Month: December 2008
At Cato Unbound there is a symposium about the roots of the financial crisis, with several notable contributors. To sum up my view again, I agree that government had many bad policies, many of those policies made the crisis worse, and that such policies should make us despair at the quality of government as regulator, past, present, and future. But still markets must bear a very considerable share of the blame. Bryan Caplan reminds me of my banana post, excerpted for your convenience:
Let’s say that the government subsidized the price of bananas, you bought so many bananas, put them on your roof, and then the roof collapsed. Is that government failure or market failure? The price was distorted, but I still say this is mostly market failure. No one made you put so many bananas on your roof.
If Minsky and Hayek are running in a race for interpreting the last two years of the U.S. macroeconomy, Hayek has something to offer but so far Minsky is in the lead.
Now suppose that we had a way to raise the multiplier by more than half, from 1.8 to 2.8. The same fiscal stimulus would now produce an increase in GDP of $2.8 trillion–quite a difference. Nice deal if you can get it.
In fact you can. It is pretty easy to increase the multiplier; just raise import tariffs by enough so that the marginal propensity to import out of income is reduced substantially (to zero if you want the multiplier to go all the way to 2.8). Yes, yes, import protection is inefficient and not a very neighborly thing to do–but should we really care if the alternative is significantly lower growth and higher unemployment? More to the point, will Obama and his advisers care?
That’s Dani Rodrik and do read the whole thing, if only to see where the title of this post comes from. I may be reading him incorrectly, but I believe he is claiming that a complete ban on imports would raise U.S. gdp by trillions.
Am I totally out of line in asking him to add the sentence: "The fact that this is the worst policy idea floated in recent memory suggests that the underlying theoretical apparatus is deficient"?
It will be interesting to see if the Keynesian multiplier becomes the Democratic Party economist equivalent of the Laffer Curve, namely a "free lunch" claim used to justify many kinds of preferred policies. Have I mentioned that having their party in power was very bad for Republican economists too?
Addendum: Rodrik responds: "I am writing all this partly in response to Tyler Cowen’s comment that any theory that suggests import protection can be a good thing must be a deeply flawed theory." I would not use the word "any," but I would say that any theory which advocates a retaliation-proof complete ban of imports for the United States, and suggests benefits of trillions, is wrong. I am well aware of the hypothesis that import substitution, during WWII, helped Mexico recover from the Great Depression and I do not attach it zero credence. But I still think, to quote myself, that: "this is the worst policy idea floated in recent memory." It is important not to let Rodrik change the terms of debate by ascribing the "any" position to me.
You see a woman after you met her before and say: you are more beautiful than I remember. She should be pleased, right?
Or you say: you are smarter than I remember. Would she be pleased the same way? Or is there a difference and why?
Fiscal policy can raise measured gdp without improving the economy
or human welfare. Take a polar case where there is zero crowding out
and there is one unemployed worker. Government taxes a rich man who is
initially hoarding liquidity and spends that money putting the
unemployed man to work.
Measured gdp goes up but is the new state of affairs better than the old?
Say the unemployed man had valued his leisure at 20K and was not
taking the previously available jobs for 19K. The government now pays
him 40K. For the new worker that is a gain of 20K in value but of
course the cash itself is a transfer and does not represent a net gain
from an economic point of view (though you may like the distributional
Let’s say the new public sector output is produced by labor only.
40K is spent to produce output which, in a market setting, would be
Put aside money flows. We have 20K more of output value and a 20K sacrifice of leisure value.
That’s no net gain, but measured gdp has risen by 40K. Note that
the contribution of the public sector to measured gdp doesn’t very
effectively measure true value added.
Introducing some crowding out makes fiscal policy look worse, as
would considered the deadweight loss from taxing the rich man. You
could make many other adjustments to the example; some would favor
fiscal policy, others would not. The most obvious adjustment to make
fiscal policy look good is to assume that the new output a valuable
public good. Or you might argue that the resulting spending multiplier
is higher than the real balance effect which results from the rich man
holding the money (lower prices for everyone else).
But keep this example in mind the next time you see a measured
empirical connection between fiscal policy and gdp. "Money spent" and
"gdp registered" are not the same as "value created."
