Month: January 2009

Sentences to ponder

I'm not sure if the book is interesting, have any of you read it?  But I remembered these sentences from a review:

Vincent checks herself into three additional institutions, masquerading
as a mental patient who tells the intake counselor that she doesn’t
feel “safe” (the magic word) in the real world. (She tries to pay for
these visits herself, but fails: in one of the book’s few funny
moments, her insurance company rebuffs offers of cash, because only
crazy people bankroll such visits themselves.)

Here is more.

As an aside, I was sent this song about the financial crisis.

Worry less about releasing terrorists

The total population of terrorists ebbs and flows all the time.  When the number goes up by one hundred, no one much notices.  If the number goes up by one hundred because we release some previously identified terrorists, there is or will be a public outcry.  But it's the same consequence.

Fewer terrorists are better than more terrorists, to be sure.  But a terrorist we release is not obviously worse than a terrorist who was free in the first place.

We evaluate outcomes differently when we feel we are in control or should be in control.  We should examine this intuition carefully, since it is not always justified.

We also treat an outcome differently when we feel it allows an enemy of ours to "get back at us."  I suspect this difference in feeling is not usually justified and that it is the primary driver behind the fear of releasing terrorists.

I can think of "political theater" reasons why an attack from a released terrorist would be worse than an attack from an "already free" terrorist.  Overall I do not yet feel that we are thinking about this issue rationally.

The Difficulties of Stimulus Policy

60 Minutes had a moving piece on Sunday about Wilmington, Ohio where thousands of people are losing their jobs due to the closure of the town's largest employer, DHL.  Many people had worked at the air distribution center for decades and through no fault of their own were losing their jobs, their health insurance and in one of the hardest losses of all, their community.  Barack Obama and John McCain both talked about Wilmington in their campaigns and yet for all their talk it's clear that neither monetary nor fiscal stimulus can do much for Wilmington.

Consider the situation, DHL employed 10,000 people and Wilmington is a city of 12,000 (not everyone lived in the city proper).  When DHL leaves there will be no other employer to take up the slack and DHL is leaving.  It's losing $6 million dollars a day.and closing all of its internal US operations.  No amount of new road construction or school restoration will restore the jobs lost in Wilmington. Banks may lend and interest rates may fall but the airpark is unlikely to come back.  Even when the rest of the economy recovers. will Wilmington?  The sad truth is that the workers of Wilmington are unlikely to ever find new jobs in their old city.  

I say this not to argue against a stimulus package, either fiscal or monetary, but to illustrate the limits of what we can expect.  We can do something to ease the transition as workers relocate and retrain.  To the extent that a stimulus works, it will make it easier for workers in Wilmington to get new jobs but these jobs will not be in Wilmington.      

Falling World Wide Trade

One of the things that I do find very disturbing about this recession is that it is worldwide.  World trade may fall this year for the first time since 1982. As I argued earlier, the problem goes beyond any credit crunch, which according to the story below has been solved for trade.  The problem is a lack of demand.  Here is more frightening news on the trade front. 

Freight rates for containers shipped from Asia to Europe have fallen to zero for the first time since records began, underscoring the dramatic collapse in trade since the world economy buckled in October.

Trade data from Asia's export tigers has been disastrous over recent weeks, reflecting the collapse in US, UK and European markets.
Korea's exports fell 30pc in January compared to a year earlier. Exports have slumped 42pc in Taiwan and 27pc in Japan, according to the most recent monthly data. Even China has now started to see an outright contraction in shipments, led by steel, electronics and textiles.

A report by ING yesterday said shipping activity at US ports has suddenly dived. Outbound traffic from Long Beach and Los Angeles, America's two top ports, has fallen by 18pc year-on-year, a far more serious decline than anything seen in recent recessions.
"This is no regular cycle slowdown, but a complete collapse in foreign demand," said Lindsay Coburn, ING's trade consultant.

Idle ships are now stretched in rows outside Singapore's harbour, creating an eerie silhouette like a vast naval fleet at anchor. Shipping experts note the number of vessels moving around seem unusually high in the water, indicating low cargoes.

It became difficult for the shippers to obtain routine letters of credit at the height of financial crisis over the autumn, causing goods to pile up at ports even though there was a willing buyer at the other end. Analysts say this problem has been resolved, but the shipping industry has since been swamped by the global trade contraction.

Guess who wrote this?

The use of Google is not allowed:

“Organized public works, at home and abroad, may be the right cure for a chronic tendency to a deficiency of effective demand. But they are not capable of sufficiently rapid organisation (and above all cannot be reversed or undone at a later date), to be the most serviceable instrument for the prevention of the trade cycle.”

The answer is here.

Hint: The year is 1942.

