Category: Uncategorized

The ECB bond-buying plan

by  Tyler Cowen

“The ECB is once again intervening as the last line of defense,” said Jacques Cailloux, chief European economist at Royal Bank of Scotland in London. “The intervention will put a halt to the bond market crash that some member states faced. However, the ECB is now in for the long haul and will potentially have to buy up to half of the Italian and Spanish traded debt, the biggest risk-pulling effort ever engineered in Europe.”

Here is the article.  This analysis by Paul Krugman probably won’t be beaten, and more here.

Arguably it’s now a question of who stares down whom.  If you do not doubt German resolve, bet on the ECB and lend money to Italy fairly cheaply.  If you fear that Italy suffers from its own version of the great stagnation, and doesn’t have good enough political institutions to make decent reforms (and now the hammer of the private capital markets is partially removed), maybe the ECB will cry uncle at some point and give up.  Knowing that, confidence will not return and the speculators will continue to pounce.  We’ll see soon enough what the markets think.

As I am posting this, Dow futures are off about 250 points, although that bad news could be traced to numerous causes.

Speculative attack games can be hard to predict for the marginal cases (personally I am skeptical), but the general uncertainty resulting from the U.S. debt fight, and the resultant “flight to safety” isn’t helping matters.  It’s another way in which our fiscal nonsense brings some very real costs, and quickly.  Have you seen that France might suffer a downgrade from AAA?  In the abstract, that makes sense.  Why should they be safer than the US?  Again, our stupidity makes the European mess harder to resolve by shifting the focal equilibrium from a good outcome to a bad, scary outcome.

Assorted links

by  Tyler Cowen

1. Future behavior is seen as more intentional than past behavior.

2. In what field are blind mathematicians most likely to work?

3. Lessons for gift-giving: give cash and honor requests.

4. The silent bank run in Greece, continued, some amazing stories.

5. Via Chris F. Masse, the world’s safest asset class (and it is French, some explanation here).

6. Chileans throw fruit and small stones at the rescued miners.

7. Excellent Ezekiel Emanuel piece on cancer drugs and price controls.

Assorted links

by  Tyler Cowen

1. Netflix revenue vs. Blockbuster revenue, graph, sorry folks it is in nominal terms!

2. Is government about the supply of public goods?

3. “It is a science fair project, but it turned out very well for me.”  And he has a blog, good post on the Apollo program.

4. Dominic Lawson on chess.

5. How is China doing as an innovator?

6. Profitable biases of NBA referees; interesting hypothesis, although I am not convinced the referees are the active factor.

Do exogenous increases in the # of children lower child quality?

by  Tyler Cowen in

Maybe not (in which I channel Bryan Caplan):

So what does it mean for an older brother when Mom and Dad come home for the hospital with twins? What’s it like to be the younger sister of twins?

First, you get less computer time. Frenette finds that, even after controlling for family income, education, and myriad other factors, having twin siblings reduces the number of computers per child by 14.1 percentage points.

Second, you are less likely to be enrolled in private school — youth are 4 percentage points less likely to in private school when there are twins in the family, all else being equal.

Third, parents are less likely to save money for their children’s post-secondary education in families with twins.

And the impact of fewer computers, less private school, and less saving for post-secondary education on children’s academic performance is…not much.

Fifteen year olds from families with twins do no worse than other children in international standardized assessments of reading achievement. If anything, they appear to do slightly better — but there are too few families with twins in Frenette’s sample to know whether the difference is statistically significant.

As a parent, I find these results encouraging. Even if your resources are stretched, and you can’t do everything you’ve planned for your kids, they might turn out just fine anyways.

The possibly gated paper is here and here.  For the pointer I thank Michelle Dawson.

Real vs. nominal dollars for discretionary spending

by  Tyler Cowen

Matt Yglesias tweets:

Did every libertarian in America suffer mass amnesia about the difference between real and nominal dollars yesterday?

Others complain as well.  Keep in mind a few things:

1. The spending forecast itself is made in terms of nominal dollars and that is what I, and others, reported.  Bloggers report nominal dollar magnitudes all the time, without pretending to be tricking anybody.  Reporting real dollars would mix in the base information with someone’s forecast of future expected inflation and in general that is not considered to be more enlightening, all the more during a period where people disagree radically about inflation forecasts.  Graph viewers can make their own real vs. nominal adjustments ex post, as indeed they are used to doing.

2. For the Keynesian argument, it is often nominal dollars which matter most.  And also, in Keynesian terms, it is the reaction of the Fed which will be of paramount importance.  Even a not very potent version of QEIII could easily undo whatever mild contractionary effects this spending change might have.

3. Inflationary pressures are not very strong and arguably there are deflationary pressures.  That’s bad, but it means the nominal is not going to be so far off from the real.

