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Strong statement…but bear with me.
Imagine that you are in a game where you are required to pick a strategy for each round that you think will maximize global benefits. You are the principal strategist, and each round every other player will evaluate your strategy for efficacy against a common goal using proprietary information.
What is the optimal strategy in this game? Is it to announce everything you’ll play this round, or is it to announce your intended target, and never specify a time frame?
I hold that the latter is the optimal strategy. Why? For three reasons:
- Time is always and everywhere a binding constraint.
- The optimal goal in any game is to minimize binding contraints.
- You invite critcism either way.
If you take those three rationalizations seriously, then in the Fed has been playing the wrong strategy all along. If you define a goal for NGDP, then there is no need for much of the criticism that the Fed has received…its problem is that it did nothing of the sort. If the Fed had followed my strategy, then there would have been no need for QE2, and the ensuing debates…QE would have been QE, and that’s it…until NGDP was growing at the previous level trend.
The key in this game is not not have to play a hand every round. You are best to define yourself immediately, and then you set up a defensible position that needs little maintenance after the first round.
The Fed did not play my strategy…and we contine to suffer because of it.
Here is a chart of Federal revenue as a share of GDP in Canada, posted by Livio De Matteo, one of the newer bloggers at Worthwhile Canadian Initiative:
Many a contemporary American libertarian dreams of the day when US Federal spending is confined to ~15% of GDP. However, in the real world this happens in a country that has a fairly robust single-payer basic health care system*, early-childhood-on education initiatives (a previous Conservative government even passed a fairly robust school choice plan that was subsequently killed by a Liberal government after 2 years), and a generally higher level of simple transfers. Some transfers don’t make a whole lot of sense, and kind of get caught in backflips, but nevertheless, there it is. Canada seems to take in ~15% of GDP in taxes, although there is a fit about the budget deficit, which is measured in the happy-go-lucky millions.
I think this lends some credence to the notion that I know Matt Yglesias and Kevin Drum are partial to. That is, ‘largely release people from sources of grave uncertainty (like spells of unemployment, extreme health care and education bills, etc., which can be done at a relatively cheap cost), and sensible market reforms become much more popular’. I can see Canada leading the way in replacing their income tax with a revenue-neutral carbon tax.
But there is a chicken-and-egg story here, as noted by Joseph Heath**:
…it is important to observe that this lack of a correlation [between redistribution and long-term growth of GDP per-capita per Peter Linder's work] does not show that economic theory is false, that incentives don’t matter, and that government cna do whatever it wants. The lesson to be learned is exactly the opposite. One of the major reasons that big-spending governments tend not to be penalized by the market is that, due to their very bigness, they need to operate more efficiently, and they need to work harder to get incentives right.
The US government, by contrast, has a tax code that is seemingly designed, from the ground up, to keep tax accountants and attorneys employed. Our institutional structure is to blame for most of this, but our relatively low individual tax rates (compared to other rich democracies) enable it.
This is an important story since we’re wading into a battle between spending cuts and raising revenue. As I think about the issue more, I notice that few of my complains come from the entitlement state at all, and the ones that do are about the structure of programs, not the programs themselves. In contrast, I have major complaints about the revenue side of government, and still more major complains about the regulatory side of government (at the local, state, and Federal levels). I think a lot of self-styled libertarians or people who lean that way feel the same way. I don’t think that utilitarian redistribution is a bad trade for some of my other goals (which would likely uncomfortably expose certain segments of the population to the cold whims of the marketplace). How about you?
Note: Provincial spending in Canada pushes government/gdp up to ~32% vs ~28% in the US.
*With the option of pursuing private insurance above and beyond. Not my preferred plan, but it seems work on average.
**Filthy Lucre, pp57-61
Derek Thompson did a good write-up on private currencies for The Atlantic, and even included a sidebar on the Fureai Kippu currency of Japan! I am quoted as saying, in regard to the question of where money gets it’s value:
“Imagine that we are on a gold standard and a severe drought hits,” economist Nick Blanchard explained to me in a useful example. “Suddenly water is in extremely high demand relative to gold, and everyone would be happy to rid themselves of bullion for water. Would you say that the dollar derives its value from gold, or the fact that people will accept it to buy water? The gold price of water is a floating exchange rate as much as is the dollar price of yen.”
“The real value of any currency comes from the reasonable assumption that when you demand goods and services, the paper/metal/lint/whatever in your pocket will be accepted in exchange for that thing,” he continued. “Currency loses all its value when people no longer want it in exchange for what you want.”
Indeed, I focus very heavily on money as a medium of exchange. It’s pretty common that people get the price of money and the value of money confused, and switch between thinking of (and talking about) money as a medium of exchange and unit of account willy-nilly. I almost never think of money as a store of value. The fact that we store value in dollars is an artifact of our currency featuring positive interest rates.
A little more on Fureai Kippu: It is an all-electronic currency, and has two central clearing houses, one in northern and southern Japan. FK credits are easily transferable, and many younger people transfer their credits to older relatives so that they can pay for care. The biggest thing (other than health care) to spend FK credits on is education. Private teachers are very popular in Japan, and many of them accept the credits as partial payment of tuition. And finally, a survey of elderly in Japan found that they preferred workers who were paid in Fureai Kippu to those paid in Yen, because the care was better (or more “authentic”). The absence of interest rates is what creates this effect — different currencies foster different relationships between people. Bernard Lietaer is fond of referring to this as “Yang money”, and “Yin money”.
From research done the Inon Inon Pricing Research Centre, and Leigh Caldwell:
Everyone knows – or thinks they know – that prices such as £1.99, £5.99 or £9.99 are optimal price points for retail goods. Customers read the first digit first, and the last two are ignored – or at least, they have much less cognitive impact. In general, consumers were thought to put a subjective value estimate of about ten per cent less on an item priced at £3.99, than one at £4.00.
This has been a fairly robust result in the past, and is intuitive for a number of reasons, “but WAIT!” say Leigh:
[And] the results were a surprise. At first we thought that the effect we have discovered was just a previously unnoticed artefact, hidden by the fact that no proper experiment has been published before. But after further exploration, we think it is also an effect of changing consumer preferences. As customers become more aware of marketing tactics and more cynical about any communication from companies, their psychology and behaviour inevitably changes.
So, to the results. The summary points are:
- Prices ending in .99 no longer have any advantage in consumer value perception, and do not lead to higher sales.
- The optimal penny value varies by country. In the United States, it is .01. So, instead of $3.99, companies should charge $4.01. In European countries, the optimal price point is different for different product categories, but there is a peak at .04 for many products. So, British or European retailers currently charging, say, £0.99 should increase the price to £1.04.
- By switching in this way to a “dollar-plus” price instead of “dollar-minus”, retailers can increase sales volume by an average of 8% and increase profit margins by 1-3% (depending on the exact price point).
- Consumers, when presented with the new price point, report an increased level of trust and affinity with the brands of the retailer and manufacturer. We believe this arises from the “honesty signal” that comes from abandoning a discredited and manipulative sales practice.
This is indeed very interesting, and I eagerly await reading the full study (which Leigh is offering as a pre-print!). Head over to Leigh’s blog for more rather counter-intuitive findings from his new research!
Update: If not a bit late, April fools!
I swear it isn’t “pick on Ezra Klein day” here at Modeled Behavior, but he has been covering fairly thoroughly the proposal in the Senate (?), signed by every GOP member, for a balanced budget amendment to the Constitution. Unfortunately, it is not just a balanced budget amendment — and end in and of itself, and one that I would consider if done properly — but an amendment to a) limit Federal spending to 18% of GDP and b) make raising future revenue extremely difficult.
I think “stupid” is the wrong word. “Dangerous” is more like it. And maybe “radical.” This isn’t just a Balanced Budget Amendment. It also includes a provision saying that tax increases would require a two-thirds majority in both houses of Congress — so, it includes a provision making it harder to balance the budget — and another saying that total spending couldn’t exceed 18 percent of GDP. No allowances are made for recessions, though allowances are made for wars. Not a single year of the Bush administration would qualify as constitutional under this amendment. Nor would a single year of the Reagan administration. The Clinton administration would’ve had exactly two years in which it wasn’t in violation.
I agree with most of what Ezra (and Bruce Bartlett) say about the proposal. I’m not a fan of large government, but I’m also not a fan of creating problems. This proposal seems to be all about creating problems under the auspice of “starve the beast”. Or rather, creating a big enough problem, and engineering your preferred solution from the front end, which is cuts (ostensibly to Medicare and discretionary spending). This is a poor way to govern, whether you like or dislike the welfare/warfare state.
However! Ezra has a follow-up post in which he ties California, taxation in the south, and the likely effects of the GOP’s amendment together, noting that by blocking the ability to directly raise revenue, the government would be forced into regulatory and budgetary tricks to fund itself. Tricks that would likely be more inefficient and economically damaging than simple direct taxation itself.
It’s fairly obvious why rules making it hard to pass new taxes would lead to more regressive taxation: If passing taxes is extremely difficult, then passing taxes plus overcoming the opposition of powerful interests becomes almost impossible. And so you focus on passing taxes that don’t arouse powerful interests. In practice, that means passing more regressive taxes, as the poor have less political power than the rich. It’s an amplified version of the reason it’s easier to cut spending on programs that benefit the poor, like Medicaid, than on programs that benefit the rich, like Social Security — which is, incidentally, exactly what Republicans appear to be proposing in their 2012 budget.
All of which is to say, the Republican Balanced Budget Amendment, which requires a two-thirds majority in both houses of Congress to raise taxes, would probably lead to much more regressive taxation. Our budget process would look like California’s and our tax code would look like the South’s. That’s winning the future!
Here is Ezra’s graph of the composition of revenue generation in four regions:
Low and behold, taxes in the south are much closer to my own vision for taxation! No, the taxes are not exactly the same, but I would welcome a shift toward consupmtion taxes and away from (capital/labor) income taxation. You can design a VAT or carbon tax to be as progressive as you would like. I also prefer a tax on the value of land, and not on the “improved value” of building (which, along with eliminating land use regulations would incentivize dense construction). The final piece of the puzzle is a progressive payroll tax. I think you could copy this model on both the state and Federal levels. It is almost the exact opposite of the “Northeastern” model of high income and property taxation. I think it’s a better model.
If we shifted our taxation toward consumption it would, in fact, be wining the future.
Here’s a piece from David Leonhardt that has been getting some of play on blogs that I frequent. It’s definitely good to see that more of the profession are coming around to the “quasi-monetarist” view that monetary policy is not impotent at the zero bound, that it can do much more. Here’s David:
Whenever officials at the Federal Reserve confront a big decision, they have to weigh two competing risks. Are they doing too much to speed up economic growth and touching off inflation? Or are they doing too little and allowing unemployment to stay high?
It’s clear which way the Fed has erred recently. It has done too little. It stopped trying to bring down long-term interest rates early last year under the wishful assumption that a recovery had taken hold, only to be forced to reverse course by the end of year.
Given this recent history, you might think Fed officials would now be doing everything possible to ensure a solid recovery. But they’re not. Once again, many of them are worried that the Fed is doing too much. And once again, the odds are rising that it’s doing too little.
Indeed. Myself and others have been emphasizing that the passivity of the Federal Reserve in late 2008 (or, as I like to tell it, the Fed being hoodwinked by rising input costs) was indeed an abdication of its duties…but what duties are those? It’s unclear, because the nature of the Fed’s mandate allows it to slip between two opposing targets at will. Michael Belognia, of the University of Mississippi (and former Fed economist) makes a similar point in this excellent EconTalk podcast. The big issue, as I see it, is the structure of the Fed’s mandate. Kevin Drum (presumably) has a different issue in mind:
Hmmm. A big, powerful, influential group that obsesses over unemployment. Sounds like a great idea. But I wonder what kind of group that could possibly be? Some kind of organization of workers, I suppose. Too bad there’s nothing like that around.
I think this idea of “countervailing powers” needed to influence the Fed is wrong-headed. There is no clear-cut side to be on. Unions may err on the side of easy money…but then again, Wall Street likes easy money* too, when the Fed artificially holds short term rates low. It’s all very confusing. But that’s arguably great for the Fed, because confusion is wiggle room…however it’s bad for the macroeconomy, because confusion basically eliminates the communications channel, stunting the Fed’s ability to shape expectations.
