Month: January 2009

Words I wrote yesterday about fiscal policy

The argument for fiscal stimulus is simply that it will stop things from getting worse by preventing further collapses in aggregate demand. That may be true but fiscal stimulus won’t drive recovery. Recovery requires that zombie banks behave like real banks, that risk premia are properly priced, and that the economy undergoes its sectoral shifts toward whatever will replace construction and finance and debt-driven consumption. Fiscal policy won’t do much toward these ends and in fact a temporarily successful stimulus might hinder these long-run adjustments.

Here is a very good piece from Hal Varian on fiscal stimulus.

The marginal value of health care in Ghana: is it zero?

Megan McArdle points us to this scary report:

2,194 households containing 2,592 Ghanaian children under 5 y old were
randomised into a prepayment scheme allowing free primary care
including drugs, or to a control group whose families paid user fees
for health care (normal practice); 165 children whose families had
previously paid to enrol in the prepayment scheme formed an
observational arm. The primary outcome was moderate anaemia
(haemoglobin [Hb] < 8 g/dl); major secondary outcomes were health
care utilisation, severe anaemia, and mortality. At baseline the
randomised groups were similar. Introducing free primary health care
altered the health care seeking behaviour of households; those
randomised to the intervention arm used formal health care more and
nonformal care less than the control group. Introducing free primary
health care did not lead to any measurable difference in any health
outcome. The primary outcome of moderate anaemia was detected in 37
(3.1%) children in the control and 36 children (3.2%) in the
intervention arm (adjusted odds ratio 1.05, 95% confidence interval
0.66-1.67). There were four deaths in the control and five in the
intervention group. Mean Hb concentration, severe anaemia, parasite
prevalence, and anthropometric measurements were similar in each group.
Families who previously self-enrolled in the prepayment scheme were
significantly less poor, had better health measures, and used services
more frequently than those in the randomised group.

Economists v. Historians on the New Deal and the Great Depression

Writing at The Beacon Jonathan Bean nicely reminds us of Robert Whaples survey of economists and historians on questions in economic history.  Among the questions that Whaples asked members of the Economic History Association to express agreement or disagreement on was the following:

Taken as a whole, government policies of the New Deal served to lengthen and deepen the Great Depression.

About half of the economists agreed (or agreed with some provisos) that the New Deal lengthened and deepened the Great Depression.  Thus this point of view among economic historians is basically mainstream.  Among historians there was much less agreement with the statement, although a significant minority, 27%, agreed, mostly with some provisos. 

A Matter of Life or Death

Also known as Stairway to Heaven, directed by Michael Powell.  It’s one of the best movies, period, and it is finally on DVD, appearing today.  I’ve been waiting for years and I just ordered mine; I’ll also be teaching it in Law and Literature this spring.  It’s a law trial, a primer on Anglo-American relations, a love story, and a meditation on hope and death.  Here is a review.

Department of No

Many organizations that spent years building large endowments to
provide more stable sources of support have seen them decimated. A
number of our most loyal donors have watched their own investment
portfolios be depleted and cannot provide their traditional funding.
Our audience members cannot buy as many tickets as they have in the
past. And our board members are less able to involve friends and
associates in our fundraising galas and other activities.

This perfect storm has already weakened the fabric of our nation’s arts ecology. Over the past several months, the Baltimore Opera Company,
Santa Clarita Symphony, Opera Pacific, the Los Angeles Museum of
Contemporary Art and others have closed or come close to closing. There
probably will be a torrent of additional closures, cancellations and
crises in the coming months.

Of course they want a bailout but this is for me not a priority.  Given the new distribution of wealth, arguably we need more culture for lower-income people and less culture for the rich.  I don’t think the old distribution of wealth is coming back anytime soon.

It’s something to watch when the egalitarian and elitist tendencies of modern liberalism clash so strongly.  When it comes to high culture it’s like this:  "I don’t think they should have so much money, but I sure like what they spend their money on."  Yet if deflationary pressures are going to benefit lower class individuals with jobs, something has to give and that is, in part, the discretionary arts spending of the wealthy.

The longer plea for aid is here.  I thank Christopher Janak for the pointer.

Where is the geographic center of Johnny Cash’s moral and musical universe?

I was listening to the new and excellent Vince Mira CD of Johnny Cash covers (some of them in an elegant Spanish), when Yana asked me to explain Johnny Cash to her.  "Does he sing about the South?" was a tough question to answer.  I place the center of his moral and musical universe somewhere between Little Rock, Arkansas and Oklahoma City.  (How about Fort Smith?)  That locale rules out neither trains nor cattle.  That allows him to straddle the South, West, Midwest, and Texas, while retaining the option of a rail connection to the North.  The town even has a prison.  (For the underinformed, here is a list of Johnny Cash songs.)  Is there a more appropriate center?

Addendum: I now discover that Vince is only fifteen years old!

Here is Vince performing "That’s All Right"; phenomenal.  Here is the overall YouTube listing.

How did the tax cut get so big?

Yes, 40 percent of the Obama stimulus package will be a tax cut.  It’s already a talking point that "the Democrats have lost their nerve" but the reality is not so devious.  Obama wishes to deliver on his pledge to cut taxes (always electorally popular) and upon close inspection the economic team probably hasn’t found a lot of first-year stimulus spending it likes.  That leads to this obvious policy conclusion and of course it is very good news.  No, I do not think these tax cuts will drive recovery but a) less money will be wasted, and b) it shows that the Obama team is willing to flinch and be realistic, not just as a final compromise but indeed as an opening gambit. 

