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Every now and again the fact is brought up that by count most of the cells in your body are bacteria.

This is a cute and interesting bit but it should be pointed out that simple prokaryotic bacteria cells are very small in comparison to the complex eukaryotic cells that make up most of our tissues. A tenth of the size by length, a 1000th of the size by volume.

You might assume that animal-rights activists would be better at animal welfare than industrial slaughterhouses. I’ve recently seen two pieces of evidence this is not always the case.

First, are animal lovers that have it wrong. Officials in Valley Forge park outside of Philadelphia are planning on culling the deer population from 1,277 to under 200. Sharpshooters will kill 500 this winter and next,  and 300 to 250 in the winters after that. Animal rights activists “Friends of Animals” are arguing, however, that the deer population should be culled naturally by encouraging the number of coyotes to grow. Officials are objecting because it would take a long time to bring the herd population down and require a large number of coyotes. But from an welfare perspective it’s a little strange of an argument. Surely being chased down and killed by a pack of coyotes must cause much more suffering than being picked off by a sharp shooter.

Next is the industrial slaughterhouses that have it right. Two U.S. chicken producers have begun knocking chickens out with carbon dioxide before they kill them, resulting in a lower stress and lower suffering death. One problem they are havingis that it is difficult to advertise, since buyers don’t like to be reminded that the animals are slaughtered in the first place. This is not encouraging, because it suggests that the current state of advertising is an equilibrium where all firms are hiding information about the actual slaughter. If you can’t brag that you’re being more humane because consumers want to be uninformed, then the market incentives to be more humane aren’t there.

Fortunately there are some incentives, in the form of less bruised and higher quality meat from the lower stress death. Whether motivated by this or not, some firms have made the switch to lower suffering slaughter:

A Nebraska company, MBA Poultry, which sells under the Smart Chicken brand, has been using gas stunning technology since 2005. The company does not aggressively market the technology, but a label on the back of its packages contains the phrase “controlled atmosphere stunning.” The company’s Web site mentions the technology but does not explain what it is.

In Britain, although many chicken processors use gas stunning, store packages typically do not mention it.

For what it’s worth the owner of one of the two U.S. companies that is switching certainly claims to be motivated by animal welfare concerns:

Mr. Sechler said the system he chose, after years of research, was better than similar gas-stunning systems used in Europe. Those systems, he says, often deprive birds of oxygen too quickly, which may cause them to suffer. They are also designed to kill the birds rather than simply knock them out, something that Mr. Sechler is not comfortable with.

Of course as Tyler Cowen has argued, the utilitarian approach to animal rights has it’s limits. Illustrating his point nicely was a recent op-ed in the New York Times that argued that to reduce animal suffering we should gradually eliminate all predators. To me this illustrates we must weigh other values than suffering minimization. Nevertheless, I can’t see any other values that tip the scales in the two instances I’ve discussed above. I think the animal rights activists have it wrong and the slaughterhouses have it right.

It is easy for us to scratch our heads and wonder why just now after the longest recession in 75 years is the Fed beginning to roll out price-level targeting.

However, apparently teh interwebs considers pro-inflationist policy not simply a misguided notion, but a form of crimethink against which good people’s reputations must be protected.

Wikipedia on Keynes

Allegations of pro-inflationary views

Keynes has been characterised as being indifferent or even positive about inflation.[104] Keynes had indeed expressed a preference for inflation over deflation, saying that if one has to choose between the two evils its "better to disappoint the rentier" than to inflict pain on working class families. However Keynes was consistently adamant about the need to avoid inflation where possible.

In The Economic Consequences of the Peace, Keynes had written:

Lenin is said to have declared that the best way to destroy the Capitalist System was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.

Keynes remained convinced of the dangers of inflation to the end of his life,[30] during World War II he argued strongly for policies that would minimise post war inflation.

Note this comes immediately after the section entitled “Allegations of Racist Sympathies”

Robin Hanson wonders why people who care about “sustainability” only worry about a handful of resources, and argues original music is an example of a non-renewable research that people don’t worry about:

For example, consider the sustainability of music. Each new song sits somewhere in a range of originality, from very original to very derivative. The more new original songs are developed and marketed, the harder it gets to develop and market new songs that will be seen as relatively original. Song writers then become more tempted to develop and market recycled versions of old songs.  As the supply of original songs is slowly exhausted, the music industry slowly changes its focus from original to derivative songs.

Since original music cannot last forever, we face a “sustainability” question regarding whether we are using up the supply of original music too quickly, too slowly, or just right.  Formally, this question is very similar to questions of whether we are using up copper or farmland too quickly. Such things can also be reused, where all else equal reuse is less attractive than first use. But to most people, questions about the sustainability of music, or of novels or movies, seem silly, relative to the usual “serious” sustainability questions. Why?

It’s an interesting question, but I think Robin is incorrect about why they don’t worry about the sustainability of originality. Well, to be fair, I’ve not followed a lot of Robin’s near-far essays, so I actually don’t understand his explanation, in particular why movies and music are near and natural resources are far. So I can’t say he’s wrong, just that I have a (I think) different explanation that fully and simply explains the phenomenon.

There are two models of how originality could be used up. For both let’s say there is a song that is popular to remix, and it has already been remixed 100 times.

In the first model, there is diminishing returns to remixes in the utility function. Consumers values originality and so they experience diminishing returns to listening to additional remixes. Here originality being “used up” means that you’ve already consumed all 100 remixes, and therefore the 101st provides zero utility.  Thus consumers have to experience the first 100 songs in order to be affected by the zero marginal utility of originality, and they will only be affected if they are fully sated. In contrast, if copper is entirely used up, consumers will be affected by consuming none of it. Thus the non-rival nature of music is key here. In general, it seems people worry about the sustainability of rivalrous goods, not non-rivalrous ones. The other examples he points to, movies and novels, are also non-rivalrous. Can Robin point to a good that is non-rivalrous across time that sustainability fans care about?

Another consequence in this model is that if you’re unaware of the first 100 songs, then the 101st song has as much utility as the 1st. This is decent approximation of what we see today, as most consumers are unaware that a lot of music they listen to isn’t original, and generally have a poor grasp of the derivativeness of music and art in general. There are plenty of people listening to the Louis XIV song Letter to Dominique who have never heard the T. Rex song Metal Guru, and so they have no diminishment in utility because they don’t know that’s it’s a rip-off. Hell, even Louis XIV claim they’ve never heard of T. Rex.  The point here is zero marginal utility of originality requires a lot of information which todays consumers frequently don’t possess, so why would they in the future?

In the second model of diminishing originality is diminishing returns in the production function. Here you literally run out of ways to remix a song in an original way, and  artists stop creating. Here again consumers are affected very differently from when, for example, copper is used up. A comparable case would be if copper was “used up” in the sense that all possible products that you could make copper out of had been made, and they could all be consumed by consumers forever. Future consumers can consume all the music we can and more, but could possibly have no petroleum to consume.

So here in summary are the differences between sustainability of original music and other sustainable concerns:

  • music is non-rivalrous,
  • being affected by originality requires information consumers often don’t have,
  • the only way the constriant is binding is if consumption or production are fully sated,
  • and in any case future consumers will have more music consumption choices than we do.

These differences seem fairly consequential, and I’m not sure there’s anything left for Robin’s near-far argument to explain.

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.

I might have said joins the “4% Club”, however, I think we may have won that battle. When the President of the New York Fed starts discussing what the dynamics of a temporarily higher inflation target might look like we are in the closing stage of that campaign.

So, now we turn to a second battle, how do we make sure that markets are convinced that the Fed can indeed generate the inflation it wants? On the whiteboard a strong commitment is enough. When we see how markets hang on the Fed’s every word I tend suspect that it will be enough.

However, there are millions of unemployed workers on the line here. There is no reason to take chances. Hence, the second battle is to convince policy makers to warm up the choppers and prepare to deliver cash into the hands of American citizens.

Ezra adds much needed support

The answer is obvious: "explicit (though temporary) cooperation between the monetary and fiscal authorities." In practice, that would mean Bernanke gets John Boehner, Nancy Pelosi, Harry Reid and Mitch McConnell in a room and says the politics and specifics of this are their job, but the economy needs more fiscal stimulus if it’s going to recover, and the Federal Reserve stands ready to make that not only possible but also virtually costless. Inasmuch as Republicans aren’t big fans of further government spending right now, the best option could be the exact one that Bernanke recommended to Japan: a Fed-financed tax cut. Perhaps a payroll-tax holiday for the next year or two.

I have endorsed a payroll tax holiday. Some economists have raised concerns about that particular strategy. We might have to adjust it a bit. I welcome that debate. However, what is important at this stage is that we know who are enemy is


As we move towards a legislative effort we may be tempted to turn the guns on one another. We may be tempted to push for a solution that favors our long term priorities. However, such wrangling jeopardizes the fate of our citizens.

We must understand that this can go very, very badly. If anything good can come out of the Japanese Depression it is a reminder of just how horribly things can turn out.

In response to my recent post about a China-bashing campaign ad, several  commenters replied that I was ignoring the fact that many American lose out as a result of trade with China, and that the ad is okay because it’s criticizing policies that encourage or fail to prevent that trade. And it’s true, trade does create losers. Furthermore, we can certainly argue about trade policies on the margins, which is what the ad starts off doing. But to move from there to implying that we shouldn’t praise the economic growth and modernization in China that has been called an “economic miracle” shows wild indifference to the welfare of the hundreds of millions who have been lifted out of poverty. Heaping stupid stereotypes like gong sounds and fortune cookies on top of that adds even more offensiveness. Honestly, I’m surprised they didn’t use the Oriental riff.