Interview with the central banker of Zimbabwe

As you might expect it is very…what's the right word here?  Excerpt:

I've been condemned by traditional economists who said that printing
money is responsible for inflation. Out of the necessity to exist, to
ensure my people survive, I had to find myself printing money. I found
myself doing extraordinary things that aren't in the textbooks. Then
the IMF asked the U.S. to please print money. I began to see the whole
world now in a mode of practicing what they have been saying I should
not. I decided that God had been on my side and had come to vindicate

Here is the whole interview and thanks to Bob for the pointer. This comment was interesting too:

In November you shut down Zimbabwe's stock exchange. Will you open it again?
stockbrokers were creating a money supply that wasn't there. I printed
Z$1.5 quadrillion, but the exchange was operating with Z$100
sextillion. So I said, "Who is doing my job?" Unless there is more
discipline and honor, the exchange will stay closed. I can't be
bothered. I don't know when it'll open. It's a free market, a business
which must be allowed to succeed or fail.

Virtual or and Real

A banker has absconded with 86 billion from Dynasty Banking.  Dynasty Banking?  Is that an obscure Icelandic bank?  Almost, it's a bank in the massive world of Eve Online.

Two years ago in a post called The Future of Macroeconomics I wrote the following:

What makes virtual worlds important for economics is that for the first
time ever, macro-economists will be able to do experiments.  I predict
that we will see some very interesting experiments in the near future.

The massive theft from Dynasty Banking is creating a bank run.  There is no FDIC in Eve Online but other banks have agreed to lend Dynasty cash if it is needed – no doubt they fear contagion.  No word yet on whether fiscal or monetary stimulus is planned but I will watch the experiment with interest.

If this is not enough to boggle your mind, Eve Online is in fact an Icelandic firm!  Which explains why the money in Eve is called ISK, also the code for the Iceland Krona.  To bring the story full circle the Icelandic banking collapse is causing problems for the developer.

"The present currency restrictions are putting us in a straitjacket.
We are in talks with the government, but if we can't let capital in, we
might be compelled to leave Iceland, even though this would be against
our wishes."

EVE currently has around 300K subscribers.

Gudmundsson's comments come after those of CCP CEO Hilmar Petursson,
who told Edge in October following the banking collapse, "I’m fortunate
that CCP has hardly been affected by the economic crisis here. We now
have to take advantage of our status as a global company and maintain
our diversified banking relationships."

CCP also has offices in Atlanta and Shanghai.

Finally, in other news, we have this:

Royal Khanid Navy Grand Admiral Zidares Khanid this morning released a
statement claiming that Khanid Kingdom forces yesterday attacked
thirty-three separate Blood Raider Covenant targets – ranging from
unmanned installations to fully-defended outposts – in what the release
terms “an effort to strike a blow against the spreading blight of
willful heresy.”

Just thought you would want to know. Does your head hurt yet?

Thanks to Roger Avalos for the pointer.

Economist characters in the movies

Jonathan Falk asks me:

Depending on how you
categorize John Nash’s profession, Richard Jenkins is either the first or second
actor to be nominated for an Academy Award for playing an economist.  How
many “economists in the movies” have there been? 

My basically
unresearched list:
Richard Jenkins as
Walter Vale in The Visitor
Ray Baker as Carl
Kaysen in Girl, Interrupted (very minor role)
Russell Crowe as
John Nash in A Beautiful Mind  (maybe)
Austin Pendleton as
Thomas King in A Beautiful Mind (I actually discussed this with him
once… He told me he had no idea what any of his lines
Nick Nolte as
Augusto Odone in Lorenzo’s Oil
Am I missing
anything prominent?

There is of course Ben Stein in Ferris Bueller.  What else?

What instead? 2

Matt Ygelsias asks what’s the
stimulus-skeptics’ alternative prescription?  Tyler offers his recommendations below.  I'm somewhat less of a skeptic about fiscal policy than Tyler – there is a good case for moving up useful infrastructure spending (both public and private) today – but I agree with Tyler that it is too early to think that monetary policy is ineffective.  M1 is rising sharply, M2 is up.  Monetary policy works with lags.  As to what to do instead I have offered a number of possibilities including:

1) Investment Tax Credit Unlike traditional fiscal policy an investment tax credit cannot be
fully crowded out and it works best when it is expected to be
temporary. Cuts in income taxes stimulate the least when they are
expected to be temporary.  But in contrast, an investment tax credit
stimulates the most when it is expected to be temporary because a temporary
credit must be used now or lost while a permanent credit gives you the
option to wait.

2)  A supply side stimulus: The IRS knows how much income that each taxpayer reported last
year.  So let's cut everyone's marginal tax rate based on last year's
income.  In other words, suppose that last year Joe earned $66,520
which puts him in a 25% tax bracket.  Joe's tax schedule this year will
be exactly the same as last year except for every dollar earned above
$66,520 the tax rate drops

to 15%.   We do this for all
taxpayers so that each taxpayer has their own schedule and for each
taxpayer there is a decreasing marginal tax rate.Note that this plan increases the incentive to work and it doesn't
increase the deficit.  In fact, the Tabarrok plan increases tax
revenues!  The key is a marginal tax cut with a different margin for
every taxpayer based upon last year's return.

