In this aspect of medical care, patients are consumers, and would benefit from price competition in a less-regulated market. Having strep throat doesn’t so much require “specialized knowledge”, as it requires a signed piece of paper so that you can get specialized drugs. Most moderately bad cuts are treated with the highly technical, and extremely specialized skill…applying super-glue.** Same thing with pain management, which in the name of the “War on Drugs”, we severely limit and police. This is why I think that leftist-liberals get it exactly backward when they want to push people into insurance markets, and then use a lot of administrative tricks in order to control costs. What you want to do is push people into a market for these services, perhaps by subsidizing price competition.
Then we can discuss the extent to which the government should intervene as a single payer for the remaining 1/3 of medical spending; which includes inpatient care (plus some emergency outpatient procedures from the previous category), long-term care, and end-of-life services, among a few other things. The point is you can’t just wrap the blanket of “life and death” and “specialized information” around every single medical service, and then claim that markets don’t work.
As an aside, is it really wise to base regulation on perceptions of different groups of people? Seriously?
*The information is a little dated, but it hasn’t changed much if at all: http://nihcm.org/pdf/EV_JensenMendonca_FINAL.pdf.
**I pride myself on the fact that I’ve super-glued many a cut of my own! Also, I have some odd illness that is STILL untreated, and it is naggingly annoying…however it’s hasn’t proven “life or death”. I would have much preferred shopping on price for services (like my CT scan for instance, which was $1,500) to having my insurance company pay tens of thousands of dollars in tests and visits — all which have yielded no results.
Noah Smith graciously responded to my post regarding education, pointing out a very interesting fact that I had overlooked:
Niklas Blanchard at Modeled Behavior basically agrees. But there is one point of mine that I think he doesn’t quite get. He asks: “But why would there be a supply shortage at such high tuition rates?” His answer is that universities require such huge initial investments, and take so long to pay off, that building them is not feasible for the private sector. I think that although this is true, the main reason for the supply shortage is that schools don’t “pay off” in the traditional sense, ever. Colleges just seem to only work well as nonprofits. And the only people who are willing to invest huge amounts of money in nonprofits are the government and rich private individuals (e.g. Leland Stanford). We have a supply shortage because governments make the decision whether or not to build new public-school campuses (and recently they have not done so), while colleges themselves can only respond to skyrocketing demand by raising price.
I agree, and this adds to the discussion…but this fact also raises even further questions.
First, what makes universities “work” as nonprofits and not for-profits? I suspect that there is a tiny bit of bias in the datasets between state universities and for-profit colleges as far as outcome, but still, for-profit institutions have a very large dropout rate*, and generally don’t have the prestige of even a poor state-sponsored institution. For example, I live in Council Bluffs, IA, where graduating from Iowa Western Community College is something of a badge of honor, and graduating from ITT Tech is sort of a joke. Still, seems like a value (aka signalling) judgement.
Bottom line: if the fact of reality is that you need a piece of paper marked by calligraphy (as network theory would suggest), then institutional capital plays a large role in differentiation.
Second: We are more wealthy now than we have ever been as human species. However, in the 18th/19th centuries the mark of a successful philanthropist was to start a university (i.e. Leland Stanford). Where are the philanthropists today? Today, the mark of a successful philanthropist is starting a fund for children in Africa. I don’t begrudge this development (although I do begrudge the deployment of much philanthropy), but it bears investigation. The closest analogy I can think of is live-performed classical music, which survives almost solely on government subsidy. There is an interesting story here. The marginal productivity of performing Beethoven’s 9th is not changed since the 19th century. In fact, more people know it more perfectly today than ever before in history. We can reproduce it in multiple mediums, at higher quality than any single person watching Beethoven conduct his symphony ever dreamed. Yet, many countries see it fit to heavily subsidize the live performance of the opera.
