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I am on Up With Chris this morning starting at 8AM on MSNBC with Betsey Stevenson, Bill Black, and Ezra Klein.

Via Matt Yglesias a blurb on Free Market Fairness

Unlike traditional libertarians, Tomasi argues that property rights are best defended not in terms of self-ownership or economic efficiency but as requirements of democratic legitimacy. At the same time, he encourages egalitarians concerned about social justice to listen more sympathetically to the claims orinary citizens make about the importance of private economic liberty in their daily lives.

So, this is just a blurb and shouldn’t be taken too seriously. Nonetheless I have seen this question “How are liberty/property rights best defended” bandied about before.

However, the key question is: Why do you want to use reason to defend liberty or property rights or any belief system for that matter?

Presumably reason helps us clarify what we actually believe. However, if you are defending a system then that suggests you have already decided that you believe in it.

In that case the most authentic response is: I believe in it, deal with it. 

There is no point to using reason if you have already decided what you believe.

My growing sense is that the core intellectual struggles surrounding the Great Recession have been practically resolved.

There were three core things that needed to be understood.

1) That the near term future of capitalism could only be secured by hurling huge sums of money at the US banking system in 2008-2009. That was done.

2) That a perhaps not cataclysmic but nonetheless horrific second global financial crisis could only be secured against by hurling huge sums of money at the European banking system in 2011. That was done.

3) That the global downturn is a phenomenon of Aggregate Demand in general and liquidity/collateral constraints in particular. As such it would be alleviated by the easing of credit and the transferring of liabilities from the liquidity constrained to the liquidity free.

Though too little was done in time, this point has more or less been ceded by a critical mass of the intelligentsia. Furthermore, in the US, per-capita depreciation is proceeding at such a rate that the liquidity free would be induced – against their individual risk tolerance and rate of time preference – to procure large quantities of capital.

The attempt to do this will transfer purchasing power to the liquidity constrained and will thus alleviate the crisis.

And, there are enough people with strong enough voices who understand and are communicating this to keep efforts at stopping at bay.

More could be done policy wise, but I do not think at this point more is likely to be forth coming simply because we talk about it. Too much is riding on the opinions of people who are not interested in the conversation.

So, as a practical intellectual matter the Great Recession is done.

It is time to move to other things.

Here are three that I think are important to get to next.

Reason and Economic Policy

I used to believe that the disagreements in the economics/policy/elite journalism world were founded on attempts to seize the zeitgeist through intellectual intimidation. That is people pretended to be arguing over policy issues but instead were try to push the political culture towards their preferred answers to meta-questions of policy.

For example, is providing lots of assistance to the poor something society should embrace. Is letting people keep what they earn something society should embrace.

Everything else, I thought, was window dressing.

Yet, watching the blogosphere I have come to doubt this. For example, there were strong pushes to adopt policies which would make almost everyone poorer and the poor relatively poorer. Who supports this outcome?

For sure, there is disagreement on values but I don’t think in translates into that much disagreement on policy. There is also bullshit, properly defined, but I think it is of a derivative order. The bullshitters are attempting to prop a policy view that has genuine support.

So, I think “being genuinely wrong” is a more important problem than I originally realized.

The thing is, everyone is looking at roughly the same evidence. So the problems here have to be problems with reason and interpretation.

Listening to people debate I think the biggest problem is reason. In some cases one could replace the words “progressivity” with “jam” or “growth” with “blueberry muffins” and the arguments would be no more or less sensible. That is to say, the disagreement is not even semantic.

This is one reason why I encourage my colleagues to be gentle rather than mean. Another – so that we my be honest – is that I am, obviously, viscerally uncomfortable with meanness.

Nonetheless, if people are making errors of reason yelling at them is not likely to help them because being yelled at makes it more difficult for people to focus. It is also not likely to put readers in a mode where they are more open to reason. Instead they are likely to view this as a sporting match and try to determine who is and is not on their team.

GDP is Dead

I wanted to make my first mention of this funnier, but its better just to get something down.

Its understandable that before the internet, fast search and laptops capable of handling huge data files folks would want the best summary statics of the economy they could get.

The concept of GDP is a good attempt at a consistent representation of the total economic output of a region.

However, in the modern era we don’t really need it for most purposes. Maybe some sort of historical and cross country record keeping where the data is incompatible.

In the US, however, we have much more direct measures of the variables of interest. Indeed, we have access to many of the addends which are used to create GDP in the first place and there is no reason I know of that we couldn’t lobby to make all of them available.

Given that, why still focus so much on GDP?

In order to make it consistent and add up correctly we have to make lots of compromises which obscure our understanding of the economy. Why not brush GDP aside and focus on the disaggregated data that we care about.

Indeed, given the way he talks about the issue I wonder if Scott Sumner might be happier with nominal compensation of employees as his stabilization target:

FRED Graph

Here is the trend by the way

FRED Graph

Notice the different dynamics of the two “bubble” recessions.

Capital

As I have been talking around for a while there is – what look to me – to be poor intuition concerning physical capital and investment. This is unfortunate because unlike a lot of concepts in economics physical capital is tangible. We can actually go visit the capital.