Ads like this beg the question of why we only get angry when jobs are lost to trade. Yes, there have been many manufacturing jobs lost as companies increasingly produce and assemble manufactured goods in China, Vietnam, and many other areas of Asia. But the destruction of jobs not a byproduct of trade alone, but a byproduct of progress in general. Technology, for instance, is easily as a powerful a job killer as trade. You can see this in the fact that while manufacturing employment has decreased in this country, total manufacturing output and output per worker has gone up. The following graphs, courtesy of Mark Perry, display these facts nicely:

The massive increase in productivity, with output increasing even as jobs decrease, demonstrates that trade is not the only thing that destroys jobs; so too does technology, and the productivity it creates. Yet could you imagine a campaign ad criticizing a politician because he supported technology? Or productivity?

It’s important to recognize that there are very few forms of progress that don’t make some people worse off. Imagine if the growth in China’s economy had come solely from the production of some good that we didn’t make in the U.S., and in fact wasn’t made anywhere else in the world. Still, the huge increases in wealth would drive commodity prices higher, which means we would pay more for things like copper and oil. Sure some people who purchase and enjoy the brand new products that our hypothetical China makes would be better off, so too would those employed in the industries making goods China imports. But some people would only be made worse off by higher commodity prices, both directly and indirectly, as higher input prices make some production unprofitable and thus jobs are lost. Should this diminish the fact that millions of people in China were lifted out of poverty?

The industrial revolution produced winners and losers too. Blacksmiths and buggy whip makers were put out of business by the automobile. Does this diminish the invention of the automobile? Greater agricultural productivity put many farmers out of business.  Do people demonize the industrial revolution for making them worse off?

This isn’t just true for big, economy-wide shifts in technology, but individual inventions as well. The success of the iPod has destroyed jobs at Walkmen assembly plants. A quick, easy, and cheap cure for cancer would put many specialized healthcare workers out of a job. This is creative destruction, and it would be wrong to argue that’s it’s not a great thing.

If you think the difference between trade and technology is that our trade policies gives China an edge, consider the many ways in which we subsidize technology, innovation, R&D, and capital in this country. These subsidies, like the trade distortions, mostly just exaggerate an unstoppable trend. Take a look again at the output per manufacturing worker in the graph above, clearly it would be ridiculous to assume that absent those subsidies to technology and capital the state of manufacturing would be as it was in the 1970s. Sometimes progress is inevitable.

Likewise a massive shifting of manufacturing to China and other parts of Asia was inevitable once certain developments took hold. What happened was the China government began easing it’s boot off the throat of it’s people by gradually moving from Moaism to a mixed economy. Once that transformation had begun there’s only so much that trade or exchange rate policies can or could have done to prevent massive amounts of manufacturing from moving to China. By maligning China’s economic success, by attacking someone for saying it is a great thing, you can only be defending the boot upon China’s throat, because there’s nothing short of autarky we could have done to stop much of what has occurred.

Just as manufacturing jobs inevitably shifted from here to China, rising wages in China have begun the inevitable shift of some manufacturing from China to poorer countries like Bangladesh.

I believe in a social safety net. We should help workers whose jobs are destroyed and who are facing hardship. But there is no reason to privilege workers whose jobs were destroyed by China’s growing economy over those whose jobs were destroyed by technology. Likewise we should no more demonize China than we would demonize inventors and the technologies they produce.

UPDATE: Via Matt Yglesias comes an important reminder that the Democrats are not the only ones bashing China with xenophobic ads. The following video is even more egregious and disgusting than the anti-Toomey ad.

A couple of things on the paper real quick:

First, my characterization of the response of the consumer is incorrect. I said

Suppose that I know that every time a recession hits the government will respond by cutting the payroll tax. I notice that when this happens lots of teenagers run out and try to get a job. In response stores fill up with inventory and sales are common.

This is fine from the store’s perspective as they are getting all this cheap teenage labor so it is worth it for them to have sales.

Well then, I say to myself, I should hold at least a little bit of my cash in reserve. I don’t know when another recession will hit but I do know that when it does I want to be ready to hit those sales.

This is incorrect. The correct human interpretation is as follows:

The government cuts payroll taxes which encourages more teenagers to work. However, this means that stores face lower costs. That implies that sales in the current recession will be larger than they otherwise would be. Knowing that I hold on to my money longer waiting for the larger sales.


Second, I am working through this now but it seems to me that a key assumption to get the unambiguous result that a payroll tax cut will reduce output is that such a cut has no impact on aggregate demand.

If we believe that consumers are reducing their consumption because they wish to hold higher real money balances or equivalently pay down debt this should not hold.

Let me wax nerdy for a moment and I will post the English if I get a chance.  A credit shock at time t lowers the credit worthiness of all households. This drives a wedge between the risk-free interest rate at which households can liquidly save and the rate at which they can borrow.

If cash flow shocks arrive stochastically then this increases the expected cost of being cash short but does not decrease the benefit of being cash long. The optimal portfolio response is then to increase cash holdings. This creates an aggregate demand shock as all households attempt to increase cash holdings at the same time.

This will also serve as an incentive to decrease outstanding debt because this will loosen cash flow constraints. Thus households will attempt to increase net savings.

In either case this implies a reduction in consumption.

The central bank would like to offset this with a reduction in the real interest rate. However, it cannot fully offset because it has reached the Zero Lower Bound.

This creates a cascade effect where the drop in aggregate demand decreases output, increases unemployment and increases the probability of a cash shock. This in turn further increases the incentive for households to be cash heavy (or debt light).  Thus the shock is self reinforcing at the ZLB.

Now let us move to a payroll tax cut.

The payroll tax cut will decrease costs for firms which will encourage more output at lower prices at all times for which the cut is in effect. This will shift the aggregate supply outward.

However, it will also shift aggregate demand outward because

1) Cash flow to households must rise thus allowing them to reach portfolio balance sooner

2) The deflation will be faster meaning that real money balances will rise faster, thus households will reach portfolio balance sooner.

There will be then two effects

1) Households will wish to push spending into the future because prices will be lower

2) Households will wish to increase current spending because cash flow constraints are looser.

This should be equivalent to saying both curves shift outward and the net effect is determined by which curve shifts more.

So, I heard in passing about the result that a payroll tax could be deflationary in a liquidity trap. I had assumed the intuition was simply that an increase in output would drive down prices, however, this seemed at odds with the fundamental observation that prices are slow to respond in a recession.

I will admit two embarrassing things. First, I did not read the underlying paper. Second, part of the reason is because I didn’t know that Eggertsson wrote it. The fact that I would taken the result more seriously knowing the authorship does not reflect well on me, nonetheless it is true.

That having been said I will deal with the real results of the paper now. The paper seems to suggest that a policy of reducing tax rates in response to a recession will be contractionary because our expectations of future inflation decline.

Here is the result in human terms. Suppose that I know that every time a recession hits the government will respond by cutting the payroll tax. I notice that when this happens lots of teenagers run out and try to get a job. In response stores fill up with inventory and sales are common.

This is fine from the store’s perspective as they are getting all this cheap teenage labor so it is worth it for them to have sales.

Well then, I say to myself, I should hold at least a little bit of my cash in reserve. I don’t know when another recession will hit but I do know that when it does I want to be ready to hit those sales.

Thus I spend less than I otherwise would today. This drives down aggregate demand today and makes the current recession even worse!

Not good.

Now, that’s how the New Keynesian models are framed. I actually don’t think that consumers are that sophisticated. I think that most of this stuff works through business channels. But, I think it mimics the consumer model.

So, my view of the world goes like this:  An executive at the Gap says to herself, look profits are pretty strong despite this sales dip. We’ve done a good job in streamlining our operations. Should I think about expanding? Maybe put in a few stores in areas we think will be big over the next five years.

Yeah, I could do that, but if the recession gets worse then

A) we will have fewer sales and so that’s risky

but also

B) if the recession gets worse the government will cut the payroll tax which cuts the cost of putting in the new store then.

As such its best to wait until we are sure that the this thing won’t get any worse. The worst thing we could do would be to pay high costs now for low sales later.  At a minimum we should wait and pay low costs later.

So, the prospect of cost declines makes her want to wait and pay then. This is what high real interest rates look like in real life.

Thus she decides to hoard cash. Again, not good.

These are all very good points. I am not 100% sure I buy them because payroll tax cuts are a state contingent countercyclical policy. In English that means that I don’t think this situation is likely to happen again for a long time. Moreover, the more policy levers we pull now, the fewer we have to pull later.

This means that there will be fewer incentives in the foreseeable future and so costs have no where to go but up. Nonetheless, why risk it!

So, what is to be done?

Here are a few options

A) Loan in lieu of sales tax. That is, the Federal Government will loan to the states an amount equal to twice their total sales tax revenue in 2008 adjusted for increases in population and inflation. In return the states will agree to a two-year sales tax holiday.

B) Past Payroll Tax Rebate. The IRS calculates how much payroll tax you have paid in the each of the last ten years. I believe that they have to have this info readily available for seeing if you qualify for SS benefits.

Then IRS pays you 10% of the total amount as a lump-sum payment.

What does this accomplish.

  1. Its “progressive” at least in the sense that it is rebating a tax most people find regressive.
  2. No one gets out more than they paid in. This is a sticking point for a lot people, so it needs to be addressed.
  3. People get cash even if they are currently unemployed. Great for dealing with liquidity constraints.
  4. It effectively increases the incentive to supply (hire) labor during booms. However, those are times when the ZLB is not binding and so those effects will  be offset by the Fed.

This is getting more complicated than I like. Larry Summers favored temporary, targeted and timely. I favor, simple, fast and bold. My simple dimension is really getting hammered here.

Any suggestions?

Barbara Kiviat asks

Why do people care so much about the minimum wage?

Which you would think was answered by her own statement

Yes, it’s true, in Econ 101 we all learn that price floors disrupt the most efficient allocation of resources in a marketplace. When it comes to low-wage workers, that leads to companies hiring fewer people than they would otherwise, leaving some folks who want jobs without them.

In fact, in recent years economists have struggled to find explanations for real-world situations in which higher wages do not, in fact, lead to lower employment.