I doubt a for-profit company would structure themselves around playing the Classicals. But back to the issue at hand. The dichotomy between the highly wealthy and the common man was astronomically higher in previous times than it is today. One would say that it is like the wealthy today vs. the poor in Africa. And that would explain the trends in philanthropy. People in rich countries have risen to a level of affluence such that class is not about income in America, it is more about various measures of signalling in a large echo chamber. I would point out that the initiative for universal education has made the world this way, but that seems redundant. The point is that the “theory of second best” would say is that since increasing levels of wealth, and previous government distortions provided us with a landscape where it is incredibly hard to build institutional capital for a new university, then the government should step in an provide for the deficit.
My reading: There was a market for education, and then the market was destroyed by productivity, and subsequently subsidized.
I’d be eager to hear your take (and what Noah has to say)!
P.S. If you buy this analysis, it points to either a structural deficiency in the way humans acquire skills, or a structural deficiency in the way certain groups perceive humans acquire skills. I tend to lean toward the latter.
*Note, that many of these comparisons are not “apples-to-apples”. I work for a university that caters to the armed services, adults, minorities, and foreign exchange students. One cannot expect that we would have the graduation rates of a typical four year institution.
In his Kentucky Day with the Commissioner (?) presentation today, James Bullard makes the case for targeting headline inflation. This is likely consistent with the recent hawkish turn he has taken, but is it correct? Is it true that we should expect core inflation to be a predictor of headline inflation, as he suggests?
First things first, though. Bullard proclaims victory for the quasi-monetarists:
This experience [rising asset prices in multiple markets, including stocks, bonds, commodities, as well as declining real interest rates and a depreciated dollar] shows that monetary policy can be eased aggressively even when the policy rate is near zero.
But then Bullard takes a turn toward hawkish land, with five points regarding core vs. headline inflation:
- Headline inflation refers to overall price indexes.
- Core inflation refers to the same indexes, but without the food and energy components.
- Core inflation is often smoother than headline inflation.
- Core eliminates 20% or so of the prices in the index.
- The “core” concept has little theoretical backing. It is very arbitrary.
Here is my problem: Our measures of inflation are both dubious at best, and a lagging indicator. The focus on headline inflation in the run-up to the crash of 2008 is the reason why monetary policy failed. Nowhere in the talk did Bullard mention unemployment, which I view as a good thing. However, he could have mentioned that a wage-price spiral requires that wages spiral, as well. That doesn’t seem to be happening:
[Click Image to Enlarge (h/t Paul Krugman)]
I didn’t hear the lecture, but from reading the notes, I’m quite confused. Does Bullard believe that the current spike in headline inflation is a trend, and why? Furthermore, should the Fed be targeting where inflation has been, or the forecast of future inflation, which is within a reasonable range as of right now.
[Click Image to Enlarge]
It all seems to me to strengthen the case for NGDP level targeting. Then we wouldn’t be having these silly debates. All you have to ask is: “Is NGDP growing on target?”
[Click Image to Enlarge]
Not quite yet. And furthermore, I would argue that we need a period of above-trend growth in NGDP in order to get capacity utilization level to their previous trend as quickly as possible. There may be merit to shifting to a lower trend rate of NGDP growth, but not at a moment when capacity utilization is low, and unemployment is high. In short, I see no threat of the current headline inflation pressures translating into accelerating inflation. The Fed should continue to be accommodative until at least the point that we reach the previous trend level of NGDP.
P.S. Sorry for the incredibly bad charts. For some reason, Excel is force closing on my computer now, and I had to switch to using Openoffice.org. I am less than impressed, to say the least.
Given the skyrocketing costs of higher education in the United States, it is worth asking whether there is a supply side deficiency in higher education, or is education a bubble that might or might not be particularly hard to pop? Especially given that student debt has surpassed credit card debt for the first time ever. Noah Smith raises this question on his blog in response to a Matt Yglesias post regarding human capital stagnation. I am intending this as simply raising questions about the subject. As you will note by the end of the post, I offer a hypothesis that broadly agrees with Noah.
