Sentences to ponder

by  Tyler Cowen in

Campaigns are built to fool us into thinking that we're voting for individuals. We learn about the candidate's family, her job, her background — even her dog. But we're primarily voting for parties. The parties have just learned we're more likely to vote for them if they disguise themselves as individuals. And American politics would work better if we understood that.

That's from Ezra Klein.

*Madoff Victims in Their Own Words*

by  Tyler Cowen in

That is the subtitle, the title is The Club No One Wanted to Join and the editor is Erin Arvedlund and the compiler is Alexandra Roth.  Here are a few excerpts:

You are an evil predator…The Bible says that as Christ hung on the cross He cried out to God, "Father forgive them, for they know not what they do."  I do not forgive you.  You and your family knew exactly what you were doing.  You will face God soon, and he will hold you accountable for your sins.

And another:

I no longer hate you.  You are no longer the Monster that terrifies my dreams and fills my nightmares, because now I have courage and strength, and I have taken back control of my life.

This ordeal has allowed me to grow.  It has allowed me to be a better friend, a better daughter, a better sister, and better me.

And for that I say, thank you!

And another:

P.S. I have been spelling your name in low caps for a while now, simply because you are a low life.

And:

I never met you, yet you had more influence and control over my life than I ever did.

Are TV ads more effective if we pay less attention to them?

by  Tyler Cowen in

I consider this a speculative result but it is interesting nonetheless:

"There has been a lot of research which shows that creative TV ads are more effective than those which simply deliver information, and it has always been assumed that it is because viewers pay more attention to them.

"But in a relaxed situation like TV watching, attention tends to be used mainly as a defence mechanism. If an ad bombards us with new information, our natural response is to pay attention so we can counter-argue what it is telling us. On the other hand, if we feel we like and enjoy an ad, we tend to be more trustful of it and therefore we don't feel we need to pay too much attention to it.

"The sting in the tail is that by paying less attention, we are less able to counter-argue what the ad is communicating. In effect we let our guard down and leave ourselves more open to the advertiser's message.

"This has serious implications for certain categories of ads, particularly ads for products that can be harmful to our health, and products aimed at children.

"The findings suggest that if you don't want an ad to affect you in this way, you should watch it more closely."

How to interpret Germany, again

by  Tyler Cowen in

Here is one recent Paul Krugman post on Germany, here is another.  Excerpt from the first:

Via Mark Thoma, Dean Baker points out that real government consumption of goods and services – that’s government buying things, as opposed to cutting taxes or handing out checks – has risen more in “austerity” Germany than in the United States.

In the second post:

Germany’s austerity policies have not yet begun – up to this point they’ve actually been quite Keynesian.

I would frame this debate with a few points:

1. Kindred put it well: "No one is saying Germany is an economic miracle. Some people, like Tyler Cowen, are saying that Germany's experience doesn't track very well with standard economic models and this fact needs to be acknowledged by those who loudly proffer policy advice…No one (that I've seen) is saying that Germany's turn-around is due to austerity."  The good analyses of Germany credit the real economy and restructuring — the supply side — with credible fiscal policy as only one part of a broader story, while recognizing Germany already had higher government spending, high previous use of debt, and better automatic stabilizers. 

2. The German recovery has been export-driven, which also suggests the role of domestic fiscal policy is secondary.  

3. If Germany is so Keynesian, why did Krugman write in June: "And it’s also important to send a message to the Germans: we are not going to let them export the consequences of their obsession with austerity.  Nicely, nicely isn’t working. Time to get tough." 

It's fair enough for Krugman to simply admit he was wrong.  But then he should…admit he was wrong (and also ponder what such an admission means for "get tough" trade policies).  Maybe Krugman has a story about how he was talking only about their pending austerity, and approving of their current policies but simply failing to mention that at the time, but it's hard to get that impression from reading his corpus of 2010 writings on Germany. 

4. Talk of exports as zero-sum has been dwindling.  German imports have risen to new highs and it is also apparent that the Germany economy is a positive-sum locomotive for most other countries.  And a lot of the German exports contribute to the productive capacity of other nations.

5. For well over a year, and also in earlier research, Krugman has repeatedly argued that AD-expanding policies work only if they are accompanied by a credible commitment to continue them in the future.  Germany has exactly the opposite of such a commitment, indeed they have a fairly credible commitment to near-balance the budget by 2016.  By Krugman's logic a) the German use of stimulus shouldn't work, and b) we shouldn't measure the German AD stance by checking current policies only and therefore we should not judge their overall fiscal policy as very expansionary.  His current remarks on Germany leave aside this intertemporal perspective.