To make this more clear, here is the simple data

image

This is important because the blue category is the stuff of everyday life. The red are things we might not interact with everyday but deeply get on a non-macro economic level.

Our daily experience can influence how we think about the capital stock. More importantly, we can relate our daily feelings with our feelings about growth and the US.

For example, when you say this capital gains tax increase will reduce investment and hence growth what you mean is that some developer will decide to build a smaller shopping center. I don’t mean this derisively. One of my biggest complaints is that Cameron Village needs to be expanded and that there is neither a Ross nor a Marshalls Inside-the-Beltline.

Yet, these are the complaints of investment and capital accumulation and we should understand that.

You can also think about how the type of things we debate on a macro level weigh against concerns like: local zoning restrictions or enterprise-ready open source software.

P.S.

I forgot to note that I included manufacturing facilities in the “Everything Else” category even though they are buildings because most folks don’t regularly interact with a manufacturing plant.

Some notes on the comments I made here, inspired by correspondence.

Note 1: My comment was original in the sense that I didn’t pick it up from anywhere. However, its by no means a philosophical leap and so I would be shocked if no one has asserted it, even if there is some straight forward demonstration that it is wrong.

Note 2: When I say causality is superfluous I mean that it is not a meaningful metaphysical construct. Either you are talking about something plainly physical or you are talking about nothing.

You may be simply making a description of space-time. So if I say: “the cue ball hit the eight ball and caused it to move.” I may simply be describing the shape of these objects through time.

This is the same kind of statement as: “The camera is on the table”

We can further talk about the “statics” underlying the camera being on the table. Or we can talk about the “dynamics” of the cue ball hitting the eight ball. However, these are all generalizations of observations we have regarding objects in space-time.

And, importantly the generalizations are derived from objects that we have in fact experienced.

On the other hand, if you mean that there is some sort of metaphysical necessitation such that when cue balls hit eight balls the latter must move. And, further that this metaphysical necessitation may be hidden from us (ala David Hume) then you are speaking of nothing.

When people utter the words “the cue ball caused the eight ball to move”  they are usually providing a description of how they feel about the cue ball and the eight ball.

And, the reason that confirmation of this statement alludes us is because there is no truth to be had outside of the mental and emotional state of the speaker.

Note 3: None of this is to say that we can’t apply the term causation to our generalizations about the shape of objects through time. It is simply that this re-defining strips away any metaphysical specialness associated with the term.

Niklas says I should call this series “stream of consciousness”.

However, to be clear this is not meant to suggest that anyone I happen to mention is making an unsubstantiated claim but that this is just some things I have been thinking about but haven’t had the time to wrestle with so that I can be even reasonably confident that I am correct.

Nonetheless, I think it can be interesting/useful just to put ideas out there.

ABCT

Lots of my Austrian Business Cycle Friends (as opposed to more political economy Austrians) I think are confused by believing that Mainstream Business Cycle Macro and Keynesianism in particular are theories about how an economy “prospers”.  That’s a much more general concept than what Mainstream Business Cycle Theory is trying to explain which is the general glut and particular the cyclical glut in unemployment. One could believe that Keynesianism is correct and still believe that policy wise we should not reduce unemployment because the cost to prosperity – whatever we mean by that – are too high.

The Near Term US

I continue to see the fundamentals for the near term US is being good. Indeed, the only negative I see is the overhang of household debt. However, that need not stop an expansion driven by business spending. 

Inflation and Business

If you really think household debt is the problem then inflation is the solution in more ways than one. First it erodes the debt – yes.

But more fundamentally it has the potential to raise the cost of consumption, by lowering the purchasing power of the dollar. This is actually what you want!

You want consumers to buy less crap yet work more. That is the solution to “over-consumption” and a weaker dollar facilitates that.

How Inflation Works Through the Economy

For some of my journalist friends struggling with this. Think about it this way. If we have universal 6% inflation then a Cheeseburger from the McDonalds $1 menu now costs $1.06.

Where does that extra 6 cents go?

If we trace it through the economy it winds up in one of three places basically. It could be higher wages for the workers at McDonalds. It could be higher prices for the material inputs to making a Cheeseburger. Or, it could be higher profit margins for McDonalds.

In the first case we have normal price-wage inflation. Debt burdens for households fall and the standard way economists talk about the world applies.

In the second case we have inflation in material costs. This can be very painful for everyone but the owners of raw materials. Its this type of effect that generates “stagflation”

The question we have to ask ourselves is how realistic is this?

Will the demand for material be that high without a corresponding increase in sales volume? As material prices rise will firms be able to economize of materials by using “relatively” cheap labor.

In the case of energy this can be difficult, but to generate sustained 6% inflation we either need a severe energy shortage or a shortage in other materials.

In the last case of profit margins we will see exploding equity values. We can work out the math but I hope its clear that profit margin have to rise much faster than inflation if they are absorbing inflation. (because they are not 100% of the cost base)

So we get much higher equity values which spurs business investment.

The basic way this can go “bad” is if inflation is absorbed by materials and those materials cannot be produced with or substituted for labor.

I am not sure if anything other than precious metals and oil fit this mold.

