Month: July 2011

From the comments (ouch!)

E. Barandiaran passes along to us:

On the substantive issues of how to solve U.S. fiscal crisis, I suggest to read Ray Fair’s latest paper

ABSTRACT: This paper estimates how large fiscal-policy changes have to be to solve the U.S. government deficit problem. This question is complicated in part because of endogeneity issues. A fiscal-policy change designed to decrease the deficit has effects on the macro economy, which in turn affects the deficit. Any analysis of fiscal-policy proposals must take these effects into account: one needs a model of the economy. This paper uses a macroeconometric model of the world economy to examine the deficit problem. A base run is first obtained in which there are no major changes in U.S. fiscal policy. This results in an ever increasing debt/GDP ratio. Then net taxes (taxes minus transfers) are increased by an amount sufficient to stabilize the long-run debt/GDP ratio. The increases are linearly phased in over a three-year period beginning in the first quarter of 2012. The estimates of the needed net tax increases are large. Compared to values in the base run, net taxes after the phase in need to be about $650 billion higher each year in 2011 dollars. In percentage terms this translates into about 45 percent of personal income taxes, 51 percent of social security taxes, 24 percent of transfer payments to state and local governments and to persons, 44 percent of purchases of goods and services, and 176 percent of corporate profit taxes. The output loss is 1.38 percent of real GDP over the 9 years analyzed.

Indeed, Ray shows that your crisis it’s not a laughing matter.

I’m more skeptical about macro models than is Ray Fair, and that includes more skepticism toward the Fair model.  Still, I don’t think there is any kind of free lunch available which renders this general mode of reasoning invalid.  Ouch!

File under “We’re not as wealthy as were thought we were.”

The draft Eurozone plan

It is here (and further detail here), via Paul Krugman, who rightly slams it.  Matt offers comment, so does Wolfgang, many more details and updates here.  If you had told me it was an Onion-like satire of all the previous plans, and not an actual serious plan at all, I would have believed you.  Here is one of the stranger, funnier, sadder, and more Straussian paragraphs:

6. All other Euro countries solemnly reaffirm their inflexible determination to honour fully their own individual sovereign signature and all their commitments to sustainable fiscal conditions and structural reforms. The Euro area Heads of States or Government fully support this determination as the credibility of all their sovereign signatures is a decisive element for ensuring financial stability in the Euro area as a whole.

In other words: “We know you are worried about Italy and Spain so we promise you that they are fine.”  There is a good deal of ah, optimism about the real side of these economies:

9. All euro area Member States will adhere strictly to the agreed fiscal targets, improve competitiveness and address macro-economic imbalances. Deficits in all countries except those under a programme will be brought below 3% by 2013 at the latest…

Here’s an important sentence, and I view the exclusive reference to “Member States” as throwing in the towel:

As a follow up to the results of bank stress tests, Member States will provide backstops to banks as appropriate.

It is also promised that the bailout model for Greece won’t be used again.

Time to blast the Brahms!  In all fairness to the plan, maybe that’s the only disc in anyone’s collection these days.

Addendum: “The proposed expansion of the EFSF’s role would have to be ratified by national parliaments, and could fall foul of critics in Germany, the Netherlands and Finland.”

When the UK took over Newfoundland

In large part it was because of a debt crisis:

In 1933 the Newfoundland legislature voted itself temporarily out of existence, ending 79 years of responsible government. The following year, Newfoundland accepted a constitution similar to those in place in the directly-controlled Crown colonies. A country voluntarily giving up self-government is highly unusual, yet many other societies also experienced a loss of faith in democratic institutions during the Great Depression of 1929-39. The roots of the fiscal and political crisis that led to the collapse of responsible government can be traced to the First World War.

Here is much more.  Don’t expect this model to be repeated anytime soon.

Hat tip goes to Joseph Cotterill.

Facts about Panama

…from 2005 to 2010 its economy expanded by more than 8% a year, the fastest rate in the Americas. The IMF expects it to grow by over 6% a year during the next five years. Panama will soon overtake Costa Rica and Venezuela in GDP per head. Accounting for purchasing power, it is one of the five richest countries in mainland Latin America.

Here is more.

