Month: December 2008
…our models for why the risk discount has taken such a huge upward leap in the past year and a half are little better than simple handwaving and just-so stories. Our current financial crisis remains largely a mystery: a $2 trillion impulse in lost value of securitized mortgages has set in motion a financial accelerator that we do not understand at any deep level that has led to ten times the total losses in financial wealth of the impulse.
Thus my dissatisfaction with Larry White’s piece: he talks only about the impulse, while it is the propagation mechanism-the financial accelerator-that is the important part of the story. $2 trillion shocks to global wealth do, after all, happen every several years, everytime there is a recession or a big rise in the prices of natural resources. But financial distress of the magnitude we see today happens once a century. Since the Bank of England developed its lender of last resort doctrine in the 1830s, we have only had two episodes this bad: the Great Depression and today.
Addendum: Arnold comments; I think Brad’s short essay is so far the single best thing written on the crisis.
One headline reads:
Detroit Bailout is to Bring on U.S. Oversight
The other reads:
In Hard Times, Russia Moves to Reclaim Private Industries
The Russian automobile sector, however, appears to be booming and it is not mentioned as a candidate for nationalization.
By the way, here is Paul Krugman, apparently saying we need to accept the disappearance of the U.S. auto industry. I am happy to see this point but I am also a little confused and unfortunately the press report is incomplete; he cites economic geography so does he think the Toyota plant in Kentucky will have to shut down?
I thank Andres Sawicki for the pointer.
When assessing any proposed fiscal stimulus, ask yourself the following questions:
1. Will more debt ruin my country and cause its economy to crumble or explode?
2. Is this project worth doing in its own right?
3. Will more than 53 percent or more of the expenditures come on-line in the next nine months?
4. Will the program actually target unemployed resources?
5. Has fiscal policy already acted to protect previously planned levels of state and local expenditure?
If the answer to #1 is no, proceed if you can either answer "yes" to #2 or if you can answer "yes" to #3-5 together. On related issues, here is a very good piece by Hall and Woodward.
I am repeatedly struck by Keynes’s skill as a literary stylist. Usually this praise is denied the General Theory but I consider the book his Finnegans Wake; the most difficult passages are often the most charming but of course they are not for everyone.
I see three main themes in the book as a whole:
1. Income effects are more important than substitution effects.
2. Expectations matter.
3. The private and social returns to liquidity are very different.
(as applied to macro) and #3 were most original in his time. The book
as a whole circles around these themes and repeats them in varying
combinations, not always coherently or consistently. You could also
add the claims that 4. monetary factors render a "natural rate of
interest" problematic and 5. labor markets are special. Chapter two is
essentially about #1 and #5.
Keynes did go beyond the classics,
even if he did often caricature them. (Keynes is brilliant as a
historian of thought when praising but almost always wrong when
criticizing.) Since Keynes never gives us a truly coherent model —
not even verbally — it is easy to pick holes in the GT.
Keynes had so many exciting new ideas that he never decided what his
main point was or exactly under which conditions it would hold.
of chapter two is devoted to establishing the proposition that workers
cannot in any direct way choose a lower real wage. For Keynes nominal
wage flexibility doesn’t solve the
main problem. If nominal wages fall across the board in an economy,
prices will fall and real wages will remain high. Unemployment will
continue while the economy enters a downward spiral. I’ve already
discussed that point here but to sum up my view Keynes is presenting a special case not a general case.
p.9 puts forward a version of the doctrine of money illusion.
defines involuntary unemployment, namely if the economy can be inflated
into a higher level of employment. This pragmatic definition reflects
that Keynes was never sure why workers minded inflation, and a cut in
the real wage, less than they minded a cut in the nominal wage. But
that is one of his behavioral postulates and it has survived into macro
to this day.
The "neo-Keynesian" models are not so loyal to Keynes. Keynes held sticky nominal wages to be a policy prescription, but not necessarily a good description of the world.
one and two are stunning, as they announce that we are now living on a
different economic terrain. But we’ve yet to see whether the main
arguments are truly sound.
On Thursday we’ll be doing chapters
three and four — be ready! And I encourage other bloggers to follow
along and offer their own commentaries.
Typepad won’t let us erase the bottom (duplicated) entry on Keynes, as it no longer shows up on our screen of posts. The top entry will accept comments, the bottom one won’t, so stick with the top entry. We are still bugging them for better service.
