Month: July 2011
U.S. Treasuries prices rose on Tuesday as U.S. stock market declines renewed the safe-haven bid for bonds despite nagging worries over a possible U.S. default that could slam the value of government debt.
Fears the government will run out of cash by Aug. 2 if lawmakers do not reach agreement in debt talks actually bolstered Treasuries as investors still looked at U.S. government debt as one of the lowest-risk investments out there.
This is, in fact, a very Keynesian point. Spanning doesn’t hold. Markets aren’t complete. Low rates on Treasury securities are signaling fear, not safety. The price of gold, and Swiss francs, are very high right now.
Of the world’s share of AAA sovereign debt, we issue 59 percent of it. (Next is Germany with ten percent and then France with nine percent of the total.) You can read this a few ways:
1. Wow, we really abuse that AAA privilege.
2. Losing the AAA rating would spell disaster for repo markets and the like.
3. The world trusts us enormously, isn’t that wonderful?
4. All of the above.
That is the new book by Robert B. Ekelund, Jr. and Robert D. Tollison; I have not yet read it. It is listed as due out August 15th, although Amazon seems to have one in stock now.
Such studies you should take with a grain of salt. Still, I found these results interesting:
Jeroen Nawijn of NHTV Breda University of Applied Sciences in the Netherlands found a holiday happiness curve: Our mood tends to be lowest through the first 10 percent of a holiday and quite high during the “core phase,” which spans about 70 percent of the vacation time. Our spirits soar on the day before going home.
…Philip Pearce of James Cook University in Australia studied tourists visiting tropical islands along the Great Barrier Reef and discovered that their moods were particularly negative on the second and third days of their holidays, the time during which they also seemed to develop the most health problems. These ailments included skin rashes, tiredness, allergies, ear infections and asthma.
Yet it is not just a new climate or cultural differences that can make you feel bad; it is also the free time itself. Ad Vingerhoets, a quality-of-life expert at Tilburg University in the Netherlands, calls this a “leisure sickness.” People with this condition develop symptoms of illness during weekends and vacations, even though they rarely feel bad at work, he says.
4. Nudging the poor to consume more medical services: is time more important than money?
This has never seemed like a good fiscal solution to me. In part it simply shifts expenditures from the public books to private hands. That may have useful “shadow value properties” (if the government budget constraint is more immediately binding), but it’s not a net real resource savings for the economy as a whole.
And in part I am suspicious of such a discrete “notch” in how we treat individuals. Right before your birthday you’re in one program and the day after your birthday you’re in a totally different program? Something has to be screwy, though you can debate whether that screwiness is ex ante or ex post. I usually think more in terms of smoothly sliding schedules and, when needed, changes in their slopes, with only gentle bumps in the relevant notches.
If the choice is “cut all payments by ?? percent” or “raise the retirement age by two years” I would opt for the former. If (and oh what a huge if) you had a Cowenian dictatorial technocrat in charge, you could even think about lowering the eligibility age. That said, everyone would be “buying in” to the program at much less favorable rates than is the case today. I do fully understand the public choice reasons why that wouldn’t stick, why it would survive only in a Cowenian dictatorial technocratic equilibrium, and why in real democracy it would quickly become a “goodie” to be handed out to poorly informed, short time horizon voters in a disastrous, budget-busting manner.
Put all that behind us but store it in memory. When I see President Obama considering an increase in the Medicare retirement age, here is what I do not infer:
1. I do not infer he is a coward (didn’t he stake his whole political future on ACA?).
2. I do not infer that he is a worse bargainer than are the Republicans.
3. I do not infer that he is a very stupid man.
4. I do not infer White House cabal theories which have his mind in the hands of evil villains, hellbent on reelection and ready to throw all progressive principles to the winds.
Here is what I do infer:
1. I infer he understands that the Medicare Payment Advisory Board isn’t going to live up to the high hopes for it. It may not even survive.
2. I infer he understands that most other plans for Medicare cuts won’t get through Congress, and that it will only get tougher to pass such plans each year.
3. I infer he understands that somewhat fewer Medicare recipients at any point in time will, possibly, make it easier to reform and indeed improve other aspects of the program.
4. I infer he understands that Medicare truly is the budget-buster of our time and that its future will not ever be ruled by technocratic principles.
Most of all, I infer that our President has had a very deep, very true, and indeed very depressing education in public choice economics. And I infer that any path to a workable fiscal conservatism will be tougher and more painful and more distortionary than we had thought.
Personally, I still would opt for an alternative route, even if it were doomed to fail politically. But that’s a luxury I have precisely because I am not…President of the United States.
Addendum: Ezra Klein comments.
Here is a very interesting Krugman analysis of this problem. It ends up with the Fed owning all T-bills, and, in Anil Kashyap’s opinion (and mine; there’s not enough cash to cover all the required collateral) the Repo market collapsing. I do see an alternative path. Krugman writes:
What we normally say in a liquidity trap is that the Fed is keeping short-term interest rates at zero, which is as low as they can go because below that cash dominates bonds. And the Fed achieves that zero rate by being willing to buy short-term government debt whenever the rate threatens to rise above zero.
That’s a fair description, but perhaps it is a description rather than a binding equilibrium response; the Fed doesn’t have to do that and why should they if it ends in ruin? (There’s the further tricky question of whether Krugman’s assumption is holding expected fiscal policy constant.)