The Business Investment Story

I am dismayed by the fact that so little of the blogosphere seem even interested in dissecting what’s going on with Business Investment. I talked to one guy from Investment Business Daily who seems interested in the subject.

This is a big part of the recovery and will be important if growth is to continue.

When I have looked through the data it basically looks like this.

When the recession came businesses cut way back on industrial machinery and transportation. Now it turns out that – sadly or not – industrial machinery is not a big part of the US economy.

However, transportation equipment – cars, trucks, planes, ships – are a huge part of the US economy. These dropped like a rock.

However, investment in computers and software barely took a dent and has actually continued its accelerating pace. Indeed, looking at the data you have to be very careful about how you do the price indexes here because the quantity of investment in *computer power* and *software packages* are exploding through the roof. However, the cost is also collapsing, so netting out the “real investment” can be difficult.

Even still businesses are spending more raw cash on software and computing.

What’s happening now is that transportation spending is recovering. That’s driving the really big numbers. However, total fleets are still older than average so this could potentially last a few more quarter even by just coming back to normal.

Government Sector

The decline in the government sector has been a bigger deal than people realize. Especially since government grew so strongly during the 2000s.

Lots of people think about the Federal government. However, government as an economic producer happens at the State and Local level. That’s where the action is.

Its possible but seems unlikely that State and Local will continue to contract at the rate it did this past 18 months. This brightens our growth and jobs forecast.

Children and Voting

Though this seems like a silly issue to a lot of people its part and parcel of the whole: “are there a such thing as human rights” question.

People often appeal to the immature nature of children. But clearly there are mature children and immature adults. If you draw the dividing line at age then this is a line of convenience.

But, we would we tolerate that in other areas of human rights? Surveillance of Americans would be really convenient for catching criminals and terrorist and in reality few innocent people would probably be prosecuted. Perhaps, even fewer if we had lots of exculpatory data. Yet, are we ok with this?

The why are we ok with rules of convenience regarding children?

The Inequality Debate

In so many ways this entire debate looks jacked up to me. Its not clear what people are trying to prove/demonstrate. I see posts “refuting” the inequality stats that look to  me like they are just providing the mechanism.

I see people jumping to all sorts of conclusions about what this means for the rich and even “tax cuts” that don’t make any sense.

Part of this is that we are confusing the fact that people are upset about the real personal issue of not be able to find the type of job they hoped with this deeper headier issue about inequality.

However, rather than focusing on supporting or refuting inequality, what we need is some sort of schema or topology of inequality. We know some household effects are occurring. How can we decompose that into various other effects. We know this is not occurring by magic. There must be some decomposition.

My Brothers Keeper

Bryan Caplan makes does some really good posts about the welfare state and our obligations to one another. I know they are great because they leave me squirming in my seat.

I obviously want to hear more of what Bryan has to say but I think in the case of the Brother’s Keepers law the key is particular disgust.

So, its unlikely that someone is not going to give significant resources to support a family member in need unless they are particularly disgusted by them.

I am thinking about my own family and large income transfers are trivially done. Indeed, the only case when someone would be unwilling is if they have particular reason to think a family member will do something “bad” with the money.

I imagine that if you said you have to give family members money then the fear is that people would not be able to avoid these bad cases.

Now, perhaps this is also the key issue in redistribution. Some folks see the behavior of the poor and are disgusted. Some are not. This is going to influence how you feel about social redistribution.

E-Cat

Wasn’t the 1MW energy catalyzer supposed to be demonstrated by now. What happened?

US as a Natural Resource Extractor

I think some of my progressive friends should think long and hard about whether or not this is a bad idea. I know there is a reflex against Big Oil.

However, think about the employment of low skilled Americans. Isn’t this exactly the type of work that could raise their real wage?

Also, are we really going to have a major effect on the planet by reducing the amount of resources the US produces? Maybe some agreement will be reached under which the world can agree to consume less.

However, without that you are only going to have people going after more expensive sources for the same thing and low skilled Americans finding little demand for their labor.

Solar

My general sense looking at the roadmaps is that solar is the future and is not *too* far off. I think we are talking about the one to two decade scale here. Maybe a little more, probably not a little less.

However, remember that solar replaces coal. We still have nothing with even  the theoretical energy density of hydrocarbons. Hydrocarbons will play a major role for the foreseeable future.

They may be limited to large scale transportation. Particularly Air and Sea.

Virtual Rooms

We normally think of the future as coming with “implants.” So for example, glasses or contacts that project an imagine into your eyes.

However, consider that when you combine motion capture with a standard 3D screen you can create a virtual image that sits anywhere you want in realtion to the viewer.

So imagine a room with three walls that are large 3D projections. Now also imagine motion capture so that imagine depends on where the viewer is looking.

At this point we can make it seem like “anything” is in that room with the viewer and that the room is as big or as small as we want. As long as the ceiling and floor are consistent with the projected image and the view does not turn around to look at the door she came through, we can make the room seem like its anywhere.

We can also put people from different rooms all into the same room virtually. Each person will see and be able to talk to the other people as if they were there.

You just can’t touch them.