Now here’s the problem as I see it: NGDP is still running below trend, and expectations of inflation are currently running too low to return to the previous trend. Notice, I said nothing about the level of employment. Unemployment is certainly a problem, but the cause of (most of the rise in) unemployment is a lower trend level of NGDP.
Given that you agree with me about the problem, which is the better solution:
- Gather a group (ostensibly of economists) to press to rewrite the Fed charter such that the Fed is now bound by a specific nominal target, and its job is to keep the long run outlook from the economy from substantially deviating from that target using any means possible.
- Find an interest group with a large focus on unemployment to back the “doves” in order to pressure the Fed into acting more aggressively.
I would back number one over number two any day. And the reason is that while I’m in the “dove” camp now, that isn’t always the case. At some time, I’ll be back in the “hawk” camp, arguing against further monetary ease. Paul Krugman has recently made the same point about using fiscal policy as a stabilization tool. My goal is to return NGDP to its previous trend, and maybe make up for some of the lost ground with above trend growth for a couple years. That would solve perhaps most of the unemployment problem.
But say it doesn’t. Say we return to a slightly higher trend NGDP growth level for the next couple years, and due to some other (perhaps “structural”) issue(s), unemployment remains above the trend rate we enjoyed during the Great Moderation. Would it be correct to say that monetary policy is still not “doing enough”? I don’t think so. At that point, we should look toward other levers of policy that can help the workforce adjust to the direction of the economy in the future.
I’m not say that is even a remotely likely scenario, I’m just trying to illustrate the complexity and possible confusion (and bad policy) that could come out of a situation that Drum seems to be advocating. Better in my mind to have a rules-based policy than an interest group-pressure based policy.
P.S. This was the first post I’ve ever written using my new Motorola XOOM tablet. It wasn’t the hardest thing I’ve ever done, but it was by no means easy. And I wanted to add some charts, but that would be particularly annoying.
*Which, of course, is not necessarily easy money, just low interest rates.
He’s always taking hiatuses from blogging, and claiming to be “travelling”. Now I know that he has been leading a double life. From Romer’s interview with Ezra Klein:
EK:You’ve also criticized the Federal Reserve for not doing more. What would you like to see them doing?
CR:I’m teaching a course this semester on macro policy from the Depression to today. One thing I had the class read was Ben Bernanke’s 2002 paper on self-induced paralysis in Japan and all the things they should’ve been doing. My reaction to it was, ‘I wish Ben would read this again.’ It was a shame to do a round of quantitative easing and put a number on it. Why not just do it until it helped the economy? That’s how you get the real expectations effect. So I would’ve made the quantitative easing bigger. If you look at the Fed futures market, people are expecting them to raise interest rates sooner than I think the Fed is likely to raise them. So I think something is going wrong with their communications policy. They could say we’re not going to raise the rate until X date. Those would be two concrete things that wouldn’t be difficult for them to do. More radically, they could go to a price-level target, which would allow inflation to be higher than the target for a few years in order to compensate for the past few years, when it’s been lower than the target.
All kidding aside, this is policy advice gold. I can broadly agree with all that Romer is saying in the whole thing. I’m not gung-ho about using fiscal policy and expecting it to “work” in the sense that it raises NGDP to a level which is consistent with returning to trend quickly (especially with a conservative central bank), however I don’t see anything wrong with smoothing the edges of recession by helping people through the tough time using fiscal policy (mostly simple transfers), and of course reducing employment during a recession. As prescribed here (not by Mark Thoma, but by a paper circulated by John Boehner), is asinine.
P.S. I think that the level of suffering an economy would have to deal with as the result of sharp deficit reduction is directly related to the willingness of a central bank to accommodate the policy.
I was browsing around the Brookings site, looking for papers that I might find interesting, and I stumbled across an article by Peter W. Singer which analyzed survey results from 1,000+ “Millennials” who are deemed to be interested in future governance. I put Millennials in quotes because I’m often confused by generational markers, but Singer seems to define “Millennial” as “born between 1980 and 2005″. That’s a pretty large time span, but I’ll accept it. Anyway, I was interested in learning what how well my views coincided with the things Millennials found important. There isn’t anything too earth-shattering in the paper if you have a general idea of polling of young voters, but here the statistics.
- Most of the survey participants identified as Democrats (38%), followed by Independents (29%). I draw the conclusion from later data that Independents in this group largely identified as left-liberal. These two groups together, assuming I’m correct, swamped Republican identification, which stood at 26%.
- Most of the participants cited news organization websites as their highest priority news sources, with cable news following behind. Blogs and comedy shows like The Daily Show were low. Surprisingly, most cited parental influence on their political views, with other popular leaders (political, faith, celebrities) having a very low share.
- Not surprisingly, schoolbooks are defining the historical narrative, with Franklin Delano Roosevelt being their ideal leader from history, followed by Abraham Lincoln and John F. Kennedy. Barack Obama personifies “leadership needed” in the 21st century.
- Unfortunately, in my view, these participants view China as a “problem country” in the future, and few view China as an ally. I think this is driven by popular discourse, which I view as wrong and wrong-headed…and now actively damaging.
- Very good news, however, is that a majority (57.6%) think the US is “too involved in global affairs”. Also on the positive side, among the least important “challenges for the future” is immigration. I’m very interested in changing the discourse and the tide surrounding immigration in the future. It is the cheapest, easiest, and fastest way in which we can raise the poor out of poverty, and greatly increase the welfare of everyone in the world.
- On the down side, terrorism is a large priority for the participants (31.6% saying its the top). Not surprisingly, Republicans dominate the group who thinks this (at 52%), and 84% of participants think terrorism will always be a threat. No disrespect to those who have lost their lives due to terrorism, but I barely see terrorism as a “threat” at all. Indeed, I, and the majority of people in the developed world have never experienced terrorism as a “threat”, existential or otherwise. There may be incidences of terrorism in the future, and they may involve a high-profile loss of life…but I don’t think that policy should be in any way dominated by the existence of such rare possibilities.
On the whole, as should be no surprise to people who follow demographic trends, younger people seem to be more left-liberal on issues. This survey didn’t really deal with domestic social policy, and didn’t deal with economic policy at all…but I think that by and large that identification has a lot to do with social issues like gay rights, abortions, etc. I am optimistic that our young leaders will be more “libraltarian”, which is definitely a good thing in my mind. No, there will of course not be a libertarian revolution, and policy probably won’t get outwardly “better” (i.e. we’ll probably have to deal with the income tax, and onerous licensing and regulation), but I think that on some important margins, the future looks bright.
In my days in the telecom industry, I dealt with one of the largest former deals of a carrier reselling spectrum branded through another carrier. For a short while, Qwest Communications had a deal with Sprint where Qwest would resell Sprint’s wireless service, branded as Qwest, using the Sprint spectrum. These are my own observations from that situation. Think of this post as a complement to the posts about how entry into the wireless market is very hard.
This was a nightmare (and killed the enterprise) for multiple reasons:
- The provision of service, and the perception of branding. Because the service was Qwest branded, people rightfully assumed that Qwest was the company they were receiving wireless service from. This means that Qwest had to invest in support for both technical and billing services. In practice, this was a disaster. Billing wasn’t a big deal, since Qwest had a very large billing apparatus at its disposal (arguably larger than Sprint’s). Wireline carriers have a comparative advantage in billing. However, technical support was a jumble between what Qwest could handle, and was Sprint needed to handle. Not to mention the fact that beyond that, phone manufacturers were another layer of bureaucracy. There was rarely a line drawn, and customers ended up frustrated by the fragmentation.
- The handset market. The United States is unique in the world in the way we use carriers as “gatekeepers”. That is, that handsets are carrier specific. This creates very large annoyances by itself, but in reselling service, it becomes a quagmire. Qwest had many problems keeping up with mobile phone demand, even before iPhone Android. The latest phones Sprint was offering would be late or never to arrive on the Qwest network, and would essentially pit Qwest in competition with its own partner. Is the convenience of a wireless bill coupled with your home phone/tv/internet bill really worth it if you don’t have access to the latest technology? Usually not.
- Large fixed costs in licensing which couldn’t be offset by the prices of wireless service. Qwest was amazingly ambitious with pricing in the beginning of their wireless enterprise. Pioneering such conveniences as “5% bundled discount”, “unlimited minutes at 7″ and “unlimited data”. This was a very large mistake that went out the window very quickly. These plans were arguably great for consumers, but they couldn’t be sustained in the arrangement Qwest had, because the costs of licensing the spectrum were too large. Qwest wanted to make a large splash, and they didn’t do a bad job…but the PR after they had to rescind these deals was very damaging. People just didn’t flock to Qwest Wireless, for obvious reasons of the cellular market being very sticky. It was a brilliant marketing move executed at the wrong time by the wrong player. They were expecting a larger migration…but large migrations are not characteristic of wireless service because of the fact that it is a rather fixed investment in the US.
Qwest (or CenturyTel) now resells Verizon, but simply deals with billing. That is, they include Verizon on their own bill, and offer a slight discount for bundled service. This is a much better arrangement given the realities of number one. However, Qwest was really done in by artificial scarcity of wireless spectrum and to a lesser extent the market structure. Licensing Sprint’s network was phenomenally expensive. The costs didn’t allow Qwest to differentiate their product, and make even a tiny splash in the broader wireless market. This could have been different had the costs of owning spectrum been lower…as they probably would be in a market, especially for higher frequencies.
It is interesting to note that US West owned a portion of very low frequency spectrum that they built out in certain markets for wireless service. US West used to offer cell phones that, in the 14 markets they covered, offered the best service anywhere (remember, this is the late 90′s). That spectrum was sold to Verizon.
The question in the title is a very ambitious question, and one that I don’t have the answer to. It has been a long time since I’ve spent any amount of energy studying the telecom industry from an investment and market perspective. Its something that I used to do when I worked for the “baby-Bell” Qwest (which has since been bought). However, I’ve always been interested in telecom, an interest that stemmed from my mother’s career with AT&T (then Northwestern Bell, then US West, then Qwest). However, no one cares about competition in wireline service anymore, almost to the point where TAP seems redundant. I once wrote an e-mail to the CEO of Qwest urging him to license their physical copper, and focus investment on FTTN and FTTH. That obviously didn’t happen. As a fun fact, if you’ve ever toured a telecom CO, it’s fairly appalling, dirty, and messy. Reflecting little ongoing investment in old technologies.
In any case, the AT&T/T-Mobile merger has caused quite a firestorm, with predictable lines being drawn. Someone else given the time and incentive will have to definitively answer the questions of the effects on competition, the consumer, and the relative market power granted by the deal. I’ll be honest, due to the sticky nature of the market, I have a vested interest in prices rising. I am grandfathered in at my contract rate, which includes unlimited data, and any extra revenue that I don’t have to give the company pays me dividends.
In any case, I see a much different problem that is at the core of this deal. AT&T has made it fairly clear that they are purchasing T-Mobile for their assets, most notably, their network technology…which actually means the spectrum bandwidth that T-Mobile owns. Now, AT&T along with Verizon own ~90% of the 700Mhz band in large markets. This is “good spectrum”, because lower frequency has an easier time penetrating things like cement and hills. However, most data seems to be carried on higher frequency spectrum, which obviously degrades signal. I’m not exactly sure of the spectrum that T-Mobile owns, but if it is lower frequency, it would actually be a boon for AT&T, which seems to have problems with data connectivity.
But the real problem is the FCC. The way in which we ration the wireless spectrum is abhorrent, and very political. Resale of spectrum is almost unheard of simply due to the one fact alone. If there was a market in spectrum usage, it is likely that AT&T wouldn’t need a deal like the one they are proposing, they could just strike a deal to either license or buy spectrum from someone else at a reasonable market price. The could bargain spectrum which doesn’t suit their needs so well for a range that does. There could be all sorts of highly beneficial transactions, if only there was market established. There is, of course, no market established…so the only cost-beneficial course for companies to take is to gobble eachother up in order to attain certain assets.
Wireline service was arguably a natural monopoly, and continues to be a largely geographic monopoly to this day. “Competition” in wireline service is one of the most confusing things you’ll ever peer into. This need not be so with something as modular as wireless, but the FCC is ensuring that wireline model is ported over to wireless service. THAT is what is hurting consumers. Perhaps regulators shouldn’t let this deal go through…but they should also realize that they created the conditions for this deal to be pursued in the first place. They’re setting the fires they subsequently try to put out. It seems like a lot of time and energy being spent to make us poorer than we otherwise would be with a simple free market.
