Month: January 2009

The budget constraint

A new tax favor for the relatively wealthy is now in the stimulus package:

In place of those business credits, Democrats expect to include a
"patch" for the Alternative Minimum Tax, a provision meant to prevent
upper middle class wage earners from moving into a higher tax bracket.
The AMT was originally designed 40 years ago to assure that the
wealthiest Americans were not able to shelter their earnings from the
Internal Revenue Service.

Estimates peg the cost of this year's AMT fix at around $70 billion,
and congressional leaders and key members of the tax-writing Senate
Finance and House Ways and Means committees would prefer to deal with
it now rather than wait to make it part of an end-of-the-session crush,
as it has in recent years.  Rep. Charles Rangel
(D-N.Y.), the Ways and Means chairman, said yesterday that plans were
"more than tentative" for including the AMT provision in the stimulus

Furthermore, Congress is expanding SCHIP, but maybe it's not as progressive as it sounds:

If Democrats thought health care reform was going to happen this
year, said health policy consultant Robert Laszewski, they would have
leveraged the popular, bipartisan children's program to build support
for the much bigger universal coverage plan that will need every vote
they can find.

Quick passage of the children's health care bill reveals "a lack of
confidence" by Democratic leaders, Laszewski said. Asked what's going
to stop health care reform this year, he said, "$2 trillion of special

Why I resumed Netflix

Asa, a loyal MR reader, asks:

Tyler, I just finished reading your Inner Economist book and in there
you said you stopping doing Netflix because you felt that the waiting
Netflix discs sometimes felt like a burden to you. Have you changed
your mind on this? I use Netflix, but sometimes I feel compelled to
watch a disc I have at home just to get "the Queue flowing again" even
if I don't really feel like watching it at the moment. In reality I
should just send the disc back if I don't want to watch it anymore, but
somehow that seems like a waste. I'm wondering if you have more
thoughts on this.

My problem with movies is simple.  I can read faster than some people, but I can't watch a movie faster than anyone.  So the relative price of movie-watching for me is high (the marginal utility of books does not for me decline rapidly) and often I need the big screen to hold my interest.  Nonetheless I read Essential Cinema and the new David Thomson book — both superb — and decided I wanted to see a chunk of movies.  I've already blogged Satantango and Ruiz's Time Regained was a surprisingly good cinematic treatment of Proust (no jokes please).  I'm looking forward to I Am Cuba, Cat People (the original), Peeping Tom, Bottle Rocket, Night Moves, The Letter, Pasolini's Salo, and about fifteen others.  Probably then I'll quit again.

By the way, the movies I liked this year were Man on Wire, Let the Right One In, the first thirty minutes of Wall-E, Encounters at the End of the World, In Bruges, Burn After Reading, and Transporter 3.  I haven't yet seen either Silent Light (Carlos Reygadas) or Gran Torino but I expect to like both.  I even enjoyed Vicki Cristina Barcelona, against all expectations.

Tonight, from this very good article, I read a very good sentence: "In other words, older women are discriminating, which is why so few films are made for them."

How long will the liquidity trap last?

Is that too silly a question?  (And have purveyors of the liquidity trap argument been willing to make predictions?)  After all, the TED spread is now below one and there are other pieces of financial good news.  If the liquidity trap ends (assuming there was one in the first place), monetary policy will work to stimulate aggregate demand.  A big fiscal stimulus won't be necessary.

Will there still be a liquidity trap three months from now?  Six months from now?  With all those smart people in the White House and at Treasury?  What if there is a ten percent chance, each month, that the liquidity trap goes away?

The proposed fiscal stimulus is a big, irreversible investment, which may or may not be needed, and of course it takes some time to get rolling.  The traditional economist's recommendation is to apply a very high hurdle rate to such commitments.  One alternative is to wait and see if the liquidity trap ends in the near future.

I am not an optimist about the real side of the economy, but I would be surprised if we still were in a liquidity trap one year from now.

