Toulouse bleg
I’ll be there in a bit, though I won’t have enough time to leave town. What should I do? I thank you in advance for the suggestions, dining included. And do I have a good overnight option right next to Amsterdam airport?
A further note on the broken windows fallacy
I’d like to second the points by Alex and also Bob Murphy. An additional factor is that when a window breaks (never mind ongoing regulations and wealth taxes, which as Alex notes will be worse) wealth goes down. Keynesians tend to overestimate the importance of flows and underestimate the importance of stocks and sometimes they neglect the latter altogether. Just as there is a spending multiplier, there is also a multiplier from changes in wealth. For instance declines in perceived wealth will cause people to spend less. The Keynesian AD gains from a broken window have to stem from the difference between the spending multiplier and the wealth multiplier. Under the permanent income hypothesis, there’s not a lot of daylight here. Furthermore the perceived wealth decline, even if it doesn’t lead to immediate one-to-one reductions in spending, can persist over several periods. Granted, PIH is not exactly correct, but still the net impact of stimulus on current employment and income won’t be that large because of the negative wealth effects. Fiscal policy remains a weak pill. The declines in housing prices in recent years really have taken their toll on AD so the wealth multiplier is not to be ignored. The notion that a stable and sustainable restoration of AD actually requires some increases in perceived wealth is one of the most underrated ideas among today’s Keynesians.
I would make a few more general points:
1. It is possible that a broken window may increase employment and output and under sufficiently unusual assumptions it may also increase welfare. But it’s not likely. I think the point, showing the possibility of this exceptional case, should be a footnote in an intermediate macro text but no more.
2. The importance of wealth creation for human well-being is the more important lesson, by far, from economics. There are plenty of productive investments by which government can improve matters, starting with fixing escalators in the DC Metro system, not breaking them! Ultimately, in the Hansonian sense, the debate is about how much we should glorify wealth creators and in this regard Hazlitt not Keynes gets it right.
3. A more directly practical point is that tighter ozone regulation will spur some hiring but probably lead to labor market crowding out, rather than targeting the current unemployed. I don’t know if those regulations are a good idea or not but I do think the case for them has to stand on its own two feet and not on Keynesian principles.
Did Ron Paul call for bimetallism?
I didn’t watch the debate, but I see talk of Paul and bimetallism on my Twitter feed. Note that bimetallism is better than a pure gold standard, as it is less likely to bring dangerous deflation. Under bimetallism, you fix a gold-silver parity. Eventually the equilibrium price for gold and silver, vis-a-vis each other, will deviate from that parity. People will hoard the legally undervalued money, and the legally overvalued money will circulate as a medium of exchange (“bad money drives out good,” as they used to say). Think of it as randomizing your medium of account: you get whichever medium of account is more inflationary (less deflationary), gold or silver.
Here is Milton Friedman defending bimetallism.
Every now and then some joker comes along and wants to legally fix the price of forty different commodities and use that as money, etc. Think of it as another path to stimulus and maybe quite a credible one!
*Chipping Away at Public Debt*
The editor is Paulo Mauro and the subtitle is Sources of Failure and Keys to Success in Fiscal Adjustment. It provides useful background on the debt crises, or lack thereof, in today’s major economies, including Italy, Japan, Canada, the UK, and the United States.
Assorted links
1. The euro crisis in Lego form, as seen by a nine-year-old.
2. There is no great stagnation. And John Hagel reviews TGS; he does not want the mindset to spread. And who is falling out of the middle class.
3. Misophonia.
4. The new Felix Salmon aggregation project.
5. The export of green timothy hay the culture that is Japan: “High quality timothy is whatever the customer says it is!”
The fight to liberate food trucks
The Institute for Justice, a self-described “libertarian public-interest law firm,” launched its new National Street Vending Initiative early this year in Texas and has since expanded it to Atlanta (where city officials had decided to reserve all public property for a single vending company) and Chicago (where aldermen have proposed rules so severe, they could cut off vending in the entire downtown area). The institute even released a report, “Streets of Dreams,” which reviews vending regulations in the country’s 50 largest cities, including Washington.
Here is much more.