It would also be an interesting twist for the FCC to tell AT&T to drop the deal and in return, they’d be able to license the extra spectrum they apparently need. That isn’t an optimal solution, but one I’d be interested to see unfold.
Krugman has a recent post where he cites a SF Fed study regarding the unemployment rate among recent college graduates:
Mark Thoma leads us to new research from the San Francisco Fed showing that recent college graduates have experienced a large rise in unemployment and sharp fall in full-time employment, coupled with a decline in wages. Why is this significant?
The answer is that it’s one more nail in the coffin of the notion that employment is depressed because we have the wrong kind of workers, or maybe workers in the wrong place.
And asks:
The right question to ask, with regard to all such arguments, is, where are the scarcities? If we have the wrong kind of workers, then the right kind of workers must be in high demand, and either be in short supply or have rapidly rising wages. So where are these people?
Now, not to diminish the fact that what most people refer to as “The Recession” was, in fact, the result of a demand deficiency (or more aptly, a large increase in the demand for money not accommodated by the Fed), I’d like to point to some anecdotal evidence that in reality there is a problem a skill mismatch and “recalculation” that is proving difficult to tract. To the extent that this is the problem, rather than a problem, I’m not quite sure. From David Andolfatto:
For the 15 million Americans who can’t find jobs, the labor market is like an awful game of musical chairs. There are many more players than there are available seats.
Yet at Extend Health, a Medicare health insurance exchange firm in Salt Lake City, Utah, the problem is just the opposite—a growing number of chairs to fill and not enough people with the skills to fit the jobs.
“It seems like an oxymoron in this environment that you can somehow be challenged to find great workers,” CEO Bryce Williams admits, almost sheepishly.
Extend Health’s call center workers help retirees navigate the process of signing up for commercial Medicare Advantage and drug coverage plans.
For this fall’s Medicare Enrollment season, the firm will need close to a thousand workers. The ideal candidate is over 40, with a background of financial services in order to qualify for insurance licensing.
“They need to be able to pass the state of Utah exam, which is not easy,” Williams explains. “They need to have a background in comparing the financial metrics of trying to help someone compare and analyze and give great advice.”
Andolfatto has a link to another story along the same lines regarding manufacturing workers (a field which has become highly specialized). There is also the two facts that college degrees are large fixed investments in skills that may be reduced in demand. This is something that I’m largely familiar with, as I was in school for a prized IT career before the tech bubble burst. As I know Mark Thoma has noted (though I can’t find the link), we have a disproportionately high amount of graduates in business and finance, which is probably still true, and a low proportion of graduates in applied sciences. This of course leads into the next issue: the squeezing of efficiency out of a smaller workforce. How does that relate to the degree profile of our college graduates? Because it is comparatively easy to squeeze extra efficiency out of people who work “in business”. Much easier than, say, squeezing extra efficiency out of an existing construction or manufacturing worker. So if more people are specialized in business or finance, areas that took a major hit, and also an area where substitution is comparatively easy, then there is likely a skills mismatch between there.
So yes, I believe that there is more than trivial problem of skills mismatch, which I think was nearly the whole story up until late 2008, when the large fall in expected NGDP caused various financial obligations to be much harder to service (that tends to pin people down, and reduce employment options). That is a demand story. However, as we slog out of this recession, real job growth may remain low even as we return to previous trend NGDP. We should be at least prepared to discuss the supply side when that happens.
P.S. If anyone was wondering, I’m starting to feel better, though I haven’t gotten a diagnosis as to what is wrong with me, still. Been keeping busy with confusing insurance statements, school, and work. I think I’m at the point where I can end my hiatus from blogging, and write a few things. Glad to be back =].
P.P.S. For a long time I’ve been trying to find oddball diagnoses that fit my symptoms. Doctors hate that, by the way…but I do it anyway. In any case, I’ve been stuck on Whipple’s Disease for a while. Symptoms fit like a glove.
After reading through the Modeled Behavior Twitter stream and playing around with Google’s new Ngram database (and the Google Body Browser), I had an epiphany, which I immediately tweeted:
Here’s an interesting comparison, but I defy you to counter it: Google (Labs) is the modern-day Bell Labs…
For anyone who would like to read an interesting, if not rather rosy view of Bell Labs in the heyday of its operations, check out the book The Rape of Ma Bell, by Constantine Raymond Kraus and Alfred W. Duerig.
Bell Labs was the research and development arm of the AT&T conglomerate. It subsequently became Lucent Technologies, and then was integrated into the Alcatel-Lucent conglomerate. Here is an excerpt from Wikipedia:
At its peak, Bell Laboratories was the premier facility of its type, developing a wide range of revolutionary technologies, including radio astronomy, the transistor, the laser, information theory, the UNIX operating system, the C programming language and the C++ programming language. Seven Nobel Prizes have been awarded for work completed at Bell Laboratories.
The theme of a productive arm of an organization funding wild research has even transcended the physical universe into popular narratives of late. In Avatar, Giovannia Ribisi’s character, in a tussle with Sigourney Weaver’s character, reveals that it is their revenue stream that keeps her research functioning. Similarly, in GI Joe, Christopher Eccleston’s character informs Joseph Gordon-Levitt’s character that once they conquer the world, he can perform all the research he wishes.* Not to mention, the famous conspiracy theories surrounding Nikola Tesla involve the same sort of relationship.
Web 2.0 companies are particularly interested in this sort of symbiotic relationship between profit-generating arms, and public goods research. Was AT&T a glimpse into the future? Will we see more of this?
*Forgive me for not remembering the characters’ names!
A while ago, I made a post which argued for reverse causality in the search for the source of the US’ widening income inequality. In that post, I made this point:
What is it that European countries do? Massive income redistribution. That may seem superficial, but it’s the answer that I’m most happy with. It has long been known to network theorists that competitive networks (with a return to scale to node connection) are characterized by power law distributions. This is a natural phenomenon; it happens in the blogosphere, the financial markets, in sports, and it happens in economies as a whole. Left to its own devices, it is inevitable that such networks will evolve an shockingly large disparity between the best-performing actors, and the mean actor.
Lane Kenworthy, who writes a lot about inequality issues, has a recent post on his blog (and a subsequent link to a longer article in a U of Arizona journal) which seems to corroborate the story I told above:
What about in an absolute sense? Would the incomes of low-end households have grown more rapidly in the absence of the top-heavy rise in inequality? If we look across the rich nations, it turns out that there is no relationship between changes in income inequality and changes in the absolute incomes of low-end households. The reason is that income growth for poor households has come almost entirely via increases in net government transfers, and the degree to which governments have increased transfers seems to have been unaffected by changes in income inequality.
I was probably subconsciously channeling my inner Kenworthy when I wrote the previous post, as I read his blog sporadically. If I had it my way, the discussion would break along three lines:
- Wealth Inequality.
- Income Inequality.
- Consumption Inequality
And on three lines, we would be able to analyze poverty. What would be the value in this? We would more easily be able to define public policy on narrower grounds. For example, wealth distribution is always going to be sharply unequal. People with higher incomes relative to consumption will always be able to amass more wealth than lower income groups (wealth meaning savings + assets, wealth is something I think many people conflate with income). However, what is the best policy for addressing this aspect of the problem? Simple income transfers won’t work alone, we need to incentivize intergenerational savings among the poor. In that light, Social Security is not the most optimal program, as it discourages savings.
I tend to not really focus on income inequality, but it does feed into the more important aspect (in my view); consumption inequality. Are poor peoples’ consumption patterns keeping up with what we as a society would consider some measure of a “quality” standard of living? Are they able to afford necessities like electricity, HVAC, food, and medical care? If not, this is where we get to fiddle with income in my most preferred way (and the way which allowed other countries’ poor to keep up with growth): simple transfers. Look for efficiency on the supply side, but on the demand side, just augment income. This could be in the form of a universal deduction for income under a certain level, or cash or voucher transfers. It is relatively cheap and easy to structure these transfers in a way that incentivizes future-time orientation…indeed, that is what the Mexican organization Opportunidad does.
I realize that democracy is much messier than this, but it is something to work toward. The welfare state need not be cumbersome…indeed, the US is unique in the world in the inefficient ways it implements a patchwork system. Canadian Philosopher and pop-economics writer Joseph Heath has said that the US government gets away with it because we don’t redistribute a whole heckuva lot of income…but as that enterprise grows, we’ll inevitably have to address our abhorrent inefficiency issues.
Addendum: Lane Kenworthy has also done some good work on the question of measuring poverty and material wellbeing, so check that out as well. Seems the real barrier to constructing a time series from this data is that it doesn’t go back far enough to create a reliable measure of wellbeing over time.
I find it very hard to discuss taxes. I actually don’t like it, when I have to do it in person, or on a blog…it rankles me into a defensive mode immediately. Let met explain.
I’m a right-wing, mostly libertarian. I’m for efficient taxation to satisfy social goals…and that is the problem. Social goals are always changing. Unlike railing against stupid market inefficiencies like barbers licenses and land use, this involves a revenue calculation, and not one that is straightforward.
Back when I was a “wet behind the ears” libertarian person, I took the efficacy of “starve the beast” seriously. But that was before I learned how the >world works. It is entirely obvious that starve the beast can only work in the most excruciating circumstances…and I don’t want humans to have to deal with pain, I just don’t want them to have to deal with stupid government.
So I find it hard to talk about taxation. I think that the former should be lower (rates) while we should reform public services to offer a consistent level of quality, and efficacy — and get rid of many that are prized. And I have ideas about how that can happen, but unfortunately, I’m constrained by language mechanics, and network effects..
So how do you call for less burdensome taxation and more efficient public services, or even less in the absolute? I don’t know. I suppose if I was a think tank researcher, I’d have it all figured out (hint?). But as a blogger, I find it really hard to convey.
Canadian readers may catch themselves in a fit of exasperation to learn that I don’t spend a lot of time understanding the Canadian tax code. I know the basics, and I know that it generates revenue much more efficiently than the American tax code (although you do have an odd propensity to take money, give it back, and then take it again — a la the child care tax dividend). In any case, the following description strikes me as novel…but also ridiculous at the same time. From Frances Wooley, of Worthwhile Canadian Initiative:
Under the current system, Canada’s corporate income tax acts as a withholding tax. When a corporation makes a profit, it pays corporate income tax. But the government doesn’t keep that money forever and ever – it just withholds it for a time.
When a corporation pays out its profits to shareholders in the form of dividends, shareholders get a dividend tax credit – which credits the individual with the taxes the corporation paid on her behalf.
If it wasn’t for the fact of deadweight loss, this would be an incredibly ingenious tax scheme. Basically, a loan to the government, which they pay on a margin call. It does incentivize investment though, so provides Canada with a higher capital stock than otherwise. However, deadweight loss is a reality, and this reeks of the type of idiocy that the conservatives made out of the lunacy of the liberals’ child care tax dividend.*
Here’s another absurdity:
Professor Kent also proposes taxing capital gains equally with salary and interest income – so a $100 capital gain would be taxed at the same rate as $100 in interest income.
?
*The gist of the story is that there existed, at the behest of liberals, a universal child care dividend (regardless of income). A check that you received every month, simply for having children — regardless of your income (or if you have children, as I understand it). The idea is that you would use it to pay for daycare, and then you could have a higher marginal income as a family. However, in the infinite wisdom that conservatives have shown in recent history, they decided that it was unfair that “rich people” got the dividend as well. Their grand plan was that they would tax, give the dividend out to everyone, and then tax the money back from households over a certain income threshold. As far as I know, that is the way it works today (don’t quote me!). I hope everyone understands how that represents the behavior of a drunk person.
Matthew Yglesias posted a blog with a similar title, without the exclamation which I express for this idea. Here’s Matt, channeling his inner William Easterly:
Alternatively, one under-discussed possibility is for a guy who has a lot of money and a desire to help poor people to just identify some poor people and give them some money. It sounds banal when you say it, but one of the main obstacles to people being less poor is that they don’t have enough money. If you give them money, they’ll have more of it. Will this be optimal in all cases? Of course not. But in the vast majority of cases, you’ll do some good. It’s tempting to believe that you’re on the [v]erge of some major conceptual breakthrough in the field of philanthropy. But give some consideration to the possibility that you’re not. Perhaps if you have a special talent for anything, it’s a talent for making money. It’s not very hard to identify some people who might need money more than you do. Maybe you should just give them some, and then go back to making money.