Mr. Obama also responded to criticism of waste and inefficiency in such
programs by promising new spending rules, like a requirement that
states act quickly to invest in roads and bridges or sacrifice federal
From the NYTimes.
Here is the very good Boston Globe article, which focuses mostly on the financial crisis. Excerpt:
In a sense, economics was a field made for blogging: Its ideas advance
by disputatious back-and-forth, and not surprisingly these professors
took to gently (or not so gently) mocking one another's writings, even
engaging in lengthy arguments that stretched out over days, if not
"Any major blogger who makes a mistake is corrected in five minutes,"
says Cowen. Yves Smith agrees: "It's a version of the Wikipedia effect,
with people correcting each other."
Addendum: Our apologies, typepad comments are down for this entry (only). I have to run out this moment but I'll set up at least a temporary fix for tomorrow's Keynes symposium, part I. What typepad is doing is trying to switch to a new system. Every time they switch it turns off comments for some bloggers (but not all). They switch back to the old system and comments are fine again but a few days later they try out the new system again, etc. Sorry! They really do need to get this problem solved.
I was surprised to read the first plank of Obama’s proposed stimulus:
First, we will launch a massive effort to make public buildings more
energy-efficient. Our government now pays the highest energy bill in
the world. We need to change that. We need to upgrade our federal
buildings by replacing old heating systems and installing efficient
light bulbs. That won’t just save you, the American taxpayer, billions
of dollars each year. It will put people back to work.
Maybe that is deliberately unglamorous but I was expecting a more dramatic first punch. Here, by the way, are some simple arguments for energy-efficient buildings. My Google search doesn’t yield much useful, however, in the way of critical analysis. (Any leads, readers?) And surely ten years from now our government still will have the highest energy bills in the world, unless the goal is to grow so slowly that the Chinese government will pass us.
Oddly the two goals of the plan — saving dollars and creating jobs — often stand in tension. Let’s say we could heat all those buildings for a dollar: how many jobs would that create? Is the goal to "spend less" or to "spend more"? The mere fact that you can write in the comments section: "Spend more today to spend less tomorrow!" does not convince me.
The second plank of the program is more roads and bridges, which for better or worse you can consider the opposite of a carbon tax. How quickly can that money be spent anyway? The plan mandates quick spending of the transferred funds. But maybe state and local governments will hold off on some currently planned expenditures (which is contractionary) so they can be ready to spend immediately once they receive their "use it or lose it" allocations. Has anyone thought that problem through?
The third plank is upgrading school buildings. ???????????????? Maybe this is Obama’s attempt to mimic ditch-digging, under the unassailable banner of "education," but again how quickly can these projects come on-line? I call this one total waste and an outright mistake.
The fourth plank is extending the information superhighway. Maybe, but isn’t human capital the real constraint at current margins?
The fifth plank is internet-connected hospitals and electronic medical records. Those are good ideas but I don’t see how they contribute to economic recovery. Basically you either force or pay medical care providers to do it and for sure health care is not the ailing sector.
The bottom line: When it comes to fiscal policy, many projects are not very good. Most projects take a long time to come on-line. The fiscal stimulus should, most of all, be directed at an effective marginal incentive scheme to keep up state and local spending. I am still enthusiastic about Obama’s economic team, but I am starting to worry a little. How many of these expenditures actually help needy people? How many actually will help the economy? In fairness to Obama this was a radio address, and thus hardly the setting for meaty analysis, but still I am a little underwhelmed.
1. Stephen Schwartz, The Other Islam: Sufism and the Road to Global Harmony. Islamic theology is a reading interest of mine and I don’t mean the stuff that the terrorists promote. This book is not a comprehensive introduction to Sufism but it is interesting throughout and most of all excellent on the sadly neglected topic of Albanian Bektashi theology.
2. Alexander Dolgin, The Economics of Symbolic Exchange. A long, sprawling, and often creative and interesting overview of cultural economics, especially as it relates to issues of symbolic goods.
3. Michael Bérubé, Life as We Know It: A Father, A Family, and an Exceptional Child. About the author’s Down syndrome child; this is a very good book and it is also conceptual, not your usual concrete-bound memoir.
4. Heraldo Muñoz, The Dictator’s Shadow: Life Under Augusto Pinochet. This book fills in a lot of back detail about the Pinochet years. It is not perfect, but it is far more objective and useful than I had been expecting, especially given that the author was persecuted by Pinochet.