This is hardware that already exists. The software probably needs to be made and the cost brought down. Also there are going to be huge bandwidth requirements. Nonetheless, we can do virtual rooms right now.

I think that is enough to really change what it means to “be somewhere”

It seems as if the most famous of economic writers himself is jumping aboard the “market monetarist” train, and advocating a level target for NGDP as a Fed regime shift:

At this point, however, we seem to have a broad convergence. As I read them, the market monetarists have largely moved to an expectations view. And now that we’re almost four years into the Lesser Depression, I’m willing, out of a combination of a sense that support is building for a Fed regime shift and sheer desperation, to support the use of expectations-based monetary policy as our best hope.

And one thing the market monetarists may have been right about is the usefulness of focusing on nominal GDP. As far as I can see,the underlying economics is about expected inflation; but stating the goal in terms of nominal GDP may nonetheless be a good idea, largely as a selling point, since it (a) is easier to make the case that we’ve fallen far below where we should be and (b) doesn’t sound so scary and anti-social.

I whole-heartedly welcome Dr. Krugman aboard, and am happy to have him on our side (although I never really imagined that I was arguing against Krugman, except on an infra-marginal level — his views of the concept of the “liquidity trap” nonwithstanding). Krugman’s 1998 paper outlining an expectation model of monetary policy is a go-to paper for my understanding.

In my opinion, a credible central bank does have nearly unlimited power (in theory, perhaps not legally) to move nominal GDP anywhere it likes regardless of the level of short-term rates. There are points in the actual transferring of assets blurs the line between what would be considered monetary policy and fiscal policy on a technical level…but in my experience, market monetarists have always emphasized the expectations channel (rather than, say, the credit channel, or interest rates) as the primary monetary transmission mechanism[1]. And it has always been the case that market monetarists believed that the expectations of the future path of NGDP drives current NGDP (rather than the size of policy interventions).

In any case, as Scott Sumner recently said, “There is nothing so powerful as an idea whose time has come.”


[1]Nick Rowe has a recent post on this, and David Beckworth has done excellent work on expectations vs size.

P.S. It will likely be a long time before I can regularly blog again. It is the government’s end of fiscal year, and so it is my organization’s as well…and that means reports, audits, presentations, etc…on top of my usually high workload. I do miss blogging, but I’m glad that there are plenty of others out there taking market monetarism (and specifically NGDP level targeting) seriously!

So there is a little hub-bub over the the Buffalo sentence which I have never liked.

I prefer Fish Fish Fish Fish Fish, because not only is it grammatically correct but true.

Some sticklers – read a-holes – want to say that fish is actually an intransitive verb, but not where I come from. If my uncle tells people he’s gone to fish trout everyone knows what that means. 

So Fish who are Fished For by other Fish, Fish for yet other Fish.

Moreover,  the Law of the Ocean is that the sentence has infinite regress.

So the fish who fish for fish that are fished for by other fish -you know those guys  – well they fish for fish that are fished for by fish who fish still other fish.

or as I like to say

Fish Fish Fish Fish Fish Fish Fish Fish Fish Fish Fish

And well, we’ll stop there

…Brad Delong has it:

In 20 years, historians will interview the then-aged monetary, banking, and fiscal policymakers of the 2000’s. They will ask them why they did not take more aggressive steps to return nominal incomes and demand to trend levels when they were sitting in the hot seats. I already wonder what their excuses will be.

I don’t care much for what the fiscal policymakers will have to say…I’ll be largely interested in the state of monetary policy-making in 20 years, and how our crisis will look through that future lens. Will this chart haunt our current monetary policymakers’ future nightmares?

Tyler Cowen has famously talked about the innovation slowdown. Paul Krugman for years derided the internet as a diversion.

Some of what’s going on is misinterpretation of what progress looked like.

To put it in really abstract terms the mechanical revolution turned about the be a really big deal. The fossil fuel revolution took it even further.

However, part of what happened is that the made a big difference in the world you could see. The built environment just looked a lot different.

People, however, don’t really exist in the built environment. People exist in their minds. Nozick aside, it is the consistent generation of felt experiences that matter. Whether they have some strong analog in the outside world, whatever that might mean, is kind of beside the point.

The outside world only matters because it seems to present limits to the ability of our minds to function. Cold minds, can think of nothing but getting warm. Hungry minds can think of nothing but getting food. Dead minds cannot think at all.

This forces us to deal with the external world. However, imagine that we conquer hunger, cold and other extreme conditions. In more common terms lets say our basic needs are taken care of.

Then the mind is free to explore as it wishes and we should expect an economy of the mind.

This is in some sense the economy of Tech and Ed. Modern information and communication technology is about interacting as directly as possible with minds.

We have sights and sounds delivered directly to us. We are able to communicate with friends and family around the world. We can build relationships and share ideas. Relationships in particular are what minds really want to do.

All that physical stuff was just a crude means to that end. It would not be surprising if that part of the economy languished almost forever more.

Indeed, on a slightly different note, I am wondering if there is not a significant “backslide” in our near future. As virtual communications become more powerful and ubiquitious it makes sense that the value of physical face-to-face communication will fall.

