Category: Economics

Uh-oh:

…it's also clear that part of the gun-buying rally is driven by
people like Mr. Chambers who are buying weapons the way others invest
in a hot stock. The buying is pumping up prices. Many popular models of
guns are back-ordered for a year or more. Some manufacturers are
operating plants 24 hours a day. According to the 2009 edition of the
Blue Book of Gun Values, the average price of European-made AK-47s —
the famous Soviet-era military weapon now made in several countries —
doubled from $350 last September to more than $700 by the end of 2008.

Bert Collins, an Atlanta commercial
real-estate manager, recently bought two AR-15 rifles for about $1,600
each. He's keeping one in its box, untouched, with the hope of selling
it at a profit should Congress re-enact the law, which expired in 2004.
"It's certainly a better investment than my 401(k) has performed," Mr.
Collins said.

Bubba Sanders, owner of Bullseye Supply LLC, in Brandon, Miss., said
he has "a number of doctor clients whose financial advisers have told
them to invest in ammunition. Beats the hell out of money markets and
CDs. You can double your investment in ammunition in a year."

I thank John de Palma and James Solier for the pointers.

Via HBS, a good introduction.

I thank George McQuistion for the pointer.

I don't think so.  I think the truth — hard for some people to digest — is simply that these smart Social Democrats, rightly or wrongly, don't much believe in massive fiscal stimulus.  They're used to the idea that their economies have big structural problems that government spending cannot eliminate.

If fiscal policy can work for a large country such as the United States, it should work for the Netherlands (or Portugal) as well, even if it would work with less potency.

The benefits from the first round of spending would be captured almost completely within the Netherlands.  If unemployed resources can be well targeted, and without messing up incentives too badly, (big "ifs" in my view), that provides an almost automatic case for extra Dutch government spending.

It is a good question whether the Dutch already have too much government spending.  I will say yes but I don't much hear this from fiscal policy advocates.  Maybe they think the current Dutch balance is "just right" but again that means at the margin fiscal policy, targeted at unemployed resources, won't wreck the overall balance.

What about the second round of expenditures from the fiscal policy?  Well, if a big chunk of those newly employed workers increase their spending on food, shelter, and local transportation, lots of the second round is captured in the Netherlands as well.  Even buying a T-shirt from China will likely benefit a Dutch retailer to some extent.

You will hear the common tale that "everyone not crazy thinks fiscal policy is a good idea, but some countries are too selfish, or too cowardly, to do it."

That story is an easy out, but the truth is that not everyone is so enamored of massive fiscal policy stimulus.  If they were, they would be doing it.  But they're not.

Hong Kong, by the way, is preparing a relatively aggressive stimulus package.

Here is a relevant blog post on Germany.

Masonomics looks at the human brain as an organ that is highly evolved
to engage in deception, including self-deception. It can reason without
necessarily being rational. The way I see it, Masonomics does not
necessarily agree that humans tend to choose the best ways to achieve
their objectives. Instead, we are limited by our capacity for
self-deception, among other shortcomings.

That is from Arnold Kling.

Here is an excellent blog post and Fed study.  There is too much content for my summary to dominate clicking on the link but the bottom line is this:

This analysis suggests mortgage modifications – without principal reduction – will have limited success.

It is one of the best economics blog posts this week.

Remember the good old days, when economists used to write papers about how firms — most of all public utilities — would under-report profits, to minimize regulation and control?  These days we have firms over-reporting profits to minimize regulation and control.

(As an aside, Wells Fargo was the most responsible of the major banks, so we shouldn't regard the profit report as a complete lie or illusion.)

We also have economists saying that banks should essentially be turned into public utilities.

And the major regulator is saying the firms shouldn't be reporting so much at all.

Times indeed have changed.

Matt, Ezra, and Bob Frank, among others, have been talking about this topic.  Say we taxed rich bankers at 95 percent above a certain income level.  Salary income would be converted into capital gains.  We don't want to tax capital gains at 95 percent or even 50 percent.  Plus taxing unrealized capital gains — if you desire that the earners cough up the money now — involves other problems.

Of course some firms and sectors cannot equitize pay in this fashion.  A big implicit tax is then placed on such sectors.

You could work very hard to develop a tax code that will cover exactly the people you wish, at the margins you wish.  You could work very hard and still fail.

Looking for "longer-term incentives" is a sounder approach than trying to force "much smaller incentives."

I agree with your point
that fiscal policy can work through V and that is the correct way to
think about it.  In fact Alex and I present this in our forthcoming
Principles text.

I think, however, you put too much emphasis on
interest elasticity.  Which is the relevant "M" in the equation of
exchange?  Surely not currency.  Yet I can earn an interest return on
most parts of M2, if I care to.

