Three TED Talks
My TED talk isn't up yet but three of my favorites are:
- Pattie Maes from MIT demonstrated some very cool technology. Check it out – you will want it.
- Eric Lewis knows how to pound the piano – he is going to be big.
- Aimee Mullins gave a good talk. Not super-exciting per se but notable in so clearly marking the point at which post-humanity has begun. (Note how misdirected her heartfelt conclusion is.)
Assorted Links
- Everything you want to know about smart grids from the very smart Lynne Kiesling.
- "In the hubbub surrounding President Obama’s
decision to cap salaries of commercial-bank CEOs at $500,000 (if they
receive future federal funds), the salaries of college and university
presidents have been flying under the radar." Clarence Deitsch and Norman Van Cott look at the President's club.
- Australians denied insurance for genetic reasons. Clearly, a case for genetic insurance.
Counter-cyclical asset: Safes
Here is the anecdote:
…sellers of safes said that business was up as customers confront new fears, be they losing money in failing banks or being robbed by desperate fellow New Yorkers. …”We’ve had customers come in who are putting half a million to a million dollars in cash in a safe in their home,” said Richard Krasilovsky, 58, of Empire Safe in Midtown…
Fiscal Policy Using the Quantity Theory
Much of the debate over fiscal policy has occurred in Keynesian terms but its worth pointing out that it's perfectly reasonable to discuss fiscal policy in a monetarist framework. Start with the quantity theory of money MV=PY, money times velocity equals prices times real output.
In the long run we know that real GDP is pinned down by real factors (labor, capital, technology, institutions and so forth) so increases in M will increase P proportionally. But in the short run there are plenty of reasons to think that increases in M can increase Y – this is accepted by monetarists, Austrians, rational expectation theorists (ala Lucas) for unexpected changes in money, Keynesians and new Keynesians (only originalist RBC type theorists would object.) But M and V enter the equation in an identical fashion and thus logically must have the same effects for the same change. Thus if you think money is potent then V must be potent as well and V is fiscal policy.
To be precise, V is how fast money turns over and we can think about shocks to V as spending shocks. Spending shocks can be driven by consumers or by the government – this is what Brad DeLong means when he says "the government, in this respect, is just like any other group of starry-eyed optimists whose eagerness to spend pulls the economy into a high-employment, high-pressure boom."
One way of understanding the current recession is that V has fallen by a lot and it is dragging down Y (just as would a sharp fall in M). We can counter with an increase in M (monetary policy) or by an increase in V (fiscal policy).
Now we might think that V driven by government is too slow or too wasteful (ala Kevin Murphy (pdf)) to work well or we might think that neither increases in V nor increases in M would be as effective as Keynesians imagine since there is also reverse causality (falls in Y and expectations of slower growth in Y are reducing M and V). We could pursue the last point to its fullest and abandon the quantity theory altogether (making V an endogenous function of Y, for example, and removing it as an independent variable). But if we hew to the basic ideas of the quantity theory–and remember, it's not a true model only a way of looking at the world!–then fiscal policy is not impossible.
Modernity
In case you are wondering the book is in the Joey Pigza series recommended by Greg Mankiw, who has excellent taste in kids books (Number Devil was good also, thanks Greg!). The reader didn't seem to mind the lack of pictures.
Assorted Links
- Twenty depressing graphs from Calculated Risk.
- In Italy a credit crunch is what happens when you don't pay your loan.
- The Wire's David Simon on how the death of newspapers leaves the guardians unguarded.
Counter-cyclical asset of the day: Atlas Shrugged
weeks of this year compared with sales for the same period in 2008. This
continues a strong trend after bookstore sales reached an all-time annual high
in 2008 of about 200,000 copies sold.
Hat tip to Newmark's Door.
Comparing Recessions 4
GDP was down at a 6.2% annualized rate in the last quarter of 2008 (revised figure). Earlier I criticized the Minneapolis Fed for a peculiar way of presenting data comparing recessions. I've been impressed, however, with how they have responded since I (and others) raised this issue. First, they quickly clarified what they were doing. Second, today they have added a very nice javascript which lets you compare output and employment during this recession to as many others as you like with a few clicks. Check it out.
Monetary Policy?
The Federal Reserve has tried all kinds of innovative ideas to stimulate the economy but according to a headline in the NYTimes they will not be trying one of Milton Friedman's more radical ideas:
Petty Cartels
Entrepreneur Erroll Tyler doesn't want a bailout, his amphibian tour buses don't needing bailing out. What he does want is to bring his service to Boston but a local cartel appear to have a lock on the licenses issued by the city government. Here's a short video making the case, including law professor Randy Barnett who argues that the 14th amendment should be interpreted to protect economic liberty.
Slumdogs and Millionaires
Hernando de Soto makes an apt comparison between slumdogs and millionaires in an interview with Barrett Sheridan of Newsweek.