*Stealth of Nations*

The author is Robert Neuwirth and the subtitle is The Global Rise of the Informal Economy.  Excerpt:

The merchants here are Chinese.  But most of the customers, like Chief Arthur, are from Africa.  The trade is generally brisk — on Fridays it can be overwhelming — and it’s accompanied by what seems like a permanent sound track: the rasp of unspooling packing tape and the whir of currency counters.  Each box that leaves the market is heavily sheathed in plastic tape — to ensure a secure seal and to make it hard to tamper with.  And the economy here, as in almost all haphazard markets around the world, is cash-only.  All payments are made in yuan, and, as the largest denomination in Chinese currency is one hundred yuan — worth about $14 — people making big deals carry massive bundles of cash.  Chief Arthur, for instance, who was carrying a wad of four hundred hundred-dollar bills, had to convert them into almost three thousand hundred-yuan notes — a stack of bills large enough that he needed a briefcase or duffel bag to carry it around.

Much of this book draws from Nigeria, China, and Ciudad del Este in Paraguay.  Black markets are a well-worn topic, but I found a lot of the material here to be fresh and vital.  The book is due out in October.

IHS does Liberty Academy

Welcome to Liberty Academy! We’ve created learning paths to help you navigate the ideas of liberty through specific disciplines. Each path contains several lessons. The lessons are ordered to improve the learning process but you can skip around if you prefer.

Each lesson contains the following elements:

  • A LearnLiberty short video explaining the concept
  • Suggested resources for delving deeper into the topic
  • Questions to enhance your understanding
  • A discussion area to share your insights and ask questions

From the comments

This is from Mark, the caps are his:

We had these big interconnected undercapitalized things that were mandated by federal policy to keep expanding the amount of paper they bought or backed, which meant inevitably they were going to reach the point where the paper they were backing was too risky, and the GSE’s mandated growth necessarily called for them to issue more paper of their own to do that..And then you had Basel II and its US application that made GSE paper Tier I capital to support maximum loan growth in private sector banks. No wonder credit dried up when the GSEs were taken over in Sept 08. But you never see the Rortys and Mins speak to this perspective. THE GSE’S WERE PROCYCLICAL VECTORS THAT TRANSFORMED HOUSING DEMAND TRENDS INTO CREDIT MARKET TRENDS AND VICE VERSA, FREQUENTLY AMPLIFYING THEM, BUT THEY WERE NOT STRONGLY CAPITALIZED ENOUGH TO ABSORB A TREND REVERSAL.

The Toilet Challenge

In our textbook, Modern Principles, Tyler and I write:

In the United States, diarrhea is a pain, an annoyance, and of course an embarrassment. In much of the developing world, diarrhea is a killer, especially of children. Every year 1.8 million children die from diarrhea. To prevent the deaths of these children we do not need any scientific breakthroughs, nor do we need new drugs or fancy medical devices. What these children need most is one thing: economic growth.

Economic growth brings piped water and flush toilets, which together cut infant mortality from diarrhea by 70 percent or more.

Bill Gates and the Gates Foundation think that some scientific breakthroughs are needed and they are putting millions into the Toilet Challenge a new project to build a better toilet.

“No innovation in the past 200 years has done more to save lives and improve health than the sanitation revolution triggered by invention of the toilet,” Sylvia Mathews Burwell, president of the foundation’s global development program, said in a statement. “But it did not go far enough. It only reached one-third of the world. What we need are new approaches. New ideas. In short, we need to reinvent the toilet.”

So what is wrong with the current commode?

It’s too expensive for people in the developing world; it requires water and a sewer-system hook-up, which aren’t always available; and it does nothing to actually treat human waste, said Frank Rijsberman, the foundation’s director of water sanitation and hygiene.

Gates is to be credited with taking on an important and unsung task. Some of the ideas he has spent money on, however, seem to be highly unrealistic. Consider:

Professor Georgios Stefanidis and his team at Delft University of Technology propose to develop a toilet system that will apply microwave technology to transform human waste into electricity. The waste will be gasified using plasma, which is created by microwaves in tailor-made equipment. This process will yield syngas, a mixture of carbon monoxide (CO) and hydrogen (H2). The syngas will then be fed to a solid oxide fuel cell stack for electricity generation. This toilet system will be able to serve single households or groups of households.

My rule is that any society capable of managing and maintaining such a system will already have flush toilets (either that or they live on the space station).

What kinds of economics will intelligent aliens have?

Ahmet, a loyal MR reader, asks:

What aspects of a functional economy would you expect to find in a developed extraterrestrial civilization? Barter, money, interest, financial derivatives, options?