By no means has this happened yet. Indeed, it appears that in many areas the value of physical face-to-face communication has risen. Yet, this just doesn’t seem consistent with the long term fundamentals.

Are we in a face-to-face bubble?

This is what fuels my growing interest in radical exurbanism. The idea that developments in telecommunication will allow people to live far away but still have business relationships.

We might then imagine living arrangements evolving solely around being near family and friends. A sort of extensive network of small towns, each containing people highly sorted to wanting to live within the norms of that small town and with the people of that town.

If there is cheap transportation, this makes this even more possible. Imagine driverless electric autos transporting physical goods between these areas at very low prices.

Yet, even if we’ve gotten a long way past hunger and cold, we are not far past death. This still leaves open the door for a world in which Med grows in importance.

Now its actually possible that the force of Med will drive the geographic economy in the opposite direction, as downtowns are defined as the centers of medical activity. I don’t know.

Ezra Klein quotes Christina Romer on the dollar

At full employment, a strong dollar is good for standards of living. A high price for the dollar means that our currency buys a lot in foreign countries. But in a depressed economy, it isn’t so clear that a strong dollar is desirable. A weaker dollar means that our goods are cheaper relative to foreign goods. That stimulates our exports and reduces our imports. Higher net exports raise domestic production and employment. Foreign goods are more expensive, but more Americans are working. Given the desperate need for jobs, on net we are almost surely better off with a weaker dollar for a while.

This is more or less the economic-y answer; the one I learned sitting on the intellectual knee of the good and the great.

Yet, I have come to doubt it recently. There will be a couple of strand of thought here. As usual you are getting undigested musings and analysis.

First, as Michael Pettis points out – if a strong currency is so good, how come so many countries are reluctant to receive this bounty. We could say – as is typical in economics – different strokes for different folks. But, when everyone seems not to want what you’ve got this should at least make you stop and wonder.

Second, all of sorts of things that the public feels are “bad” come from a strong dollar. Manufacturing jobs are more scarce. The public and private sectors are encouraged to run-up more debt. There is “overconsumption.”

Now, yes I have the natural economist tendency to scoff at all of this and tell the public that these are great things. If we can make cars with a printing press rather than with autoworkers that’s a good thing, not a bad one.

That is, foreigners want to hold dollars. However, for them to get dollars some American has to give them dollars. How do you make an American do that? Well, one way is to sell the American a car. He or she will then give you thousands of dollars in exchange.

However, since what you want is the dollars themselves and not US goods and services, the American has essentially gotten the car simply by using the printing press. The printing press shoots offs some dollar bills. We give the dollar bills to foreigners, they give us a car and everyone has a nice day.

This is appealing. But, why do people persistently act as if this is undesirable? Maybe they all simply misunderstand the world. Or, maybe our analysis is incomplete. Maybe the problem is that the dollars must originally come through increased borrowing by someone. The Fed is not just handing out Benjamins after all.

Maybe the fact that all of this has to run though the Financial System implies that the financial system is able to capture all of the benefits, leaving the average American only at a competitive disadvantage employment wise.

I don’t know, but I am interested.

Third, I have been thinking about preferences over beliefs. Bryan Caplan awoke me from my dogmatic slumber over this issue. People want to believe certain things. Rational irrationality and all that.

(Yes, some of my family and friends will complain that I floated the phrase rational rationality well over a decade ago but that had a different meaning. It was about issues that now come under the heading of limited attention.)

Anyway, people have preferences over beliefs. Well then shouldn’t those preferences count for something? And, if so how do we count them? Suppose everyone just wants a strong dollar. No reason. They just want it.

Is that somehow less meaningful than wanting to eat a burrito? If so why?

Now if that ain’t twisted enough, exactly what are we doing if we convince them not to want it? Are we doing good? Are we helping people? If it is good to help people achieve their preferences then is it bad to alter their preferences towards something they have not achieved?

I realize that the effect here might be small in comparison to the massive effects of movements in the dollar but it reminds me other issue and I think the issue is at least intriguing.

On May 11th, 2011, my original blogging location, CheapSeatsEcon, will go offline, as I have decided not to renew the domain. It’s been quite an exciting ride from my humble beginnings as a free WordPress blog, to having my own domain, to writing for ModeledBehavior. I have been blogging for a little over a year now, and in that short amount of time I’ve made new friends, interacted with some of the most intelligent people in the econ/political blogosphere, done a couple QA’s for bigger sites, gotten quite a few e-mails from people asking various questions, and got some freelance work doing research locally. In short, it’s been much more eventful than I had ever dreamed!

One of the craziest things that ever happened to me was Tyler Cowen linking to my third post ever. I told literally everyone who would listen to me! The funny thing is, though, that I still get pretty excited when people link to my articles…it just never seems to fade (or maybe I’m just weird). I’ve gotten many compliments (and links) from people I greatly respect, and it’s been wonderful debating with everyone (I don’t want to name names, because you inevitably leave someone out)!

In any case, I’d like to thank all of the readers of the blogs for which I’ve written. You certainly are the reason that I write, and your support is the reason I am where I am today in the blogosphere!

