Month: June 2010

Akshay asks me:

Given that there are more coins and coins are worth more in London, with gbp1 and gbp2 coins, would you expect panhandlers to do better or worse? I would guess that people are less likely to part with their change and give it to beggars, whereas in the US people generally hate carrying around coins… And they are worth a lot less.

On the other hand, when they do get donations, the amounts are probably higher.

You can ask a comparable question about tips.  In the Eurozone, one works pretty hard to avoid a steady accumulation of coins.  The twenty cent piece feels worth less than does a U.S. quarter, because it competes for pocket space with the one- and two-euro coins. My intuition is that, adjusting for the size of tip or donation, in Europe or the UK small-denomination transfers are more common, which means that people with lower values of time end up sorting the coins.

Germany’s real effective devaluation in terms of relative unit labour costs compared with the EU27 during 1994-2009 is about 20%.

The post, which focuses on German outsourcing to Eastern Europe (an effect not included in the above estimate), is interesting throughout.  Germany is sometimes called an "inflexible" country or an "inflexible" culture.  But if you look at the longer sweep of history, you can make an equally good or better case that the Germans have a remarkably flexible culture, sometimes too flexible.  In this particular case it seems to be just flexible enough.

This account can help us understand why Germany is not so keen on higher inflation and a weaker euro.  Think of depreciation as a substitute for wage flexibility.  If you've managed a good deal of wage flexibility — in part in advance — policymakers probably don't need or want the depreciation.  It bears also on why the Germans don't so much see Keynesian economics as applying to their country.

Addendum: I very much enjoyed this Paul Krugman post.

Read the whole thing; my original post was here.  

On my point 1, that the central bank moves last, Brad writes:

Yes, the central bank can neutralize any additional fiscal stimulus by raising interest rates. (It is not clear that it can undo any fiscal contraction by some combination of lowering interest rates and quantitative easing: it may be able to.) What is clear is that the U.S. Federal Reserve and the Bank of England are right now definitely not in a place where they would neutralize any additional fiscal stimulus by raising interest rates. And my bet is that the ECB is also not in such a place–although it is much harder to figure out what they think and what they will do. That the central bank moves last is important and relevant, but not determinative when you are in the neighborhood of the zero lower bound on interest rates.

Maybe the central bank cannot undo a fiscal tightening, but surely it can undo a fiscal expansion, by making money tighter, limiting QE, and/or changing the pace at which it undoes previous QE.  My assumption is that the central bank has a preferred inflation vs. unemployment position for the economy, so why be so sure they won't undo the expansion of the fiscal authority, if only probabilistically?  Portfolio considerations, or public relations, may matter, so I am not postulating strict neutrality, rather changes in fiscal debt do less good than we might think.   

On point two, that monetary expansion is easy, even at the zero bound, Brad writes:

That's why having the government hire unemployed people to do useful things and paying for it by printing up money at basically zero budgetary cost (right now) is an even better policy. Even if consumers do save all that money, fiscal stimulus on the spending side still has an impact: useful stuff gets done.

That's fine, with the side note that I am more skeptical about public sector spending.  I'll push this line of reasoning to the next step, however, and stress we don't need to increase debt at all to have a big and effective stimulus.  (By the way, accepting this argument means that a central bank can undo a decrease in the federal debt, as mentioned in point one.)   

On point three, on federalizing Medicaid, we agree.  Point four is about the value of worst-case thinking and that means a fiscal crisis can come even when it appears unlikely.  I wish to heed that risk by doing something other than pledging our next President and Congress will solve the problem.

Elsewhere, Brad has written:

The obvious policy is the long-term debt neutral stimulus: spending increases and tax cuts for the next three years, standby tax increases with triggers and spending caps with triggers thereafter, all calculated to guarantee that the debt is no larger ten years from now than in the baseline.

An alternative version of this would be:

We can and should do major stimulus without increasing the debt burden, short-term or long-term.  Increasing M, through monetary policy, is usually more effective than making periodic attempts to keep V up and running, through fiscal policy.  Plus it is often easier to turn monetary rather than fiscal policy on a dime, especially in a democracy and for Brad I can cite the risk of a Republican administration.  Talk of the zero bound doesn't matter much for the policies we should choose, namely money-financed, non-exotic direct stimulus.

Why is it necessary to take on or intellectually defend higher debt levels?  Short-term debt can too easily become a long-term commitment.  Why is it necessary to discuss the zero bound so much?  In my view of this exchange, Brad and I largely agree, but he does not (yet?) agree that we largely agree.  I want to see him criticize debt finance more than he seems willing to do.

I believe the "zero bound" is perhaps the single largest "red herring" in the economics profession today.

Addendum: Arnold Kling comments.  And Brad DeLong responds in the comments section.