Indeed, I think that Matt discounts the effectiveness of making simple transfers of cold hard cash (or digital numbers) from one section of society to another. Here’s me:
This tendency [to fiddle with wages] is called the “just price fallacy“, and it is very popular in politics…and unfortunately, seems to be human nature to decry prices we don’t deem to be “just”. Going all the way back to Diocletian, we can find examples of people verily condemning “price gouging” or “profiteering”. Of course, as we know from economic theory (and experience) setting price floors causes unemployment, and setting price ceilings causes shortages.
In (nearly?) all cases, simply giving poor people money is much better anti-poverty measure. Ironically, Milton Friedman, widely regarded as a “conservative economist” was one of the strongest backers of the negative income tax — a policy deemed “too liberal”! Why the tepid response to things like the Earned Income Tax Credit from the non-economist left (we know the right do it to simply score political points with constituents)? Well, it seems that it stems from what I like to call the “Barbara Ehrenreich theory of value[1]“. For those of you who do not know who Ehrenreich is, she pretty much built the industry of authors working undercover doing low-paying jobs, with the intent on writing a normative essay about the experience. Of course, the common conclusions are that we should treat these people nicer (which is fairly uncontroversial), and we should pay them more based on the humility that they face. By giving money directly to the poor, it seems that we are “justifying” employers that profit from “slave labor”. Of course, this is wrong and wrong-headed, but the view persists.
I’m guessing that I have a much weaker paternal instinct than Matthew, such that once it was identified the socially optimal level of transfer, then I say just simply give people money — which is the cheapest thing to do from a deadweight loss perspective. I am guessing that Matthew would much prefer a system of voucher payments, in order to exert more control over how poor people spend money. At least this is a tacit acknowledgement that hyperbolic discounting is a major problem for poor people. This is one of the big criticisms that I have for “solutions” politicians dream up. As I outlined in this article:
There is a very high correlation between poverty and hyperbolic discounting. Because this is true, many of the left simply deny that the fact that it exists, or worse — even if they acquiesce to the fact that poor people tend to heavily discount the future, they claim that we need better education, more information, etc., to battle the problem. The traditional hard-line right wing (not Hayek, yes Rothbard) is Mathus’ and Franklin’s prescription; let them suffer.
Why these strategies are wrong is that they both exaggerate the problem. Education is the perfect example of something that people who heavily discount the future will not tolerate. The whole problem with extreme hyperbolic discounting is that it makes people unwilling to tolerate short-term deprivation in order to receive exponential long-term benefits. The right’s preferred solution does the exact same thing. Making alcoholics ineligible for liver transplants, or not paying for cigarette smokers’ chemotherapy so that they have to suffer financially isn’t going to deter anyone, because the punishment is so far off that it is effectively discounted to zero. There is no use in kicking people after they’re down, in the same way that it is unconstructive to repeatedly tell people how badly they are screwing up.
I’m not personally all that interested in how poorly people spend their money. However, it is relatively straightforward to design incentive systems that take hyperbolic discounting into account.
Interestingly this is an area where I sort of disagree with Arnold Kling, who bills himself as a ‘civil societarian’. He believes that voluntary donation to public services will provide a superior outcome in gaining high-quality public services. I’m skeptical of this, as there are search costs, and information asymmetries inherent in judging the quality and efficacy of the vast amount of public services. I think it would simply lead to the most visible services getting all the money, with the less visible services suffering…independent of the value they create for society. For example, it is a monumentally large task to maintain records of property rights. It’s easier now, but historically it has been so difficult that possession became “9/10ths of the law”, simply because records were so poorly kept. This service creates an immense amount of value for society, but it is nearly invisible. It would probably get shafted in a voluntary donation drive in competition with Food Stamps, Medicaid, and Welfare. I think that government has important economies of scale in distribution that would be hard to match with private institutions. The problem is dealing with the inefficiencies of our institutional arrangements.
It is definitely in everybody’s interest that everybody becomes as rich as possible. To that end, we should provide poor people with the means and (possibly) the incentives to make choices that increase their wealth over time (and most importantly, increase intergenerational wealth). To that end, simply giving poor people money that is phased out slowly over the course of an income quintile is much more efficient than the hodge-podge of a safety net we currently have.
Addendum: Before I had a chance to peruse Kevin Drum’s blog, I see he commented on the same thing, taking roughly the opposite view. Although I’m confused by this statement: “The generosity of the American taxpayer is not exactly legendary, after all.” Is that taken to mean that people don’t voluntarily pay more to the government, or that Americans aren’t charitable in general?
I’m a tad bit late on commenting on the tax compromised reached between the White House and Republicans, but I think that there has been some fairly high-quality commentary around the blogosphere. I stand mostly with the reasonable left in supporting what was put into the package, even though we got the wrong payroll tax cut, and a strange and potentially politically deadly compromise on the Estate tax (which I otherwise oppose, but wouldn’t let my positing get in the way of providing economic stimulus, like some on the left).
Mark Thoma worries that the payroll tax cut will become permanent (edit: found the link). This is the mirror of the argument that government spending tends to become permanent, as well…which I have an inkling that Mark doesn’t mind that feature so much.
I think Kevin Drum misses a grand opportunity to call out to the left to articulate a better way forward here:
In the end, this is the second stimulus we all wanted. It’s not a very efficient stimulus, and it sadly caves into the conservative snake oil that the sum total of fiscal policy is tax cuts, but them’s the breaks. Anyone who doesn’t like it needs to spend the next two years persuading the public not just to tell pollsters they don’t like tax cuts for the rich, but to actually vote out of office anyone who supports tax cuts for the rich. That’s the only way we’ll win the replay of this battle in 2012.
I’m not looking to go tit-for-tat on whether direct government spending/investment is “more efficient” than providing payroll tax cuts, as it’s pretty clear which side we are both on (as I’m much less sanguine on the Keynesian consumption function, for a reasonable view from the other side, see here), however I do want to address his prescription of a public awareness campaign in order to return to “normal”, with normal being defined as roughly “Clinton-era tax rates” on capital and high incomes.
I view this very compromise as a golden opportunity for the left to reinvent themselves with regard to taxation, win an adjacent political battle (and a dear progressive goal), and wrap it all up in a bow that not only makes our government funding more efficient, but lowers tax rates for virtually everyone. And that is to begin a campaign of gradually removing the income tax, in exchange for a revenue-neutral tax on carbon, which would be gradually instituted as the income tax was phased out. In addition, offer an automatic stabilization policy of payroll tax cuts (all of them, or at least all of the “employers share” — the better side to cut — in exchange for a sharply more progressive payroll tax, used to fund Social Security and Medicare/caid. Institute a progressive VAT or GST with a standard deduction of the first $25,000 of income for all taxpayers, and expand a means tested EITC, as well. You could trade this for elimination of minimum wages, but that’s not a real pressing problem in my mind. At the end of the line, offer a land tax in exchange for really whatever the right happens to want for it. Repeal of the estate tax, maybe?
That would be a real “progressive” package that would end the debate regarding the level of income taxation (from any source; labour, capital, etc). It would simplify our tax code, and get rid of ridiculous inefficiencies like the mortgage income tax deduction. More importantly, contrary to our current tax code, the new consumption-based funding of government would encourage a greater savings and investment equilibrium.
Beyond the scope of this post — but relevant — is different ways that you can find to streamline efficiency of the government. I seem to remember an argument put forth by Matt Yglesias that I personally agree with (and can’t find the link to currently), and find it baffling that it is so often overlooked; and that is that there are some government workers whose marginal utility is so low, that paying them anything at all constitutes overpayment. So it’s not a question of overpayment, it’s a question of marginal utility. At the margin, is society gaining utility by paying various individuals? If yes, then pay them. If not, then don’t.
That aside, I do think that this is a unique opportunity for Democrats to articulate a new vision for government funding that better enables elements of the welfare state that they hold so dear, this is highly progressive, removes the distortions and bad incentives created by the income tax, and genuinely makes the economy more efficient — facilitating growth. It could be a popular platform, and one that I would vote Democrat for, and I’ll be that many other pragmatic libertarians would feel the same way.
Of course, at the end of the day, I still believe that monetary policy is the last mover. The Fed has quietly indicated that it is looking at extending QE2, which is definitely good for the prospects of any pet fiscal policy.
I just discovered UrlAI.com, a site that professes to analyze a blog, and explain the characteristics of the author and writing style, based on the content of a few of the recent posts. Being a curious lad, I decided to enter Modeled Behavior and see what would be the result. This is what I got:
“modeledbehavior.com is probably written by a male somewhere between 66-100 years old. The writing style is academic and upset most of the time.”
Check out the link to see some pie charts.
Just to make sure that I wasn’t the one that was skewing the age range with my decrepit, archaic prose, I decided to analyze my former blog, cheapseatsecon.com, as well. The results:
“cheapseatsecon.com is probably written by a male somewhere between 18-25 years old. The writing style is academic and upset most of the time.”
Phew. While I add obviously add to the angry academic temperament of this blog, I don’t add to the aged fascia. I’m looking at you, Karl.
[h/t John Barrdear, whose blog I found by accident, and is actually very insightful.]
P.S. This was a joke, but UrlAI is interesting, though it probably isn’t suited for a multi-author blog.
As everyone probably knows, SKUs were a big deal when the X-Box 360 and Playstation 3 came out. They both offered multiple platforms of entry, at different prices. I’m most familiar with the PS3, which offered a 40-, 60-, and 80 gigabyte version. There were also hardware differences between the 40gb version and others (USB ports, etc.)
In today’s ads, I saw nothing of different tiers for the PS3, with all advertisements boasting the 160gb version of the PS3 slim for $299.99. However, X-Box has stuck with this formula, offering a very anemic 4gb version for $199.99 and a beefier 60gb bundle for $299.99.
Storage is, for all intents and purposes, mind-blowingly cheap. Did price discrimination fail in this market, or is there another explanation for the absence of a tiered option for the PS3?
P.S. I realize that this isn’t the exact definition of price discrimination. I think it is close, but the scheme has a different name that escapes me at the moment…and the retail use of each system is the same.
Karl posted something that he should have titled “Stream of Consciousness” instead of “Unsubstantiated Claims” where he thought out loud. One of those thoughts landed on the Fisher effect.
My sloppy writing makes it sound as if I am saying Reihan should read up on the Fisher effect. What I mean to say is that Reihan brought up the fact that people fear inflation eroding savings. These fears are common. I have had many a Facebook debate over them. Indeed, Ron Paul has repeatedly pointed to this has his main reason for fearing debasement of the currency.
I believe that the Fisher effect is controversial among Austrians, and Keynes didn’t believe in the relationship at all, except under hyperinflation. Using price inflation in the Fisher equation makes a lot of things confusing, because the composition of output under recession circumstances (less than full employment — or a flat SRAS) is that raising inflation expectations to, say, 3% from 2% will likely cause an increase in real output, leaving inflation at it’s long-run target. Indeed, the Fed isn’t even interested in boosting inflation expectations past its set 2%, and has made that very clear. What the Fed wants is higher NGDP…but unfortunately it operates under a target for nominal interest rates.
Scott Sumner has a post about how inflation is, counterintuitively, good for savers. The thrust of it is that raising NGDP expectations will raise the Wicksellian real interest rate. People will spend more on investment (maybe not consumption, but probably), and we will get far more output, while trend inflation remains intact (and if it doesn’t, then the Fed can act as necessary). This is a boon to savers, as it raises not only the interest rate on savings accounts, CD’s, and the yield on bonds…it raises other asset prices as well, like stocks, real estate, commodities, etc. All are vehicles for saving, and a higher level of NGDP causes every type of investment to increase its yield.
This is the fundamental reason inflation is confusing. People think a lot about cash, but not many people save in cash (as in safes) under a normal positive trend inflation rate — criminals mostly. I think that price inflation is just muddying the debate here, and is completely useless.
A little late, I know, but Happy Thanksgiving everyone!
“If money isn’t loosened up, this sucker could go down”
-George W. Bush in Sept 2008
I really enjoy reading Kevin Drum…but I often forget about his blog because it’s not synced to my phone, which is my own fault. In any case, I’m going to comment “of the cuff” on two posts that Drum has made recently.
The first is his post on the Fed’s interest on reserves policy. I can’t really quote any of it specifically, so you’ll have to go and read it.
