Month: June 2005

In response to my previous query, the ever-intelligent Arnold Kling writes:

For an individual, I am willing to count a capital gain as income. I am more or less indifferent between earning a capital gain and earning a dividend.

For a nation as a whole, to a first approximation I do not believe that a capital gain is possible. Suppose a corporation issues a bond, and a year later the market revalues the bond upward by 10 percent. It seems to me that the bond owners’ gain is the corporation’s loss. I think that is true in general for capital gains and losses in the economy–they net out.

Another way to arrive at the view that capital gains and losses ought to net out for the nation as a whole is to consider that national income equals national output. If a re-valuation of assets produces no output, then it produces no income. It seems to me that the ups and downs of financial assets are quite properly excluded from national income and therefore from national saving.

Read more here.  Catallarchy.net offers a similar perspective.

My take: I have no desire to overturn the conventions of national income accounting.  But this view still fuels the belief that our currently measured low savings rate does not matter much.  (Non-bubbly) capital gains imply high future output and possibly high future savings as well.  Let’s say you received news that manna would drop from heaven in five years’ time.  No this news is not "savings" but you still have something to eat in the future.

Let’s say the capital gains are bubbly and thus temporary.  Some people still are more liquid in the meantime (exam question: is anyone less liquid?  Do these liquidity losses offset the gains?).  Surely this should count for something, although not nearly as much as non-bubbly capital gains would count.

Can the Keynesian distinction between individual and social liquidity be used to create a new version of Hayekian business cycle theory?

It’s sold as a must-have accessory to give urban SUVs a whiff of the outback. But U.K. officials say drivers who use spray-on mud to avoid identification by police speed cams face hefty fines for obscuring their license plates.

Targeting self-conscious 4×4 owners whose rugged vehicles seldom see obstacles bigger than a speed bump, the enterprising British e-tailer behind Sprayonmud sells the scent of the countryside in a squirt bottle.

For 8 pounds (about $14.50), buyers get 0.75 liters (.85 quarts) of genuine filthy water, bottled from hills near the company’s premises on the rural England-Wales border. The aim, says the website, is "to give your neighbors the impression you’ve just come back from a day’s shooting or fishing — anything but driving around town all day or visiting the retail park."

"The mud is from Shropshire," said Sprayonmud proprietor Colin Dowse, a financial consultant who has been selling the product in the United Kingdom for 12 months. "It contains mud plus some secret ingredients to improve stickability so that it dries before it runs off the paintwork."

But, while the site promises SUV owners a route around social stigma flung by a growing anti-4×4 lobby, motorists of other stripes are thought to use the same technique to freely flout speed limits.

Tipsters in motoring forums advise canny drivers they can smear mud over their license plate to avoid detection by police speed cameras, which photograph plates’ registration details to ID lawbreakers using a national vehicle database. A few squirts of dirt, and snapped speeders would become as good as invisible.

Here is the full story, and thanks to Joseph Weisenthal for the pointer.  By the way, this example is too ridiculous to deserve its own installment of "Markets in Everything."

Read this analysis and dialogue, courtesy of Brad DeLong.

Americans save a relatively small percentage of their disposable incomes.  Yet many commentators argue that capital gains on homes and equities, as well as expenditures on education, should count toward the national savings rate.  But are those savings "as good" — from a macroeconomic point of view — as plain old abstinence?  If they were, that would make our lives so much easier; we could worry less about a national shortfall in savings.

To make it interesting assume that the capital gains are not the result of a bubble.  Bubbly asset prices would be an illusory form of savings in the longer run.

Now capital gains in the form of real assets or human capital are less liquid. You might make better widgets, but can lug the machine down to the store to buy groceries?  Will it finance your retirement?  Well, why not?  The advance of capitalism liquifies real assets to an increasing degree; borrow against the assets when you wish.  The still underrated Benjamin Anderson stressed this point in his 1920 The Value of Money. 

So what is the problem?  Does liquifying real assets somehow bring excess leverage to the economy?  I don’t see why.  Or does borrowing against real assets lead to a later switch toward consumption, thereby necessitating transformation costs?  Each individual thinks he has a more liquid savings position than is the case; borrowing is cheap but society as a whole must incur reallocation costs to convert the real capital into consumption.  But how big a factor can this be?

All seems fine.  Yet in my neo-Austrian gut I cannot bring myself to think as capital gains as analytically equivalent to abstinence out of income.

I file this one under the category of "macroeconomic problems I’ve been thinking about for twenty years but haven’t made much progress on."  I’m not even sure I understand what others believe, much less what is true.  I’ve turned on the comments, in case you have a good argument why one form of savings is worth less than another.

It seems that monkeys can be taught to use money:

…[but] do the capuchins actually understand money? Or is Chen [the researcher] simply exploiting their endless appetites to make them perform neat tricks?

Several facts suggest the former. During a recent capuchin experiment that used cucumbers as treats, a research assistant happened to slice the cucumber into discs instead of cubes, as was typical. One capuchin picked up a slice, started to eat it and then ran over to a researcher to see if he could ”buy” something sweeter with it. To the capuchin, a round slice of cucumber bore enough resemblance to Chen’s silver tokens to seem like another piece of currency.

Then there is the stealing. Santos has observed that the monkeys never deliberately save any money, but they do sometimes purloin a token or two during an experiment. All seven monkeys live in a communal main chamber of about 750 cubic feet. For experiments, one capuchin at a time is let into a smaller testing chamber next door. Once, a capuchin in the testing chamber picked up an entire tray of tokens, flung them into the main chamber and then scurried in after them — a combination jailbreak and bank heist — which led to a chaotic scene in which the human researchers had to rush into the main chamber and offer food bribes for the tokens, a reinforcement that in effect encouraged more stealing.

Something else happened during that chaotic scene, something that convinced Chen of the monkeys’ true grasp of money. Perhaps the most distinguishing characteristic of money, after all, is its fungibility, the fact that it can be used to buy not just food but anything. During the chaos in the monkey cage, Chen saw something out of the corner of his eye that he would later try to play down but in his heart of hearts he knew to be true. What he witnessed was probably the first observed exchange of money for sex in the history of monkeykind. (Further proof that the monkeys truly understood money: the monkey who was paid for sex immediately traded the token in for a grape.)

Here is the full story.

The FT, The Economist, and the NY Times have all run articles pondering whether the Euro might end; here is another typical account.  If so, how would the end come?  Would Italy pull out to keep excess budget deficits?  Would Germany pull out on the belief that it would do better with its own monetary policy?  Might a "sound money country" pull out if the other members seek Euro inflation to stimulate their economies?

The arbitrage dynamics are tricky.  The Euro was introduced slowly and with a competent marketing and information campaign.  In contrast the end would come quickly and in a less cooperative setting.  Imagine a major European nation announcing that its citizens had six months to reconvert Euros back into a national currency.  How would the government know what the conversion rate should be?  Set the rate too high and a wrenching deflation will be required.

People had a good idea what the Euro would be worth but the road back would involve much more uncertainty.  I don’t even know if a resurrected deutschmark would be a stronger currency than the Euro (I can, however, give you my guess on the lira).  And wouldn’t either everyone in Europe, or no one, wish to cash in to the new currency right away, depending on the conversion rate and the associated degree of credibility?  Don’t currency substitution models, and all their tricky implications (it becomes very difficult to control prices), come into play?  Might short-term interest rates go whacky?  What would be the domino effect on, say, Polish asset values?

I’ve never been a huge fan of the Euro, but these are scary questions.  It would be ironic if the strongest argument against the Euro was simply the eventual need to dissolve it.