Month: August 2011
Recent fiscal policies, including the 2008 stimulus payments and the 2009 Making Work Pay tax credit, aimed to increase household spending. This paper quantifies the spending response to these policies and examines differences in spending by whether the stimulus was delivered as a one-time payment or as a flow of payments from reduced withholding. Based on responses from a representative sample of households in the Thomson Reuters/University of Michigan Surveys of Consumers, the paper finds that the reduction in withholding in 2009 boosted spending at roughly half the rate (13 percent) as the one-time payments (25 percent) in 2008.
You may recall that the structure of these tax cuts was designed scientifically to produce maximum bang for the buck. That is from a new paper by Claudia Sahm, Matthew Shapiro, and Joel Slemrod (pdf).
Of course, if you are more worried about the length of the deleveraging recession, some mistakes may cancel out and perhaps the ARRA approach, leading to higher savings and quicker balance sheet repair, was wiser after all.
1. Of Gods and Men.
5. Black Narcissus (the most secular of the lot, and it’s about nuns).
6. Pasolini’s The Gospel According to St. Matthew.
7. Léon Morin, Priest, by Jean-Pierre Melville.
All of these movies are underwatched these days. There is also Winter Light.
I believe this period in economic history deserves a closer look, starting with S.B. Saul’s book The Myth of the Great Depression.
1873-79 was quite turbulent, but afterwards the global economy adjusted to deflation. Those years were among the most beneficial in human history, as the foundations of the modern world were laid.
This is one reason why I become suspicious when deflation is blamed for Japan’s current problems, or when we are told that weak AD could lead to two lost decades in the United States. I do not favor deflation but its curse need not last forever.
If we are mired in the muck for two decades or more, as Japan has been, I blame low rates of productivity and technical progress. A simple comparison with North Dakota and Nebraska drives home the point. For the globe as a whole, increased resource prices are not the same as a productivity boost, but for a single region they can be.
Deposits are flooding into the biggest U.S. banks as customers seek shelter from Europe’s debt crisis and falling stock prices. That forces lenders to raise capital for a growing balance sheet and saddles them with the higher deposit insurance payments. With short-term interest rates so low, it’s hard for financial firms to reinvest the new money profitably.
Regulators have asked banks to take the deposits anyway, three people said, with one lender accepting $100 billion. The regulators want lenders to take the deposits because it improves the stability of the financial system, according to one of the people, who said U.S. banks are viewed as places of strength.
The banks are taking the assets but asking that the associated capital requirements and deposit insurance fees somehow be relaxed or waived. The article is here.
If you are wondering, I do consider this partial evidence for a liquidity trap. But I request consistency. If this is evidence for a liquidity trap, the absence of this development in prior periods has to count as evidence against the existence of a liquidity trap. Furthermore by no means is negative nominal interest on deposits the industry standard, far from it, except perhaps in Switzerland. So we’re still not in a liquidity trap, if one has to give a simple yes or no answer. T-Bills aside, there are plenty of margins at which money holding decisions follow intuitive economic principles.
As a child, he may have killed a lion; he quite possibly coined the phrase “my bad”; he certainly warned Congress about Osama bin Laden in 1993.
In another sign of the influx, private jet flights between San Antonio and Mexico nearly doubled between 2008 and 2010, reaching 3,997 in 2010, according to city officials.
The city’s Mexican Entrepreneurs Association, founded 15 years ago, has grown from a handful of members to 200. On a recent evening, dozens of members and guests sipped red wine and nibbled canapes of smoked salmon and roast beef at a networking event.
…The number of investment visas given to Mexicans has risen sharply. A total of 10,512 E-1 and E-2 investment visas were granted to Mexicans from 2006 to 2010, a 73 percent increase over the previous five-year period, according to the State Department.
The article is about how the new wave of immigrants from Mexico, fleeing the drug war, are often very wealthy and highly educated. Keep in mind that the overall yearly flow of Mexicans to the United States is now about a fifth of what it was in 2006. Nonetheless, it is being called the “Mexodus.”
For this blog post, let’s assume Keynesian economics.
For all the talk of a “large stimulus,” you don’t hear much about a “longer stimulus.”
The problem with a “too small” stimulus is that you get an initial economic boost, but when the stimulus expires the economy slumps back down, as indeed happened in mid 2011. Ideally a stimulus employs some idle labor, stops it from depreciating, and tides those workers over until they can look for other jobs in fundamentally better economic conditions. Those last few words are important. If conditions are not improving soon, the ability of the stimulus to “buy time” for those workers isn’t worth much. The workers get laid off from the government projects and their reemployment prospects are no better than to begin with. We end up having spent a lot of money to postpone our adjustment problems, rather than achieving takeoff.
