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.
From Car Czar to Car Politburo
Headline in the NYTimes:
Obama is said to shift plans to fix Detroit: A Panel, Not a Car Czar.
Love Makes You Fat
Uri Gneezy and Jason Shafrin show that the more likely you are to get divorced or terminate your relationship the less likely you are to gain weight. We call this keeping one's options open.
The time is now 1234567890.
That is all.
Kicking the Stimulus
Smokers are three times more likely to kick the habit for at least six months when they are paid up to $750 (£520), a new study has found.
Nearly 900 General Electric workers took part in the test across 85 US sites. The results were published in the New England Journal of Medicine.
GE will launch a similar scheme in 2010 for all US employees, believing it will be cost-effective in the long term.
Buy a House, Get a Visa
Add Thomas Friedman to Tyler, myself, Lee Ohanian and others suggesting immigration as a way to alleviate the recession:
Leave it to a brainy Indian to come up with the cheapest and surest way to stimulate our economy: immigration.
Koreans,” said Shekhar Gupta, editor of The Indian Express newspaper.
“We will buy up all the subprime homes. We will work 18 hours a day to
pay for them. We will immediately improve your savings rate – no Indian
bank today has more than 2 percent nonperforming loans because not
paying your mortgage is considered shameful here. And we will start new
companies to create our own jobs and jobs for more Americans.”
Note that the multiplier on the “buy a house, get a visa” strategy would be much larger than any possible domestic multiplier since the money would come from outside the economy (and efficiency would improve as well.)
I think there would be considerable support among economists that immigration (buy a house, get a visa), a payroll tax cut and maintaining state and local funding would be reasonably good policies in this recession (albeit not necessarily sufficient) yet these policies seem to be the ones that the political system rejects out of hand. (See also Matt Yglesias here and here). Now, I can understand rejecting these policies as compared to doing nothing, ala a precautionary principle, but why these policies are rejected compared to taking a trillion dollar gamble is puzzling even to someone like myself schooled in public choice.
The Physics of BS
Here is Frank Tipler on macroeconomics:
accurate predictions means that they do not know what they are talking about. We
non-economists should realize this also, and realize that our leaders, who are
being advised by macroeconomists, haven’t got a clue where they are leading us.
Well ok I have some problems with macroeconomics too but considering many of Tipler's writings his criticisms of macroeconomics are rather amusing. e.g.
Singularity–God–is like. The laws of physics tell us that our universe
began in an initial singularity, and it will end in a final
singularity. The laws also tell us that ours is but one of an infinite
number of universes, all of which begin and end in a singularity. If we
look carefully at the collection of all the universes–this collection
is called the multiverse–we see that there is a third
singularity, at which the multiverse began. But physics shows us that
these three apparently distinct singularities are actually one
singularity. The Three are One.
There is one religion which
claims that God is a Trinity: Christianity. According to Christianity,
God consists of Three Persons: God the Father (the First Person), God
the Son (the Second Person), and God the Holy Ghost (the Third Person).
But there are not three Gods, only one God. Using physics to study the
structure of the Cosmological Singularity, we can see that indeed the
three “parts” of the Singularity can be distinguished by employing the
idea of personhood. In particular, physics can be used to show how it
is possible for a man–Jesus, according to Christianity–to actually be
the part of the Singularity that connects the Initial and Final
Singularities. So the Incarnation makes perfectly good sense from the
point of view of physics.
Jim Hamilton on Real Shocks
Hamilton hits the nail on the head:
…[I] disagree with some of my colleagues is in their presumption that wage or price rigidities are the core frictions that are responsible for producing the present situation. I have in my research instead stressed technological frictions. For example, when spending on cars abruptly falls, there is a physical, technological challenge with getting the specialized labor and capital formerly employed in manufacturing cars into some alternative activity. In my mind, it is a mistake to pretend that any federal program is capable of immediately re-employing those resources into an alternative, equally productive enterprise. More fundamentally, I have suggested that our present situation is as if someone had quite successfully sabotaged the basic functionality of our financial system. Until we once again have a financial sector that can successfully allocate credit to worthy projects, we're not possibly going to be able to produce as much in the way or real goods and services, no matter what the level of aggregate demand or stimulus package might be. In terms of the textbook Keynesian models that people play with, I'm suggesting that "potential" GDP growth for 2009:Q1– that growth rate which, if we try to exceed it by stimulating aggregate demand, we primarily just get more inflation– is in fact a negative number. I do not accept the proposition that there is a level of government spending– however large a number you choose to suggest– that will prevent the unemployment rate from rising above 8%. But I do believe that if the government borrows a sufficiently large amount, we will have to worry in a very concrete way about what will sustain the foreign demand for U.S. assets.
Hamilton continues by noting that such a position is quite compatible with spending to maintain state and local government expenditures with block grants, fundamental infrastructure spending on things like the electric grid and working hard to restore the financial sector.
But rushing through new government spending plans, just for the sake of spending? Count me off of that bandwagon.
Robin Williams and Alex Tabarrok
I was asked to do a radio interview with KPCC while I was at TED. The interview had just started and I’m talking about organ donation when into the studio walks Robin Williams! Naturally all chaos ensues and Robin takes over… but not before I manage to squeeze in an economics joke with Robin playing the straight man! Some kind of first there. I’m not sure Robin got the joke but I think this made the host laugh all the more. No one can out talk Robin, however, so he riffs on organ donation and fiscal stimulus for some time. Eventually Robin goes on his merry way and the host and I get back to organ donation, bounty hunters, voting and other cool stuff. An amazing experience for me. Real audio here (try here if that doesn’t work)