Yglesias is, of course, completely right. In fact, human capital stagnation seems to me a much likelier culprit for a “Great Stagnation” than the dubious hypothesis of a slowdown in technological innovation. People can’t spend their whole life in school, so education really is “low-hanging fruit”.
The buildup of Noah’s post pretty much screams his conclusion: supply shortage. But why would there be a supply shortage at such high tuition rates?
The skyrocketing prices you see after 2000 does not reflect skyrocketing enrollment. If you look at his previous graph, enrollment in four-year programs has had a fairly uniform increase throughout the last half of the last millennium. Enrollment in two-year programs is essentially flat. If I showed you similar graphs regarding the housing boom vis-a-vis population (which Karl, in fact, has done!), you would likely immediately assume that there is a bubble. Enrollment, just like population, has grown fairly predictably. At least predictably enough for investment in educational capacity.
So no, I don’t really buy the supply story as a full explanation. But it is useful to ask why supply hasn’t expanded roughly congruent to the increases in price? One (I think powerful) explanation is that the fixed costs to education (the buildings, the teachers, etc.) is expensive, and that half (or more) of the battle is building institutional reputation. Private schools (like DeVry and Kaplan) have overcome the first barrier, but have largely failed to overcome the second. This is where the idea of the government (at least initially) funding a national university system actually has a lot of merit. The government is likely the only institution that can hemorrhage money at the rate it would take to build the institutional capital a successful, and respected post-secondary institution would need. As Noah notes, there is no shortage of Ph.D’s out there looking for work (but this isn’t, in-and-of itself a reason to hire them).
Another useful question to ask is, why don’t universities price based on demand for classes? Almost every university has a fixed tuition rate for every class, and then we try and shoehorn people into a financing option that satisfies said price. Our university certainly does, and it’s not at at clear that is the best use of resources. We often cancel classes that don’t attract enough students…but why? The professors don’t get allocated any differently, they just have one less class that semester. The marginal cost of educating a student is very, very low. Why not advertise a discount special, and fill those desks? You’re still paying the professor, and you already have the building (or online classroom, for that matter). It would be a golden opportunity for disadvantaged kids to snag education on the cheap. You may say that this would lead to many people putting off enrolling in classes until specials arise. It might (but excellent, consumer surplus and all), but that isn’t the experience of car dealerships trying to move inventory to make room for new inventory.
The answer to the second question, I suspect, has a lot to do with signalling…which could also be the driver of the inflation of education in a more broad sense. No one wants to have the status “discount school”.
Addendum: An alternative (and compelling) explanation has to do with the wage transmission mechanism between the financial sector, and finance/math/physics/econ professors. Their marginal productivity is literally based on enrollment, and largely fixed…and certainly hasn’t grown at an extreme pace. What has grown at an extreme pace? The salaries of their alternative options in the finance sector.
Karl has a post earlier today where he makes the case that the “love hypothesis” broadly explains trends we see in k-12 education. Specifically, that we school children in ways that show we care, rather than ways that maximally benefit children. However, he then brings up that this wouldn’t explain rising student debt:
What the love hypothesis doesn’t explain is rising student debt. Why are the students themselves taking on ever larger burdens. Is it so they can prove that they love themselves? That’s not totally implausible, but out the gate it doesn’t seem very compelling.
Fortunately, we don’t have to shoehorn the love hypothesis to fit. This is a kind of a form of the principal-agent problem…although not so much a “problem” per se. When children are the agents, and parents are the principals, then parents spend money in the ways that they see fit, which explains how the love hypothesis would provide a transmission mechanism from what parents spend into the type and amount of schooling that children receive, even if children (agents) aren’t really getting much out of it at the margin.
However, student loans are an example of the principal and the agent being the same person. Students are largely mortgaging their own futures in order to increase their marginal productivity. Thus they don’t need to love themselves, that explains why people spend money on other people’s education (indeed, it explains the skyrocketing tuition at ivy league schools, where parents do pay the bills many times).