I think that Drum gets two things wrong in his analysis. The first is that interest on reserves is a very desirable policy that smooths out the Fed Funds rate fluctuations, reduces lending spreads, and reduces the opportunity costs of capital. Milton Friedman was the most famous proponent of interest on reserves, and Canada and Australia (if I’m not mistaken, working from memory) also pay interest on reserves.
When Kevin says that the IOR should be zero, what he should be saying is that the Fed Funds rate should be zero, and should have been in Sept 2008 (currently 0-.25, at the time it was 2). In addition, the IOR should be manipulated in a way that the interest rate on excess reserves follows the trajectory of the Wicksellian real interest rate…which is probably currently mildly negative (as shown by TIPS). Otherwise IOR is a favorable policy. Its the timing of the institution of the policy that is problematic.
On Drum’s second point, the IOR policy wasn’t the driver of the collapse in 2008, inadvertently tight monetary policy was. If you are hardcore about monetary disequilibrium, like I am, then that was the key to the entire recession (contra what was happening with financial intermediation). The IOR policy was just heaping gasoline on a fire, so to speak.
I think that it is hard to read Yglesias, Drum, and others regarding the issues because they are trying to fit the concepts into the framework of a financial crisis leading to disaster which they already hold. Reverse causality, and it is much easier to explain events.
Secondly, Drum comments on the budget deficit:
By the way, if you want to reduce the federal deficit, guess what else has to happen? The trade deficit has to come down. This is one bellwether of seriousness on the budget deficit: if you mention the trade deficit, you’re serious.
This kind of made me sigh in disappointment. It is a common fabrication that the trade deficit is harming our domestic market. What should be the trade balance? I don’t know. It would be a very peculiar world, indeed, if trade was always perfectly balanced.
Think of a local example. Do you and your best friend have a perfectly balanced trade relationship? Always one-for-one? Probably not. You probably try to approximate a level of balance, but you probably rarely get it right. You may owe your friend favors, or visa versa…and that type of relationship may persist for years…maybe even decades! One of you may get a little irritated now and again, but you remain friends…and everything ends up working out. (Not to mention, you created money out the thin air!)
Similarly, a country’s trade deficit matters in the long run only in the event that it causes a breakdown in the relationship which leads to a breakdown in trade. That is material, and severely affects both parties. Does Drum know when this is going to happen? Probably not.
I’d wager two things over the next 10, 20, 50, 150 years: the US (provided the notion exists) will continue to run trade deficits, and the US economy will continue to grow at roughly the long-run trend (3%). Care to take it?
Trade balance is solely artifact of fiscal and regulatory policy at home…which may be what Drum is getting at, but I think he’s making a normative judgement of what the balance of trade should be. It will forever baffle me why anyone would condemn getting real goods for paper is a terrible predicament. The best thing that could possibly happen to the US is if China instituted a policy of burning dollars domestically. Why you would expect a summit of international leaders to come to a conclusion regarding the situation is beyond me. Take care of your own policies on the supply side, and let the market work out the rest.
If I wasn’t unreliably tethering my internet connection, I may have noticed that Drum has fleshed out his point on the trade deficit, and broadly agrees with what I was saying. Embarrassing, yes.
Kevin Drum has a fascinating post about the method by which cats drink water:
In other feline news, four engineers have finally figured out how cats lap up water. Dogs, of course, merely scoop it up crudely in their tongues, but cats, it turns out, have a far more elegant method based on subtle considerations of fluid dynamics, a remarkably fast tongue speed of 78 cm/sec, and the need to keep their whiskers dry.
Cats are obviously much more elegant than dogs, having muscles fine-tuned to various activities, and (most importantly) having much more acute vestibular system in their ears to gauge equilibrium (balance). However, it seems that dogs drink in roughly the same fashion, by curving their tongues back and lifting a column of water into their mouths, as can be seen in the video below. The unseemly lapping sound, and inelegance is mostly due to the structure of the mouth.
The thing that fascinates me most about these types of things is the elegance by which our crude bodies can decipher and react against the laws of nature. I’m awful at sports, so I’m obviously a failure at fluid dynamics…but some people can sink 3-pointers at the drop of a hat. Others can hit a golf ball 300 yards and make it onto a putting green (which I can’t even do on Wii), and still others can throw (and others can catch) a 40 yard pass under extreme pressure. All of this involves solving for extremely difficult equation sets that take even geniuses hours…and yet our bodies solve for these equations nearly instantaneously. It is a sheer marvel of biology.
So the next time some pointy-nosed nerd asks if you can solve complex differential equations in fluid dynamics, throw a basketball into a hoop from the half-court line, and give him a smug grin. You did what would take him a large amount of time in mere seconds.
Bonus if it is a windy day.
A couple days ago, Reihan Salam put forth the question of why the United States is so great. Which means how has the US economy performed so well over the last century? Karl answers with what he deemed a “conventional answer”, and FreeExchange grapples with the question, concluding a mix of market size and the influx of talent to America (read: immigration).
I agree that market size has a lot to do with the wealth that the US generates. The most important thing to note is that the US is a free trade area. Capital and labor are free to migrate easily and efficiently across the borders of states in the US. This advantage, the comparative advantage of trade, has allowed the US to innovate in ways that having trade barriers would not allow. The most striking example comes from (I believe) David Friedman, when he noted that there are two ways to make automobiles; you can erect a factory and build them with steel, or you can plant a field and build them with agriculture…or, presumably, you could erect a tower, and build them with finance. The easy with which this division of labor can manifest itself within the United States is definitely a key to the prosperity we enjoy. Although I believe that the advantage of market size has run its course, it has still been very important.
I want to touch on an element that fell out of favor among researchers in the 60′s, but has since seen a tepid renaissance. That is, culture matters.
Conveniently, that is the title of a book that was put out after a Harvard international studies conference headed by Lawrence Harrison and Samuel Huntington. To begin, I’d like to turn to Robert Putnam, from his book, Making Democracy Work, in which Putnam describes his visit to the government offices of the poor Puglia region of Italy:
In the dingy anteroom loll several indolent functionaries, though they are likely to be present on an hour or two each day and be unresponsive even then. The persistent visitor might discover that the offices beyond stand only ghostly rows of empty desks. One mayor, frustrated at his inability to get action from the region’s bureaucrats exploded to us, “They don’t answer the mail, they don’t even answer the telephone!”
Putnam then contrasts that experience with the experience of the government offices in the rich Emilia-Romangna region in the north:
Visiting the glass-walled regional headquarters is like entering a modern, high-tech firm. A brisk, courteous receptionist directs the visitors to the appropriate office, where as likely as not, the relevant official will call up a computerized database on regional problems and policies…A legislative pioneer in many fields, the Emilian government has progressed from words to deeds, its effectiveness measured by dozens of daycare centers and industrial parks, repertory theaters adn vocational training sites scattered throughout the region.
These two regions stand but 400 miles away from eachother, but they may well be worlds apart. The curious question is, why? They are both populated by Italian people who share the history of Italy. Putnam concludes that the source of this disparity is low trust leading to an inability to achieve large-scale cooperation. He argues that the differing histories is the source, tracing all the way back to medieval times. While the south was traditionally monarchist, hierarchical, closed, and dominated by the church; the north was more egalitarian, communal, and open to trade. Later, the north was influenced by the ideas of the enlightenment.
The idea is that while the south was discouraging networks from forming, as they presented challenges to the hierarchy (and especially the church), the north embraced the formation of social networks, which allowed it to form valuable human (and social) capital.
In their book, Harrison and Huntington present data regarding trust and economic performance (measured in PPP per capita GNP). Not surprisingly, there is a strong correlation between the percentage of people who “trust people in general”, and GNP per capita (sorry I don’t have a link, but if I find suitable data, I’ll reconstruct). The question is, why? Argentinean scholar Mariano Grondona has proposed typological rules. These rules fall into three broad categories.
- The first category are norms related to individual behavior. These include norms that support a strong work ethic, individual accountability, and a belief that you are the protagonist of your own life and not at the whim of mystical powers or “powerful leaders”.
- The second category are norms related to cooperative behavior. Foremost is a belief that life is a non-zero-sum game and that there are payoffs to cooperating in a larger group. Societies that believe in a fixed pie of wealth have a difficult time creating social capital, and are often characterized by looting and cheating.
- The third category are norms related to innovation. Cultures that look to rational scientific explanations of the world tend to be more innovative. It is also very important that a culture be tolerant of heresy and experimentation. Orthodoxy stifles innovation. It is also important that a culture welcome competition and celebrate achievement. Overly egalitarian societies reduce the incentives for risk-taking.
Not surprisingly, those cultural traits are also the key to well-functioning organizations, including businesses, charities, and governments. A final norm, and one that is possibly the most important, is how people view time.[1] As Eric Bienhocker states:
Cultures that live for today (or, conversely, are mired in the past) have problems across the board, ranging from low work ethic, to inability to engage in complex coordination and low levels of investment in innovation. Why work hard, and invest in cooperation and innovation if tomorrow doesn’t matter? In contrast, cultures that have an ethic of investing for tomorrow tend to value work, have high intergeneration savings rates, demonstrate a willingness to sacrifice short-term pleasures for long-term gain, and enjoy high levels of cooperation.
Trust also affects the intangible wealth of nations. Bryan Caplan is fond of touting the fact that poor immigrants are extremely productive, as long as they work in America. The amount of physical capital (A, k, L in Cobb-Douglas) in the US certainly tells part of the story, but as the World Bank has pointed out, it can’t come anywhere near telling the whole story. In fact, our institutions contribute 80% to the US’ capital stock. Contrast that with the poorest nation on earth, the Democratic Republic of Congo, whose intangible capital actually depresses the total wealth of the country.
William Easterly has pointed out that in the last half-century, the developed world has provided more than $1 trillion in economic assistance to the developing world. Yet poverty in places like Africa and South America still persists. Africa even regressed[2] (until recently). The lesson? It is important not to ignore the cultural basis of economic growth.
[1]The Origin of Wealth, Eric Bienhocker. I’d like to thank Bienhocker as well, for providing a guide to much of my analysis of culture.
[2]Just wanted to let you know that that is one of my very favorite TED speeches. It is incredibly inspiring.
Most people who follow the economics blogosphere have seen the famous picture of the world’s lights at night. The most popular use is to point out the stark difference between North Korea and South Korea.
I found some beautiful pictures that use that satellite data and colored changes in illumination.
[Click Image to Enlarge]
[Click Image to Enlarge]
I think that the image of Europe is the coolest.
Nick Rowe does an immense public good whenever he writes about esoteric monetary concepts in a way that is both accessible, and causes a high level of debate in the comments. At least he does me an immense service that I should probably be paying him for. Thanks for the consumer surplus, Nick!
In a recent post, he lays out an analogy between Daylight Savings Time and the non-neutrality of money (in the short run).
A purely nominal change (whether we say than solar noon is called “12.00″ or “13.00″) will have a big real effect. Even though we all know that it’s just a nominal change. Nobody is fooled by the government changing our watches without us seeing them do it. Nobody suffers from “time illusion”. We know it’s not really earlier. In fact, it’s the people who don’t hear that the time has changed who are likely to still get up at the same real time, by the sun.
And the real effects of this nominal change will last, at least until the Spring, when the government will tell us to change our watches forward again.
Read the whole thing, because it is a very good discussion about how monetary policy can have real effects in the short run. Nick, of course, subscribes to money neutrality in the long run. It is informative to discuss the nature of the short- and long run with regard to economics. When normal people talk about the “long run”, they implicitly mean a time in the future (which is sometimes delineated). This is buttressed by the use of the famous Keynes quote. Of course, this is not really what is meant by “the long run” in economics. The long run in economics is reached when the economy reaches a stable equilibrium after some change. As a very simple thought experiment; assume that all goods and services in the economy are priced in the same manner gasoline is — globally and (mostly) electronically — and thus prices adjust relatively quickly, and assume that markets are perfectly efficient. When the Fed makes a change to the supply of money, all prices adjust within a day or two. That is the long run. The time span doesn’t really matter. Obviously the real world is nothing like that, and there is a time lag between the change and the new equilibrium, but it need not mean “a long time”, although it often does.
Many economic models assume long-run money neutrality (or superneutrality!). That changes in the money supply only affect prices in the long run, and the economy has a long run growth rate that it converges upon given by its capital stock, and that the long-run composition of investment/saving/output is unaffected by the short-run fluctuations.
