Category: Economics

Here is one excerpt:

In times like these, deficit spending to pump up the economy doesn’t make consumers feel more confident; it makes them feel more insecure because they see a political system out of control. Deficit spending doesn’t induce small businesspeople to hire and expand. It scares them because they conclude the growth isn’t real and they know big tax increases are on the horizon. It doesn’t make political leaders feel better either. Lacking faith that they can wisely cut the debt in some magically virtuous future, they see their nations careening to fiscal ruin.

Read the whole thing.  Just about every paragraph is excerpt-worthy, for instance:

Alberto Alesina of Harvard has surveyed the history of debt reduction. He’s found that, in many cases, large and decisive deficit reduction policies were followed by increases in growth, not recessions. Countries that reduced debt viewed the future with more confidence. The political leaders who ordered the painful cuts were often returned to office. As Alesina put it in a recent paper, “in several episodes, spending cuts adopted to reduce deficits have been associated with economic expansions rather than recessions.”

This was true in Europe and the U.S. in the 1990s, and in many other cases before. In a separate study, Italian economists Francesco Giavazzi and Marco Pagano looked at the way Ireland and Denmark sharply cut debt in the 1980s. Once again, lower deficits led to higher growth.

There are, of course, ways to explain these other histories.  Monetary policies, interest rates, and exchange rates were all different in many of these studied cases.  The point is not that aggressive fiscal policy is always bad.  The point is that there are plenty of coherent models where fiscal consolidation is better than fiscal expansion.  "Lack of confidence in a nation's fiscal future" is a key condition for many of those models to hold.  Is that not possibly the case today?

…over the past decade, the income of black Brazilians rose by about 40
percent, more than double the rate of whites, as Brazil’s booming
economy helped trim the inequality gap and create a more powerful black
consumer class, said Marcelo Neri, an economist in Rio de Janeiro.

Here is much more, and on a more interesting topic than economics.

From a recent interview:

I trust you answer the e-mail of your friends at no charge.
I haven’t got to the point yet where phone calls and e-mails are billable, but I am working on it. That would be happiness defined for me. What I’m hoping is to get a 900 number, so I can tell all my friends, “Call me back on my 900 number: 1-900-HITCH22.” I can talk for a long time.

But who would want to listen?
That would be the 900-number test.

For the pointer I thank Hugo.  He asks me: whose 1-900 number would you like to ring?

Addendum: Here's Felix Salmon on Hitchens.

The stock of fish is declining worldwide at a rapid and accelerating pace.  In Can Catch Shares Prevent Fisheries Collapse? the authors survey fish stocks and find that individual transferable quotas (ITQs) do appear to work in stabilizing and even increasing stocks:

Although bioeconomic theory suggests that assigning secure
rights to fishermen may align incentives and lead to significantly
enhanced biological and economic performance, evidence to date has been
only case- or region-specific. By examining 11,135 global fisheries, we
found a strong link: By 2003, the fraction of ITQ-managed fisheries
that were collapsed was about half that of non-ITQ fisheries. This
result probably underestimates ITQ benefits, because most ITQ fisheries
are young.

The results of this analysis suggest that well designed catch shares
may prevent fishery collapse across diverse taxa and ecosystems.

One of the authors of the paper, Christopher Costello, is featured in the video below from Reason TV which covers the world wide decline in fish stocks, "capital stuffing," and the use of ITQs to solve the tragedy of the commons (FYI, all these concepts are discussed in Modern Principles).

The video mentions but does not investigate further the problem of fish and whales that travel long distances, making property rights more difficult to enforce–a good subject for classroom discussion. See also this 60 Minutes video on tuna.

Addendum: Catch-shares have recently (2009) been introduced in Cape Cod.  Here's a good primer on the costs, benefits and difficulties of implementation.  One interesting observation:

Doing away with season restrictions reduces 'derby' conditions, in which fishermen race out, even in dangerous weather, to catch as much as possible. It also eliminates seasonal market gluts, potentially increasing the prices fishermen can command for their catch.

Paul Krugman, like many other bloggers, asks a good question:

Why, then, are Very Serious People demanding immediate fiscal
austerity?

The answer is, to reassure the markets – because the markets
supposedly won’t believe in the willingness of governments to engage in
long-run fiscal reform unless they inflict pointless pain right now. To
repeat: the whole argument rests on the presumption that markets will
turn on us unless we demonstrate a willingness to suffer, even though
that suffering serves no purpose.

And the basis for this belief that this is what markets demand is …
well, actually there’s no sign that markets are demanding any such
thing. There’s Greece – but the Greek situation is very different from
that of the US or the UK. And at the moment everyone except the
overvalued euro-periphery nations is able to borrow at very low interest
rates.

Here is a short bit from today's morning news:

The euro slid 2.5 percent last week versus the greenback as
credit-default swaps on France, Austria, Belgium and Germany rose,
sending the Markit iTraxx SovX Western Europe Index of contracts on 15
governments to a record.

The French in particular are having serious and formerly unexpected problems and that is one of the two major EU countries, not Greece or Iceland. The French also don't have one of those impossible debt-gdp ratios.

In the blogosphere, discussions of market constraints are too heavily influenced by interest rates, which also "measure" an ongoing flight to safety.  (U.S. rates have fallen of late, but does that mean our fiscal position has improved?  Hardly.)  All of these austerity-promoting leaders are in constant communication with their finance ministers and departments and many of them are hearing glum, on the ground reports from relatively competent bureaucracies.  Furthermore many of these politicians seem to have the discipline to engage in a bit of worst-case thinking, rather than just looking at modal outcomes.

Call me naive, but I believe that most of these politicians would in fact prefer to spend the money and hand out goodies to favored constituencies.

What may be destroying economic recovery is not fiscal contraction, but rather lack of trust,  "Trust" is an underused word in macroeconomics.

Also, do not forget Cowen's Third Law, namely that: "All propositions about real interest rates are wrong." 

The real interest is only one indicator of where fiscal policy is at.  The point that interest rates serve multiple functions, and don't always communicate direct market information very well, comes from…John Maynard Keynes.  Let's at least keep that possibility in mind.