P.S. If anyone is interested in the subject, and I get more time, I may start doing more posts about “complexity economic” theory; including implications and applications, and its relationship to the current state of the economy. I did a couple series’ on my old blog, but they weren’t very popular, and were very wordy (one of them was very math-y as well). If anyone else as any other suggestions (and I’m at the very least competent in the subject matter), you can comment or e-mail me and I’d be happy to write about them.

I didn’t do anything cool, or come up with any neat, contrarian, controversial, or interesting points to tell you about Earth Day (luckily there is always Mark Perry). So an old postcard that I designed will have to do.


[Click Image to Enlarge]

The picture of earth was a bump and shadow map, and the text was custom (and quite time consuming to make), the postcard was a stock image, but the postage stamp and ink stamp were added =].

If you have any such points about earth day, share them in the comments!

At significant risk to your perceptions of me, I post this early on a Wednesday. Last week Adam posted an interview with Marion Nestle, who is a strong advocate for something that I can’t really figure out, but being charitable I presume it is adding warning labels for artificial food coloring on foods due to their effect on childhood hyperactivity. Her rationalizations are weak, and the evidence doesn’t seem to be on her side, but I was surprised (and delighted) to find this on my can of horrible high-alcohol malt liquor:

I have no idea where the inclination to add FD&C Blue #1 and Red #40 came from. I certainly didn’t care (not when there’s another label proclaiming 12% alcohol!). I would imagine that it has to be regulatory, since this isn’t even the class of product that do-gooders are worried about. On a related Adam Ozimek note regarding slippery slopes, an Iowa Congressman proposed legislation banning the mixing of alcohol with caffeinated beverages. I don’t think it got anywhere.

Update: Indeed, it looks as if this is due to regulation. So maybe not so much market reform leader as harbinger of regulatory burden. Apparently cochineal extract and carmine carry risks of severe allergic reaction, including anaphylaxis. I actually agree with this, as labels are fairly benign from a cost perspective, and widely illuminating if you happen to have such a condition. Much more rational than a ban based on dubious evidence.

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

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:

  1. 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.
  2. 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.
  3. 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.

Yglesias on phone calls

I really wish competition among cellular operators was robust enough that it would be possible to buy a smart phone with data and SMS but no voice plan whatsoever.

Indeed. I should add, there are times when it is convenient to speak a message, and there are times when it is convenient to hear a message. Yet, most of these times don’t overlap and speech-to-text and text-to-speech should be able to solve that for us.

There are times when you want to more or less have a tele-meeting with someone and video conferencing applications should be able to take care of that.

Modeled Behavior was snubbed by Time Magazine. No matter, they’ll have another chance to get the list right.

A few of my favorite or most read blogs.

  1. I read Calculated Risk with my morning coffee. I assume many people do. You can’t live with out the charts. Its sidebar is also a good place to see whether there is something new up at Econbrowser or Macroblog.
  2. Paul Krugman is where I turn immediately when I have a spare moment. Krugman makes quick and dirty points that are at a minimum interesting and often compelling. Its one of the most compact reads.
  3. Matt Yglesias. I catch almost every post here. Even though I know the point he is going to make on many issues the framing is always interesting.
  4. Econolog tops the list when I sit down to “read blogs.” Its rare that I won’t find some out of the mainstream argument backed by reason, evidence or both. This is the stuff of intellectual fun.
  5. Overcoming Bias. There is no blogger that regularly readjusts my thinking as often as Robin Hanson.
  6. Will Wilkinson’s various outlets are wordsmith candy. When I crave blogging as art, I know where to go.
  7. Mark Thoma is where I turn when I am in information junkie mode. If its worth reading chances are its there.
  8. The Atlantic is my second spot for brain food.  I am not just saying that because I don’t want to split up McArdle, Fallows and Sullivan. I typically browse the Atlantic as a full package.
  9. I usually find my way to Marginal Revolution but honestly I find most of the posts too short. I want to hear more. It often feels as if I am being teased a bit there.
  10. Free Exchange is might be the best place for getting a solid take on what’s going on right now, without straying to far from blog-nerdery.

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:

  1. Wealth Inequality.
  2. Income Inequality.
  3. 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.

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.

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.

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.

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?

[H/T David Leonhardt]

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.

Scott Sumner routinely forgets my name when listing people who thought money was tight, and favored unconventional monetary responses to the recession…but that’s okay. I wasn’t blogging that much in late 2008. In any case, I would like to provide a concise answer to a question Scott raises on his blog today:

The very fact that Congress and the President are ignoring this issue (confirming FRB nominations), pretty much tells me that they are clueless on monetary policy. On the other hand, both groups do favor more AD, so their “heart” is in the right place. And of course I’m a big believer in democracy. So who do I favor making the decisions; the clueless or the heartless? I’m tempted to say “Whoever agrees with me; first tell me the target Congress would set.” But of course that’s cheating. The honest answer is that I don’t know. But it is becoming increasingly clear that we won’t get good policy until this dilemma is resolved.

In my mind, the myth of an independent central bank has pretty much been shattered (Karl’s as well). Every time the theory of why we have an independent central bank has been put to the test in a big way, the Fed has failed miserably.