So, all economists agree that in the very basic model minimum wages should lead to lower employment among the low skilled. Recently economists have struggled over whether or not in practice our policies are reducing employment among the most vulnerable members of our society.

But, Kivait says, meh.

If we want to help low-income families, we could do a lot more than change a wage many of them don’t make anyway. And if we want to minimize government intervention in free enterprise, we might choose a battle that is meaningful to companies outside of such a narrow range—half of all minimum-wage workers have jobs in the leisure and hospitality industries.

If we don’t care about providing jobs to the lowest skilled, least employed portion of our society then what do we care about?

I understand that among the politicians the minimum wage really is just a political football to show how pro-worker or pro-businesses they are.

However, you do understand that actual people with actual lives are on the line here. That if we choose unwisely that literally thousands of families will suffer.

We need to get this answer right and so far it looks to me like the weight of the evidence suggests the minimum wage is harmful and it is harmful to the weakest among us.


Sorry Rebecca if this rubs you the wrong way, but I just couldn’t help it

Mark Thoma posts this graph


In early 2008 I said

Inflation is here, yes. Commodity prices in general and agricultural prices are skyrocketing. This is something that we talked about here last year. However, the Japanese Scenario is becoming more salient everyday.

As I say regularly to my colleagues, “This is not just sub-prime, this is not just housing. This will get much worse before it gets better.”

The reason I point this out is that the basic path of the recession was totally foreseeable if you paid attention to the incoming data on liquidity demand.

This is key because we are now engaged in a great debate on how to get out of this crisis. I maintain that the type of analysis that foresaw a crisis of this exact nature coming should be given extra weight.

If the people who were saying in early 2008 that a severe liquidity crisis was brewing were correct, shouldn’t this at least raise somewhat the general estimates that resolving the liquidity crisis is the key to growth.

I know there are a lot of people who point to federal government policy uncertainty. Who knows what Obama might do? However, policy uncertainty didn’t predict the crash while liquidity concerns did.

As such I strongly suggest that those who are committed to bringing us out of recession focus their attention on liquidity.

That having been said there are numerous ways of dealing with this:

1) Obviously I have pointed to higher inflation targeting. I am still a big fan of this and I think at the core a credible promise to induce inflation is the ultimate key.

2) I endorse QE 2. Like many I am skeptical of why the Treasury couldn’t just buy up all of our long term debt, issue T-bills and receive the same benefits. However, if it serves as a communication device that the Fed is serious about reducing long term rates then I am for it.

3) Tax cuts. I know for many of my liberal readers this is increasingly becoming a bad term. However, the point is not whether we concede to a so called “republican” idea, the point is whether we reduce unemployment for those in need.

I have argued and will continue to argue if that for some reason, that I don’t completely understand, the markets fail to take the Fed seriously we still have the option of injecting large amounts of liquidity quickly through tax cuts.

Please, lets not get hung up on whether tax cuts are an excuse to hand out money to the rich. We can cut payroll taxes. We can even provide a payroll tax credit where you get back the first 5000 your family paid in payroll taxes.

I am indifferent to the structure. What matters is that we get funds into the hands of consumers. What matters is that we end the liquidity crisis and reverse the upward trend in unemployment.

I know that you would prefer infrastructure, but every day we wait is another day that many of our citizens go without a job. Lets act quickly, boldly and in accordance with the experience and models that we have available.

It might be nice if we figured out a complex dignity voucher, skill building program that retrains Americans for a new service based economy. However, of primary importance is that the millions of Americans who are desperately looking for gainful employment find it.

We have the power to accomplish this. However, to do it we must lay down our partisan shields and accept any means necessary for moving us out of the liquidity trap.

Unless there is a macroeconomic reason you believe they will fail, please endorse tax cuts as an option.

Glenn Beck drew (more) attention the other day when he declared on his radio program that he didn’t believe in evolution because “I haven’t seen a half-monkey, half-person yet”. Leave aside for the moment the fact that humans descended from, and in fact are, apes, not monkeys. Let’s give Beck the benefit of the doubt and presume what he meant was that he has never met something in between a human and some monkey-like creature, and here I think I can help him. As you can see in the map below, a mere 7 minute drive from Fox News Studios at Rockefeller Center where Beck broadcasts is the American Museum of Natural History. There Glenn can visit the The Hall of Human Origins and see life-sized dioramas of Australopithecus afarensisHomo ergaster, Neanderthal, and Cro-Magnon. Not only that, but he can also see actual casts of Lucy, the 3.2 million Australopithecus afarensis skeleton, and Turkana boy, the 1.7 million year Homo erectus skeleton.

Now Lucy may not technically be a “half-monkey, half-person”, but as you can see from the picture below of  how an Australopithecus afarensis is believed to have looked, that’s not a half bad description of her.

Of course, lover of science that he is, Mr. Beck may have seen these casts and recreations already, and his skepticism can only be appeased by meeting the “real thing”. Well, he should have said something earlier, because from June through October 2009 Lucy was actually on display at the Discovery Times Square Exposition a mere 7 minute walk from Fox News Studios. He could have gone there on his lunch break.

If Beck wants to see a “half-monkey, half-person” all he needs is a little genuine curiosity and about 30 minutes of free time. Given his talent and zeal for digging up convoluted “proof” of far fetched conspiracy theories, you’d think he be a little better at finding evidence for a legitimate theory like evolution; especially since there’s plenty of evidence right in his neighborhood. Maybe someone should tell him that “Van Jones loves Karl Marx” has been scrawled on a bathroom wall at the American Museum of Natural History. Important evidence like that is sure to draw him there.


Lovable gubernatorial candidate Jimmy McMillan made a stir Monday night with his single issue platform: The Rent Is Too Damn High.

There are many issues at play here but Ed Glaeser and Joseph Gyourko indentify one potential candidate.

The bulk of the evidence that we have marshaled suggests that zoning and other land-use controls are more responsible for high prices where we see them. There is a huge gap between the price of land implied by the difference between home prices and construction costs and the price of land implied by the price differences between homes on 10,000 square feet and homes on 15,000 square feet. Measures of zoning strictness are highly correlated with high prices.

While all of our evidence is suggestive, not definitive, it seems to suggest that land-use regulation is responsible for high housing costs where they exist.

So there has long been a casual argument that cancer is a disease of civilization. That is, that cancer was rare up until at least the development of large cities and perhaps industrialization. This might suggest pollution of some sort is a vital precursor to cancer.

Robin Hanson posts on some evidence to back up this claim

In modern populations, tumours arising in bone primarily affect the young, so a similar pattern would be expected in ancient populations. … Another explanation for the rarity of tumours in ancient remains is that tumours might not be well preserved; however, experimental studies show that mummification preserves the features of malignancy. ..

We propose that the minimal diagnostic evidence for cancer in ancient remains indicates the rarity of the disease in antiquity.

Though if this is the case then it seems we may be dealing with a ubiquitous set of pollutants as wild animal deaths from cancer seem to be on par with human rates.

This is the title of a paper by economists Scott Cunningham and Todd Kendal that provides an overview the economics of prostitution and how it has been affected by technology for the forthcoming Handbook on Family Law and Economics. Here are some scattered observations.

Among the many interesting results they report are that 40% of prostitutes have a college degree, and 80% have had some college.

Apparently, the current economic downturn has led to churn in the industry and lower wages, as supply has expanded and demand has contracted. For many women this puts the market wage below their reservation wage, which drives them out of the market.

Uncommon for economists they report ethnographic results as well, for instance:

Ethnographic interviews with various workers revealed that spouses and partners were typically aware of, and even complicit in the sex worker’s labor supply, frequently working as a manager or assistant.  These results indicate the necessity for a fuller understanding of the complex relationship between prostitution and marriage.

The authors apply a hedonic analysis to prostitute prices and thus estimate a price premium for various characteristics including race, age, and services offered. Contrary to the economic literature showing either an Asian wage premium or no difference relative to whites, wages for Asian prostitutes are found to be systematically lower than for other minorities:

Another interesting question they address is what happens to the demand for sex ads on Craigslist when a $5 fee is imposed. The graph they provide tells the story:

There are many other fascinating results in the paper, and good information on datasets for researchers interested in these issues. Scott’s website with links to his other research is here, and you can follow him on twitter at @scottcun.

The Democratic Senatorial Campaign Committee is running this extremely ugly and xenophobic ad against Pat Toomey, who is the Republican U.S. Senate candidate for Pennsylvania. The ad includes all the classic racist Orientalism touches, from gong sounds to fortune cookies.  The goal of the ad to slander Toomey with a quote of his where he says “It’s great that China is modernizing and growing”. Gasp! Oh the horror!

The economic growth and modernization in China over the last 30 years has lifted literally hundreds of millions of people out of poverty, and if you don’t think that’s an unmitigated great thing then fuck you, I hope a Chinese person does “steal your job”.

I know campaign ads shouldn’t affect us. We should vote based on policies and expected welfare impacts of those policies. But at some level these political ads become pollution, a pure negative externality. And I can’t look past it when a party or politician is willing to spew pollution to get elected. If you’ve got to denigrate a whole nation of people and one of the greatest economic miracles of the last 50 years, and stir up a hornets nest of ugly xenophobia in order convince people you’re the man for the job, then you’re demonstrably not the man for the job.

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.

I haven’t said much about the foreclosure issue because I am sure there are many commentators who understand it better than I. In particular I have not been completely clear on what the downside risks for the banks are.

Some have discussed Mortgage Backed Securities (MBS) being pushed back on to the originators, which in some cases are the major financials.

What I don’t have a good sense for is how much origination exposure each bank has. For example, some of the truly crappy stuff came out of shops like New Century and Accredited which are now shut down.

However, some fairly poor quality stuff was put out there by Countrywide which is now subsumed into Bank of America. How much of this risk does Bank of America take on? What does the law say here?

In addition, some really really exotic stuff came out of Wachovia. How much of that is now a potential liability for Wells?