T-Bills are almost like money today, especially with low short rates. Think of higher default risk as like a Gesellian stamp tax on T-Bills. One equilibrium is that people spend more on durables as they shift out of liquidity, which has now been partially taxed. Another equilibrium is that everyone rushes into the truly safe asset, namely cash, and the T-Bills do truly disappear. Or heterogeneous agents may do a bit of both.
It would seem to boil down to the third derivative on the utility function. Still, empirically cash does not soak up all the periodic shifts out of other risky assets (e.g., commercial paper), so why should it soak up all the shifts out of T-Bills?
More concretely, in a liquidity trap model (which I reject, by the way, but that’s another story) an increase in default risk could have some expansionary properties.
Addendum: Brad DeLong offers comment.
Here are photographs of refrigerator interiors, in the form of a slide show. Recommended, and don’t forget the descriptive captions on the bottom of each, indicating who owns the refrigerator.
For the pointer I thank Brent Depperschmidt.
The big news, instead, is that Italian and Spanish spreads — the difference between interest rates on their bonds and interest rates on (presumably safe) German bonds — have widened drastically again. Last week’s big rescue plan apparently didn’t restore confidence.
Sometimes it looks as if the Europeans and the Americans are in a contest to see who can do the most to mess up an economy that should be very strong. Today, surprisingly, the Europeans seem to have won a round.
That’s from Paul Krugman. The difference, of course, is that one set of problems is insoluble and the other is not. The United States needs to avoid a financial crisis (and can), but you can argue that Europe needs to have one to cure its problems.
1. Against the “safe haven” argument; note also that terror planners in “safe” countries are likely to be more efficient, and thus more destructive, than planners in the wild.
5. Do not visit the bear. Got that?
The popularity of private-plane travel is forcing many high-priced camps, where seven-week sessions can easily cost more than $10,000, to balance the habits of their parents against the ethos of simplicity the camps spend the summer promoting.
Kyle Courtiss, whose family runs Camp Vega in Maine, said that his staff was trained “to be cognizant of stuff like that” and that private planes were “not what this camp is about.”
The article is interesting throughout.
The story is here. Here is a clue:
“If both of my wives are revived,” Mr. Ettinger told the Detroit News last year, “that will be a high class problem.”
So far, not many newspapers have picked up this “obituary,” though I doubt if that is an intended tribute to Ettinger’s ideas.
The main argument against a balanced budget amendment is that it makes it more difficult to engage in Keynesian counter-cyclical fiscal policy. The main argument in favor is that without some legal or moral constraint, the ordinary rules of politics will push costs onto unrepresented and unorganized future taxpayers, as Jim Buchanan argued. In order to transcend these arguments I propose an unbalanced budget amendment.
The unbalanced budget amendment is a requirement that in good times the government must run a budget surplus. The virtues of such a rule are that it allows for counter-cylical fiscal policy during a recession. Indeed, it reduces the cost of counter-cyclical fiscal policy because it guarantees a reserve fund for just such emergencies. The unBBA is thus a type of automatic stabilizer of the kind I have argued for before (e.g. here).
A simple version of the unBBA requires surpluses but more generally the rule would be a surplus or a similarly sized reduction from the previous year’s deficit. The size of the required surplus/deficit reduction would be tied to a function of current and recent GDP growth rates.
Notice that while making counter-cyclical fiscal policy easier the unBBA would tend to create budget balance as surpluses in good times were spent in bad times. Thus over a period of time the unBBA has similar results to a BBA. By requiring surpluses (and thus taxes) to be high(er) in good times,however, rather in bad times the unBBA has a lower cost and a better chance of being passed than the BBA.
Overall, an unbalanced budget amendment seems much preferable to a balanced budget amendment.
1. Gavin Maxwell, A Reed Shaken: Travels Among the Marsh Arabs of Iraq. One of my favorite travel books. It avoids both being too impressionistic and being too didactic. It never assumes that the writer’s state of mind is interesting to the reader per se. It brings a little-known and by now largely destroyed corner of the world to light.
2. Ludwig Mises on the exhuastion of the reserve fund. I first read that passage when I was fourteen years old and I was scared.
4. Henry Mayhew, London Labour and the London Poor. There is a splendid new Oxford University Press edition. Browsing or reading this book is one of the best ways to get a feel for Victorian England (circa 1850-51), or for how labor markets have changed.
5. The Last Werewolf, by Glen Duncan. Half of this is quite fun, the other half is quite stupid. Your call, but half fun is actually a lot.
I’ve also relented and finally tried Game of Thrones. I’m just at the beginning; we’ll see whether it ends up owned or liberated.
So says Modeled Behavior, citing also Paul Krugman. All true, but the need to point this out to people suggests it is not widely understood. Which suggests the tax, at least right now, brings a relatively low deadweight loss. A lot of people don’t really see that it is a tax at all. Admittedly, that state of affairs may not last forever.
There is also hyperbolic discounting, namely that the marginal extra loss from earning more income may be coming many years in the future. Even if you’re sixty-two years old, the reduction in subsequent Medicare benefits may last through your eighties or longer. That also makes it a less distorting tax.
Because it tricks people in this manner, it may well be a less fair tax. But still it is a more efficient tax, at least if it can be enforced.