4. On top of all that, it is far, far from obvious that those specified spending changes are actually going to take place.  The tendency is for promised spending slowdowns to be ignored or reversed.

Some MR commentators raise the issue of per capita measures of discretionary spending and whether they will decline.  It might be nice to have growing public sector per capita quality with growing population and growing wealth.  But if the good in question is a public good (and is it not supposed to be?), adding extra people to the mix, ceteris paribus with no spending boost, is compatible with those additional people getting more or less the same services as the previous consumers.  Falling per capita expenditures on public goods, if it is not too big a fall, still means a greater real quantity of public goods enjoyed, given non-rivalry of consumption.

The correct response to all this information about future projected spending is still “I guess that’s not much of a spending cut, is it?”

By the way, entitlement reform is MIA.

Instead what I see is a lot of people adding up the entire fiscal gap — ignoring that the stimulus is ending anyway and was going to end anyway — and proclaiming that Tea Party extortion is causing the economic heavens to fall.  Ross Douthat nails it.

Here’s a big “ouch” for some of you:

Sixty five percent approve of deal’s spending cuts. But it gets worse. Of the 30 percent who disapprove, 13 percent think the cuts haven’t gotten far enough, and only 15 percent think the cuts go too far. One sixth of Americans agree with the liberal argument about the deal.

The final effects of the deal are hardly a Ron Paul world and so we are seeing massive exaggeration, driven by the fallacies of mood affiliation, excess sensitivity to social information (“who won the showdown?”) and us vs. them thinking.  What we have is a weak, vacillating postponement of all the hard decisions.  In hindsight, the decision to allow no revenue increases will be seen as a huge blunder, by conservatives most of all.

Why I am more pessimistic about the euro than are most people

by  Tyler Cowen in

Here is Willem Buiter, trying to make a case that the euro will survive.  It’s an interesting piece, but in contrast I have focused my attention on two issues:

1. In my view, the survival of the eurozone is not simply a matter of adding up the current solvency deficits and comparing them to the available quantity of aid.  Rather I see the aid recipients as leaky vessels.  Pumping more money into those countries won’t recapitalize their banking systems.  In fact, once leaving the euro is seen as an option, those banking systems will systematically lose both deposits and capital.  Depositors are afraid to wake up one morning and have lost their euros.  The banks in those countries can’t ever be sound, at least not until something gives.

Imagine if the FDIC weakened or eliminated its deposit guarantees to regional banks, once those regions started experiencing some economic troubles.  That’s the parallel situation in Europe.  If sovereign debt isn’t secure, how can the guarantees of those sovereign states to their banking systems be secure?  And then why should non-guaranteed banking systems recover?

2. The best shot at patchwork regulation is to introduce a common resolution authority and a common bank deposit guarantee mechanism for the eurozone; Buiter discusses a related option.  But ultimately that leads to full fiscal union or at least a eurobond.  If you guarantee all of a country’s banking deposits, you are creating/guaranteeing a riskless security for that country.  In the limiting case, imagine the government itself opening a bank and suddenly having guaranteed liabilities.  You may or may not favor eurobonds and fiscal union, but I feel on safe ground predicting that they won’t happen.  Nothing in the partial bailouts up until now has led me to change or weaken that opinion.

I do not so much see people denying #1 or #2, but I also do not see them starting with these as the main problems to solve.  And thus I am more pessimistic than they are.  But I am pessimistic about the survival of the full eurozone, which is not the same as being pessimistic about Europe.  By the way, the latest news update is here and it isn’t good.

Sentences to ponder

by  Tyler Cowen in

Here is Nancy Youssef, via Kevin Drum:

Rather than cutting $400 billion in defense spending through 2023, as President Barack Obama had proposed in April, the current debt proposal trims $350 billion through 2024, effectively giving the Pentagon $50 billion more than it had been expecting over the next decade.

With the wars in Iraq and Afghanistan winding down, experts said, the overall change in defense spending practices could be minimal: Instead of cuts, the Pentagon merely could face slower growth.

….”This is a good deal for defense when you probe under the numbers,” said Lawrence Korb, a defense expert at the Center for American Progress, a left-leaning research center. “It’s better than what the Defense Department was expecting.”

Hey, maybe they’re not really cutting spending after all!

Assorted links

by  Tyler Cowen

1. A politically incorrect Indian economics professor who teaches summer school at Harvard; here is Wikipedia.

2. Arbitrage!  A lottery that can be beaten.

3. A 1914 neurology exam.

4. An excellent Interfluidity post on how we thought we were wealthier than we were, and why it matters.

5. Scott Sumner’s culture report.

6. What does the debt deal mean for health care?  And winners and losers in the deal.