Moreover, lets say you didn’t originate the loan but you did package it. Do you bear any liability here? Is there a liability chain where if the originator goes down goes back to whomever packaged the relevant MBS?

In any case, even though I don’t know the answer to those questions – I do know how to read a CDS chart and there looks like the beginnings of some movement here.

Chart via ZeroHedge


I’d be interested to hear what some of the regulation guys – Mike Konczal – can tell me about resolution authority. What does it look like? What do we have the power to do at this point? Can we crack BAC into good bank – bad bank if necessary?

Will Wilkinson points to research that confirms my otherwise weakly substantiated biases and so naturally I am inclined to cite it.

Karma is not an exclusively Hindu idea. It combines the universal human desire that moral accounts should be balanced with a belief that, somehow or other, they will be balanced. In 1932, the great developmental psychologist Jean Piaget found that by the age of 6, children begin to believe that bad things that happen to them are punishments for bad things they have done.

My take is simple: Karma is bullshit – the greatest lie ever told. In truth, the arc of the moral universe is long but it bends towards death and destruction. The universe is either utterly indifferent to your suffering or it actively seeks to destroy you and repurpose your molecules for other uses. In no way, shape or form is it your friend. In no way, shape or form is it balanced or just. If there is evil in the world then it is nature. If there is a God then he is a demon. If there is fate then ours is doom.

This story only has one ending and it ends with the extinction of all life. Good will not ultimately be rewarded. Evil will not ultimately be punished. The story will simply end. It is not just. It is not fair. It is not OK.

The only remedy open to us is to fight daily for our survival and our values. To live in open defiance of the physical laws that will eventually extinguish us. To suck every ounce of happiness from the world before it is done. To eat, drink and be merry for tomorrow the universe will grow cold and all life will die.

And, to along the way, ease the suffering of those we can. Suffering is not a lesson or a just dessert. It is an evolved mechanism that serves not our purposes but the purposes of natural selection. Poverty is not the punishment for ills but where the evil of nature has not yet been beaten into temporary submission. It is an uncaring universe crushing our brethren underfoot.

This will not end well, because nothing ends well. In the end, the universe, like the house, always wins. Yet, we do not have to tolerate agony and pain all the way up until our inevitable demise.

We live. We love. We laugh in defiance of that inevitability. If we have our heads on straight we’ll do it right up until the cold, bitter, utterly unjust and utterly unavoidable end. We are mortals – those who die. That fact should infuse our every value and animate our every action.

When my loved ones take ill they sometimes ask me –with hope in their eyes – “Am I going to die?” Yes, I answer, I cannot change that. But not today.

Not today.

Arnold Kling, picking up on a paper by Jeffery Rogers Hummel suggests that Bailout are inconsistent with an Aggregate Demand story.

My main takeaway from this paper is that from an aggregate demand perspective you should never need a targeted bailout. This is obvious if you think about it. Every aggregate demand shock is either a money supply shock or a velocity shock. Any negative velocity shock can be offset by a money supply increase. Thus, if an institutional failure is going to cause a negative velocity shock, you can absorb the failure while increasing the money supply.

I think that the case for targeted bailouts has to rest on a supply-side story. That is, you think that losing Citicorp will affect the supply side of the economy in some horrible way.

I think that is somewhat right. A collapse of a major financial institutions could induce a recalculation or structural readjustment. The banking system provides liquidity through unique channels. If those channels are destroyed the economy must recalculate to a new equilibrium. This is part of the reason bank failures are so deadly.

We should note also that unless we think that the creation of the banking system itself was somehow second-best, then this recalculation cannot be optimal.

For people lost in the terminology, think about it like this. Suppose I have a big micro-lending program going on that supports women in Bangeldesh. Then suppose one day the micro-lending org goes under because the CEO embezzled a lot of money.

Then all of the villages that once received funding are going to experience a major supply shock.  Because it takes time to develop these relationships, another micro-lender can’t just swoop in. Moreover, trust in the whole micro-lending process has been eroded. This could lead to a structural increase in poverty in those villages. This will also be second-best and is why micro-lending bailouts as a public policy make sense.

However, there is also a massive liquidity loss from the micro-collapse as well. Credit tightens, spending will drop and cash hoarding will rise. This will induce an Aggregate Demand shock and a cyclical collapse in the villages as well. This collapse can theoretically be undone through monetary injections, though without a bank to provide those injections you will probably have to resort to direct payments.

For the case of the United States, I think TARP largely prevented the former scenario. The only place there was a massive structural collapse was in the mortgage market. It was possible for some people to purchase homes in 2005 who simply cannot purchases homes now and a person in their circa 2005 circumstances may never be able to purchase a home again. This is a supply-side collapse.

However, that process was underway long before Lehman fell apart. The Lehman fall could have produced a secondary structural collapse but various interventions including TARP largely prevented that from happening.

There still was, however, a liquidity collapse. We can debate over whether we want to call it a fall in the money supply broadly-defined or an increase in money demand narrowly-defined but the underlying dynamics are the same. Liquidity became scarce and as such people started hoarding cash.

So in short I don’t think these stories exist in opposition, nor do I think the necessity of TARP implies that our problems are mostly structural. It is because of TARP and other programs that we avoided full scale structural collapse. We still, however, have not dealt fully with the Aggregate Demand collapse.

Like much of the blogosphere I was puzzled over Paul’s China criticisms. However, as a general rule of thumb, when you disagree with a Nobel Laureate on an area closely related to the one in which is received his prize, assume that the misunderstanding is on your part – not his. So, I have been quiet and kept reading.

Now, I think I get and it comes in a few lines

China isn’t fighting deflation — it’s fighting inflation, so the undervaluation of the yuan has to be accompanied by restrictive credit policies domestically. (China can separate exchange rate policy from domestic monetary policy because it has capital controls)

The problem is not that Chinese monetary policy is too loose, it is that it is too tight. Paul is saying it has to be tight because of the way in which the Yuan to Dollar peg is maintained.

When we generally think of pegging currencies, we think of monetary policies moving in tandem. China wants a cheap Yuan so when the Federal Reserve prints dollars, the Bank of China has to print Yuan. Saying the Yuan is too cheap is the same as saying the dollar is too expensive and of course we have a cure for that – print more dollars.

However – and this is where I am primarily giving a Paul a chance to step in and really clear things up – when the Chinese government prints Yuan, it trades them for dollars but doesn’t allow those Yuan back into the country.

In order to invest in China you need state permission and the state limits how much money comes in. It essentially has an import quota on Yuan.

This means that while Yuan are loose in the international market and therefore cheap, they are actually tight at home and therefore expensive. Because China is controlling the flow on money across the border it can have a loose international monetary policy but a tight domestic monetary policy.

Indeed, it goes deeper than that. A loose international Yuan bids up foreign demand for Chinese goods. This in turn both increase the quantity of goods China produces and their domestic price. Essentially, foreign consumers are given a price advantage relative to domestic consumers.

However, China doesn’t want domestic consumers to face higher prices. So, it has to tighten the domestic Yuan even tighter. It has too push down domestic demand so that the sum of international demand plus domestic demand are not so high that they produce domestic inflation.

The tight domestic Yuan, therefore, is driving down Chinese consumption at precisely the time in which the world could use more consumption. The loose international Yuan also gives foreigners a price advantage when buying Chinese goods and so it is driving down inflation in the US at precisely the time the Fed is trying to dive it up.

However, the story still gets worse from there – I am really riffing here, half of this is just occurring to me as I type. The loose international Yuan can only be used to produce manufactured goods. Manufacturing requires commodities both as the feed stock for the actual goods and to be used in the construction of new manufacturing facilities.

What does that mean. It should mean that when the Fed loosens policy, that China responds by loosening the International Yuan which in turn gets shunted towards commodities. Thus rather than boosting the consumer price level as we hope, Fed easing actually winds up boosting commodities.

This is because China is offsetting the total increase in worldwide consumer demand by tightening the Yuan at home, and boosting the total increase in commodity demand by loosening the Yuan abroad.

Thus this Yuan policy does all the wrong things.

This is my best shot at understanding the issue. Hopefully, Paul will swoop in to set things straight.

Yesterday on the front page of the New York Times website was an article with the headline “Democrats Are at Odds on Relevance of Keynes”. It is quite common these days to see stories like this on the front page of widely read publications that presume some level of economic knowledge (you remember the U.S. Today front page story about asymptotic efficiency of GARCH models, right?). Putting aside all of our current woes and our inability to fix them, I think there has been a general increase in the understanding of and demand for economic knowledge and I’m hopeful that this will help us in the long run. Perhaps this wider appreciation for economics will help make future bubbles less likely… not that I would bet on that.

In any case, this is all sort of a long way of introducing this graph that I put together a little while ago for a paper. It shows the number of articles containing the phrase “house price index” appearing in major world publications each year, and I think it demonstrates that the interest in an economic issue increases in proportion to how much of a problem, or potential problem, it is.

Right now there is a widespread discussion of how do you stimulate a jobs market, how effective is Keynesian stimulus, what are the effects of protectionism, and what causes economic growth and decline, precisely because these issues are huge problems right now. I’m hopeful that one of the very few positive long-run impacts of this recession will be that as a country we will have a better overall understanding of economics going forward… Then again, even as I write that I can’t help but picture the year 2012 and President Palin’s wildly popular economic platform of repealing the gas tax, engaging in a slew of protectionism, closing up the border, and claiming that the estate tax and the minimum wage are causing all of our economic woes. In the battle of economic knowledge versus angry populism, I’m afraid I have to bet on the latter.

Paul Krugman is at it again with his calls, using a model based on what I believe to be an entirely flawed conception of monetary policy at the zero bound, to argue that China’s currency policy is harming the US:

So again, the Fed is moving in the right direction, both for US interests and for the sake of the world as a whole. China is beggaring its neighbors, which in this case means everyone else.

