Hail Interfluidity!

This post is superb, as it is very much trying to elevate the level of debate on fiscal stimulus.  Here is one excerpt:

Lying is optimal. The debate among public officials about austerity cannot be taken at face value. Savers really could flee the euro, dollar, yen or yuan. Interest rates here or there could suddenly spike. A sudden dash to gold is possible. None of these financial market events would directly affect the real resources at our disposal, but any of them could devastate our ability to organize economic behavior, and would call into question the legitimacy of economic outcomes and the stability of governments. For policymakers who seek positive short-to-medium term outcomes, the optimal strategy is to avoid the first-order costs of austerity by spending and avoid second-order costs #1 and #5 by obfuscating their spending as much as possible. Costs #2, #3, and #4 tend to bite over the medium-to-long term, leading policymakers to discount them. I think we should expect a lot more austerity theater than actual austerity, for better and for worse. Expect central bankers especially to preach austerity while intervening madly in the shadows. That’s just what they do. By the same reasoning, we should expect policymakers to justify their actions with a lot of intuitive but awful theory. As the Modern Monetary Theorists remind us, the analogy between a fiat-currency-issuing government and a budget-constrained household is poor. It is, nevertheless, the framework under which most citizens and savers understand government accounts, and forms the basis of conventional discourse. Irrespective of what is a better or worse description of reality, it is safer for policymakers to frame their communication in terms of conventional theory than to promote a profoundly destabilizing paradigm shift. Expect President Obama to keep talking about how we are “out of money” even though he knows better.


This is the dumbest thing I have heard in quite some time. My opinion of interfluidity has dropped several levels.
"Austerity is first-order stupid whenever there are people to whom the opportunity cost of providing goods and services that others desire is negative."

That paragraph gets even worse:

"It is perfectly possible, and perfectly common, that a person’s gains from doing work are greater than their total pay, so that in theory you could confiscate their wages or pay them nothing and they would still do the job. But in practice, you can’t do that, because if you don’t actually pay them, it is no longer paid work"

It has several kinds of mistakes.
1. It confuses opportunity costs with positive utility.
2. It also leads to the conclusion that work that people would do for free should be funded by the state.
Yes, so we should pay people to take care of their own kids. We should have the state pay people who do volunteer work, so it is paid work... because he attaches magical significance to paid work.

It goes on.
"Under this circumstance, having the government pay for the work is welfare improving unless the second-order costs of government spending exceed both the benefits to the worker in excess of pay and the benefit to consumers or users of the goods and services purchased"

No, it is actually welfare reducing if they would do it anyway, but you initiate a forced transfer payment from someone else to fund it.

I think his #2 swamps all other considerations.

If we take the two, in my opinion obvious, propositions lifted largely from #2...

P1. Employing people badly is much worse than just giving them money.

P2. Government spending choices may almost always lead to lower quality uses of real resources than would have occurred if the government had not acted.

...then, indeed, stimulus should be nothing more than handing out money as blindly as possible.

Find some difficult-to-game metric for how much stimulus is needed, and start cutting checks when it gets above a certain level.

Good for you for reading outside the box.

"What are the things we do now that we should stop doing? And how can we make those changes without undermining the deep social infrastructure of our society, resources like legitimacy, fairness, and trust?" asks Interfulidity. The answer is pretty clear, and Martin Wolf has already given it:

"The best policy is to put together measures that sustain strong growth in demand in the short run, while constraining the huge deficits in the long run. This is walking and chewing gum at the same time. Why should that be so hard?" (http://www.ft.com/cms/s/0/fc8d1dd4-78b6-11df-a312-00144feabdc0,s01=1.html)

Doc, you're committing a fallacy when you disagree about the lying part. You're choosing your game-duration with hindsight, and playing "if only".

The author is asserting that, without the ability to replay the past, at this point in time, lies are the best way to play.

That's an assertion you can disagree with, but to do so it would be best to start with a premise other than, "assume a time machine."

The other problem with your analysis is assuming that the long-range interests of the country (insofar as you can even talk about such a thing) are aligned with the actors speaking for it.

If you think that BP's interest in stopping the spill is identical to Hayward's, you're more likely to get on a bobble-head show, but also more likely to misapply pressure, if your goal is to stop the spill. (Who knows, maybe you want to be on MTP, in which case that behavior would be optimal.)

If governments fear a flight to gold, why don't governments hedge by printing money and buying gold?

I suspect they don't really fear that. It is a self-correcting problem. See above discussion about lies.

Governments buying gold would exacerbate a flight to gold.

Again, we need Frank Luntz on the case - since when is moving closer (although still far from) a balanced budget called "austerity"????

Any of the esteemed economists care to venture a comment on what happens when a US Treasury auction fails?

And maybe add how effective the current $1.4 trillion of spending over revenues is? How much economic growth and future economic stability is it buying?


Paying 90 people for a week of digging holes, and then 10 more people the next week to fill those holes--increases GDP but doesn't provide any real benefit.

Gov't can do #1 make-work in a short time, but more planning is needed for work with a real Return (on spent resources). Like #2, gov't spending creates less value than people spending the same amount on themselves, or than business spending.

Tax cuts, and tax rebates, even in deficit, are far better for stimulus than active gov't spending.

And Tax Loans, or any program of deferred tax collection that allows tax payers to keep their money now and pay it back later, may be the optimal stimulus because it creates more short-term demand in the near term, with an automatic reduction in demand in the mid term when the postponed (loaned out) taxes have to be repaid. These nice effects mean the program total is budget neutral over the course of the business cycle.

@derek, when the Chinese offer to loan the US gov't money in bonds denominated in Renminbi, or some IMF currency that can't be printed by unilateral US gov't action, that will mean the US Treasury auction has failed.
When the Treasury borrows in another currency, that will be the end of the possibility to legally fulfill debt promises without politically painful austerity.

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