Claims about monetary policy: the substitution of public credit for private credit
By flooring maturities out to two years then, and perhaps longer as a result of maturity extension policies envisioned in a forthcoming operation twist later this month, the Fed may in effect lower the cost of capital, but destroy leverage and credit creation in the process. The further out the Fed moves the zero bound towards a system wide average maturity of seven to eight years the more credit destruction occurs, to a US financial system that includes thousands of billions of dollars of repo and short-term financed-based lending that has provided the basis for financial institution prosperity.
I am surprised we don’t hear this claim more often. When it comes to expansionary fiscal policy, this kind of critique is common, namely that substitution of public debt for private debt makes subsequent “withdrawal” quite difficult. To get to Gross’s point, add on another step or two to the argument. Monetary policy and fiscal policy these days have melded. We pay interest on reserves. We have created a lot more safe securities through bank reserves, but ultimately as a substitute for private intermediation through M3. Through monetary policy, we are trying to expand but at the same time pushing out M3 and getting more bank reserves at the Fed, etc.
The problem with this argument, if interpreted as a critique, is that a superior alternative is hard to outline. It also places too much stress on the term structure rather than the absence of creditworthy borrowers. And besides, who wants extreme deflation? Still, this argument scares me. It illustrates how vulnerable our current position is and it illustrates that we have not solved the fundamental problems which became apparent in 2008-2009.
There is a lot of snorting at people who favor higher interest rates from the Fed. I do not agree with that recommendation, but Gross’s comment gives us some ability to understand it as a recommendation. Think of it as a combined exercise of plug-pulling and collapse of deflationary risk into the present, in the hope that private credit will emerge from the rubble as a source of future economic growth.
Turnitin: Arming both sides in the Plagiarism War
The internet has made plagiarism much easier and by most accounts plagiarism is increasing rapidly. As a result, over a million instructors now use services like Turnitin, a plagiarism detector that compares submitted manuscripts against a large database of material, including previously submitted manuscripts. What is less well appreciated is that Turnitin also sells its services to students. In fact, students whose professors use Turnitin are encouraged to pre-submit their work to Writecheck which will analyze and “verify” for the students that their paper has “properly quoted, summarized or paraphrased” previous work and it will also relieve students from “worrying that their paper will be recycled without their knowledge.” Uh huh.
In other words, WriteCheck will tell students if their essays will pass Turnitin! David Harrington summarizes nicely:
Turnitin is playing both sides of the fence, helping instructors identify plagiarists while helping plagiarists avoid detection. It is akin to selling security systems to stores while allowing shoplifters to test whether putting tagged goods into bags lined with aluminum thwart the detectors.
Barsky and Summers and Krugman on Gibson’s Paradox
From Barsky and Summers:
This paper contributes a new element to the explanations of the Gibson paradox, the puzzling correlation between interest rates and the price level seen during the gold-standard period. A shock that raises the underlying real rate of return in the economy reduces the equilibrium relative price of gold and, with the nominal price of gold pegged by the authorities, must raise the price level. The mechanism involves the allocation of gold between monetary and nonmonetary uses. The authors’ explanation helps to resolve some important anomalies in previous work and is supported by empirical evidence along a number of dimensions.
The paper is here. Paul Krugman offers a very good explanation of a related hypothesis. It’s one useful way of thinking about why the price of gold is rising in a deflationary time (without requiring one to deny the potential relevance of other factors). The presentation also explains the behavior of gold prices in a TGS era, namely with low real rates of return.
I very much enjoy this puzzle. It requires a working knowledge of many different parts of economics, not just a few.
A failure to think on the margin
In our textbook, Modern Principles, Tyler and I have “Thinking on the margin” as one of the “big ideas” in economics (I believe that other guy also mentions this concept.) USA Today, in a feature called Math tips for the rest of us, is sadly unclear on the concept of a marginal tax rate:
“That raise actually might not be as good as it looks. The extra money is nice, but it could very well bump you into the next tax bracket, possibly leaving you with less money than you had before the raise.”