Krugman is continuing his call that we begin threatening to engage in protectionism through legislation aimed at Chinese products. Of course, this is wholly unnecessary. Matt Yglesias has the money quote:

The Chinese government’s discomfort with monetary stimulus is understandable. Monetary stimulus plus Chinese currency policy will equal an undesirably large amount of inflation in China. That means that in order to avoid an undesirably large amount of inflation, Chinese leaders will need to engage in a more rapid currency readjustment than they want to. That, however, merely underscores that unilateral monetary action is the right way for the US government to handle our concerns about China’s currency policy. We don’t need to threaten them, or bribe them, or cajole them, or go to “currency war” or anything. What we need to do is to adopt monetary policies that are appropriate for our economic situation. The Chinese will learn to deal with it, and in the longer term we’ll all be better off.

Which highlights the idea that beggar-thy-neighbor policies are anything but zero-sum games when it comes to money. All currencies can’t devalue against each other simultaneously, but all currencies can depreciate relative to goods and services…and that has a stimulative effect. Depending on the relative slope of your economy’s SRAS curve that either means higher inflation or higher real output. Monetary easing in the United States would likely mean higher real output in the US…but it would likely mean higher inflation in China.

What exactly does that do? It gives China cover to adjust their exchange rate policy. A policy of easy money in the US actually benefits both the US and China (assuming that China will follow an optimal policy regime).

What is embarrassing is that we live in a rich country, with a fiat currency, and we are still having a conversation about how to get the economy off the ground…and furthermore contemplating highly detrimental policies in order to do so.

Kevin Drum is skeptical of my brain mounted computer prognostication. His general point is that the “perfect memory” that computer brains would provide would only get you so far, and that there is non-trivial factual knowledge that critical and would not be storable in the sense that mere facts would be. This I can agree with. A perfect computerized memory may mean you know longer have to memorize proofs, but you still have to understand them. Still, the existence of perfect memory changes what we must work at in learning proofs and would drastically change the emphasis of education. It essentially makes every test an open book test.

He also argues that access to information is not useful without knowledge of how to use it, specifically he disagrees with my claim that “All fields will be trained more like librarians are today”.

…the fact is that librarians don’t know how to do accounting. Nor do they know how to perform brain surgery, calculate an IS-LM curve, or write a blog post.1 There are lots of kids whose computer retrieval skills are vastly superior to mine, but it does them no good if they’re trying to figure out anything more complicated than the showtime for Jackass 3D. That’s because aside from trivia, fact retrieval isn’t very useful unless you know what facts to look for in the first place, how to evaluate those facts, whether they’re reliable, how to put them into context, what’s missing, and what it all means. My retrieval skills are better than virtually any teenager’s not because of my technical prowess, but because I have some idea of what to search for in the first place, how to follow those results to other results, and how to figure out if the stuff I find is meaningful in any but the most frivolous way.

I would argue that  having “some idea of what to search for in the first place, how to follow those results to other results, and how to figure out if the stuff I find is meaningful in any but the most frivolous way” is exactly what a librarian is trained to do. This does not mean one will only need to learn the material as deeply as a librarian would, but that retrieval skills will become much more important and factual knowledge will become less important. However, I take Kevin’s broad point that deeper knowledge and understanding of materials will not become less important, and are in fact an important component of retrieval skills.

My friend and sometimes illustrator Thad Pasierb also pointed out in an email that my list of the criteria by which intelligence will be measured was missing some things. Here is what I wrote:

Once perfect memory is universal, logic, reason, and analytical thinking will be the sole dimension by which intelligence is measured.

He suggests the addition of creativity, and I agree. To put things in economic terms, the price of memory has gone to zero. Those with large endowments of memory will see their relative human capital decrease, and those with large endowments of other skills, like analytical thinking or creativity, will see theirs increase. How much of an increase in human capital you get depends on the extent to which memory is a complimentary to your skills.

Via the Atlantic

Fuck the UAW

~ Rahm Emanuel

I wager  that in these three words lies the difference between New Hamiltonians like myself and New Jeffersonians like Arnold Kling.  They make me smile. I am guessing they make Arnold tremble.

Robert Samuelson is skeptical

Economists seem split into two camps. Some, such as Paul Krugman, the New York Times columnist, believe the economy is so weak that the government should do almost anything (bigger deficits, more cheap credit) that might help slightly; and others, such as Meltzer, fear that expedient measures now will lead to bigger problems later. Between them, there’s an unstated common presumption that there are no instant cures for the economy’s lethargy. The real Fed, it turns out, is much less powerful than the mythologized Fed.

There may be limits to what the Fed is willing to do. It sometimes hard to workout the arcane language of the Federal Reserve Act, but there are definitely limits on what the Fed is legally allowed to do. However – for our purposes – there is no limit to what a Central Bank has the power to do.

Right now we are talking about the Fed purchasing government bonds in an effort to drive down yields. The limit to this is obviously when the Fed has purchased all the available government securities. However, in theory the Central Bank does not have to stop there. It can begin to buy private bonds. Indeed, it need not stop there, it can buy stocks. Indeed, it need not stop there, it can buy output directly. That is, the Fed could simply go to Wal-Mart and say – I’ll take half your inventory.

Now, I am sure that much of this is beyond the power of the Federal Reserve Act. And of course, I don’t endorse these measures.

I believe the Fed has enough credibility that when it promises to meet the long-run price path that this alone will get corporations and banks off of their cash. However, lets suppose that Bankers and CFOs have been reading too much Robert Samuelson and doubt the Fed’s power.

There is still a trump card. The Federal government can suspend the payroll tax, can raise the standard deduction to 100K, can double the earned income tax credit, can triple food stamp provision, can federalize Medicaid and raise eligibility 800% of the poverty line. It can run deficits out the wahzoo and the Federal Reserve could buy all the debt.

Is there anyone who believes that this wouldn’t induce inflation? Is there anyone who believes that inflation won’t induce banks and businesses to get off of their cash?

Regardless of whether Federal Reserve and the Federal Government should take these measures, can we at least agree that it has the power to induce spending?

If we can at least concede that then we can go back to talking about careful and measured steps to raise inflation expectations.

We don’t have to waste time in the giant game of chicken where the Samuelsons of the world refuse to move out of their nearly zero-yield CDs because they think the government is somehow powerless to create inflation.

image Paul Krugman continues his series on the lack of government spending under the Obama administration.  I don’t think he hits the point quite hard enough that when economists say government spending they mean government consumption and investment. Government outlays are the sum of all checks the government writes.

However, many of those checks are just pass-throughs: collect from person A, distribute to person B. At the end of the day the money is still spent by individuals on things that they themselves want. Such funds are not subject to the Friedman critique:

Nobody spends somebody else’s money as carefully as he spends his own. Nobody uses somebody else’s resources as carefully as he uses his own. So if you want efficiency and effectiveness, if you want knowledge to be properly utilized, you have to do it through the means of private property.

So what we really want to look at is Federal Government Consumption and Investment. Lets check the tape:

The Long View


This is with a log-scale. Why logs? Because with logs a straight line means a constant growth rate. In a world where population and productivity are always growing, virtually any long economic series is going to look like a giant swoosh. That’s just because America is much bigger now than it was in the 50s.

As you can see the growth has been pretty steady accept for that flat period during the 90s. It becomes immediately clear why that it is when you think of what the government actually spends money on. That flat period is the peace dividend.

Now lets take a closer look at recent times


Not much of a discernable trend that I can see. Maybe a bit of a slow down around 2007. So, far this is largely in concert with Krugman’s point.

However, I want to make a different one as well. If I remember correctly we passed the American Recovery and Reinvestment Act of 2009. This chart includes not only government consumption but government investment – roads, bridges, etc.

I don’t see a lot of reinvestment going on. This is because there isn’t much. There isn’t much because it is hard for the government to spend money. Lots of studies have to be done. Lists have to be prioritized. Contracts have to be bid out. Lots of anti-corruption hoops have to be jumped through.

In the end the Federal government spends money like men with benign prostatic hyperplasia urinate, slowly and weakly. What the economy needs is flomax.

There are, however, two institutions that do have to power to deliver enormous funds on demand: the Federal Reserve and IRS. I have obviously been focused on the former, but there is a role for the later.

With the debate over the Bush tax cuts looming I am not sure what can be done before the election. However, when the election is over, there are numerous options for moving tons of money via the IRS.

The first is of course a payroll tax holiday. Its big, its bold and it moves money right into the hands of consumers and small businesses. Yes, it moves money right into the hands of the very large businesses that are sitting on cash.

However, it does give them an incentive to hire additional workers and it allows you to move lots of money without having to get into the weeds of favoring this over that.

Another option is a radical increase in the standard deduction. I believe in bold yet, simple measures and so I don’t see a problem with increasing it by a factor of ten. This accomplishes several goals.

First, it gets money into the hands of consumers. Its our helicopter drop.

Second, it avoids any debate later over whether this should be the new tax structure. No one is going to suggest that a standard deduction of 100K should last forever.

Now, doesn’t this run afoul of the permanent income hypothesis? If its temporary then people will save it, no?

I am not so sure that the PIH holds in a recession like this. Unless we think that the massive phase shift we got in retail sales is because people suddenly downgraded their entire future income stream by 10% there is a scramble for liquidity going on here. This is precisely what we will help undue.

In any case, however, even if people save it, that’s not the worst thing in the world. It takes private debt and makes it public debt. This helps repair household balance sheets. Its a nationwide bailout, but its not targeted at people who got in to deep into debt, everyone gets it.

Forecasting what technologies we will adopt in the future and how will interact with them is a highly speculative game, and the past is littered with hilariously misguided projections. A famous example is an article in The Ladies Home Journal from 1900 that predicts what life would be like in 2000. While some guesses are impressively accurate, some are very wrong. For instance, here’s prediction #22:

Store Purchases by Tube. Pneumatic tubes, instead of store wagons, will deliver packages and bundles. These tubes will collect, deliver and transport mail over certain distances, perhaps for hundreds of miles. They will at first connect with the private houses of the wealthy; then with all homes. Great business establishments will extend them to stations, similar to our branch post-offices of today, whence fast automobile vehicles will distribute purchases from house to house.