While I use these types of models for my study of economics, I’m going to make the (maybe controversial) claim that I don’t believe in the neutrality of money, even in the long run. I think that the features of the money system that we use do affect the type of transactions that take place, and the composition of investment/saving/output. Even in the long run.
For example, every advanced society in the world uses a money system that is characterized by money with positive interest rates. This one fact is the reason that people save in money (i.e. have a bank account…you could argue that the setup of our money system is the reason personal banking exists!). If positive interest rates didn’t exist, then people would save in other vehicles. A concrete example of this is negative interest on money — stamp scrip. You can’t hoard money that has negative interest. So how do you save? Well, you invest in real assets that appreciate at a higher rate of interest, compensating you for their illiquid nature. In Worgl, Austria, that was trees. To rid themselves of money, people planted trees. Trees appreciate in value, and so raise the capital stock…and people were doing this in the midst of the Great Contraction of 1929-33. That is a completely different dynamic that, if the system had not been shut down, would have large real effects on the long run path of the Worgl economy. Another popular place where complementary currencies have changed the long-run dynamic is elderly care, which is very expensive, and generally under-supplied by the market (which is why we have old-age insurance and medical care). Fureai Kippu no only allows elderly people to remain in their homes longer, but allows adolescents to partially pay for tuition — solving two social problems at once! More people are cared for and educated than otherwise would be under a single-currency dynamic.
Is the neutrality of money a useful concept? Yes. But I don’t think that it is literally true. Different types of money embody drastically different values, and thus affect what is produced and consumed. The money system we use is characterized by scarcity, and induces competition for money. That is a completely different dynamic than, say, a LETS money system (like Fureai Kippu), where money is issued by the users themselves. Bernard Lietaer, characterizes this distinction as Yin money and Yang money. As he is fond of saying (paraphrased from his book, The Future of Money):
“Currently, our biggest problem with money and currencies is unconsciousness. We are not aware of what we are doing around money. We haven’t really thought about what money does to us. We believe it’s neutral, so it doesn’t matter. But it’s not neutral: it deeply shapes us and our societies. The first thing that has to happen before complementary currency systems can effect real change on a larger scale is a shift in consciousness and awareness.”
I think that is correct, but I’d be interested in hearing what Nick and others have to say about the subject.
PS I suppose the above argument puts me in the “post Keynesian” camp. Although I don’t emphasize the role of debt deflation over that of monetary disequilibrium in producing real effects.
Remarks from Ben Bernanke indicate that the Fed is shooting itself in the foot:
“I have rejected any notion that we are going to try to raise inflation to a super-normal level in order to have effects on the economy,” [Bernanke] said.
In fact, the Fed should engage in level targeting, as I have been pushing in the last few posts. It should commit to a higher target for nominal expenditure in order to return to the previous trajectory from the Great Moderation. That requires a higher level of NGDP growth than is “normal” in order to catch up. One way to do this under the current monetary regime is to create higher inflation expectations. Do they need to be much higher? I don’t think so, but it’s not entirely unreasonable to disagree.
So we know that most members of the FOMC view 2% as the preferred inflation target. We now also know that the Fed is holding true to that target, come hell or high water. 2% is better than 1%, but a temporarily higher target would produce a much more robust recovery. Arguably, the Fed is in the business of providing stable NGDP growth consistent with high employment and low inflation. It allowed NGDP to plummet and now they should be trying to make up that lost ground as quickly as possible. This statement is clearly against that goal.
We’re in for a rocky road if our monetary authority sees it fit to tie its hands.
In a Times article a few days ago is this interesting quote from Laurence Meyer, a former Fed governor:
It was this impending gridlock that might have pushed Mr. Bernanke to move, said Laurence H. Meyer, a former Fed governor. “Bernanke has said that fiscal stimulus, accommodated by the Fed, is the single most powerful action the government can take for lowering the unemployment rate, when short-term rates are already at zero,” Mr. Meyer said. “He has nearly pleaded with Congress for fiscal stimulus, but he can’t count on it.”
I’m taking this as a explicit, and unshrouded nod to the concept of “money financed fiscal policy”. Or, what is lovingly referred to in the press as “monetizing debt”. This is a situation where the government draws up a plan to distribute money, whether through direct transfers or increases in government consumption/investment, has the Treasury issue debt in the amount decided upon Congressionally, which the Fed then purchases with newly-coined money (and for hysterics, this money is created “out of thin air”!).
As Karl has noted, and as concurred upon by commenter Jazzbumpa, a program such as this would inevitably “work”. And by work, I mean it would raise inflation expectations such that businesses would be induced out of cash and into consumption and capital goods. This, of course, is something that the ARRA failed to do. This is true, but it is optimal policy?
I say no. I don’t think that fiscal policy need ever enter the picture. I think that the Federal Reserve should announce an explicit target to get the growth path of nominal expenditure to the previous level from the Great Moderation, and then continue to level target a stable growth path from there. In doing so, the Fed should immediately stop sterilizing its own open market operations by paying interest on excess reserves (indeed, the interest in reserves should be slightly negative, reflecting real rates). The Fed could then move down the yield curve, and buy Treasury debt that currently resides on the balance sheets of banks, businesses, and individuals; moving the price up while moving the yield down to zero. I suspect that there is enough debt out there that it would not run out of things to buy before hitting its nominal target. However, if it does, then it can move on to other assets.
The key thing here is that there are many interest rates in the economy, and not all of them are pegged at zero. My point is that far from needing to bring fiscal policy into the picture, monetary policy could go it alone. If the SRAS curve is relatively flat, which is a prediction of macro models, then the resultant inflation expectations would produce much more real output than inflation (lets ballpark and say 5% real growth, 2% inflation), up until full employment is reached — at which point, the Fed would revert to its normal level target. I do not think that Bernanke is “pleading with Congress” for fiscal policy. Why would he? If he identifies that aggregate demand is low relative to the Fed’s own target, then by all means, he should be taking steps to move aggregate demand to where the Fed is most likely to hit their target goals.
To those who say that it is unrealistic that the Fed would do this, is it any more unrealistic than hoping for money-financed fiscal policy?
Inflation is confusing. The concept makes crazy people crazier. And even worse, it makes otherwise sober people disagree with eachother. Reading through the accounts of QE2 on the internet the past few days have solidified my view that inflation is a thorny enough concept that we should rid it from popular vernacular. Is inflation important? Sure…but what measure of inflation is correct? CPI-U? GDP Deflator? Your crazy uncle’s index? Does inflation help or hurt savers in the current landscape?
If there is anything that gets turned on it’s head when an AD recession hits, it is the concept of inflation. During normal times (full employment and capacity utilization), inflation is harmful as it drives up interest rates, discourages saving, and encourages misallocation of capital. However, none of those things apply to the current situation in which we find ourselves with a large output gap and high unemployment. Thus, we need higher inflation in order to close the output gap (the difference in money expenditures between where we are currently, and the trend rate from the Great Moderation…currently about -13%), but that turns everything that everyone knows about inflation backward. All of a sudden inflation is good for savers, good for the unemployed, and good for economic growth. Well, stable inflation expectations are key…but it’s hard to steer a ship, and it’s hard to get a non-confusing answer out of pundits and other commentators.
In order to square this circle, I propose we forget about inflation. And not just forget about talking about it, but forget about its use in the setting of monetary policy. Instead, we should target nominal expenditure at a steady growth rate (3% a la Woolsey, or 5% a la Sumner, Beckworth, etc.) with level targeting. What advantages does targeting nominal expenditure have? Well…
- Targeting nominal expenditure (NGDP for short) allows monetary policy to better address recessions which arise from both aggregate supply and aggregate demand shocks. David Beckworth has an excellent discussion of this point.
- NGDP is a better indicator of monetary shocks than inflation indicators like CPI. Because prices are sticky, and because measures of inflation are so problematic, a fall in NGDP won’t immediately show up in inflation numbers. Also, if there is a large price shock in something like oil, this will raise the money price of all goods and services, causing anyone focusing on inflation to miss the underlying weak economy…and thus potentially set monetary policy to be too contractionary (sound familiar?).
- NGDP allows us to broaden our focus to aggregates like MZM, asset prices, yields, excess reserves etc. We’ll relinquish our inane focus on interest rates, which are a very problematic indicator of the stance of monetary policy, and have a much better picture of the health of the economy.
- NGDP sounds better. People have an innate fear of inflation. Inflation destroys savings, after all…and we all know frugal people are virtuous. Well, how about, in the event of a recession, instead of economists clamoring against the crowd that we need inflation, they say that we want aggregate expenditures (and thus nominal income) to be at some level higher than it currently is? Money illusion is a powerful motivator. Who would argue with that?
Targeting nominal expenditure would be a beneficial step from both an economic theory perspective, and a public relations perspective. Lets take the confusing concept of price inflation out of our discourse, so that we can see the world more clearly.
P.S. We are currently 13% below the target path from the Great Moderation, and are where we were at before the crash of Sept/Oct 2008. To make that up by 2011:Q3, the Fed would have to target NGDP at $17.6bn (to continue on a 5% NGDP growth path). However, Bill Woolsey favors a 3% growth path for money expenditures, which means that the Fed would only have to target a 13.8% increase by 2011:Q3 (or $16.4bn), and then continue on with 3% growth, level targeting, from then.
Update: Found the link to Beckworth’s article!
I’ve previously posted my skepticism about the fact that British “austerity” is going to have any real effect on the economy. Now, courtesy of Josh Hendricksen, we have evidence that intentions of fiscal contraction (remember, it’s expectations that count, not the current setting of policy…even for fiscal policy) pale in comparison to an accommodative monetary policy…but first, and important quote from Josh.
…I suggested that the best way to assess monetary policy is by comparing the target variable to the target. This is the only proper way to evaluate the stance of monetary policy. Interest rates and monetary aggregates might be useful guides, but they are only intermediate targets. An explicit target is also important because it helps to anchor expectations.
Now, on to the meat (from the WSJ):
Another quarter, another surprisingly strong U.K. growth figure. Growth of 0.8% in the third quarter smashed the consensus estimate, pitched at just half that level, and also demolished any thought that the Bank of England might move towards more quantitative easing at its meeting next week. The U.K. economy is looking resilient.
[...]
The U.K. economy has now expanded 2.8% in the last year, a little above the average for the pre-crisis decade of 2.6%. Encouragingly, growth is broad-based across services, construction and manufacturing; the latter has now racked up annual growth of 5.3%, the strongest year-on-year rise for 16 years, Barclays Capital notes. Despite concerns, service-sector growth held up at 0.6%, the same pace as the second quarter. Indeed, worries that the U.K. is experiencing a particularly bumpy recovery are starting to look overdone. That should help unlock corporate spending and hiring.
The important thing about fiscal policy is to note the monetary policy reaction function. The Bank of England has signaled that it is willing to be accommodative, and thus, you can move fiscal policy all around the map.
By the way, I don’t think that fiscal policy is completely irrelevant. Fiscal policy in the US had an important job of helping people through a tough time, which is nothing to balk at. Fiscal policy (broadly speaking, to include taxes and regulation) also has important long-run effects on saving, investment, and consumption that can not be ignored. But as a counter-cyclical measure tasked with moving monetary expenditures (final sales of domestic product, for example) to the long-run trend, fiscal policy will nearly always come up short. If you read this from Arnold Kling, he is in the camp that believes number three…which is pretty much where I’m at as far as using fiscal policy as stabilization policy.
Millenocket, ME. has the right idea. Matthew Yglesias has apparently been to Millenocket, and finds what they are doing funny. I’ve never been there, but as the article points out, it’s a pretty dead town, with horrible weather…so it seems out of place:
Never mind that Millinocket is an hour’s drive from the nearest mall or movie theater, or that it gets an average 93 inches of snow a year. Kenneth Smith, the schools superintendent, is so certain that Chinese students will eventually arrive by the dozen — paying $27,000 a year in tuition, room and board — that he is scouting vacant properties to convert to dormitories.
There are three ways in which I’d like to analyze this development; from an economic standpoint, a human welfare standpoint, and a social standpoint. I will argue that all three a net benefits to the US and the world, and we should make a long-term policy commitment to this type development around the country (and, indeed, other countries should imitate it).