6. Across countries, the size of ramp-up stimulus doesn't seem to matter for recovery.

Markets in everything, personal services edition

by  Tyler Cowen in

Whom would you hire to perform this function?  A man or a woman?

A number of people have been hiring “virtual” assistants in lower-wage countries to do all the tasks in their life that don’t require a personal presence. Such assistants are found starting at a few bucks an hour…

Anyway, last weekend I was talking to an acquaintance about his use of such services. He has his assistant seducing women for him. His assistant, who is female and lives in India, logs onto his account on a popular dating site, browses profiles and (pretending to be him) makes connections with women on the site. She has e-mail conversations and arranges first dates. Then her employer reads the e-mail conversation and goes to the date.

The full story is here and for the pointer I thank the eagle-eyed KW.

Some results on Japanese quantitative easing

by  Tyler Cowen in

There is a useful paper by Hiroshi Ugai, which finds mixed results, here is part of the abstract:

This paper surveys the empirical analyses that examine the effects of the Bank of Japan (BOJ)'s quantitative easing policy (QEP), which was implemented for five years from March 2001 through March 2006…

…because of the QEP, the premiums on market funds raised by financial institutions carrying substantial non-performing loans (NPLs) shrank to the extent that they no longer reflected credit rating differentials. This observation implies that the QEP was effective in maintaining financial system stability and an accommodative monetary environment by removing financial institutions' funding uncertainties, and by averting further deterioration of economic and price developments resulting from corporations' uncertainty about future funding.

[yet]…many of the macroeconomic analyses conclude that the QEP's effects in raising aggregate demand and prices were limited. In particular, when verified empirically taking into account the fact that the monetary policy regime changed under the zero bound constraint of interest rates, the effects from increasing the monetary base were not detected or smaller, if anything, than during periods when there was no zero bound constraint. The studies generally show that the QEP had a greater monetary easing effect than that stemming from merely lowering the uncollateralized overnight call rate to zero percent, while the effects in raising aggregate demand and prices nevertheless turned out to be limited…the substantial decline in responsiveness to monetary easing on the part of corporations and financial institutions resulting from their deteriorated core capital due to a plunge in asset prices played a major roles.

Profile of Peter Boettke in The Wall Street Journal

by  Tyler Cowen in

Here is one bit:

But the 50-year-old professor of economics at George Mason University in Virginia is emerging as the intellectual standard-bearer for the Austrian school of economics that opposes government intervention in markets and decries federal spending to prop up demand during times of crisis. Mr. Boettke, whose latest research explores people's ability to self-regulate, also is minting a new generation of disciples who are spreading the Austrian approach throughout academia, where it had long been left for dead.

…Mr. Boettke "has done more for Austrian economics, I'd say, than any individual in the last decade," says Bruce Caldwell, an editor of Mr. Hayek's collected works.

And another:

Still, Mr. Boettke isn't too concerned with matters of style. More folksy than formal, his commitment to economics, as his wife Rosemary says, is "always on."

He has a tendency to ramble, interrupt and use salty language. In between the dozen books and over 100 articles he has written, he spends hours debating with students around his backyard barbecue grill.

Often, when Mrs. Boettke needs him to run errands, he makes students pile in the car with him to finish the debate. He also has trouble closing down his inner economist.

The full article is here.

Sentences to ponder

by  Tyler Cowen in

Chilean officials have not yet informed the miners of the months they will need to endure before a rescue shaft can be drilled and a cage lowered to pull them to the surface.

The story is here.  At lunch today, one topic was how the Chilean miner experience, when it is over, might revise our understanding of social science.  A related question was to estimate the probability that there will be a killing before the time underground is over.  How much would that chance go up if one woman were in the group?  An equal number of women?

Is it unethical for us to "watch" them, talk about them, or speculate about them?  If doctors tell terminally ill patients the nature of their condition, why are the Chilean authorities waiting to tell the men how long they will have to wait for rescue?

How do they "stall them" when the miners ask when are they getting out?

Addendum: Apparently the miners were just told how long it is likely to be.

Fessing up to previously incorrect beliefs

by  Tyler Cowen in

Brad DeLong offers a list:

In my belief that central banks had the tools, the skill, and the political will to stabilize economies at high levels of employment and low levels of inflation, and thus that fiscal policy and financial institutions policy no longer had any compelling stabilization policy role to play.