But maybe the answer is more nuanced than that. Perhaps the Federal Reserve itself is simply a proximate cause. If you take the view that the actions of the Fed represent the consensus of the economics profession, then perhaps it is the economics profession who are the underlying cause.

In either case, it is clear that there should be hard rules in place that the Fed must abide by. At the same time, I think that the Fed should have maximum room to act independent of politics when it really needs to. Our current “dual mandate” provides nothing but an excuse for the Fed to shirk its duties. Thus, I believe that the Federal Reserve Charter should be rewritten to state that it is the Fed’s contractual duty to set an explicit nominal target, level targeting, and do everything in their power to hit that target. If you ask me I favor NGDP, but some people favor price level, and some favor inflation…if you really want to pin the Fed down, write which nominal target the Fed needs to hit into the charter. NGDP will still be here 100 years from now.

However, and this is important, that is the end of Congress’ power. Once they have arbitrated as to what the Fed needs to do, Congress gets out of the way and lets the Fed act. The only point at which Congress should have the authority to intervene is if the Fed is off-target, in which case Congress should have the power to remove the current board (or specific members) and appoint a new one. But, and this should be written into the charter as well, the only circumstances in which Congress can do so is if the Fed is missing its target (or criminal behavior, or other things that don’t have to do with monetary policymaking).

Separating politics from policymaking is definitely a good thing (I even came around on TARP), especially in monetary policymaking. However, having a monetary authority that is gallivanting around, allowing NGDP expectations to plummet 8% with zero recourse is unacceptable.

Tyler Cowen points to an Ebay scam artist who has ripped off my grad school plan to get rich. I will admit there are some differences.

My plan was to be infomercial based and feature has-been b-list celebrities touting the utter joy to be had by my product. Its 100% biodegradable. It produces zero carbon emissions. It arrives immediately. I comes with a lifetime warrantee. It will never break. It will never chip. It is utterly indestructible.

You can take it anywhere and it goes with everything you own. Its pet friendly, kid friendly, hypoallergenic, and gluten-free. It requires absolutely no maintenance and is a snap to clean.

You literally buy it and forget it. You simply have never had another product like it.

All you have to do is call click now!

In an update to his popular post, which is causing some interesting commentary on Twitter, my co-blogger Karl Smith has this to say:

My argument is no, this isn’t just another bad experience. Its a failure of our most basic institutions and is leading to pure loss.

Indeed, I think that the wrong way to think about the problem of recessions is that there is a fundamental problem with market economies, or that recessions (no matter how deep) represent a market failure. To me, this recession (both the depth and length) is fairly clearly a monetary failure…and if you catch me on a bad day (or a good day, depending on your disposition I suppose), I’d even go as far as to claim that the type of money system we use makes our economies prone to the types of failures we have recently experienced. In fact, financial crises are not rare. The World Bank has identified 96 banking crises (large enough to cause economy-wie problems) and 176 monetary failures since the dismantling of the Bretton Woods in 1971.[1]

Even before the termination of gold convertibility, massive crashes were remarkably common the world over. From the Holland tulip mania to the Great Crash of 1929, these crashes have happened with frightening regularity. Being as these types of economic issues span countries, time periods, regulatory regimes, and degrees of economic development; I think that it is safe to say we should begin turning a inquiring eye toward the one system that permeates all of these societies throughout time and location.

That, of course, is the type of money we use, the characteristics of which have been replicated by nearly every society since the relinquishment of barter, and the dawn of what we would consider “modern money”. This recession is, of course, no different. An increase in the demand to hold safe assets (of which the medium of exchange is generally the safest, at least in developed economies) causes a disconnect between workers and factories. People and machines sit idle. Productive capacity dwindles, along with hours worked. Price and wage stickiness facilitates a real downward adjustment to market clearing rates to cause grinding deflation (or disinflation, which under a regime of positive trend inflation is similarly problematic).

Is there a bug inherent in the money system that is used the world over that causes these disconnects? I think that analyzing the dynamics of the flow of biomass through natural ecosystems can provide useful insights into how the money we use causes the economy (or sectors of the economy) to become brittle (too brittle to sustain?) and prone to failure.


[1]Caprio and Klingebiel, 1996

One odd empirical regularity is that hard-nosed, pessimistic, realist, free-market guys like myself seem to spend more time agreeing with soggy Liberals than with the Conservatives who supposedly share our worldview.

Part of that has to do with the success of the general Libertarian project, as Scott Sumner outlines here. Many free market ideas have now simply become conventional wisdom among wonks of all stripes.

Partially , however, I think it is that many modern Conservatives intuitively base their analysis of the world on a philosophy is that anathema to my worldview. Their view is that if you take a responsible, measured, well-reasoned approach to the world things will work out. Failure is thus a sign that you have not done that.

My sense is that this is fundamentally crap.

First of all things are not going to work out. You are going to die. Your friends and family are going to die. Everything you care about and everything you ever worked for will be destroyed. This story, our story, only has one ending and it is death and destruction.

If you don’t recognize that, you are living in a fantasy world.

Second, even in the short term your plans almost certainly won’t work out. Most ideas are bad ideas and there are infinitely more ways to fuck something up than to get it right.