The economics of importing capital through education are fairly straightforward. The long run growth of an economy, given money neutrality, is a function of an economy’s real capital stock. Ceterus paribus, increasing the efficiency of capital increases the ability of an economy to grow in the long run. If the $27,000 spent on educating a Chinese child is more productive than any other investment, which means the real returns to a US education are higher than any other investment available to them (something that is almost surely the case), then this results in an increase in the marginal efficiency of capital. Whether these Chinese immigrants remain in the US, or return to China, the effect on world growth will for the better. Literally everyone will be better off due to the rising of the world Wicksellian equilibrium interest rate as China and other countries become more productive (and thus, richer).
The US is arguably much more efficient at education than the Chinese, so why not export education?
From a human welfare standpoint, consider this analysis from the World Bank:
This volume asks a key question: Where is the Wealth of Nations? Answering this question yields important insights into the prospects for sustainable development in countries around the world. The estimates of total wealth–including produced, natural, and human and institutional capital–suggest that human capital and the value of institutions (as measured by rule of law) constitute the largest share of wealth in virtually all countries.
[...]
Growth is essential if developing countries are to meet the Millennium Development Goals by 2015. Growth, however, will be illusory if it is based on mining soils and depleting fisheries and forests. This report provides the indicators needed to manage the total portfolio of assets upon which development depends. Armed with this information, decision makers can direct the development process toward sustainable outcomes.
This analysis looks at the levels of “intangible wealth” that is embedded within human and institutional capital. The US is found to have $418,009 in intangible wealth per capita (comprising 80% of our real capital stock). That means, simply by stepping within the borders of the United States, human productivity is enhanced by this massive stock of wealth embedded in our people and our societal institutions. By contrast, China has just $4,208 per capita (comprising 55% of the total wealth stock).
Now, despite the obvious material living standards present in the United States, access to intangible capital totaling more than 99 times the amount available in China, comprises a vast gain in human welfare for each and every person who comes to the United States to live and be educated.
Finally, from a societal standpoint, having more immigrant workers increases the real wage rate for most people in the US. Not only that, but it because of the increase in marginal productivity of the Chinese worker (assuming that a non-trivial sum of people will return to China), this will increase the wages of Chinese workers — which, in turn, will increase the demand from China for US-produced goods and services. A greater supply of future labor is very important to the future of the wealth creation (and thus, the welfare state), as is evident by Japan’s aging population.
So, let’s overcome this roadblock…
There is one hitch. Under State Department rules, foreign students can attend public high school in the United States for only a year, a system that Dr. Smith considers unfair, given that they can attend private high schools for four years.
…and make a real Pareto improvement in the lives of people around the world. Most of all, the lives of these prospective Chinese immigrants.
To end, a quote from Terry Given, an English teacher:
“I don’t want to sound flip,” Ms. Given said, “but why not? We won’t know until we get the opportunity to know them and give them the opportunity to know us. There’s something to be said for putting ourselves out there to see if we can be the prize that’s claimed.”
Amen.
Mark Thoma worries about gridlock in the house as a result of the upcoming elections. He has three big concerns that he’s looking at in the short-run that could prove to stall recovery. I want to address what I believe about all three.
The first is that we will be gripped by the austerity movement that has captured Europe and that, as a result, we will withdraw stimulus too soon. Republicans have been promoting policies to reduce the deficit for some time now, spending cuts in particular are on the agenda. Many among the Republican leadership would have canceled the remaining stimulus already, including extensions to unemployment insurance, if they were in control.
Now, according to Nate Silver (@fivethirtyeight), Republicans have a fairly good shot of gaining 52 seats in the House, for a house composition of 231R-204D. This may be enough to stall any new spending, based on the populist rhetoric of the tea-party base…but I don’t think it is enough to move any actual significant budgetary legislation. One reason is that Republicans don’t actually care about budget deficits. Further, the austerity plans that are being implemented in Europe aren’t exactly the most immediate. I don’t think that austerity in Europe is going to cripple any economies, much less their own. The Bank of England in particular has intimated that it would likely offset any contractionary impact of Britain’s budgetary plans. So the question is still very much up in the air as to whether austerity is the death knell for recovery — I, personally, don’t think it is; but that is contingent upon a willing central bank.*
The second concern is related to the first. I expect that we will have a slow, agonizing recovery, particularly for employment. I do not expect a double dip, but it’s not out of the question by any means, and we need to be ready in case it happens. Unfortunately, the election is likely to bring gridlock and it’s doubtful that Congress will be able to act in response to a second downturn. An increase government expenditures in response to a slowdown is certainly off the table. It’s hard to imagine Republicans who have argued — wrongly in my view — that the stimulus did not help the economy getting behind increased spending.
According to recent movements in the markets, there is actually reason to be optimistic. Even so, employment may not come down to traditional “full employment” levels (a situation that I find highly likely). However, after (or if?) we return to the previous trend rate of NGDP**, those are probably more issues of structure (search/match, skill profiles, etc.) that the government may be able to help mitigate, but will likely to be alleviated slowly, simply by the nature of these problems. What does robust growth and stagnating employment look like for the future of economic policy? Protectionism, which highly en vogue among tea partiers and the “labor-left” alike. That is something that I’m worried about.
But my biggest concern is what will happen if new problems emerge in the financial sector. The resolution authority in the Dodd-Frank legislation is supposed to prevent the need for another financial bailout, but I am not at all confident that this will be sufficient to solve widespread problems and threats of failure in the banking system. There’s a good chance that the resolution authority won’t get the job done and that a bailout will be the only way to resolve severe problems. However, if problems do arise and another financial bailout is needed, forget it. Opposition to the banking bailout makes it nearly impossible for Congress to undertake another bailout of the financial system.
This is a problem where Thoma and I seem to disagree about causality. Would the Fed allow NGDP to fall at the fastest rate since 1938 once again, as they did in late 2008? It’s possible, but I don’t think it is likely…and as you may know, I think it was increasingly tight money which led to big financial problems — not the other way around, which I believe is the causality that Thoma is looking at.
Why don’t I welcome gridlock in economic policy that is almost certain in our future? Well, because there are important questions about the response to the recession that need to be answered, that will most likely remain for the foreseeable future under gridlock. The structure of bailouts, the role of Fannie/Freddy in the future of housing policy (and the future of housing policy in general), the supposed “world trade imbalances”, the future health care policy, and to a lesser extent UI, minimum wage and the very structure of taxes in the US. These are all very important questions that affect millions of people, and are very hard to answer under a regime of unanimous opposition that would likely prevail under a gridlocked government.
However, I don’t think the recovery will be endangered by gridlocked government, since the Fed has signaled it intends to take the lead…something it should have done two years ago.
P.S. Should probably note that the Yglesias link above disagrees with the notion that things cannot get done under divided government.
*Ability isn’t really a question in my mind.
**Assuming level-targeting.
I’m delighted to see that Stephen Williamson mentioned Ithaca HOURS, a Local Exchange Trading System (LETS) alternative currency operating in Ithaca, NY. It is possibly the most robust complementary currency in the United States, which makes it an exciting experiment in alternative money systems. However, Williamson doesn’t seem to like it, and raises a some very valid points about the motivation to create an alternative currency:
It should be clear that the hours-issuing Ithacans did not attend classes in conventional modern economics. The theory underlying their currency system is in part related to social credit and Marx’s labor theory of value, with some wishful thinking thrown in for good measure. The wishful thinking relates to the ideas that exchange using hours can somehow enforce a minimum wage of $10.00 per real hour (i.e. there is Ithaca hour illusion), and eliminate cutthroat capitalism, thus making the economy somehow more friendly. However, for later use, note three key ideas in their story: (i) money is not neutral: more units of it in circulation increases local employment; (ii) there is a protectionist element: form a local club, which promotes trade among members of the group, the corollary being that there is less trade with the rest of the world.
He is referring to this graphic story about the founding, use, and purpose of the Ithaca HOURS system.
I’ve written about this problem before:
A very common fallacy that you will encounter when doing research about complementary currencies has to do with the nature of trade: a fallacy of composition. It is very common to view the economy as a zero sum game. Thus, if I win, by definition, someone else has to lose. This type of competition does occur within economies. For (a very simple) example; if you buy a Coke, Pepsi loses your business…and if everyone in the world buys Coke, Pepsi goes bankrupt. However, this type of competition doesn’t happen between economies. Economies as a whole do not compete. If everyone buys Toyota cars and GM goes bankrupt, the US economy does not lose — indeed, the economy has become more productive and thus wealthier.
It is common on the left to view complementary currencies as a way to “keep money within the community”. In this view, when we purchase things locally, the money stays within the community whereas if you purchase something from a different city, state, or country, the money leaves the community. There is absolutely no truth to this view, and the logical conclusion to this is that real self-sufficiency maximizes wealth…but then money is absolutely worthless! Never mind the fact that self-sufficiency makes everyone poor.
So if the above is not the purpose of complementary currencies, what is? If you view money from the perspective of traditional economics, then the only reason to have a complementary currency is to avoid the limitations of the zero-bound on positive interest rates. However, since the zero bound simply represents a lack of imagination, even within the current monetary paradigm, that the primacy is important, but it is not the only reason.
More philosophically, if you happen to view our money system as a value transmission mechanism, things are different. I believe not only that money makes transactions easier, but even that the types of money we use emphasize certain types of relationships between people. The way our money system works (and indeed, the way money systems work the world over) incentivizes competitive relationships. These types of relationships leave much demand for services unmet by supply — education is a prime example. I advocate complementary currencies because they can effectively bridge the gap between unused supply and unmet demand.
Complementary currency systems have also been shown to increase the velocity of legal tender within a local economy (Lietaer 1998), a goal which is exactly contrary to the claims made by leftists in the previous section.
The most common types of things that are paid for in complementary currencies are non-tradeable goods/services. Non-tradeable goods (and services) are items that can not be transported and sold in another location. For example, I can’t get a hair cut in Britain from where I live in Omaha, NE…I actually need to go to Britain. Real estate is another popular example…and unsurprisingly, people pay for both hair cuts and partial payment of their rent in Ithaca HOURS.
Complementary currencies are particularly popular in Japan, where two decades of mild deflation (or price stability) in the face of an aging population has taken quite a toll on society. Japan also has a department within the Ministry of Finance whose job it is to create new currency concepts and test them. The most advanced complementary currency in use in Japan is the Yamoto LoVE, which is completely electronic (no hand-to-hand bills).
I think there is an implicit assumption among “respectable” economists that the monopoly of money creation by the Federal government is the optimal state of affairs. It is certainly efficient, but at what cost? There is a strain of research in complexity economics that likens money to carbon in an ecosystem. The efficiency of an ecological system is measured by its ability to process biomass through the system; similarly, the efficiency (in the thermonuclear sense) of an economy is its ability to process money. However, as I have noted, there is a cost for this efficiency, and it is paid in resilience (just like in an ecosystem). Furthermore, complementary currencies such as the WIR Bank in Switzerland (the most “official” complementary currency in existence) actually work counter-cyclically to stabilize business cycle fluctuations.
Throughout history there have been numerous examples of complementary currencies in use which coincided with works of wonder, human enlightenment, and vastly increasing wealth an living standards…and there is good reason to believe that the mechanics of the currency these civilizations were using facilitated this growth. Perhaps it is time to learn from the wisdom of ancient civilization.
Karl does not like karma. Now obviously, being the anti-theist that I am, I don’t believe that there is a benevolent god dishing out karmic punishments and rewards…nor do I think there is a necessary causal link between actions in your social life, and haphazard physical consequences (i.e. helping an old lady across the street, and then finding five bucks…or yelling at your sister, and then stubbing your toe on a chair).
Karl is quite right that human lives are basically a fight against entropy, in which entropy always eventually wins. We strive to use energy inputs to create fit order (which of course, is called “wealth” in economics), in order to escape griding poverty. And in order to maintain such a regime, we need a constant influx of energy inputs and a constant outflow of waste. If these conditions aren’t maintained, everything falls back into a disorder and disarray…most of the population on earth dies, and all of our crowning achievements whither away.
However, this fact need not lay waste to the entire concept of karma. Due to the nature of our societal setup, there is ample opportunity for repeated interaction. This is what I view as the key to the concept of karma. In a world where there is no repeated interactions with people, then there is no need for the concept, as your past circumstances are unknown upon future interactions. Because our society offers ample opportunity for us to repeatedly interact with multiple groups and individuals. Thus, our past actions have a causal link to future interactions.