I like to explain rising student debt (and thus, greater consumption of higher education) using education as a network good. Network goods are characterized by two concepts that would illuminate this: knock-on and tipping points. Put simply, if no one had a bachelor’s degree, no one would need a bachelor’s degree. On the other side of the coin, if everyone has a bachelor’s degree, then you are locked out unless you get one. The more people that have bachelor’s degrees, the more useful they are to those who possess them, until the network reaches a tipping point where employers begin preferring bachelor’s degrees, on to a point where employers require a bachelor’s degree. That pushes people into the market for master’s degrees, rinse and repeat. This could likely go on forever in an with infinitely-lived agents, and infinite degree successions.
Or maybe I’m just too dead tired to reason well today.
I have been reading Jason Brennan’s recent Philosophical Quarterly (.doc) article, per recommendation from Bryan Caplan. In the interest of full disclosure, I should note that I have an inclination toward policy preferences that limit the electorate based on something akin to the Competence Principle, which you can read about in Brennan’s paper. Basically, it states that anyone who wields the power of violence against another individual’s life, liberty, or property should do so in a competent and morally just manner. Thus, a jury should not convict a person based on irrelevant attributes (race, religion, etc.), on a whim, or at random. The jury should, at the very least, be attentive to the case, and have the ability to adjudicate on the merits of the case as presented.
This seems like a pretty straightforward principle. However, David Estlund has leveled two criticisms of basing a theory of epistocracy on the Competence Principle. The first, which I believe is easily (and handily) disposed of by Dr. Brennan is the expert/boss fallacy:
Estlund thinks we should accept the truth and knowledge tenets. Some democratic theorists reject these tenets, but their reasons for doing so are deeply implausible. Instead, Estlund says, we should reject the authority tenet. The authority tenet commits what he calls the ‘expert/boss fallacy’. One commits the expert/boss fallacy when one thinks that being an expert is sufficient reason for a person to hold power over others. But possessing superior knowledge is not sufficient to justify having any power, let alone greater power, than others. We can always say to the experts, ‘You may know better, but who made you boss?’ For example, a nutritionist may not compel me to conform to a diet, even if she knows that the diet would be good for me. You may not force me to listen to newest Celine Dion album, even if you have indisputable proof that I would love it. And so on.
Note, however, my argument I am making for epistocracy does not rest upon the authority tenet, but instead on an anti-authority tenet.
3*. The Anti-Authority Tenet: When some citizens are morally unreasonable, ignorant, or incompetent about politics, this justifies not granting them political authority over others.
The Competence Principle is a version of this anti-authority tenet. While the authority tenet specifies qualifications for holding power, the anti-authority tenet specifies disqualifications. By saddling epistocrats with the authority tenet, Estlund makes the case for epistocracy seem more difficult than it really is. Epistocrats need not argue that experts should be bosses—they need only argue that those with little expertise should not be bosses.
However, the much more substantial criticism (and the one on which I believe that Dr. Brennan wavers) is on the Qualified Acceptability Requirement principle. This principle states that it is either impossible or not inherently just to base the competency requirements for voting on the condition of qualification. The two reasons being (in the case of an exam); who defines the exam? And “what if competency isn’t normally distributed, such that a certain race/class/etc. becomes over-represented, and then invokes its own interests on those who didn’t win”?
Brennan takes to the philosophical divide by essentially accepting this principle, surveying which justice may be worse, and then making the case for the Competence Principle. However, there need not be a morally problematic test. This is where economics comes in.
The demand for voting may be relatively elastic, indeed, I imagine that it is (i.e. if you could sit in your armchair and vote as opposed to leaving your house and incurring a very negligible cost, there would be many, many more voters). The key to avoiding the Qualified Acceptability Requirement is to exclude, but not by any design. Thus, we introduce the welfare maximizing arbiter: price. Because voting is nominally free, more people than otherwise would vote. What if we raised the price of voting? We would expect to get less voters.