Despite the difficultly inherent in such projections, I am prepared to argue that not only are brain mounted computers a likely future technology, but their widespread adoption is a dominant strategy equilibrium. For those unfamiliar with game theory, a dominant strategy equilibrium is the outcome that results when everyone plays the strategy that “dominates” all of the other strategies available to them, where “dominating” means it has the highest payout no matter what strategy the other players use.  Given the existence of a strictly dominant strategy equilibrium, it is inevitable.

There’s probably an accepted term for the collective bundle of technology I’m talking about that’s fancier sounding than “brain mounted computers”, but it gets the point across. I’m actually referring to several technologies that all exist in some form or another today, including virtual retinal displays, augmented reality,  neural input devices, and of course very tiny computers to run the whole thing.

Let me describe it extreme layman’s terms (the only terms I know): you’ll have a powerful computer in your future iPhone-like-device that is connected to a special contact lens that so that screens floats in front on your face, and you steer the whole thing with your brain. The most important facts about this technology is that a) nobody will be able to tell whether you’re looking at your computer or not, and b) it will always be available to you.

Why is using this device a dominant strategy? Choosing to use it is simply expanding your memory and factual knowledge to include everything on the internet. As far as anyone who knows you can tell you will never misspell a word,  not know a fact, forget the words to a song, or know any piece of data. Quick: what was the per-capita GDP of Guatamala in 1976? Anyone with a brain mounted computer will be able to tell you.

Because nobody will be able to tell whether you’re using it, genius will be indistinguishable from brain mounted computer use. If nobody uses it you will have the advantages over your coworkers that perfect memory would give you today. If everybody but you uses it you will have all the disadvantages that someone with really terrible memory has today. When everyone else uses brain mounted computers, those without them will look forgetful and unknowledgeable. It will be a dominant strategy in the same way that optional genius would be today; only extreme individuals will choose to reject it.

In time society will adjust to these technologies, and the speed and anticipation of your thoughts will increase, such that the notion of real memory will no longer be distinct from virtual memory.

Education will have to change drastically, and the fact based portion of schooling will become trivial. You’ll only need to learn how to look stuff up in a given field. All of accounting will take a week to learn. All fields will be trained more like librarians are today.

Once perfect memory is universal, logic, reason, and analytical thinking will be the sole dimension by which intelligence is measured.

Since we know memory needs to be exercised, our real capacity for memory will wither and future generations will evolve with less and less capacity for it. If some disaster were to wipe out electricity and return us to a low tech world we would be helpless, unable to remember the most basic facts without the aid of our brain computers. The few remaining natural brains (which is what we’ll derisively call them) -who chose to live as luddites in secluded villages in far away forests and jungles- will become kings… if we can remember where to find them.

If the existence of this technology is inevitable, and surely that much is uncontroversial, then how can its widespread adoption possibly be avoided?

Jim Hamilton points to a slide from Charles Evan’s presentation that does exactly what I hoped


It shows how price-level targeting would map on to the usual inflation rate speak that Bankers and CFOs are used to. It shows in the blue bars what market participants would expect. A gradual return to the target.

It shows in red bars what “price level targeting means for them” that is an inflation rate that temporarily overshoots before settling back down to the target.

This is the kind of thing that people can understand and it helps clear up what’s going on. Its not some wild new regime that they cannot predict. It is a temporary deviation that leaves the long-run target intact. I especially like how the two bars line up in 2014, giving a clear expectation of when the traditional world and when this new strategy will converge.

Of course, any policy explanation – and I am assuming the official channel for something this complex has to be the Fed minutes – needs to include a “revised as data becomes available” clause and regular updates on where we are in the process.

I also like how the top two lines makes it clear why this strategy is appropriate. We are just returning to what would have been the case if we had never missed the target in the first place.

These type of communications are great and hopefully will allow market participants to accurately understand the Fed is trying to do here. I am very interested to see how market participants respond on Monday.

A new paper challenges the conventional  that math is a young man’s game, and also finds that the U.S. share of the global production of mathematical articles has shrunk. They summarize their findings like this:

  • Contrarily to a widely held belief (among both scientists and lay people) the rate and quality of mathematical production does not decline rapidly with age. For mathematicians who remain scientifically active, productivity typically increases over the first 10 years, then remains almost constant until the end of their career. However there is a substantial attrition rate (i.e. mathematicians who stop publishing) at all ages.
  • There is a substantial variation over time of the geographical repartition of mathematical articles. For example although the U.S. are still by far the largest country in terms of mathematical production, their share has declined from 50% in 1984 to 34% in 2006. Similarly, the share of China is rapidly increasing but it is still surprisingly low (only 3.8% in 2006).
  • International mobility is rather weak, and it is much more symmetric than could be expected, both in terms of numbers of mathematicians and in terms of “quality” measured by the output of the mathematicians who change countries.

The study also looks at individual characteristics of mathematicians to determine what it takes to become a “good” one. They found that:

  • Size does matter: large departments are good for individual productivity. However this effect is largely due to good hirings and becomes very small when authors fixed effects are incorporated.
  • Having a specialized department has a negative impact on productivity when no fixed effect is used, but this impact becomes positive with fixed effects. This tends to indicate that a narrower scope lowers the quality of hiring, but that researchers fare better in a department with colleagues close to their mathematical interests.
  • Looking at US universities, we find several interesting results. First, money does not seem to matter: even if the endowment per student has a strong positive impact when authors fixed effect are not used, it has a non-significant negative impact when these fixed effects are incorporated. This negative effect is actually significant when taking into account the fact that the university is public or private.
  • Again for U.S. universities, the fact that a university is private has a small positive effect with respect to public ones. There is also a sizable positive effect of location on the east coast relative to the mid-west, the west coast standing in between the two.



I am still surprised at the Fed Chair we have. Where is the Fed Chair who was willing to try to get ahead of the problems in late 2008? Or the "Helicopter Ben" of 2003? Or the student of big downturns in Japan in the 1990s and the U.S. in the 1930s.

It’s a very different animal we have today. And this speech didn’t do much to convince me that he is going to do what ought to be done.

And it is also not the time to talk about how monetary policy can be carried out via the Federal Reserve’s communications strategy.


As I said many times, I don’t expect any of these [expectations related channels] to have particularly powerful effects, they create incentives for businesses and consumers to increase spending, but there’s no guarantee that they will act on those incentives given the negative outlook for the economy (so fiscal policy authorities should not assume that the Fed "has this"). Again, as I’ve said before, you can lead the horse to low interest rate water, but there’s no guarantee it will drink consumption and investment. In addition, as Brad notes, it’s not clear that the size of the quantitative easing will be sufficient. However, in combination the factors listed above could, perhaps, be helpful. It’s certainly better than doing nothing.

Mark is more clear, however, I don’t keep with other blogs as much as I should so I am not exactly sure why Brad is so down on the communication or commitment strategy as I would call it.

Lets think about an extreme case of the Fed committing to zero interest rates for 10 years.  I expect that Brad would agree that this would cause the yield on the 10 year Treasury to collapse to roughly zero.

However, we would also see a collapse in corporate bond rates. If we look at the credit spreads on corporate debt they are back to normalish levels.


Now perhaps, Brad would argue that this is simply because of the balance sheet actions of the Fed. The Fed is driving people out of the MBS market and into corporate bonds. Perhaps, but corporate profits are strong and corporations are cash heavy. This probably explains a good bit of the drop in spread.

In any case, so long as the Fed does not abandon its current balance sheet policy we should expect commitment to drive down the corporate bond rate. Indeed, I would also expect it to shrink the spread as the uncertainty associated with debt turnover would fall.

Now, Mark suggests that even if this happens it won’t be enough to get corporations to spend. The economy is still uncertain. This is true, however, again corporate profits are strong and with a commitment to low interest rates the liquidity risk is low.

Moreover, negative real rates mean that even if an investment breaks even in real terms it makes money for the corporation. All corporations have to do is keep up with the rate of inflation and they will do better than sitting on their cash.

Lots of people, not just Brad and Mark, are asking what the Fed intends to do, as if buying particular assets were more important than talking about the path of monetary policy.

A credible communication is a commitment. A commitment is a financial asset. Having it written down on a sheet of paper and traded on an exchange doesn’t make it more real. Giving people other pieces of paper that happen to have Federal Reserve Note stamped on them, doesn’t make it more real either. Not when people suspect that you might later take those notes back and tear them up.

What matters is whether or not people take the commitment seriously and adjust their behavior accordingly. This makes the communication vehicle vital.

Speech at Boston Fed

While it may be too early to draw firm conclusions about monetary policy at the zero bound for short-term interest rates, I would like to draw some tentative conclusions.

  • First, a policy of gradually adjusting monetary and fiscal policy, as conducted in Japan after deflation first occurred, may not be as effective as an active policy response taken before deflation has become embedded in the economy.  Of course, it should depend on the given situation and incoming data.
  • Second, while monetary policy may have difficulty fully offsetting a severe shock when the zero bound is hit, there are still important channels for monetary policy to use to mitigate the negative shocks.
  • Third, it is not a coincidence that in Japan, the United States, and Europe these economic problems have been encountered in conjunction with banking and financial market problems.  Analysis of monetary policy with the zero bound needs to more richly capture the aspects of the financial sector that are major contributors to economic difficulties.
  • Finally, we all recognize that conducting unconventional monetary and fiscal policy at the zero bound requires political will.  This of course must be factored into any analysis of policy options.

Still disappointed? The roll out is coming fast and furious. This is the central bank of the United States mind you, arguably the most powerful economic institution in human history. Evans on price level targeting:

In a nutshell, I think there are special circumstances when price-level targeting would be a helpful complement to our current and prospective strategies in the U.S. Clearly communicating an expected path for prices would help guide the public’s understanding of the Fed’s intentions while we carry a large balance sheet and promise continued low interest rates for an extended period.