To wit, clean living is not some form of salvation. Nor, is prudence assurance that that you and your loved ones will be okay. Suffering is inevitable and the best one can say is that it hasn’t happened to me – yet.

Bad things happen because badness is the natural state of the world. If something good ever happens count yourself lucky and be aware that this too shall pass.

Thus, I see our proper mission as easing pain, where we can, to the extent we can, the best we can. This is best done up close and personal where you are mostly likely to quickly notice if your efforts to help are actually doing harm.

It is best done with a respect and reverence for the power of self-organizing systems, spontaneous order and the resilience of natural equilibria.

Its best done slowly, and in baby steps, building upon the wisdom of the past.

And, most importantly it is best done with humility, knowing that in all cases that, “but for the grace of God pure heartless luck, there would go I”

Its this last part that I think many modern Conservatives miss in their conviction that everything would be okay if it were for those meddling Liberals. Everything would not be okay. It never will be. If we do our best it might, and I mean might, be a little bit better.

Karl has a post today arguing that Brian Wesbury is wrong for taking the view that fiscal stimulus is not effective (indeed harmful!) for two reasons: 1) that it pushes up interest rates through government borrowing (crowding out), and 2) people will expect future taxes to pay for the stimulus.

Unfortunately these are annoying arguments that get conservatives in a lot of trouble with smart commentators on the other side, and then tend to discredit their entire enterprise. Paul Krugman has made a cottage industry out of sniping these crude arguments from otherwise distinguished economists (see Robert Barro via flexible-price models).

However, while Googling Mr. Wesbury, I came across an article that I want to dredge up from February 2008. I want to do this not to point out that Wesbury has no credibility (like some commentators *ahem*), but to show how thinking in terms of interest rates screws people up, and how uncertainty is very dangerous to reputations. The title of the article is “Brian Wesbury Sees No Recession Ahead“.

Q: You say we are not in a recession and we are not even headed for one, right?

A (Wesbury): That is correct. Every single recession in the United States for the last 80 years has been preceded by a tight Federal Reserve policy — in other words, excessively high interest rates. And we clearly don’t have that today. Recessions are also preceded frequently by tax hikes or protectionism. So I would say that today we have very low interest rates, we have low tax rates, and we are not moving in a protectionist direction. As a result, those conditions that have led to recessions in the past don’t exist. One last point: I know of no point in history where we have ever scared ourselves into a recession. It just has never happened before and I don’t think it will happen this time, either.

This is a bombshell of a quote. My main point is that given the events that had happened up until then, saying that we won’t experience a terrible-horrible recession was not an unreasonable position to take. The problem is equating the setting of interest rates with the stance of monetary policy. I also know of no correlation between taxes and recession, and I’m sure he had in mind Smoot-Hawley when he was talking about protectionism…but that tariff was a drop in the bucket of what the actual problem was (then and today): falling NGDP.

By late 2008, in hindsight, Wesbury looks like a fool…but how would he have possibly known that the Fed would let NGDP fall at the fastest rate since 1938 later in the year? As a counterfactual, had the Fed kept up expectations that it would hit its 5% NGDP growth target, Wesbury’s statement wouldn’t look so bad today.

Arthur Laffer was (YouTube) famously in the same boat while talking with Peter Schiff, and of course made to look like a moron. My first piece of advice would be to not attempt to make public predictions. Since that is impossible, my second piece of advice would be to err on the side of caution when making predictions based on models (that is also true with NK multiplier models)…especially when facing strong headwinds.

P.S: I’m happy about the “Babble” tag.

So in my last post I brought up Hitler, which reminded me of Godwin’s Law.

As an online discussion grows longer, the probability of a comparison involving Nazis or Hitler approaches 1

Now this, which Godwin’s original version, isn’t as bad as most formulations of the law which go something like this

If an internet thread goes on long enough someone will eventually bring up Hitler

I highlighted enough because that makes the typical formulation into a tautology. How long is long enough? Well as long as it takes for someone to bring up Hitler.

So, what you are saying is that if we wait long enough for someone to bring up Hitler then someone will bring up Hitler? Revolutionary insight.

Godwin’s a pretty smart guy so it turns out he was clever enough to avoid the tautology. But, his formulation is only ever so slightly better.

Why?

Well, depending on the constraints you want to place on the evolution of the universe  – and I will admit there are some that are meaningfully binding – the probability of anything happening approaches one as time goes forward.

This is because at any time there is some positive probability of a realization of any set of feasible set of quantum states. We know mentioning Hitler is feasible and so eventually even if just by pure deep random chance it will happen.

Indeed, in some branch of the multiverse it will happen with probability one.

What we want to say is that there exists some duration of time T, such that the probability of observing a mention of Hitler goes to one as the duration of the discussion goes to T.

Now, is there any point to this rant? No, none whatsoever. But I have been pissed about this sort of thing ever since I heard Arthur C. Clarke’s much quoted tautology on technology and magic.

Any sufficiently advanced technology is indistinguishable from magic

And, in some branch of the multiverse I was bound to bitch about it with probability one. Consider yourselves lucky or victims of inevitability, as the case may be.

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