For example, imagine Robinson Crusoe and Friday are stranded on an island in which they are forced to interact daily. The probability of friendly our hostile interaction is directly related to the results of past interactions. Thus, if Crusoe stabs Friday, he increases the probability that Friday will respond with either violence, or avoidance. One can imagine extrapolating this simple model into a society with multiple complex interactions, and see how someone who always acts in a way that is hostile toward people would end up living in a world where he/she was either under constant threat of retaliation, or seclusion. This may seem like just desserts doled out by a just god…but it is really just the sum of all of the interactions people have.
Ostensibly, we are all perceived to be “mean” to some people, and “nice” to others…most people work to gather and groom a social network, and human interaction is of course very complex, so the probability distributions are never nice and tidy…and are generally always in flux. However, it is a useful way to think somewhat scientifically about a popular moral concept.
P.S. One note about the Tea Party’s notion of economic “fairness”. It is generally a conservative attitude that through grit, determination, and hard work; a person will be able to pull themselves up by their bootstraps into a higher income and better life. However, as liberals like to point out (and often oversell), mobility is oftentimes lower than what intuition tells people. Tom Hertz of American University produced a study (PDF) of income mobility in America which is actually pretty good. What it shows is that mobility within the middle class is often exactly what intuition would tell you…but mobility out of deep poverty, and into the highest echelons of wealth are much, much less than popularly perceived.
That mostly happens to be a lottery, however in a study named “The Apple Doesn’t Fall Far from the Tree” (gated), the team of researchers found that there is a high correlation in pro- and anti-social behavior between parents and their children. It is my opinion that success is often attributable to the (often inadvertent) learning and second-nature understanding of social norms of behavior. These norms are not the same for each societal class…and to have any hope of breaking into a different class, these norms have to be mastered. I’m sure you’ve heard of the contempt of “old money” to the “newly-minted wealthy”. This gives people who have grown up imitating these values a home-field advantage. It is also why the “middle class” is a relatively mobile section of the income distribution — middle class is a very large range of incomes, for which similar values hold.
So in short, I tend to agree with Matt Miller (with whom I rarely agree) that the type of society we should try to build should give maximum equality of upside opportunity combined with a downside safety net. The idea being that (as a society) it is in our interests to have a lot of wealthy people…so it would benefit everyone to help the poor get rich, rather than economically punish the rich. The structure of private/public interaction in this setup is something that I’m sure I’ll differ from many on the left.
P.P.S. I’ve always struggled with the question of “fairness” of economic outcomes. Are there any “fair” economic outcomes? What would constitute such? Is the the completely wrong question to be asking? I kind of think so, but I’d be interested in hearing what you readers have to say on the subject.
Paul Krugman is at it again with his calls, using a model based on what I believe to be an entirely flawed conception of monetary policy at the zero bound, to argue that China’s currency policy is harming the US:
So again, the Fed is moving in the right direction, both for US interests and for the sake of the world as a whole. China is beggaring its neighbors, which in this case means everyone else.
Krugman is continuing his call that we begin threatening to engage in protectionism through legislation aimed at Chinese products. Of course, this is wholly unnecessary. Matt Yglesias has the money quote:
The Chinese government’s discomfort with monetary stimulus is understandable. Monetary stimulus plus Chinese currency policy will equal an undesirably large amount of inflation in China. That means that in order to avoid an undesirably large amount of inflation, Chinese leaders will need to engage in a more rapid currency readjustment than they want to. That, however, merely underscores that unilateral monetary action is the right way for the US government to handle our concerns about China’s currency policy. We don’t need to threaten them, or bribe them, or cajole them, or go to “currency war” or anything. What we need to do is to adopt monetary policies that are appropriate for our economic situation. The Chinese will learn to deal with it, and in the longer term we’ll all be better off.
Which highlights the idea that beggar-thy-neighbor policies are anything but zero-sum games when it comes to money. All currencies can’t devalue against each other simultaneously, but all currencies can depreciate relative to goods and services…and that has a stimulative effect. Depending on the relative slope of your economy’s SRAS curve that either means higher inflation or higher real output. Monetary easing in the United States would likely mean higher real output in the US…but it would likely mean higher inflation in China.
What exactly does that do? It gives China cover to adjust their exchange rate policy. A policy of easy money in the US actually benefits both the US and China (assuming that China will follow an optimal policy regime).
What is embarrassing is that we live in a rich country, with a fiat currency, and we are still having a conversation about how to get the economy off the ground…and furthermore contemplating highly detrimental policies in order to do so.
Kevin Drum highlights a piece in an interview by Ezra Klein regarding “car czar” Steve Rattner. The quote is about Rattner’s experience dealing with Congress, which is predictably frustrating…most likely actively infuriating. However, I’m disappointed in Drum’s reaction:
I recommend we replace them all with a randomly selected bunch of sixth graders. They might not get any more done, but at least they’d be better behaved.
This kind of thing is not something that is unique to Congress. I gather from Drum’s comments (and cursory knowledge of his political inclinations) that he regards the bailout of the automakers as The Right Thing to DoTM. I, perhaps rather predictably, have a differing opinion regarding that issue, but that isn’t what I want to highlight — although it is inextricably linked to the issue. What is happening between Rattner and Congress is degrees of possibility conflicting with degrees of freedom…and the predictable result is that the actor with a high degree of freedom becomes incredibly frustrated with the walls created by network interconnectedness when confronting his or her actual degrees of possibility.
This is a timeless story that is at the heart of tribulations of entrepreneurship (and particularly visible in the entertainment industry). You don’t need to invoke the inadequacies of Congress to view this spectacle…just go down to the Human Resources department at your company (or really any other department), and listen to the complaints. I’m willing to bet that they will sound suspiciously similar to Rattner’s.
Such is the nature of the dynamics of network interaction. Replace Congress with whomever you deem fit, and ten-to-one odds says that within a rather short period, you will end up with the same sort of frustratingly difficult situation.
I want to raise awareness that even given strong will, and good ideas; large, densely-interconnected networks routinely fall into complexity catastrophe. It is a friction which is literally the basis of what Shumpeter famously termed creative destruction. While it is easy to score rhetorical points by highlighting the proximate cause, it’s really the network that is to blame.
P.S. Modeled Behavior just reached the 1,000th post mark! Congrats to both Karl and Adam for building such a great blog! I’m happy to be a (albeit small) part of the team!
Riffing off of Adam’s post on the NYC food stamp decision, I have found it useful to think of the issue through the lens of the excess cash balance mechanism (or in this case, excess stamp balance mechanism).
For those who may not be familiar, this is a concept in which adding to the supply of money causes investment/spending to increase due to individuals and firms having cash that is sitting idle, earning no return. It is a fundamental concept in “monetary disequilibrium”, and I think that it applies here.
First, let me state that regardless of the particulars of the issue, my position is that this is well outside of my comfortable level of paternalism. I had a Twitter conversation with (I believe) Adam last night about the issue, in which he brought up the fact that this could be a cheap way to buy health, and thus is comparatively libertarian at the margin, but it still doesn’t inspire me. That is why comments like this from Melanie B strike me as odd:
If you provide low-income individuals and families with vouchers to purchase foods, especially if those individuals also receive Medicaid or other gov’t-subsidized medical care, it is totally counter-intuitive to allow the use of such vouchers on items that do not assist with nutrition (as the mission-in-the-name clearly states).
In any case, on to a quick note about how I’m currently thinking about the issue. Suppose you have $100, which you consume completely in each period. You average 10% a period on foods that are now banned, thus giving you an “excess stamp balance” each period of $10. In the cash economy, people rid themselves of excess cash balances in three ways; increasing their stock of wealth by saving (by hoarding dollars or buying antiques, etc. [in a Nick Rowe economy]), engaging in higher current consumption, or delaying current consumption by loaning the cash out (i.e. buying stocks/bonds).
Unfortunately, in the food stamp economy, it is only possible save in a roundabout way (not in currency)*, as I don’t think that food stamp accounts accumulate interest (but correct me if I’m wrong!). People could definitely consume more (different) foodstuffs, or they could loan out the funds. I’m using loan here very loosely to describe the act of barter exchange. It seems to be fairly common for people to organize trades in which they purchase food items for other people, who then pay cash for the items that the person using food stamps wants…and then they trade the items.
I think the most likely set of substitute transactions is the barter situation, but even if increased consumption is the result of having an excess stamp balance, that of course doesn’t guarantee a healthy diet. However, it is possible that for some people the extra stamps will be enough to push them out of inferior good territory, which would actually be a Pareto superior outcome, which would come at very little cost.
*As Rebecca Burlingame points out in the comments:
Temporary savings = frozen dinners, which can be eaten next week or month. Long term savings = honey or something sugar preserved like syrup or jam, can be eaten next year!
I was going to write up a post on my exasperation at the Fed’s recent meeting statement, but Ezra Klein got to it before me and did a good job, so you should go read what he has to say. One point that I want to highlight, because I have made the point that the dual mandate is mostly just an insiders joke:
Paragraph two: We admit everything is terrible. In fact, it’s so terrible that it means we’re failing our mandate. “Measures of underlying inflation are currently at levels somewhat below those the Committee judges most consistent, over the longer run, with its mandate to promote maximum employment and price stability. With substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to remain subdued for some time before rising to levels the Committee considers consistent with its mandate.”
[Image Courtesy of David Beckworth]
How many of you wish that you had a job where you could consistently fail at the very time when it is clutch that you deliver in a big way? How many of you would like to say, “Well, I have a model of the economy that says we won’t be hitting any of our own targets…but oh well”? The Federal Reserve is in the exact position in the economy where they can act quickly and decisively and actually make a large impact on nominal spending. I would even go as far as to say that they can do so without “long and variable lags”, as markets should price in actions by the Fed nearly immediately, and indeed they have been.
Contrary to the popular narrative, I believe that it is this very passivity by the Fed that brought us to the brink in the fall of 2008, when every indicator of economic activity (industrial output, consumer spending, business confidence, NGDP expectations, etc.) were found to be in sudden free-fall mode. At that time, interest rates were in the 1.5%-2% range, and the Fed’s target was still 2% until October 2008!
And here we are, fully two years later, and we still cannot get the Fed to act…nor can we get the executive branch of government to take the problem seriously! This inaction belies an institution that either is ill-equipped to respond when necessary, or is structured in a way that prevents decisive action. Since I believe that the Fed has all the tools it needs (it being a monetary superpower), I would place the blame on the structure of the network.
There is nothing more important on the Fed’s plate right now than bringing nominal spending back in line with the previous trajectory of NGDP. Not only to assist 50 million people who are currently unemployed, and help numerous others rebuild their balance sheets…but to save our economy from the whims of populist sentiment that will likely take hold if our economic malaise continues for very much longer. That means rounds and rounds of fiscal stimulus. That means the development of an entire class of freeters who never reach full potential. And most importantly, that means the loss of real goods and services that could otherwise be produced in our economy — which translates into a lower real standard of living for everyone.
At this point I would do anything for a little more monetary stimulus.
Update: I probably should have put “during the recession” in the title. Unfortunately it’s gone to press.
Chevelle, at Models and Agents, explains why the previous round of “quantitative easing” performed by the Fed did not have a [sufficient] expansionary effect:
By that metric, the Fed’s past LSAPs have probably fallen short. Clearly, measuring the counterfactual is impossible, but there are reasons to believe that the impact on aggregate demand was small. Why? First, because the reduction in mortgage rates boosted refinancings only by people who could refinance—i.e. people with jobs and some positive equity in their home. Not exactly the most cash-strapped ones who would have spent the extra cash.
Second, the portfolio-balance effect of the LSAPs on the prices of assets like corporate bonds or equities is at best weak, if not counterproductive. The reason (which I explained in detail here) has to do with the fact that US Treasuries and MBS are not “similar in nature” to corporate debt and equities. Unlike the latter, Treasuries/MBS have more of a “safe haven” nature—so that removing them from investors’ portfolios create demand for more “safe” assets, rather than boosting the prices of equities, high yield bonds, etc.
Luckily, one Benjamin S. Bernanke explained how to perform private asset purchases that would, in fact, have an expansionary effect:
If the Treasury issued debt to purchase private assets and the Fed then purchased an equal amount of Treasury debt with newly created money, the whole operation would be the economic equivalent of direct open-market operations in private assets.
If you see that guy around, tell him to talk to the Federal Reserve. I remember hearing a podcast with Scott Sumner a while back where he floated the idea of the Fed buying bonds off of the public (i.e. You and I), and paying for them with cash. Lets get to it!