Let me be very clear about the setting for this proposal. In my opinion, much more policy accommodation is appropriate today. In a speech two weeks ago,[2] I stated that I believe the U.S. economy is best described as being in a bona fide liquidity trap. This belief is not a new development for me; instead, it is a dawning realization. Risk-free short-term interest rates are essentially zero. Both households and businesses have an excess of savings relative to the new investment demands for these funds. With nominal interest rates at zero, market clearing at lower real interest rates is stymied.

A third and complementary policy tool would be to announce that, given the current liquidity trap conditions, monetary policy would seek to target a path for the price level. Simply stated, a price-level target is a path for the price level that the central bank should strive to hit within a reasonable period of time. For example, if the slope of the price path, which I will refer to as P*, is 2 percent and inflation has been underrunning the path for some time, monetary policy would strive to catch up to the path: Inflation would be higher than 2 percent for a time until the path was reattained. I refer to this as a state-contingent policy because the price-level targeting regime is only intended for the duration of the liquidity trap episode. I will be more concrete in just a moment, but first, where does such a policy come from?

Much of the econo-sphere seems displeased with Bernanke’s speech at the Boston Fed. Brad Delong sees it as very bad. David Beckworth is disappointed. Krugman sees a central bank that is still turning Japanese.

Perhaps I am giving the FOMC too much credit. It wouldn’t be the first time. Still, while I would have preferred a little more punch, the Fed rightfully takes time to lay the groundwork for big moves. It needs to make sure that market participants carefully absorb what the Fed is trying to do.

Bernanke, doubtlessly, still remembers the volatility induced by side comments to Maria Bartiromo in 2006. Quotes like the following have got to feel like ice in central banker’s stomach

Wall Street gasped as Bernanke slipped, but later analysts could come to no firm conclusion over whether the new Fed chairman really did inadvertently misstep or whether his move was calculated. Uncertainty ruled the day.

Remember also the vast array of opinions which are subsumed under the headline “market participants.” Lets take a sample.

Larry Kudlow in August of this year

The Fed Can’t Print Jobs

By Larry Kudlow

Did the Fed choose stimulus over dollar stability? The greenback fell and gold rose after the FOMC signaled today that it would keep its balance sheet steady by reinvesting the proceeds of mortgage bonds into Treasuries. This is the first Fed policy shift in about a year. It comes in response to a slower economy and disappointing job numbers, with the Fed downgrading its economic outlook in its FOMC statement.

But here’s the central problem. The Fed can print more money, but it can’t print jobs — or capital formation, or productivity. With a trillion dollars of excess bank reserves already in the system, there’s no shortage of money.

Elizabeth MacDonald, Yesterday

Also, financial reform has affected the independence of the Federal ReserveBoard, drawing it closer to Congressional oversight. The Federal Reserve has been monetizing the US debt, and the markets expect even more such purchases of US Treasuries.

Rick Santelli via Zero Hedge, earlier this week

We dare the deflationists out there to look at the charts of coffee, barley, oranges, pork, cotton, rubber, iron ore, and tell us where is this much-hyped deflation…The right answer, of course, lies in one simple word – and as Santelli confirms what every Zero Hedge readers knows, it is “monetization.”

All that is well-known. What is more interesting is Rick’s discussion of what will be the Fed’s next step after another failed QE round: price target levels. This Santelli qualifies as a “Nixonian” approach of price, or specifically, yield controls, such as i.e., 2% on the 10 Year, and the Fed will keep bidding up securities until one after another target is achieved.

Peter Schiff in response to Dudley

NY Fed President William Dudley’s outrageous statements today closely conform to recent pronouncements from other Fed officials and confirm that a massive round of dollar devaluation is poised to begin.

Seemingly overnight, the Fed appears to have altered its mandate, ditching its former goal of “price stability” in favor of “moderate price inflation.” While no one is under the illusion that the Fed has kept prices stable over the last century, it used to be that the governors would at least pretend to fight inflation. Low inflation used to be the aim, now it’s the enemy.

I am sure the list goes on. I haven’t been following the anti-inflation side. I found these quotes simply by Googling the names of people I knew would be upset.

Perhaps, Delong, Krugman and Beckworth are simply trying to provide equal pressure from the opposite side. However, its not difficult to see how the Fed could fear market misinterpretation of its intentions.

This is why this must begin with a careful roll out of the concept that inflation can be “too low.”  This needs to be conventional wisdom and the reflexive response of every financial anchor when Peter Schiff comes on the screen.

“But Mr. Schiff isn’t inflation currently running too low. It seems everyone agrees that deflation could be dangerous.”  Then this chart pops up.

Inflation Sept 2010

There is a favoritism towards renting in the economics blogosphere, perhaps reflecting some partial irrationality of homeowners, or maybe it’s just a collective cosmopolitan ethos of econ bloggers. In either case I find it interesting to consider rational economic reasons for the strong preference for homeowners that Americans display. A recent paper by Pablo Casas-Arce and Albert Saiz explores an angle I haven’t heard before. Their argument is basically that an inefficient legal system creates a cost of renting versus owning:

In this paper we argue that, lacking alternative means of enforcement such as reputations, market participants will tend to avoid the use of contracts when operating in an environment with very inefficient courts. As a result, the legal system may alter the allocation of ownership rights.

To examine this claim we consider the housing market, where these effects are most financial intermediaries emerged in India in response to Financial regulation. transparent: essentially, a user of housing services can either buy a house or rent it from another owner or landlord. Hence, studying the prevalence of rental properties will tell us about the use of rental contracts and, hence, the allocation of ownership rights in such a market. To the extent that contracts can be enforced, they will allocate these rights in an efficient manner to maximize welfare. This will involve some individuals purchasing the houses they use, while others will buy access to them from a separate owner on an occasional basis, using a rental contract. But when these temporary transfers of control are costly to enforce, we will see departures from that optimal allocation. In particular, market participants may decide to avoid contractual disputes by relying less on rental agreements and, instead choosing a market structure that displays more direct ownership by the final user.

The part of enforcing a rental contract that can be costly in an inefficient legal system is kicking out a renter, either to evict them or simply because the landlord doesn’t want to renew the lease to them for some reason. Megan McArdle’s recent problems trying to purchase a home with a current renter is a perfect example of this. As they discovered, in D.C. it can be very difficult to remove a renter:

District of Columbia Law and Superior Court Rules prohibit the execution of evictions when a 50% or greater chance of precipitation is forecasted for the next 24 hours. Additionally, if the weather forecast calls for temperatures below 32 degrees Fahrenheit over the next 24 hours, evictions other than those designated as Commercial Property will be canceled.

Official weather determinations are made daily at 8:00am., and are based on the National Weather Service Forecast for the Ronald Reagan National Airport, formerly National Airport, the official weather location for the District of Columbia.

When evictions are canceled due to weather and the Writ expires due to no fault of the U.S. Marshals Service, the Landlord will be required to re-file for an Alias Writ and a new filing fee will be required. All Writs identified as Alias Writs and those that are about to expire, will be considered for priority scheduling.

This tells us that the recent problem involving the unclear legal status of a bunch of foreclosures, if not resolved clearly and carefully, could lead to a higher rental rate. After all, this decreases the efficiency of the ownership contract relative to the renter contract.

The lesson in the long run is that if you want more renters, for reasons of labor mobility or whatever, you should make sure the legal system related to rental contracts operates efficiently. This doesn’t necessarily mean favoring landlords over renters, but rather making contract enforcement clear and easy.

From the Money Illusion

Of course I’d like to take some credit for all this, especially since the Fed mentioned NGDP targeting in its most recent minutes.  But in all honesty I think the markets reacted to level targeting of prices, not NGDP.  I’ve also pushed level targeting, but Woodford and Eggertsson probably deserve most of the credit.  So of the total of $500 billion in new wealth created by pundits pushing for easy money, let’s give Woodford and Eggertsson each 10%.  Perhaps uber-pundit Paul Krugman deserves 5%, and for all us small fry pushing for monetary stimulus I’ll assign a trivial 1% share.  And recall that’s only 1% of the 10% share assigned to all pundits–1/1000 of the total.

In other words, we at TheMoneyIllusion deserve credit for a mere $5 billion dollars in wealth creation.

At a minimum I think outside pressure from the “doves” helps to counteract pressure from the “hawks.” It feels weird to write that since I have always considered myself an inflation hawk. Indeed, I remember writing in early 2008 that this was the first time I would have called for a lower Fed Funds target than what the Fed itself chose.

However, when times change, hopefully we change as well. As for me, for the first year or two I was quietly pacing about my office telling myself and others stories about how “I am sure the Fed will ease” and “Bernanke understands the Great Depression and Japan as well as anyone.”

Scott was out there screaming when it was unpopular to scream. He was denouncing policy when the “professionally correct” thing to do was express unwavering support an independent Central Bank and the technocrats who staffed it. That was courageous. It may seem silly to say so, but only to those who don’t realize that people who make their way in the world on ideas risk something when they passionately push unconventional ideas in public.

Tom Tancredo is apparently within 4% percentage points of the lead in Colorado’s Gubernatorial race. Yes, he’s the guy who raised his hand really fast in the 2008 presidential debate when asked “who here doesn’t believe in evolution?”. But is that all the crazier Tom Tancredo is? Here is one piece of evidence from his Wikipedia page that suggests the answer is “no, he’s way way way crazier than that”:

During a 2005 radio interview on Orlando talk-radio station WFLA AM 540, Tancredo responded to a questioner asking about the hypothetical U.S. response to a nuclear attack on U.S. cities by al-Qaeda, by saying that one possible response would be to retaliate by “taking out” Muslim holy sites (specifically, Mecca) if it were clearly proven that Islamic terrorists were behind such an attack. Several days later, in an interview on CNN together with James Zogby, Tancredo said that the attack was mentioned merely as a hypothetical response and insisted that there was nothing for which he should apologize.

