Category: Economics

Jared Sylvester writes me:

Earlier this month you
made one of your "Markets in Everything" posts on Marginal Revolution
about Hyunadi's program to buy back cars from people who lose their
jobs.  I thought you might be interested to know that Jos A Bank is now
offering to refund the price of a new suit in the same circumstances,
or in the case of the self-employed, in the case of a bankruptcy
filing.  You can find the details here:
http://www.josbank.com/Templates/riskfreesuit.tem

The buy a house, get a visa program which I have been pushing for some time is getting some serious play.  Writing in the WSJ, Richard Lefrak and Gary Shilling note:

The blueprint for a program to sell surplus housing to immigrants is already in place with the EB-5 visa program. Each year, 10,000 EB-5 visas for this country are available for foreigners who each invest $1 million in a new enterprise ($500,000 in economically depressed areas) that creates at least 10 full-time jobs. After two years, the entrepreneur and his family can become permanent residents.

From the Atlas Foundation, I do not usually sign petitions but in this case I made an exception.  They are looking for other economist signers and there are instructions at the link.  Please consider helping them out.

Addendum: Related only by topic, here is a very interesting post on shrinking global trade.  Very scary.

Passive Aggressive Anger Release Machine

“All you have to do is insert a coin, and a piece of china will
slowly move forwards and fall into the bottom of the machine, breaking,
and leaving you happy and relieved of anger.”

The link is here.

Henry Blodgett writes:

If the "TARP bonus" bill the House passed today becomes law, any of
the hundreds of thousands of people who work for Citigroup, Bank of
America, AIG, and nine other major US corporations will have to fork
over 90 cents of every dollar they make that puts their household
income over $250,000.

That's household income, not individual income.*  If you're
married and filing singly, you'll have to surrender anything over
$125,000.  Indefinitely.

Read the whole thing.  There is this too:

The really distressing part is what this tax will do to the corporations that we now own and are supposedly trying to save.

(Remember?  That's the reason we bailed Citigroup, AIG, GM, and the
rest of them out–to save them.  Because we convinced ourselves that
civilization would end if we didn't.)

Thanks to our stupidity
bailouts, we now own major stakes in these firms (at mind-boggling
expense). So it's not clear why we want to destroy them.  But that's
what we seem determined to do.

Addendum: Here is one of many stories about death threats against A.I.G. employees.

Bernanke will do it.  I'm sitting in an airport, so here is a very quick take.  It is cheaper and quicker than fiscal stimulus; this should have been our first move.  It is more likely to work.  There are two effects: lowering long-term interest rates and the helicopter drop of the cash.  It belies previous talk of a liquidity trap.  It does not address most of the underlying problems in the real economy and as you know I see the "sectoral shift" element of this downturn as very much underrated.  In that sense don't expect too much.  It shows that at the limit fiscal and monetary policy blur together.  The more the Fed takes on its balance sheet, the more the long-run independence of the central bank is damaged.  Monetizing so much government debt is what Third World nations do.  Draining the new money from the system will someday be a problem.  It may introduce a round of "beggar-thy-neighbor," central bank-engineered currency depreciations.  "Operation Twist," from the 1960s swapped short- for long-term assets but did not seem incredibly effective, although it was done under very different circumstances.  Trillion is the new billion.  If this fails the U.S. economy, and the stock market, will test new bottoms.  The most articulate advocate of quantitative easing is Scott Sumner.

It's about time.  Shows how peculiar it is to define a liquidity trap in terms of short-term rates.  The fact that the Fed usually buys short-term bonds is a minor issue as far as monetary theory is concerned, like the fact that the Fed usually prints $1 bills but not $2 bills.

The very healthy influence of Scott Sumner has induced me to read the Irving Fisher works I had never looked at before.  Wow.  It’s Fisher, not Keynes, who is the prophet of our times and the superior analyst of the Great Depression.  Circa 1932, Fisher wrote:

…in the depression of 1929-32, while the volume of deposit currency in member banks was falling 21 per cent, the velocity of it was being reduced by 61 percent….a mere new supply of money, to replace what has been liquidated or hoarded, might fail to raise the price level by failing to get into circulation…a mere increase in M might prove insufficient, unless supplemented by some influence exercised directly on the moods of people to accelerate V — that is, to convert the public from hoarding.

One wishes that Keynes were so clear. And what is the best way to restore confidence and break the liquidity trap?  Restoring confidence in banks, so that a multiplier, working through credit, may be effective again.  Fisher also suggests negative interest on reserves and he outlines in detail how this might be done.

That is all from his Booms and Depressions, First Principles, a very sophisticated work.  Pigou, Hawtrey, and Viner are also all worth reading; they are more advanced in their thinking than Keynes was willing to admit.

Hail Irving Fisher, still one of the most underrated economists of the 20th century.  By the way, 1936 – 1932 equals 4.

On Intrade, users are betting on a futures contract that pays out if
Mr. Geithner is out of his job by June 30. Right now, the futures
contract shows a low probability of that happening – it’s currently at
15 percent, or $1.50. Still, that’s up from previous levels, according
to the prediction market’s Web site.

Here is the (brief) story.

pp.7-8 tell you what they don't want to do, take a look.  Maybe that above list sounds reasonable, but it also sounds designed to prevent money market-like institutions from…guess what…competing with money market funds.  It also sounds designed to preserve the good name of money market funds next time something goes screwy.  It is designed to preserve p (share) =1 without requiring a legal commitment to that effect and without instituting overly burdensome regulation.  Pretty neat, huh?  It's a circle the wagons approach, combined with a reluctance to ante up any cash on the table.  You don't suppose they are still planning to depend on the Fed as a lender of last resort, do you?