The key arguments for sometimes
using fiscal rather than monetary policy have, I think, to do with
targeting very particular parts of the real economy.

Plus maybe the Fed doesn't have a strong enough political constituency to be asked to handle the entire macroeconomic problem.

To
me those two factors are much more important than anything having to do
with interest elasticity.  Plus I am still influenced by Cooley's old
AER paper (1981?) and I don't trust any of the interest-elasticity
estimates, no matter what they find.

Tyler

Addendum: This paper prompted the email.

They call the feature "Blog War," although it is friendlier than that.  The first installment is here (alternatively Brad's first full post is here and mine here) and there is more to come, some of it already in the can.  I cannot promise we will be rational in the Hansonian sense, but I do believe we will get to the bottom of where the disagreement lies.

Addendum: Matt Yglesias comments.

From a recent Business Week article, here are some suggested possibilities:

Banks may be able to finance the sale of their own troubled loans, lending money to the public-private partnerships that buy the assets. A bank's loan to the partnership would be buttressed by an FDIC guarantee. Administration officials confirm that the Treasury may allow such seller financing. The move essentially replaces junky mortgages on the bank's books with an FDIC-guaranteed loan.

…Say a private investor in one of the partnerships owns big stockholdings in a bank putting assets out to auction. By overbidding for the bank's sludge loans, the investor could help drive up the banks' shares and make a tidy profit.

…Perhaps the most intricate maneuvers will likely stem from "layering" the government's many programs of the last six months. Starting with some of the capital infusion received last fall from the Treasury, a bank could invest in a private partnership that buys toxic assets using a loan guaranteed by the FDIC. Those assets could then be chopped up and sold as securities to other investors–who put together the financing for the deal by availing themselves of another program of low-risk loans from the Federal Reserve. Thus the original bank's capital at risk in this web of deals would be almost nil. "[This] is going right back to the practices that got us into this problem–except using government leverage," Young says. "It might lead to an even wilder party than we saw before."

You should not assume that all of these strategies will be legally possible or that they necessarily work.  Furthermore the greater danger may be that banks are afraid to make money in a partnership with government aid, for political reasons.  Still, if you are seeking to think through possible problems in the Geithner plan, the article is a one good place to start.

Ricardo Caballero's defense of the Geithner plan is here.

Addendum: Jeff Sachs is worried.

That is my latest column and the core point is straightforward:

What the banking system needs is creditors who monitor risk and cut
their exposure when that risk is too high. Unlike regulators, creditors
and counterparties know the details of a deal and have their own money
on the line.

But in both the bailouts and in the new proposals, the government is
effectively neutralizing creditors as a force for financial safety.
This suggests a scary possibility — that the next regulatory regime
could end up even worse than the last.

Do read the column for a discussion of how we might make creditors suffer.  Here is why the Obama administration is having such a tough time with the issue:

Right now, people cannot understand why A.I.G. received bailout
money, so they feel deceived. A single insurance company, even a very
large one, just does not seem that essential to the American economy,
which makes the company all the more a scapegoat. Much went awry at
A.I.G., but in the context of a bailout, the company should be thought
of as the conduit for helping an entire market that went bust.

This poses a very difficult public relations problem for the government, because the Federal Reserve and the Treasury do not want to discuss the importance of the creditors too publicly right now.

Why not? It would be bad precedent, and mind-bogglingly expensive, to
promise to pick up all future obligations to major creditors. At the
same time, any remarks that threaten to leave creditors hanging could
panic the markets. So silence reigns, the Fed and Mr. Geithner receive
bad publicity over the bailouts, and we are all laying the groundwork
for a future financial crisis.

James Kwak offers comment.  Here is Arnold Kling.  Mark Thoma has very good comments on time consistency problems.

The NYTimes has a short piece in the arts section on "new deal revisionism."  Rich Vedder gets the best line:

Mr. Vedder playfully offered another analogy: the recession of 1920. Why was that slump, over and done with by 1922, so much shorter than the following decade’s? Well, for starters, he said, President Woodrow Wilson suffered an incapacitating stroke at the end of 1919, while his successor, Warren G. Harding, universally considered one of the worst presidents in American history, preferred drinking, playing poker and golf, and womanizing, to governing. “So nothing happened,” Mr. Vedder said.

Of course Mr. Vedder does not wish ill health – or obliviousness – on any chief executive. Still, in his view, when you’re talking about government intervention in the economy, doing nothing is about the best you can hope for from any president.

By the way, I am looking forward to hearing Bob Higgs on C-Span this weekend.  Higgs is a top-rate economic historian from whom I learn something new everytime I hear him.