How crazy is Tom Tancredo? Crazy enough to bomb Mecca. He’s so crazy that he believes something that’s craziness is so self-explanatory I can never imagine having to explain to anyone other than Tom Tancredo why it’s so fucking crazy.

Holy shit Colorado, good luck.

Ben Bernanke’s speech today at the Boston Fed was more evolutionary than revolutionary but it contains some important nuggets.

On inflation, Bernanke emphasizes the low rates and in particular, potentially stickier measures of inflation such as the trimmed mean and median.

Let me turn now to the outlook for inflation. Generally speaking, measures of underlying inflation have been trending downward. For example, so-called core PCE price inflation . . . declined from approximately 2.5 percent at an annual rate in the early stages of the recession to an annual rate of about 1.1 percent over the first eight months of this year.

The significant moderation in price increases has been widespread across many categories of spending, as is evident from various measures that exclude the most extreme price movements in each period. For example, the so-called trimmed mean consumer price index (CPI) has risen by only 0.9 percent over the past 12 months, and a related measure, the median CPI, has increased by only 0.5 percent over the same period.2

In addition, he acknowledges structural explanations for high unemployment and then waves them away. This is, he says, a failure of aggregate demand.

In gauging the magnitude of prevailing resource slack and the associated restraint on price and wage increases, it is essential to consider the extent to which structural factors may be contributing to elevated rates of unemployment. For example, the continuing high level of permanent job losers may be a sign that structural impediments–such as barriers to worker mobility or mismatches between the skills that workers have and the ones that employers require–are hindering unemployed individuals from finding new jobs. The recent behavior of unemployment and job vacancies–somewhat more vacancies are reported than would usually be the case given the number of people looking for work–is also suggestive of some increase in the level of structural unemployment. On the other hand, we see little evidence that the reallocation of workers across industries and regions is particularly pronounced relative to other periods of recession, suggesting that the pace of structural change is not greater than normal. Moreover, previous post-World-War-II recessions do not seem to have resulted in higher structural unemployment, which many economists attribute to the relative flexibility of the U.S. labor market. Overall, my assessment is that the bulk of the increase in unemployment since the recession began is attributable to the sharp contraction in economic activity that occurred in the wake of the financial crisis and the continuing shortfall of aggregate demand since then, rather than to structural factors.3

Very importantly he notes that the FOMC is in agreement that inflation is “too low” and that interest rates are “too tight.”

The longer-run inflation projections in the SEP indicate that FOMC participants generally judge the mandate-consistent inflation rate to be about 2 percent or a bit below. In contrast, as I noted earlier, recent readings on underlying inflation have been approximately 1 percent. Thus, in effect, inflation is running at rates that are too low relative to the levels that the Committee judges to be most consistent with the Federal Reserve’s dual mandate in the longer run. In particular, at current rates of inflation, the constraint imposed by the zero lower bound on nominal interest rates is too tight (the short-term real interest rate is too high, given the state of the economy), and the risk of deflation is higher than desirable.

Lastly he acknowledges the commitment strategy, though he raises very valid concerns

Central bank communication provides additional means of increasing the degree of policy accommodation when short-term nominal interest rates are near zero. For example, FOMC postmeeting statements have included forward policy guidance since December 2008, and the most recent statements have reflected the FOMC’s anticipation that exceptionally low levels of the federal funds rate are likely to be warranted "for an extended period," contingent on economic conditions. A step the Committee could consider, if conditions called for it, would be to modify the language of the statement in some way that indicates that the Committee expects to keep the target for the federal funds rate low for longer than markets expect. Such a change would presumably lower longer-term rates by an amount related to the revision in policy expectations. A potential drawback of using the FOMC’s statement in this way is that, at least without a more comprehensive framework in place, it may be difficult to convey the Committee’s policy intentions with sufficient precision and conditionality. The Committee will continue to actively review its communications strategy with the goal of providing as much clarity as possible about its outlook, policy objectives, and policy strategies.

One way around Bernanke’s concerns, of course, is to express a higher temporary target for inflation. Combined with a low Fed Funds rate this is inherently expansionary, as Bernanke notes. In addition, the communication vehicle is clear. Bankers understand what inflation is. CFOs of corporations understand what inflation is. They believe that the Central Bank can control inflation.

If the Central Bank announces that it is targeting higher inflation then those actors will understand precisely what is going on. They will know precisely what this means for the stock of cash that they are currently sitting on.

The committee may be concerned, however, about keeping long-run inflation expectations anchored. Suppose then that the Fed expressed its desire to return to the previous price path. Then it said something like:

“At this point committee members judge that a core PCE inflation rate of 3% over the next 48 months would be consistent with a return to the trend price level. The committee will be evaluating data as it becomes available and will update the public on the rate most consistent with returning to trend prices”

Would this type of implied discretion pose some risk to central bank credibility – yes. There is no doubt about that. Some market participants will accuse the Fed of backdoor monetization of the debt.  To an extent this can be managed by a careful rollout that hammers away at the currently low rate of inflation and emphasizes the notion of long-run trend prices. Perhaps the Fed is in the beginning stages of such a roll out now.

Though we might be worried about the risks associated with long-run inflation expectations becoming unmoored, we must be aware that similar risks are associated with a balance sheet policy and there are obviously growth risks associated with Business-As-Usual. There is no “low risk” path for the Fed at this point.

The path of greatest clarity for the markets and most power for the Fed would be to emphasize the low rates of inflation the economy has experienced and then layout specific – though modifiable – timelines for seeking higher inflation.

I wanted to make one additional point about the CREDO study I mentioned in the previous post, but I’m putting it in this separate post because it is a more boring econometric question that I don’t want to bog down the other more obvious issues with.

There is an important assumption the study makes and people should ask themselves how believable it is. The assumption is this:

Take a group of, say, six students from the public school system who have the same grade level, gender, race, income, special ed and english language learner status, and previous achievement test scores. One of these students decides to go to a charter school, and the other five do not. It is assumed that the one who chose to leave would have performed the same as the other five students had he stayed in the public school.

The presumption here is that there is no systematic difference between these students that is not captured by these variables. This begs the question, if these students are the exact same, then why did one decide to go to a charter school and the other five didn’t? Obviously there are some unobserved (to this study) variables that explain the decision to attend the charter school. Is it believable that these unobserved variables are uncorrelated with the student’s performance in school?

To illustrate the assumption even more starkly, imagine that the child goes to a virtual charter school. Is it believable that the kid whose parents pull him out of school to have him go to school on the internet is not different than the comparison kids? The importance of unobserved variables here suggests to me that these results will be biased against charter schools.

I’m not saying the assumption the authors have made is necessarily false, but simply that people who tout this study should understand that this assumption underlies the results, and they should ask themselves whether in another context they would consider it believable. I would argue that had the results of the study shown that on average charter schools outperformed public schools, some charter school critics would be dismissing the study on the basis that charters are cream skimming on unobservable variables, e.g. the charters are accepting systematically smarter, better performing students. Then again, perhaps I am biased and would be less skeptical of the assumption in this case.

My best guess is that whether or not this assumption holds depends, and that in some schools or states it does and in others it doesn’t. In Ohio, where there are a large number of virtual schools, I’m guessing it doesn’t. In New York, where charters are generally high quality and whether or not a student gets into onel contains a large randomization component, the assumption probably does hold. In fact, CREDO was able to replicate the results of a study based on randomization using their matching technique, which suggests the assumption does hold in New York.

So take it as you will, but understand that this assumption is there, and it’s important.

In the most recent National Affairs, Frederick Hess has a very important piece on education reform that everyone should read. His thesis is simple: school choice proponents have focused too much on simply getting more choice in education, and they should be emphasizing the importance of competition. This has led to exaggerated beliefs about what choice alone can accomplish. Here is how he puts it:

The biggest mistake pro-market school reformers have made can thus be put simply: They have mistaken choice for competition. The conviction that school choice constitutes, by itself, a market solution has too often led reformers to skip past the hard work necessary to take advantage of the opportunities that choice-based reform can provide. Choice is merely part of the market equation; equally crucial are the requirements that market conditions permit high-quality or cost-effective suppliers to flourish, that regulation not smother new entrants, and that rules not require inefficient practices or subsidize also-rans.

This is absolutely correct, and as he points out, nobody would argue that choice by itself would constitute sufficient or desirable deregulation in any other government monopolized industry. So following his advice, what can we say about when charter schools work and when they don’t?

Ironically, I think there are a lot of ignored lessons in the charter school study which has produced the number one charter school talking point of the day, “charter schools perform no better on average than public schools”. Read any newspaper article on charters and this fact is highly likely to be there. As I’ve argued before, there are a lot of important truths lying beneath the surface of this quote that I think most people who say it miss. In the study this quote comes from, in some states charter schools perform way better than public schools. Should not the primary lesson from this be that some states have it right, and those that don’t should learn from them? The authors of the study this fact comes from note this fact, pointing out that “results vary strongly by state and are shown to be influenced in significant ways by several characteristics of state charter school policies”

They found three lessons about policies that affect performance:

1. States that have limits on the number of charter schools that can operate performed worse than those that had no caps

2. States with multiple entities that can authorize charters did worse

3. States that allowed appeals to be made in the application or renewal of charter school authorization did better than those that did not

The impacts are significant as well. The study does not say which states do and do not have charter caps but the impact is large enough that removing the cap would make charters not underperform public schools in all but Texas, New Mexico (for math), and Ohio (for math). Again, it’s not clear which states have the cap so we can’t say removing it would actually accomplish this, but the impact of the effect is large enough that it could.

Another important policy implication of this study is that charter schools do outperform public schools nationally for poor students and english language learners. So anytime someone provides you with the quote that “charter schools perform no better on average than public schools”, the response should always be this quote from the study:

In our nationally  pooled  sample, two subgroups fare better in charters than in the traditional system: students in poverty and ELL students.

For a lot of other relevant information about the CREDO study I have a much longer more detailed post here.

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