3). A cut in the payroll tax ala Singapore.  If employment is down reduce the cost of employing labor.  This policy has lot to recommend it because unlike a fiscal stimulus it lets the reallocation process work towards its long run equilibrium.  A construction stimulus, for example, pushes people into construction (or keeps them there) when perhaps labor could ultimately be more productive in other sectors of the economy.  The payroll tax cut enhances this reallocation effort it doesn't impede it.

4)  Don't PanicThis is the policy that has cured most recessions.  The do anything and do it now mindset feeds panic.  I do think this recession will be longer than average and quite deep, it is a concern that it is worldwide.  But recessions are normal and we have unemployment insurance and other assistance programs to help people through tough times.  The economy will recover and its very possible to make things worse by trying to make things better.

What instead?

Matt Yglesias asks a very good question:

So to pull a bit of the old burden-shifting, what’s the
stimulus-skeptics’ alternative prescription? At this point in time just
about everyone–liberal or conservative–agrees that it’s generally
preferable to eschew fiscal stimulus and let monetary policy do the
heavy lifting. The pro-stimulus analysis begins not with the idea that
fiscal stimulus is awesome, but with the observation that we’ve already
done a great deal of rate-cutting, can’t cut rates any deeper, and all
signs are of the situation getting worse. Is the anti-stimulus idea to
do nothing and hope for the best? To beg for the world’s surplus
countries (Germany, Japan, China, oil producers, Switzerland, etc.) to
do giant stimulus while we sit around? Are there “unconventional”
monetary policy tricks Bernanke needs to be trying?

Pulling together some previous posts, I recommend:

1. A certain amount of "defensive" fiscal policy aimed at keeping state and local government budgets roughly constant.  This will limit downside but it won't much "stimulate," for reasons which should be apparent in the graph shown by Matt.  In various emergencies it is inefficient that state and local governments are not allowed to run deficits but implicitly the Feds can do it for them.

2. Unorthodox monetary policy, as advocated by Robert Lucas and also, earlier, Keynes.  You can stimulate AD at much lower cost this way.  "Cutting short rates" is by no means synonymous with "monetary policy."

3. Bank recapitalization.  This will cost lots and we should reallocate money away from "stimulus" toward this problem.  Falling aggregate demand is a derivative problem in today's crisis but this is a fundamental problem.  There is a vague sense on the Democratic side that "we can do everything" but the reality is that of the budget constraint, not "guns and butter together."  Have you noticed that Obama is not presenting a consolidated recapitalization/stimulus bill?  That is no accident.

I should add that I am skeptical of tax cuts as a form of stimulus, so we should evaluate tax reforms on their own merits, which involves broader questions about the overall path of spending and taxes.  But if you wish to go this route, cutting the payroll tax is probably the most promising idea.

Overpaid bankers and income distribution

From Thomas Philippon and Ariell Reshef, I thought this was an important paper:

We use detailed information about wages, education and occupations to
shed light on the evolution of the U.S. financial sector over the past
century. We uncover a set of new, interrelated stylized facts:
financial jobs were relatively skill intensive, complex, and highly
paid until the 1930s and after the 1980s, but not in the interim
period. We investigate the determinants of this evolution and find that
financial deregulation and corporate activities linked to IPOs and
credit risk increase the demand for skills in financial jobs. Computers
and information technology play a more limited role. Our analysis also
shows that wages in finance were excessively high around 1930 and from
the mid 1990s until 2006. For the recent period we estimate that rents
accounted for 30% to 50% of the wage differential between the financial
sector and the rest of the private sector.

Here is a summary article on the piece and one of the lessons is that the future of the income inequality debate lies at the micro-micro level.  The authors claim, by the way, that this 30 to 50 percent wage differential can be expected to disappear.  Right now that looks like a pretty safe bet.

We’ve already done some nationalizing

Kevin Drum is right:

And one more thing while we're on the subject: Since you, the American
taxpayers, are now the owner of AIG, you're also the main sponsor of
the Manchester United football club. The last time I mentioned this,
the season was young and our club was mired in 14th place. But I'm
happy to report that since the U.S. takeover of AIG in September, our plucky lads have been playing well and Man U now leads the Premier League.

The more general point is that nationalizing AIG, or quasi-nationalizing AIG, hasn't solved the basic problems there.   Nationalization is hardly to blame for these problems, but the post-collapse AIG has been a mess, bleeding money and lacking accountability.  You might claim: "they didn't nationalize it the right way" and maybe they didn't.  Still, once you proceed down the nationalization path, you have to live with the nationalizations you will get, not the nationalizations as a professor might recommend they be done.  The AIG transition was overseen by Bernanke and Geithner and of course Congress isn't nearly as smart or as well-informed as those two guys. 

Beware.  The mere ability to write, from the sidelines, "it should be done like X" doesn't eliminate the lessons of public choice economics.