One reason why the Obama stimulus plan isn’t larger

Paul Krugman writes:

…the traditional immunity of advanced countries like America to third-world-style financial crises isn't a birthright. Financial markets give us the benefit of the doubt only because they believe in our political maturity — in the willingness of our leaders to do what is necessary to rein in deficits, paying a political cost if necessary. And in the past that belief has been justified. Even Ronald Reagan raised taxes when the budget deficit soared.

But do we still have that kind of maturity? Here's the opening sentence of a recent New York Times article on the administration's budget plans: ''Facing a record budget deficit, Bush administration officials say they have drafted an election-year budget that will rein in the growth of domestic spending without alienating politically influential constituencies.'' Needless to say, the proposed spending cuts — focused only on the powerless — are both cruel and trivial.

If this kind of fecklessness goes on, investors will eventually conclude that America has turned into a third world country, and start to treat it like one. And the results for the U.S. economy won't be pretty.

Of course that's from 2004, when the budget deficit was far lower, so it holds all the more today.  Arnold Kling makes a related point.

It is, of course, still a completely coherent position to think that without a fiscal stimulus there will be no recovery and thus this default risk will be all the higher; I presume that is Krugman's position.  Still, in absolute terms, our worry about default risk should be relatively high.  And if there's anything we've learned over the last two years, it is that "once in a lifetime" outlier events can happen.

Keep in mind that banks still need a lot more money.  So that's a reason to be quite fiscally conservative on as many other things as possible.

Here are some interesting thoughts from Robert Waldmann.  (How long will the liquidity trap last anyway?)  And Greg Ip writes: "Last week, markets pegged the probability of a U.S. default at 6 percent over the next 10 years, compared with just 1 percent a year ago."

Clever metaphors from Keynes

I liked this part, even though I don't think AD is always the key factor:

Some people seem to infer from this that output and income can be raised by increasing the quantity of money.  But this is like trying to get fat by buying a larger belt.  In the United States to-day your belt is plenty big enough for your belly.  It is a most misleading thing to stress the quantity of money, which is only a limiting factor, rather than the volume of expenditure, which is the operative factor.

That's Keynes, writing to Roosevelt.  The letter is interesting throughout, how about this part:

I put in the second place [as a priority] the maintenance of cheap and abundant credit
and in particular the reduction of the long-term rates of interest. The
turn of the tide in great Britain is largely attributable to the
reduction in the long-term rate of interest which ensued on the success
of the conversion of the War Loan. This was deliberately engineered by
means of the open-market policy of the Bank of England. I see no reason
why you should not reduce the rate of interest on your long-term
Government Bonds to 2½ per cent or less with favourable repercussions
on the whole bond market, if only the Federal Reserve System would
replace its present holdings of short-dated Treasury issues by
purchasing long-dated issues in exchange. Such a policy might become
effective in the course of a few months, and I attach great importance
to it.

That's exactly what the Fed has been stressing and what Robert Lucas has advocated as well.

Tabarrok at TED

I will be speaking on The Future of Economic Growth at this year's legendary TED Conference, TED 2009, which takes place in Long Beach, Feb 3-7.  Other speakers include Tim Berners-Lee, Oliver Sacks, Daniel Lebeskind, Herbie Hancock and Bill Gates.  In my session, I am paired with Nate Silver, Bruce Bueno de Mesquita, and Dan Ariely.  Yeah, I'm a little nervous.  Fortunately, TED provides a masseuse for speakers before they hit the stage!  I kid you not. 

The median voter theorem, in action


Steven Chu, the Nobel laureate scientist who is President-elect Obama’s choice to be energy secretary, said in testimony prepared for his Senate confirmation hearing Tuesday that high oil prices were a threat to the economy, backing away slightly from statements made in his last job, as director of the Lawrence Berkeley National Laboratory, that gasoline prices should be higher.

Here is the story.  Technically speaking, all of his words are correct and do not contradict each other.  Still, if he can't get appointed for favoring higher gas prices, and in a honeymoon period at that…well…you see where this is headed.