…What makes a market economy possible is that people are able to find out facts about each other and about their enterprises in spite of the fact that they don't have direct physical contact. So the question is, how do you get to know things? How do you get facts? You will find out that most of the facts you want are in property papers. One of the things that developing countries miss is that close to 80 percent of their enterprises are actually not fully recorded as property.
….The enormous amount of derivatives that had poured into the market–there are close to $600 trillion of these papers around–are also not recorded in a global or centralized manner, or in a manner that allows you to begin to quantify them. [Former SEC Chairman Christopher] Cox thought that maybe the toxic part of all of these assets was $1 trillion to $2 trillion. [Treasury Secretary Timothy] Geithner told us there's maybe $3 trillion or $4 trillion. Nobody really knows, so in a way [they've created an] informal or shadow economy. This unidentified paper is the source of uncertainty and the credit contraction.
…That shadow hopefully is a temporary condition in the United States and in Western Europe. And it might pass in a year or 10 years, but it will pass. That passing condition that's occurring now in developed countries, that's a chronic condition in developing countries. We're always chronically in credit crunches–because you don't know who owns what, nobody dares lend to somebody else. Bringing the law to emerging markets is possibly the most important measure that can be taken to help these countries become rich.
Another Ayn Rand Fan Accepts Bank “Nationalization”
on Tuesday, Mr Greenspan said that “in some cases, the least bad
solution is for the government to take temporary control” of troubled
banks either through the Federal Deposit Insurance Corporation or some
other mechanism.
Targeted? Infrastructure Spending by Unemployment Rate
The ProPublica site maps/graphs infrastructure spending per unemployed worker against the unemployment rate but in effect that puts the number of unemployed people on both sides of the regression/graph and if there is any measurement error this can result in bias. The graph with spending per unemployed worker is similar to the above but with a slightly more negative slope.
Free Market Bank Nationalization
I believe that bank nationalization is now very likely. It may even be desirable. The term nationalization, however, clouds judgment on both sides of the debate. It's better to think of what we want to do as bankruptcy. Many of the major banks are insolvent. When the liabilities of an ordinary firm exceed its assets the firm enters one of a variety of types of bankruptcy procedure during which management is often removed, the firm is sold or reorganized and liability holders take ownership or are paid off at a discount. Notice that we do not call a bankruptcy procedure, nationalization, even though it typically occurs under the auspices of a government employed judge.
When it comes to the banks the issue is more complicated than with an ordinary firm because the major liability holders are depositors whom the government has guaranteed. As a result, the ultimate liability holder is the government. But now, as a thought experiment, imagine that we had private deposit insurance. What would a private insurance firm do in this situation? Would it pander to the current bank management and carry the zombie banks on its books, hoping and waiting for a miracle? Or would it step in, remove current management, pay off the depositors, reorganize and then sell the banks to recoup its losses? I believe a private insurer would follow the second path, the fact that the government is not yet ready to do this indicates how powerful bankers are in Washington. Thus, given deposit insurance the procedure most consistent with free market principles is bankruptcy, preferably a speed bankruptcy procedure under the auspices of the FDIC which has significant expertise in this field.
A speed bankruptcy; 1) punishes current management reducing moral hazard, 2) will be less politicized if done under the auspices of the FDIC than if done piecemeal with congressional involvement and 3) will get the banks working again as soon as possible.
Notice how the term nationalization confuses the issue. First, it suggests government ownership of the banks which would indeed be a disaster. People in favor of free markets will rightly want to avoid any such outcome but ironically it's the current situation of "wait and see," and "protect the banker," which is likely to lead to an anemic recovery and eventual government ownership. Second, it confuses people on the left who think that nationalization is a way to insure that taxpayers get something on the upside. That idea is a joke – there is no upside. Taxpayers are going to have to pay through the nose but the critical point is that the taxpayers must pay the depositors whom they have guaranteed not the banks.
The debate so far has been framed between a "bailout" and "nationalization." But the public rightly sees the bailout as a way to protect bankers and thus we get pressure for government ownership, which has already happened in part through government control over banker wages. Bankruptcy in contrast is a normal free market procedure, it emphasizes that the firm has failed and current management should be removed. Framing the issue in this way, for example, makes it clear that only the depositors should be protected and under reorganization there should be no control over wages on future management (wages are going to have to be high to get anyone to take on the task). Finally the idea of bankruptcy makes it clear that the goal is to get banks solvent, under new management, and back under private control as quickly as possible.
Addendum: Garett Jones nicely lays out the case for doing the normal thing.
Funny beliefs
Mark Thoma makes fun of Judd Gregg for thinking that tax cuts pay for themselves. Mark is right to make fun. What a ridiculous thing to believe. All the good economists know that it is spending increases that more than pay for themselves.