Adam Smith and Murray Rothbard and Olaf Stapledon spring to mind as sources.  Reciprocal barter most likely, and that means implicit interest rates at the very least.  But do dolphins have money?  Not obviously.  I can imagine a dolphin-like civilization which lacks money.  Dolphins seem to have relatively few goods of value, yet they are highly intelligent and have well-developed emotional lives, or at least they could be so even if you are for some reason skeptical about current-day dolphins.

Current dolphin goods seem to be food, sex, kids, and conversation, with a fairly tight PPF.  They don’t buy lampshades.  Most of “dolphin economic growth” seems to come from finding more and better food, getting more and better sex, finding safer environments for the children, and learning to enjoy other dolphins more.  It’s hard to store dolphin goods and thus it is hard for the Mengerian origin of money story to get underway.

The opposable thumb and life on land, combined with some very particular and indeed contingent signaling tendencies, gives greater scope to heterogeneous durable goods and thus eventually money.  You can think of “dolphin water” as a high tax on lots of potential inputs, though it serves as a large implicit subsidy to the fishing sector.

Without money financial derivatives are unlikely, though be careful because alien intelligence is likely to surprise us.

Bird-like creatures, which fly through the air, might have a greater chance than dolphins of developing money as a medium of exchange, in part because they avoid the water tax on durable assets.  It seems possible to handle worms and songs and sex with direct barter, so what would smarter crows (or would they be smarter?) want to trade?  What kinds of heterogeneities might they crave and toward what end?

Bee-like creatures are a different story altogether, because of their homogeneity (for the drones at least) and high level of genetically-induced cooperation.  The “economics of communication” is especially important for them.

This entire question points me back to wondering why the diversity of human preferences evolved to the extent it did.  Why don’t we just want a few things?

“Pick Your Poison: Do Politicians Regulate When They Canʼt Spend?”

From Noel Johnson, Matthew Mitchell, and Steven Yamarik:

We investigate whether laws restricting fiscal policies across U.S. states lead politicians to regulate more instead. We first show that partisan policy outcomes do exist across U.S. states, with Republicans cutting taxes and spending and Democrats raising them. We then demonstrate that these partisan policy outcomes are moderated in states with no-carry restrictions on public deficits. Lastly, we test whether unified Republican or Democratic state governments regulate more when constrained by no-carry restrictions. We find no-carry laws restrict partisan fiscal outcomes but tend to lead to more-partisan regulatory outcomes.

The presentation slides are here.  In my view this is one reason of many why a balanced budget amendment is not a workable path toward fiscal conservatism. 

The Benefits of Fiscal Illusion

David Wessel does a good job explaining how the Gang of Six plan is both a tax cut and a tax increase:

The Gang of Six, a bipartisan group of senators, threw its deficit-reduction package into the arena Tuesday and it is variously described as increasing tax revenues by $1 trillion over 10 years and also decreasing them by $1.5 trillion over 10 years. Huh?

Measured against current law, the Gang of Six plan is a tax cut. The law currently says that the Bush tax cuts expire at the end of 2012 for everyone and that the pesky Alternative Minimum Tax will reach deeper into the middle class (because it doesn’t automatically adjust its thresholds for inflation).

The Gang of Six, among other things, would eliminate the Alternative Minimum Tax—that alone would cost the Treasury about $1.7 trillion versus current law. Altogether, the various tax changes in the Gang of Six plan would reduce tax revenues by $1.5 trillion.

But no one expects current law to prevail. Congress every year, for instance, puts a patch on the Alternative Minimum Tax so it won’t hit more families. And both the White House and many Republicans want to extend the Bush tax cuts for taxpayers with incomes under $250,000 a year. (The argument is over expending them for taxpayers with higher incomes.)

So budget wonks have developed “alternative” or “realistic” baselines. The Bowles-Simpson fiscal commission used such a baseline, borrowing one developed by the Obama White House. Among other things, that yardstick assumes the AMT is patched year after year, and assumes the tax cuts for the under $250,000 crowd are extended. Against that baseline, the Gang of Six raises about $1 trillion revenue over 10 years, roughly the same sum that the Bowles-Simpson plan did. That’s how it’s also a tax increase.

Thus, if the Republican base reads it as a tax cut and the Democrat base reads it as a tax increase, we just might get a deal.

Ella and Louis offer relevant advice.