Sentences to ponder:
Dr. Kahneman said unless the findings were replicated, he could not
accept that a spouse’s happiness had less impact than a next-door
neighbor. Dr. Christakis believes that indicates that people take
emotional cues from their own gender.
The ratio is about 2-1. And it’s not just because women are concentrated in the "study abroad intensive" humanities:
The National Science Foundation reports that men earn 80 percent of bachelor’s degrees in engineering. But women’s participation in a study abroad consortium for engineers, the Global Engineering Education Exchange, typically ranges from 30 to nearly 40 percent (39.3 percent this academic year) – far outstripping their 20 percent representation in the field.
Here is what the experts think:
Among the many conventional wisdom-type explanations pervading in the study abroad field: differing maturity and risk-taking levels among 18- to 21-year-old men and women; a sense that females, concerned about safety, are more inclined to attend a college-sanctioned study abroad program than travel on their own; and, again, varying study abroad participation rates in male versus female-dominated fields.
I favor a more Hansonian explanation, such as this:
“The three main factors I found were motherhood, age and safety,” said McKinney, associate director of the Center for Global Education at Butler University. “Essentially, my informants shared with me that they really hope someday to be mothers and they can’t imagine being able to travel abroad and also be a mom. So if they’re going to have an overseas experience, they’re going to do it before they become mothers,” she said, adding that her informants “really felt plagued by the age of 30. They have a very long to-do list.”
If that hypothesis is true, what are the other testable implications? What other forms of intertemporal substitution should we observe?
Ted Frank and Ray Lehmann are taking the Stickk approach to weight loss to an extreme. For every pound less than 60 (!) that Ray fails to lose in the next 9 months he has agreed to pay Ted, $1000. Thus as much as $60,000 is on the line. Ted has made the same bet with Ray. The world has been put on notice.
Now this does raise an interesting prisoner’s dilemma problem, with Ted and Ray as the prisoners. If the prisoners can agree to "cooperate" they could both eat and lose neither weight nor money. But with $1000 per pound at stake can Ray count on Ted not to cheat on his diet by dieting (and vice-versa)? But in this context is cooperation really cooperation or is it just joint self-sabotage? A true dilemma. But I have a solution.
I stand ready to be Leviathan! As a service to my friends, I propose that Ted and Ray pay me $1000 for every pound less than 60 that they fail to lose. Hell, out of the goodness of my heart, I will pay each of them $500 upfront for the honor of being Leviathan. Now that is an incentive!
Need I tell you that Ted and Ray are long-time loyal MR readers?
1. In the 1940s, Franco Modigliani showed that this kind of argument required infinite liquidity preference, not just very strong liquidity preference. This kind of discontinuity matters in most models with liquidity preference.
2. The model suggests that negative supply shocks don’t hurt the economy yet the Dust Bowl was bad for aggregate output. Arguably the AD curve should be kinked and vertical only after some inflection point. But then we are back to negative supply shocks mattering.
3. The model implies that labor unions won’t hurt output but the model does not show that labor unions won’t hurt employment and indeed the latter question was the original point of contention. A sufficiently high legally binding minimum wage will cause employers to lay off workers, vertical AD curve or not. Maybe capital substitutes for labor or Y stays put for some other reason but employment will go down.
4. I no longer understand Krugman’s overall story. He notes that the New Deal years saw a good bit of recovery (I agree), he notes that fiscal policy was not very expansionary (I agree), he believes there was a liquidity trap (I don’t agree), and he believes that positive supply shocks run up against a more or less vertical AD curve and thus don’t help output (I don’t agree). Given all of Krugman’s views, AS doesn’t much matter and AD didn’t much expand. So what exactly drove the (partial) recovery of the 1930s?
Maybe I am taking the model too literally but without the vertical AD curve there is not much else in the model to interpret.
Police have made an
arrest in an armoured car robbery in the US in which the suspect used
the free online classifieds website Craigslist to hire decoys…
Elsewhere in the series, here is runmyerrands.com, with reputational markers for the dogwalkers, courtesy of Steve Adeff.