You'll see a lot more proposals like this from industry participants.  "Help me look good again," but with little recognition of the toothpaste tube metaphor and with few remedies for wherever the next bout of systemic risk gets squeezed to.  I don't blame the money market sector for not solving this problem (economists can't solve it either), but at the same time it's important to recognize such proposals for what they are: the new financial services sector equivalent of NIMBY.  Put your systemic risk junk somewhere else.  But where?

This paragraph, from this story, caught my eye:

With no heir, the late Herbert Blagrave, a philanthropic racing figure, left his family fortune to a trust, along with orders that the money should be spent on sick children, the elderly and injured jockeys.

The link is via Rachel Davison, and it concerns the sale of an entire English village.  How is this for a sales pitch?

Tim Sherston of Jackson-Stops called the village a "safe and sound investment" despite the economic slowdown.

"You've got an entire village — 22 houses, a cricket pitch, a village shop, a forge and 1,500 acres of farmland, 450 acres of woodland …We think actually there will be a lot of potential buyers for this."

How much will it go for?  Here is the website for the Injured Jockeys Fund, note the photo on the top.

My claims that you are not required to publicly bet your views have received enough denunciations (mostly commentators on other blogs) that I feel it is time to rub some salt into the open wounds. 

First, I have nothing against betting one's views and indeed I've done it with Bryan Caplan, though mostly for fun.  No one bets his or her views consistently, or that frequently relative to the number of views, so I am simply pointing out that a default of "no betting at all" is an OK point along that spectrum.  In fact it is a homage to the idea of division of labor.  Nor have I seen the critics publicly revealing their equity and other asset portfolios, the real bets which matter in financial terms.

More generally, we may wish that researchers express "real commitment" to their views.  I don't see betting as an essential part of such a commitment portfolio.  "Simply being a certain way" when it comes to inquiry is #1 on my list.  Having a good and deserved personal reputation for truth-seeking is another.  An emphasis on betting, in my view, represents an odd economistic view that commitments should be viewed essentially or primarily in monetary terms.  From a variety of other settings (try giving your wife "cash" for Valentine's Day) we know that signaling commitments through money can backfire.  Might that be the case here as well?

Doesn't the very offer to bet signal that your view is possibly based on private, not easily verified-in-public information?  Doesn't it signal a lack of confidence in the publicly available information itself?

If I think of the scientists who have influenced me most, or done the world the most good, very few of them were practitioners of public betting.  Furthermore that correlation is no accident (I would bet that most of them regarded, or would have regarded, the idea skeptically, or as a kind of public relations stunt).  You might think that is a market failure of some kind and maybe it is.  But in the meantime, if you do have a truly good idea, maybe the best course of action is to mimic the other holders of truly good ideas and that means not betting publicly on your idea.

I'm not suggesting that such a mimicry strategy is best with p = 1.0, only that it gives you one of a number of rationales for not betting at all.

John dePalma directs me to this article, excerpt:

…Just ask Nouriel Roubini
of New York University, who has a reputation as the most pessimistic
economist in academe. He deserves it. His most recent paper, published
last week, is entitled: "Can the Fed and Policy Makers Avoid a Systemic
Financial Meltdown? Most Likely Not."  Nobody is more aware of the
gravity of the financial situation, and nobody has done more to point
out the risks of a systemic crisis.  So how are Roubini's
own funds invested? They are 100 per cent in equities. In the long run
stocks do best and he is not yet close to retirement, so he keeps
putting more money into index funds each month. Fully aware of the
gravity of the financial situation, he is also aware of the futility of
trying to take action or to time the market. Those tempted to make the
investing equivalent of a goalkeeper's despairing dive should take note.

That's what I call taking mental accounting to an extreme.

A reader asks:

How about some comments on the refusal by Krugman to bet some of his Nobel money against Mankiw?

Put aside Krugman and Mankiw and let's consider the issue in the abstract.  Bryan Caplan believes that scholars should be ashamed if they do not publicly bet their views.  In contrast I fear this requirement would become a tax upon ideas.  How would you feel about an obligation (if only a moral one) for scholars and commentators to publicly reveal the content of their investment portfolios?  Those portfolios are their real bets.  Yet I still favor the privacy norm and I should note that Bryan never has (nor need he) revealed his portfolio to others at GMU, much less to the broader public.

Let's say that I, as a prolific blogger, express opinions on hundreds of economic policy topics, often involving either explicit or implicit predictions.  Then say that hundreds of people wish to bet with me.  Can I not simply turn them all down as a matter of policy and practicality?

If you're wondering, I practice "buy and hold and diversify," with no surprises in the portfolio and a conservative ratio of equity purchases.  But those investment decisions don't necessarily reflect my views on any given day.  I think it is intellectually legitimate (though perhaps not always prudent) to engage in mental accounting and separate those two spheres of my life.  I change my mind lots of times, on many economic issues, but does that mean I have to become an active trader?  I hope not and I'm not going to.

On long-run economic growth I'm still an optimist, though I am increasingly uncertain as to how much extant firms will capture those gains.  On the short run issue at hand, I am fully with Mankiw, and Megan McArdle, in very much doubting the "rosy scenario" emanating from the Obama budget process. 

Addendum: Robin responds, Bryan responds.