Before the Holidays begin I want to make a few points.
- Manzi: Jim Manzi has responded to me again. One of the things I love about Jim is that he is really willing to keep a conversation going. Not only that but he has responded at the Corner which opens our conversation beyond the econo-nerd sphere. Generally speaking I sense at the rate Jim an dI are going we may not have much left to disagree about after a few more exchanges. Still his last post requires a more thoughtful response than I can pull off the fly.
- Reihan: Reihan Salam has written a bunch of stuff I have been meaning to respond to but haven’t. The only point I want to address because its real quick is that inflation does not erode savings. It only erodes cash and the value of long bonds taken out before the inflation set in. However, the Fed is buying long bonds and propping their value. The only thing that is eroded in this scenario is cash. I have had this conversation with a number people and Ron Paul keeps saying this, so I think it deserves attention. Before I can get to that Google Fisher Effect and read a bunch of the piecemeal explanations. Lots of them revolve around equations but the upshot is that inflation is priced into assets including bonds and savings accounts. Only bonds issued before the unexpected inflation and maturing long after are affected.
- Profit!: Corporate profits. I saw some conflicting reports. Some saying highest, then Matt Yglesias pushing back. Possible point of confusion is the issue of domestic profits. Around 50% IRC of US profits come in from overseas – exorbitant privilege, dark matter of trade, type stuff. Basically we sell the world Treasury bills which literally pay no interest and then build semiconductor fabrication facilities in their countries which pour cash back to the US. This is not the time to go in depth but I repeatedly remind people that it is a strange thing to say the US is the world’s biggest debtor when at the end of the year the world pays us more interest than we pay themb. I think that arrangement is usually called a bank.
- Krugman: I’ve started Krugman’s Conscience of a Liberal. A number of points
- I know, I know I am way behind on popular books. Surprisingly, the incentives to read them as a Prof are pretty low, which is sad for a whole host of reasons. That having been said, I much more understand his core claim than I did from reading his columns and blogs. I am only part way through but I would say that his core-core-core claim is that the equity-efficiency tradeoff is not as pervasive as most economists think. The book has a lot there is a lot score settling and a true but I think slightly salt-in-wounds arc about the relationship between movement conservatism and racism
- However, if I ask myself “why don’t Paul Krugman and Greg Mankiw agree on the direction for America” Its because Paul thinks the equity-efficiency tradeoff is fairly weak as witnessed by a booming but equitable Great Compression. While Mankiw thinks its strong as witnessed by a lagging Europe. This is where I get to jump and say they are both right/wrong. In truth, I like everyone else don’t know, but my guess is that Paul is right about taxes and Greg is right about regulations. If you tax the wazhoo out an otherwise laissez-faire economy you would get strong growth and low inequality.
- Taxes just reduce the return to working – lets forget about capital taxes. The return to working for the highest earners is literally 1000 time that of the the average middle class worker. Yet, we don’t see large differences in household labor supply. The net effect has to be fairly weak. As always this holds for taxes but NOT for benefits. Even mild benefits could have massive labor supply consequences. So there is an issue around structuring “pro-growth” benefits. And, of course I tend to favor cash over in-kind benefits for the standard reasons, though I am more passionate about them
- Lastly on Krugman. Maybe he addresses this earlier but is it possible that Great contraction was also caused by pension plans. Rough thought, in the Gilded Age you have a lot of people living off capital and some of them were simply the children of entrepreneurs meaning they are just rolling in profits. However, once Pension Plans and other big savers get in the game then the return to just sitting on money collapses. You are forced to seek higher returns through innovation and that means hiring a bunch of professional capitalist. Over time it is precisely those people who have begun to take over the highest income positions. This is not well thought out – just a guess.
- Cochrane: I really, really want to get to John Cochrane’s latest take on stimulus because I think its wonderfully lucid and wrong. Hopefully there will be opportunities between turkey for that.
- Money and QE: Barro is among the latest saying that QE2 will be weak. There is of course a chorus saying the QE2 will usher in the apocalypse. They can’t both be right. Indeed, they are both wrong. The reason QE was in fact working is because it SIGNALLED a commitment by the bank to holdling short rates low for a long time. That is, the “exit” problem that people describe is the very feature of the program that caused it to mildly raise inflation expectations. Remember that a central banks naturally tendency in the post Mundell world is to be tight not loose. Market participants needs some assurance that these tendencies won’t come back just as they have made costly investments.
- Folksy: So I have been thinking of starting up a series explaining some economic facts in a folksy way. One of them is this. You may be hearing some people say the recovery want start because of fear of taxes hikes. Others are saying credit conditions. Ask your self this, in your daily life are you more afraid worried about the IRS or the Credit Card companies and your Mortgage lender. While a few Americans will say the former. Most will say the later. That’s way we think credit is a bigger deal than taxes.