The title is from Oliver Hart and Luigi Zingales writing in the WSJ:
Practically every day the government launches a massively expensive new
initiative to solve the problems that the last day’s initiative did
not. It is hard to discern any principles behind these actions. The
lack of a coherent strategy has increased uncertainty and undermined
the public’s perception of the government’s competence and
By principle, Hart and Zingales mean economic principle such as intervening only when market failure in the technical sense is an issue. Bankruptcy, for example, is not the end of the world (As you may recall I have been pushing the idea of speed bankruptcy for which the FDIC has developed significant expertise.) For example,
…what would have been so bad about letting Bear Stearns, AIG and
Citigroup (and in the future, General Motors) go into receivership or
Chapter 11 bankruptcy? One argument often made is that these
institutions had huge numbers of complicated claims, and that the
bankruptcy of any one of them would have led to contagion and systemic
failure, causing scores of further bankruptcies…
…This argument has some validity, but it suggests that the best way to
proceed is to help third parties rather than the distressed company
itself. In other words, instead of bailing out AIG and its creditors,
it would have been better for the government to guarantee AIG’s
obligations to J.P. Morgan and those who bought insurance from AIG.
Such an action would have nipped the contagion in the bud, probably at
much smaller cost to taxpayers than the cost of bailing out the whole
of AIG. It would also have saved the government from having to take a
position on AIG’s viability as a business, which could have been left
to a bankruptcy court. Finally, it would have minimized concerns about
moral hazard. AIG may be responsible for its financial problems, but
the culpability of those who do business with AIG is less clear, and so
helping them out does not reward bad behavior.
If only. But now we have insurance in insurance:
For these economically uncertain times, the UnitedHealth Group has a “first of its kind” product: the right to buy an individual health policy at some point in the future even if you become sick.
Called UnitedHealth Continuity, the product is not actual medical insurance, but is aimed at people who may have insurance now but are worried they may lose it – and may not be able to obtain replacement insurance on their own. They may expect to retire early, for example, before they qualify for Medicare. Or they are worried about the possibility of losing their job and their health coverage.
People who are already sick will generally not be eligible for the new product. Those who do pass a medical review, will pay 20 percent each month of the current premium on an individual policy to reserve the right to be insured under the plan at some point in the future.
There is also a politics angle: by buying such a policy you are betting against comprehensive health insurance reform under Obama. Here is a previous MR post on a related market. Here is a post on why private health insurance doesn’t work better than it does. And don’t forget Alex’s book on Entrepreneurial Economics, which promoted a version of this idea some time ago.
For the pointer I thank both Michael Buckley and Davis King.
Joe reads economics:
The Theory of Money and Credit (Ludwig von Mises): "It brought
monetary theory into the mainstream of economic analysis. It is
important reading for these troubled times."
My theory is that someone in Ron Paul’s camp told him to say that. Here is the full list of his favorite books. Here is my source. Here is an on-line version of TOMAC. Scrolling through it a bit, it is more readable than my recollection and it remains one of the better 20th century books on monetary theory.
Roosevelt went on in later weeks to speculate that the slowdown in investment was not economically explicable but was, rather, part of a political conspiracy against him, a "capital strike" designed to dislodge him from office and destroy the New Deal…In a reprise of his tactics in the "wealth tax" battle of 1935 and the electoral campaign of 1936, Roosevelt loosed Assistant Attorney General Robert Jackson, along with Ickes, to give a series of blistering speeches in December 1937. Ickes inveighed against Henry Ford, Tom Girdler and the "Sixty Families,"…Left unchecked, Ickes thundered, they would create "big-business Fascist America – an enslaved America." For his part, Jackson decried the slump in private investment as "a general strike – the first general strike in America – a strike against the government – a strike to coerce political action." Roosevelt even ordered an FBI investigation of possible criminal conspiracy in the alleged capitalist strike, but it revealed nothing of substance.
(From David M. Kennedy’s Freedom from Fear (p. 352) in The Oxford History of the United States.)
A group of capitalists go on strike to protest a government that is confiscating their wealth. The government vows to force them back to work and sets agents on their trail. Hmmm…..seems like there could be a novel in that.