Deleveraging recessions last a long time, as shown by Rogoff and Reinhart. The need for continuing deleveraging implies that even a stimulus twice the size of ARRA won’t turn the tide.
In those cases a well-designed stimulus program should not be so “timely.” For a given presented expected value sum spent on stimulus, it is better to spread it out across the years. It is better to help a smaller set of workers for five years (or however many years it takes for most of the deleveraging to end), after which they are reemployable , than to temporarily boost a larger number of workers for two years, and then leave them back in the dust because deleveraging is still going on.
The effectiveness of a stimulus will be measured by how many workers it bridges over until most of the deleveraging is over. For ARRA, that number is close to zero.
Length may be one reason why WWII was effective stimulus (again, we are operating within the Keynesian worldview here, no need to argue this point in the comments). The war lasted a while, and in the meantime a lot of balance sheet repair went on.
Oddly, there is not much discussion about the length of fiscal stimulus. But there should be.
How has the dictatorship in North Korea survived despite mass starvation and economic failure? One factor that comes out of reading Nothing to Envy is that the North Korean iron curtain has been much more impenetrable than that of Eastern Europe. Consider:
In the nearly half a century that elapsed between the end of the Korean War and Mi-ran’s defection in October 1998, only 923 North Koreans had fled to South Korea. It was a minuscule number if you consider that while the Berlin Wall stood an average of 21,000 East Germans fled west every year.
The border with China is longer and more porous than the border with South Korea but until the 1990s there wasn’t much of an incentive to escape in that direction since China wasn’t much better off than North Korea. Moreover, if North Koreans are caught in China then even today they will be sent back,probably to a North Korean gulag; so many defectors try to cross from China to Mongolia through the forbidding Gobi desert. Mongolia will then “deport” them to South Korea.
North Korean propaganda has also been very effective because unlike leaders in Eastern Europe, Kim Il-sung “wasn’t merely the father of their country, their George Washington, their Mao, he was their God.” Here is Nothing to Envy:
Broadcasters would speak of Kim Il-sung or Kim Jong-il breathlessly, in the manner of Pentecostal preachers. North Korean newspapers carried tales of supernatural phenomena. Stormy seas were said to be calmed when sailors clinging to a sinking ship sang songs in praise of Kim Il-sung. When Kim Jong-il went to the DMZ, a mysterious fog descended to protect him from lurking South Korean snipers. He caused trees to bloom and snow to melt. If Kim Il-sung was God, then Kim Jong-il was the son of God. Like Jesus Christ, Kim Jong-il’s birth was said to have been heralded by a radiant star in the sky and the appearance of a beautiful double rainbow. A swallow descended from heaven to sing of the birth of a “general who will rule the world.”
To us this sounds ludicruous but I think Demick is correct when she writes:
…consider that their indoctrination began in infancy, during the fourteen-hour days spent in factory day-care centers, that for the subsequent fifty-years, every song, film, newspaper article, and billboard was designed to deify Kim Il-sung; that the country was hermetically sealed to keep out anything that might cast doubt on Kim Il-sung’s divinity. Who could possibly resist?
When Kim Il-sung dies, Demick describes one woman’s reaction:
Mrs. Song went blank. She felt an electric jolt shoot through her body as though the executioner had just pulled the lever. She’d felt this way only once before, a few years back when she’d been told her mother had died but in that case the death was….This couldn’t be true. She tried to concentrate on what the television broadcaster was saying. His lips were still moving, but the words were incomprehensible. Nothing made sense. She started to scream
“How are we going to live? What are we going to do without our marshal?” The words came tumbling out….She rushed down the staircase and out into the courtyard of her building. Many of her neighbors had done the same. They were on their knees, banging their heads on the pavement. Their wails cut through the air like sirens.
(See also this short video.) FYI, Demick also shows that not everyone believed and preference falsification certainly occurred, although until the regime collapses it is difficult, of course, to say by how many.
All of this works I think to explain the first few decades. Kim il-sung did help to expel the Japanese, and after the Korean war, North Korea was in fact getting better. Without knowledge of the outside world, claims of being the most developed nation on earth could be sustained. But by the 1990s it was clear things were getting worse and as China grew and starvation took hold in North Korea, the North Korean’s could see that the grass was greener on the other side. As a result, defections to China increased tremendously (see my previous post). Moreover, the transfer wasn’t only in one direction, goods and information from China came into North Korea and some North Koreans even traveled back and forth across the Chinese border. Yet, even with this increase in communication and the death of Kim Il-sung the regime held together.
