Category: Economics

The question was what happens in macroeconomies as consumption approaches satiation.  Here's Bryan Caplan's answer:

…as consumption approaches satiation, workers reduce their hours of work to prevent themselves from actually reaching
satiation.  More technically, as workers approach satiation, their
labor supply curves start to "bend backwards."  The result is that
rising labor demand stemming from rising productivity raises wages yet
reduces employment.

A longer statement of the question is here and I believe it is fair to assume people still are not satiated in leisure and thus they will work less.  Does productivity have to be rising (rather than just high) in this scenario?  And isn't MU-weighted labor productivity probably falling?

My other query is whether the real interest rate approaches infinity.  Can the resulting incentives for capital consumption keep the economy away from virtual satiation altogether?  A trickier question is what is optimal monetary policy in such a setting.  Can you figure it out?

Yves Smith writes:

And in a very big disincentive to participating [in the new Geithner plan], the FASB is on its way to weakening mark to market accounting.

Yes it can be done and here is how:

Let's say that I am a bank ("financial institution") with
$100 billion in "toxic assets".  I have them on my balance sheet at 80
cents on the dollar.  The market has them marked at 30 cents.  We do
not know what the held-to-maturity performance will be, since that
requires knowing the future, although for the moment let's assume that
they are cash-flowing at the present time.

What I (the bank) do know, however, is that if I sell them
at 30 cents I take a monstrous loss – perhaps enough to force me under
Tier Capital limits and thus render me subject to an FDIC enforcement
action.  I therefore will not sell for 30 cents so long as I have any
belief whatsoever that the cash flow – or any government subsidy – will
exceed that value.

If I, as a "financial institution" can participate as a
bidder in these auctions I can foist off my loss onto the taxpayer. 
Here is how I can rig the game so as to avoid an otherwise-inevitable
loss:

• I become a "bidder" and "bid" on my own assets at 75 cents.
• I am providing 5 or 10% of the money.  The rest is covered by Treasury, The Fed and the FDIC via guaranteed bond issuance.
• The loan, ex my contribution, is non-recourse.  That is, I can lose 5 or 10% of the total portfolio purchased, but nothing more.

Now the "assets" (a passel of CDOs?) turn out to be worthless.  I
lose 5% of $75 billion, or $3.75 billion that I put up, plus the other
nickel on the original mark, but that's all. 

The taxpayer gets hosed for the remaining $71.25 billion dollars.

This can and will be done if the "sellers" of these
assets are allowed to bid either directly or indirectly as it provides
a means for banks to intentionally dump bad assets at a certain loss
that is much smaller than their expected realized loss over time, shifting the rest of the loss to the taxpayer.

This program has the potential to shift literally $500 billion or
more in losses onto the taxpayer, not through the operation of "bad
luck" but rather through what amounts to a bid rigging operation.

Fortunately that example is a pure hypothetical.  Is there a way to actually do this?

I thank DavidS, a loyal MR commentator, for the pointer.

Mr. Econotarian, a loyal MR reader, offers the following insight:

I believe this gentleman was responsible for the best theory on CEO pay I have heard – the top guy has to make a lot of money, even in bad times, so he doesn't seem "weak and sh*t". I call this the "W&S" theory.

The shamrock (three-leaf clover) is one of Ireland's most recognizable symbols. But demand for "Irish" shamrocks is now so great that the small island nation must import clover seeds from countries like New Zealand, India, and Germany. In 2007, Ireland imported nearly 200 metric tonnes of clover seeds worth $677,864.

I thank The Browser for the pointer.

Paul Krugman thinks Brad DeLong is wrong.  Brad DeLong thinks that Paul Krugman is wrong.  Robert Waldmann thinks that Brad DeLong is wrong.  The topic of course is the Geithner plan.

I'm not so far from Kevin Drum's view, as stated here and here.  It has some chance of succeeding and the relevant alternatives are also bad for the taxpayer.

But can the government itself be trusted?  Here is some of the recent fallout:

…some executives at private equity firms and hedge funds, who
were briefed on the plan Sunday afternoon, are anxious about the recent
uproar over millions of dollars in bonus payments made to executives of
the American International Group.

Some
of these executives have told administration officials that they would
participate only if the government guaranteed that it would not set
compensation limits on the firms, according to people briefed on the
conversations.

The executives also expressed worries about
whether disclosure and governance rules could be added retroactively to
the program by Congress, these people said.

The bottom line?: Here are what Thugz say about the various bailouts.  Excerpt:

…they laughed when I said the government should prioritize the punishment of senior management. In the words of Shine,
the elder statesman of the group, “You have to be real careful when you
mess with folks at the top, because when the war is over, you’ll need
these guys real quick. Ninety-nine percent of people just doing what
they’re told – you couldn’t find half a brain among all of them. But the ones with the brains – don’t let them go.”

In fact you would expect a successful businessman to understand that.

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.