In my belief that large, leveraged financial institutions had sufficient caution and sufficient control over their derivatives books that their derivative positions did not pose major systemic risk.

In my belief that the principal threat to the world economy would come from the fact that in a crisis the shaky long-term finances of the U.S. social insurance state might provoke a collapse of confidence in the long-term value of the dollar.

I shared in one and two, though not three.  I'm starting to believe in #3 however.

(That said, I would word #1 differently; for instance, I have long believed in automatic stabilizers and still do and I remain more skeptical of "ramp-up" spending than Brad.  I would phrase #2 to focus on the balance sheet more generally and not derivatives per se.) 

I also take the data on slow median income growth more seriously than I used to.  I no longer think those numbers are a mere statistical artifact.

What can you all cite as changed beliefs?  Examples like "Person X or Policy X turned out to be even worse than I had thought" do not count.

Addendum: Megan McArdle adds her list, mine could be longer too!

Would more planned savings be good? How can we lower perceived risk premia?

by  Tyler Cowen in

One common claim these days can be put in terms of the expectations theory of the term structure: since short-term rates cannot much fall, long-term rates cannot much fall either. 

Yet I would not put this argument forward as the best available understanding of the issue.  First, the expectations theory of the term structure has a dubious empirical record.  Long and short rates change for somewhat mysterious reasons and the long rates do not forecast future short rates very well.  Second, there is a distinction between Treasury and corporate rates and the latter are not zero, especially for small businesses.  

One possibility is that true corporate real rates are better reflected by the status of letters of credit, standby loan agreements, and the like.  One can view borrowing in terms of the value of an option, rather than a single numerical rate.  Many businesses no longer feel they have lots of liquidity "on tap" when they might need it from their banks and so they hesitate.

In general, I think of this crisis as having damaged a lot of agency relationships, and as having led to tighter leashes.  For instance, if you are a worker of um…"ambiguous" marginal product you may no longer get the benefit of the doubt.  The high perceived risk premium in the labor market is preventing a lot of reemployment.

Returning to interest rates, the question is what could call true real rates to fall.  The expectations theory of the term structure is not very useful in analyzing this problem.  Changes in the perceived risk premium have been an embarassment and a confounding factor for the expectations theory for a long time.

Given that background, should we plan to save more?  On the no side, I would not push "more savings" is the magical elixir in lowering real rates, since the major issue is again the perceived risk premium.

(By the way, if we lower real rates through Sumneresque inflation — which I favor — we are altering the spectrum of these agency dealings and injecting more risk into those relationships, possibly in a socially optimal manner; in any case that second-order effect has not seen enough analysis.)

Another anti-savings argument runs like this: if we switch from spending to savings, that requires longer-term production processes and resource reallocations.  The new market forecasts of what to produce involve greater risk, namely Keynes's "dark forces of time and ignorance".  If that increase in the risk is too stiff, an increase in planned savings could lead to a greater collapse in output, exacerbating both AD and AS problems.

A pro-savings argument runs like this: We're overly dependent on Chinese capital.  T-Bill auctions are now being soaked up much more by domestic lenders and that is a good thing for the world state where the Chinese economy implodes.

Another pro-savings argument is about balance sheet repair and about satisfying the preferences of consumers for greater long-term risk protection.

A major pro-savings argument is: If savings are not to go up now (and they have been rising since the onset of the crisis, supposed Keynesian paradoxes aside), then when?

The long-run boundary conditions require Americans to save more at some point and here's a fundamental point about macro.  I believe we are in a situation where the short-run and long-term boundary conditions are interacting.  People want to see the longer-term "we have to save more" problem (as well as some other longer-term problems) partially resolved before having much lower shorter-term risk premia and thus a freer flow of capital and private investment and also more ambitious hiring policies.

That makes the ride especially bumpy and the recovery especially slow.  Both the long-run and short-run conditions require partial resolution, at the same time, and yet the long- and short-run conditions point in some different directions.

I get nervous when I see Keynesian models emphasizing the short-term only or non-Keynesian approaches emphasizing the long-term only.  The more insightful approaches see the short-term and long-term factors interacting in a not always so helpful manner.

Addendum: Krugman has a recent post on savings.  I am confused by his insertion of the Fed into the classical loanable funds mechanism, which does not require a central bank.  I am also surprised that he associates the paradox of saving with the liquidity trap; Keynes for instance believed in the paradox of saving even though he thought he had never seen a liquidity trap.  It could be, however, that I am misreading him on both counts; I found the post difficult to parse.