The best way to think about fiscal policy is to judge, in advance, what is actually likely to come out of the process.  The alternative approach is to recommend policy based on one’s personal sense of what should be done and then to blame all the forces which stop that from happening.  (Rarely do these people stop to ask whether their political views are robust to the presence of significant opposition.)  A lot of people on the left are disappointed, but in my view what is coming out of the process is, so far, above average.

Do we compete more against fewer competitors?

This caught my eye:

If you’ve ever had to take a test in a room with a lot of people, you may be able to relate to this study: The more people you’re competing against, it turns out, the less motivated and competitive you are. Psychologists observed this pattern across several different situations. Students taking standardized tests in more crowded venues got lower scores. Students asked to complete a short general-knowledge test as fast as possible to win a prize if they were in the fastest 20 percent completed it faster if they were told that they were competing against 10 people rather than 100. Students asked how fast they would run in a race for a $1,000 prize if they finished in the top 10 percent said they would run faster in a race against 50 people rather than 500. Similarly, students contemplating a job interview or Facebook-friending contest said they would be less competitive if they expected more competitors – even if "winning" only required finishing in the top 20 percent. The authors conclude that competitiveness was curtailed because the larger the group, the more difficult it is to compare oneself directly to others.

The original paper is here, but note that context effects may well give you varying results in other settings.  The initial article, from the Boston Globe, discusses several other social science mechanisms of interest, although I was not surprised to learn that your dog relaxes you.

Addendum: Here is my earlier article on invisible competition.

Why being President-elect is a difficult job

But evidence is mounting that Obama is already losing ground among
key Arab and Muslim audiences that cannot understand why, given his
promise of change, he has not spoken out. Arab commentators and
editorialists say there is growing disappointment at Obama’s detachment
– and that his failure to distance himself from George Bush’s strongly
pro-Israeli stance is encouraging the belief that he either shares
Bush’s bias or simply does not care.

The Al-Jazeera satellite
television station recently broadcast footage of Obama on holiday in
Hawaii, wearing shorts and playing golf, juxtaposed with scenes of
bloodshed and mayhem in Gaza. Its report criticising "the deafening
silence from the Obama team" suggested Obama is losing a battle of
perceptions among Muslims that he may not realise has even begun.

Here is more.  Under one interpretation of the signaling game, these observers might have inferred that the very timing of the Israeli attack implies Obama’s disapproval or at least an uncertain reaction; the Israelis could have waited for the Obama Presidency but they did not.  Under another interpretation, signals aren’t just about information but signals also show caring and solidarity as valued for reasons not directly related to the initial information.  Message recipients care about who sends the signal, and how the signal is sent, not just the revelation of the underlying information.  Under this second interpretation (relatively neglected by economic theory, I might add, though not by Robin Hanson), it is much harder for things to go well.

Ed Glaeser’s words of wisdom

While the mechanics of a payroll tax cut are simple, spending hundreds
of billions wisely on infrastructure is hard. Currently, the federal
government spends about $40 billion a year in transportation, and
another $20 billion on other forms of infrastructure. There is a case
for significantly increasing this amount. Our roads do need repairing,
and it makes sense to invest more in a downturn when unemployment is
high. But even doubling the current federal infrastructure expenditure,
a vast increase, would represent only 8 percent of a $750 billion
package.

Here is much more, on the mark throughout.  Here is related material by Mark Thoma and Paul Krugman.  Here is a related post by Alex.

Addendum: Obama now is calling for $300 billion in tax cuts as part of the stimulus plan, roughly forty percent of the total.

John Taylor on the Fed’s “industrial policy”

"What you are looking at now is really being determined by other
considerations. How much should we buy of mortgage-backed securities?
How much should we loan to foreign central banks? This is really more
like an industrial policy," he said…

"If you have a situation where the Fed is borrowing to invest in all
these sectors it seems to me you have a huge governance issue…that
demands a lot of thought," Taylor said.

Taylor said the U.S. Congress has a legitimate right to demand a say
in who the Fed lends money to. The outcome would be "radical reform"
that would risk monetary policy independence, he said.   

Here is the full article.

New Media Innovations

The Kauffman Foundation hosted a number of econ bloggers, including myself, at the AEAs to discuss blogging, communication and new media. Tim Kane at Growthology summarizes the stimulating discussion:

Some of things I learned include (1) the process of collaborative filtering is increasingly useful for discovery and evaluation, and a pioneer to watch is Slashdot, (2) commenting on blogs is arguably more valuable than posting for evaluating ideas … look for weighted commenting/evaluation systems to supplant formalized referee systems over time, (3) blogs are just part of the spectrum of idea sharing, as is journal publishing, and simply having a web page is now essential to be part of a research community, (4) good ideas can filter up much faster through the academic community thanks to blogs, (5) it is very difficult to determine what revenue models will sustain the print news media, but one possible trend to watch for is the return of ideological patronage (e.g. think tank magazines) — it’s not just advertising and subscriptions that will sustain the sector, (6) it’s still probably not advisable for graduate students or junior faculty to blog instead of focus on tenurable research … for now, and (7) if blogging is representative, then risk-taking entrepreneurship will thrive, even in a recession.

You will be happy to know that it was brought up in the discussion that the MR comment section is especially good so take it away readers.