6. Speaking of Bookslut, Jessica Crispin’s favorite fiction book of the year was the Hungarian Metropole, by Ferenc Karinthy. I read it some time ago and inexplicably forgot to mention it. The feel is Kafkaesque and the premise is that a man wakes up in a world where suddenly he cannot understand any of the languages being spoken and has no way of communicating with anybody.
Tim Harford has a very good piece in today’s FT and he says yes:
Karlan and Zinman wanted to know what value there might be in
expanding access to credit. ZaFinCo was no dewy-eyed social business,
but a hard-nosed, profit-minded company, charging 11.75 per cent per
month on a four-month loan, or 200 per cent APR, much more than
Compartamos was generally judged to have been charging.
the high rates, the results were astonishing. "We expected to see some
good effects and some bad," explained Karlan, who checked in with the
experiment’s participants six to 12 months after they had filed their
initial loan applications. "But we basically only saw good effects."
strikingly, those "treated" by the experiment – that is, those for whom
the computer requested a second chance at a loan – were much more
likely to have kept their jobs than the control group. They were also
much less likely to have dropped below the poverty line or to have gone
hungry. All these outcomes were recorded well after the loan had been
taken out and (usually) repaid, so this was not measuring a temporary
This seems mysterious. How can a loan at 200
per cent APR help people to stay out of poverty? One answer is that
most people turned down for a 200 per cent APR loan would be able to
get one at 300, 500 or over 1,000 per cent from an informal
moneylender. More important is that these loans were not used to start
businesses but to help people keep jobs that they already had. If a
smart new blouse or a spare part for the family moped is what it takes
to stay in work, then who is to say that an expensive loan isn’t a wise
Yes I do find that a legitimate research topic but I was underwhelmed by this abstract:
There is inadequate understanding about why people might not own pets. This qualitative study asked eight elderly women and men to discuss why they do not have a pet, whether pets were deemed beneficial to health, and whether they had plans for future pet ownership. Reasons for not owning a pet were Emotional or Pragmatic; Pragmatic reasons were categorized as relating to Convenience, Negative aspects of companion animals and Competing demands on time or energy. Participants expressed mixed feelings in their plans for future pet ownership. Clinical and research implications of these findings are discussed.
I guess they save all the good results for the paper.
Roissy claims there is no afterlife and then writes his life philosophy:
My answer to the philosophical question I posed above is hedonism. It
is the only rational conclusion one can draw faced with the premises I
presented. When there is no second life or higher power to appease;
when our lives are machines – complex misunderstood machines cunningly
designed to conceal the gears and pulleys behind a facade of
self-delusional sublimation, but machines nonetheless – grinding and
belching the choking gritty smoke of status-whoring displays in service
to our microscopic puppetmasters… well, there can be only one
reasonable response to it all. It makes no sense to behave any other
way unless you never questioned the lies.
In my view the reasonable response to uncertainty about your long-term prospects is to be a good person and to try to create some value for other people. With some probability you are protesting against your enslavement to the games. With some probability the entire nature of the universe is deeply veiled and you will be fulfilling some higher purpose. With some probability all possible choices by you are occurring anyway. With some probability being nice is broadly consistent with hedonism, if not at every margin or every choice. People will do things for you if you are nice to them. Being nice is one of the best ways of participating in the mysteries.
Roissy gets too committed to his initial premises and does not sufficiently explore probabilistic reasoning; this is a common mistake in ethical reasoning. Alex once wrote an excellent paper on this; when making a choice focus on the cases when your choice is likely to matter.
Nonetheless I agree with this paragraph from Roissy’s post:
Spend time with little children and old people. One is innocent, the
other is reacquainted with innocence. Their company is a world away
from the drone and ruckus of all the furious humanity in between. At
the extremes you will find perspective.
In reality Roissy (for the better) pursues a certain quality and vision of life, and for fear of failure he calls this hedonism.
Matt Yglesias reports:
Jared Bernstein, a first-rate guy with what I’d say is a clearly more left-wing orientation than the members of the Obama economic team that have been announced thus far, was just announced for the new position of Chief Economist and Economic Policy Advisor to the Vice President. It’ll be interesting to see what kind of influence that post holds. At a minimum, if the president wants to get someone on the phone who’ll criticize Summers/Geithner from the left they’ll know where to call.
I believe the Obama years will cause a crisis for progressivism roughly comparable to what the Bush years have brought upon libertarianism.