Markets in everything, Japan edition

Get the double entendres out of your mind:

Lola – or Rora – to give her a slightly more Japanese pronunciation – is a beauty and she knows it.

Customers pay by the hour for her company. Usually they just want to stroke her, but as a special treat for favoured clients, she will lie back in a chair, close her eyes and pose for photographs.

Lola is a Persian cat who works at the Ja La La Cafe in Tokyo's bustling Akihabara district. It is one of a growing number of Cat Cafes in the city which provide visitors with short but intimate encounters with professional pets.

When I called, there were 12 felines and seven customers, mostly single men…

It costs about £8 ($10) an hour to spend time in a Cat Cafe.

Here is the article, courtesy of Marco Haan; other Japanese markets are discussed as well, including the renting of pet beetles.

And no, this next one is not a "sexy" Markets in Everything, but it, via Megan McArdle, is still remarkable in its own way: Quilt with Matching Tote.

Rationality is a Property of Equilibrium

Some thoughts on rationality and economics, perhaps for a future paper, motivated by the financial panic:  

Rationality is a property of equilibrium.  By this I mean that
rationality is habitual and experience-based and it becomes effective
as it becomes embedded in the rules of thumb and collective wisdom of
market participants.  Rules of thumb approximate rational decision
rules as market participants become familiar with an economic
environment.  Individuals per se are not very rational; shift the
equilibrium enough so that the old rules of thumb no longer apply and
we are likely to see bubbles, manias, panics and crashes.  Significant innovation is thus almost always going to come accompanied with a wave of irrationality.  When we shift to a significant, new equilibrium rationality itself is
not strong enough to tie down behavior and unmoored by either reason or
experience individuals flail about liked naked apes – this is the realm of behavioral
economics.  Given time, however, new rules of thumb evolve and
rationality once again rules but only until the next big innovation arrives.

Dogs and Demons

The subtitle is Tales from the Dark Side of Japan and the author is Alex Kerr.  It is recommended reading for those who would have Obama expand his stimulus plan to include more construction.  Here are some strung-together excerpts:

Few have questioned why Japan's supposed "cities of the future" are unable to do something as basic as burying telephone wires; why gigantic construction boondoggles scar the countryside (roads leading nowhere in the mountains, rivers encased in U-shaped chutes); why wetlands are cemented over for no reason…or why Kyoto and Nara were turned into concrete jungles…

Led by bureaucrats on automatic pilot, the nation has carried certain policies — namely construction — to extremes that would be comical were they not also at times terrifying…

Dozens of government agencies owe their existence solely to thinking up new ways of sculpting the earth.  Planned spending on public works for the decade 1995-2005 will come to an astronomical…$6.2 trillion, three to four times more than what the United States, with twenty times the land area and more than double the population, will spend on public construction in the same period.

…from an economic point of view the majority of the civil-engineering works do not address real needs.  All those dams and bridges are built by the bureaucracy, for the bureaucracy, at public expense.

…The construction industry here is so powerful that Japanese commentators often describe their country as doken kokka, a "construction state."…the millions of jobs supported by construction are not jobs created by real growth but "make work," paid for by government handouts.  These are filled by people who could have been employed in services, software, and other advanced industries. 

Kerr provides almost four hundred pages of documentation for these claims and more.  In the meantime, I am pondering the question of whether government in the United States is of higher quality than government in Japan.  I believe it can be argued either way. 

Addendum: Here is my previous post on fiscal policy in Japan.

Princeton Encyclopedia of the World Economy

These are two heavy volumes (1328 pp.) and if you read them you will have a very good background understanding of the institutions behind the global economy.

Here is the book's home page with some sample free material.  Here is a list of contents.  Here is one summary of the book's contents.  The editors, Kenneth A. Reinert and Ramkishen S. Rahan,are from GMU School of Public Policy although note that is not the same as the economics department.  You can buy it here.