Now, there are three ways (short of moving polling places unrealistic distances) you can raise the price of voting:
- Charge people to hand them a ballot.
- Pay people not to vote.
- Buy/Sell your vote. (Not going to talk much about this one)
All three of these options are explicitly illegal currently, but it is rather dubious as to why. The first option is obviously immoral from Brennan’s moral perspective. It is an a priori exclusion principle. In other words, you are denying a right based on a pre-existing distinction. In this case, $10, or whatever. It is the same way in which a jury would find a defendant guilty based on race.
However, the other two (to the extent that the decisions are voluntary) escape this distinction. If you were to offer people $10 at the polling place not to walk in and cast a ballot, you are not denying someone’s life, liberty, or property. You are simply increasing the price of voting in a completely voluntary way. It stands to reason that those most passionate about voting are also those who judge their competency to be high. This method would self-select for people who really care about voting. The actually dollar figure is of fairly little consequence. At a point on the demand curve, raising the price of voting will reduce the amount of voters. I think that the elasticity is high enough that a small payment is all that is needed.
There is a problem that this is may not be a judge of actual competency. Ideologically charged voters may gladly give up monetary compensation to vote. Radical collectivists and libertarian objectivists may be glad to forgo any (to possibly an unreasonable point) amount of monetary compensation to cast a ballot. However, taking the median voter theorem seriously, on average, this would end up moving the country toward more rational and just policy.
Economists take revealed preference seriously, and arbitrate that preference based on price. Thus, if 1,000 out of 5,000 people claim to want an iPad, but 100 people buy an iPad at $800, then 4,900 people value $800 more than an iPad. That is a revealed preference for $800 in your bank account (or on your credit card). That changes when an iPad hits $400. However, every one of 5,000 people will demand an iPad at $0. In the same way, every person who is likely to vote demands a vote at $0. Voting is already mildly costly (at the very least, you have to find a polling place and make it there), so only ~52% of the electorate votes currently. That is likely to diminish quickly as you further increase the costs of voting. If you do so in voluntary way, then you avoid exclusion principles.
However, you may also induce more people to simply show up at the polls. You would have to weigh that cost against the outcome of possibly better policy.
Note: This is based on a very simple model of the elasticity of supply and demand for voting. I have in no way investigated the actual elasticities. I invite criticism of the model. I readily admit that it doesn’t de facto satisfy the Competence Principle…but it may be a meaningful compromise. However, I do believe that it provides one solution to the Qualified Acceptability Requirement. If you allow people to self-select, there is no expert/subject fallacy.
At significant risk to your perceptions of me, I post this early on a Wednesday. Last week Adam posted an interview with Marion Nestle, who is a strong advocate for something that I can’t really figure out, but being charitable I presume it is adding warning labels for artificial food coloring on foods due to their effect on childhood hyperactivity. Her rationalizations are weak, and the evidence doesn’t seem to be on her side, but I was surprised (and delighted) to find this on my can of horrible high-alcohol malt liquor:
I have no idea where the inclination to add FD&C Blue #1 and Red #40 came from. I certainly didn’t care (not when there’s another label proclaiming 12% alcohol!). I would imagine that it has to be regulatory, since this isn’t even the class of product that do-gooders are worried about. On a related Adam Ozimek note regarding slippery slopes, an Iowa Congressman proposed legislation banning the mixing of alcohol with caffeinated beverages. I don’t think it got anywhere.
Update: Indeed, it looks as if this is due to regulation. So maybe not so much market reform leader as harbinger of regulatory burden. Apparently cochineal extract and carmine carry risks of severe allergic reaction, including anaphylaxis. I actually agree with this, as labels are fairly benign from a cost perspective, and widely illuminating if you happen to have such a condition. Much more rational than a ban based on dubious evidence.