Can North Korea continue to hold together after Kim Jong-il passes? It wasn’t easy to reintegrate Germany after the Berlin Wall fell and the ties there were much greater. North Koreans, it is said, still do not know that a man has walked on the moon let alone that South Korea has a far higher standard of living. What will happen when the regime in North Korea falls and North Koreans awake from their long coma?
Addendum: For more see this National Geographic video with secret footage from inside North Korea. Hat tip on the latter to Dan Klein and Fred Foldvary.
By Sylvia Nasar, due out September 13.
In a sweeping narrative, the author of the megabestseller A Beautiful Mind takes us on a journey through modern history with the men and women who changed the lives of every single person on the planet. It’s the epic story of the making of modern economics, and of how economics rescued mankind from squalor and deprivation by placing its material fate in its own hands rather than in Fate.
I just pre-ordered my copy.
2. Is China’s dominance a sure thing? (pdf, and where does that seven percent growth assumption come from anyway?)
4. Han Solo markets in everything (“The Empire will compensate you if he melts”)
If you have a license and no criminal record, you can get a six-figure trucking job almost overnight.
You can find some of the ads here, and more broadly here. My poking around showed that some of them start at 75k a year, though with raises for good performance. It is also required that you have no DUI convictions. The sense of community is strong and the State Capitol is an Art Deco masterpiece. You can get Canadian TV. What more could anyone want?
Brian Palmer has a very weak article in Slate trying to make the case that “Twin studies are pretty much useless.” The article is supposed to be about the problem of twin studies as a method but it begins by raising the specter of eugenics. As if that were not enough guilt by association, Palmer then argues that twin studies threaten democracy or at least they would if they were true. (The argument is unclear but seems to rest on the false assumption that if genetics matters then nothing else does. Need I quote the tiresome point that poor eyesight has high heritability but that doesn’t make eyeglasses useless etc.)
After having muddied the waters, the author’s primary argument is this:
Twin studies rest on two fundamental assumptions: 1) Monozygotic twins are genetically identical, and 2) the world treats monozygotic and dizygotic twins equivalently (the so-called “equal environments assumption”). The first is demonstrably and absolutely untrue, while the second has never been proven.
On the first point, the fundamental assumption is not that MZ twins are identical but that they are more identical than fraternal twins. The math is a bit easier if you assume that MZ twins share all of their genes and fraternal twins share 50% on average but this is not necessary. In fact, if you take into account that MZ twins differ genetically this raises the variation that you should ascribe to genetics. If twin one smokes and twin two does not and you assume that they share 100% of their genes then you must conclude that smoking does not vary with genes. If the twins share only 99.99% of their genes then smoking may vary with genes.
On the second point (the equal-environments assumption), Palmer writes as if comparing MZ and DZ twins was the only source of heritability estimates. In fact, heritability estimates are found by looking at twins raised together and twins raised apart, siblings and siblings raised apart, parents and child correlations and so forth and the results from these studies are broadly similar.
Even more important, for an article that goes on about “modern genetics” the author seems completely unaware that it is now possible to do a whole-genome analysis. That is, instead of assuming that siblings share 50% of their genes on average it is possible to estimate, sibling-pair by sibling-pair, how many genes siblings share and then correlate that with various characteristics. Obviously, it takes a lot more data to do a study like this but it has been done. Visscher et al., for example, use data from 3,375 sibling pairs to estimate the heritability of height. Interestingly, they find a heritability of 0.8, very close to that found in traditional studies.
Using whole-genome methods it is not necessary to assume equal environments for MZ and DZ twins. In fact, using these methods you can do genetic studies across unrelated individuals. For example, in Genome-wide association studies establish that human intelligence is highly heritable and polygenic, the authors note:
Data from twin and family studies are consistent with a high heritability of intelligence, but this inference has been controversial. We conducted a genome-wide analysis of 3511 unrelated adults with data on 549 692 single nucleotide polymorphisms (SNPs) and detailed phenotypes on cognitive traits. We estimate that 40% of the variation in crystallized-type intelligence and 51% of the variation in fluid-type intelligence between individuals is accounted for by linkage disequilibrium between genotyped common SNP markers and unknown causal variants. These estimates provide lower bounds for the narrow-sense heritability of the traits.
Twin studies have their problems, just like any method. The thrust of recent advances–advances which have been made to analyze and surmount the kinds of objections that Palmer raises–however, is that the results from twin studies are robust.
Ok, here is a final and telling point. Palmer argues that “Mutations and environmental factors cause measurable changes to the genome as life progresses.” Now that is true but you can judge how eager Palmer is to discredit twin studies regardless of the science by how he quickly concludes from this something which is truly laughable:
By the time a pair of twins reaches middle age, it’s very difficult to make any assumptions whatsoever about the similarity of their genes.