As Dean Baker says:
Arghh!!!!!!!! ….No, no and 286,000 times no! The tax system brackets give marginal rates. This means that if the raise bumps you into a higher bracket then you pay more taxes only on the income in the higher bracket. Suppose that the tax bracket for income under $200k is 25 percent, and for income over $200k is 33 percent. If you get a raise that pushes your income from $195,000 to $205,000 then you only pay the higher 33 percent tax rate on the $5,000 that is above the $200k threshold not your whole income. Therefore, there is no (as in none, nada, not any) way that getting more money, and being pushed into a higher tax bracket will leave you with less money after taxes.
Can the Swiss peg the franc?
The Swiss National Bank stunned financial markets on Tuesday by setting a ceiling for the Swiss franc against the euro in an attempt to prevent the strength of its currency from pushing its economy into recession. The central bank said it would set a minimum exchange rate of SFr1.20 against the euro.
Scott Sumner is happy, Matt Yglesias is happy, and I am not unhappy but I am nervous. Keep in mind the Swiss tried such pegs before, in 1973 and 1978, and neither lasted. At some point limiting the appreciation of the Swiss franc implied more domestic price inflation than they were willing to tolerate (seven percent, in one instance, twelve percent in another). You can argue about whether they should be, or should have been, nervous about seven percent price inflation but the point is that they were and indeed they might be again.
Fast forward to 2011. It’s the Swiss saying “we can create money more decisively and more quickly than the speculators can bet against us, and keep it up.” If the flight to safety continues, the Swiss can reap seigniorage by creating money but also there may be spillover into price inflation. You can fix a nominal exchange rate but the market sets the real exchange rate through price movements and so Swiss exports could end up growing more expensive anyway, through the price adjustment channel. If you’re holding and trading euros, and the Swiss central bank keeps churning francs into your hand at a good rate, at some point you will consider buying a chalet in Schwyz.
If the speculators sense less than a perfectly credible commitment from the central bank, they will continue to bet on franc appreciation. In other words, the Swiss are putting their central bank credibility on the line, at least in one direction. And even if they stay credible, they may not much lower their real exchange rate over a somewhat longer run, so why should they be fully committed to credibility?
Stay tuned…
Has there been a great 9-11 work of art?
That’s a question from Zoe Pollock, who links to lots of discussion. My nomination is John Adams’s On the Transmigration of Souls. Here is one YouTube performance, here is another, though admittedly it sounds more impressive on a good stereo or better yet live.
Assorted links
1. Switzerland had a twenty standard deviations event. And here is Scott on the Swiss unlimited pledge, a real test of credibility theories.
2. Fairness games, at the cost of $8,000 or more.
4. David Leonhardt on infrastructure, circa 2008.
6. Irish debt crisis may be less severe than estimated, the paper is here, Irish commentary here, some pointed reservations but still Irish austerity continues to outperform the expectations of its critics across a variety of data points.
The breaking windows fallacy
Paul Krugman argues that the broken windows fallacy is not a fallacy in a liquidity trap:
…the United States is in a liquidity trap:…[t]his puts us in a world of topsy-turvy, in which many of the usual rules of economics cease to hold. Thrift leads to lower investment; wage cuts reduce employment; even higher productivity can be a bad thing. And the broken windows fallacy ceases to be a fallacy: something that forces firms to replace capital, even if that something seemingly makes them poorer, can stimulate spending and raise employment.
…And now you can see why tighter ozone regulation would actually have created jobs: it would have forced firms to spend on upgrading or replacing equipment, helping to boost demand. Yes, it would have cost money — but that’s the point! And with corporations sitting on lots of idle cash, the money spent would not, to any significant extent, come at the expense of other investment.
What is interesting about this argument is that Krugman has gone one derivative beyond the broken windows fallacy to create an argument requiring even stronger assumptions, let’s call it the breaking windows fallacy.
Bastiat’s assumption of a one-time, randomly broken window is more likely to be stimulative than an increase in the rate of window breaking. A one-time, window-breaking is a sunk cost that does not affect profit-maximization, at least not according to basic theory. (I say basic theory because once we introduce fixed costs, bankruptcy costs and liquidity constraints a one-time negative shock may cause a firm to shut down even when it would continue to produce without the shock, ala Krugman and Baldwin 1989). Thus a one-time window breaking may cause firms to increase spending. An increase in the rate of window-breaking, however, is a change in the marginal conditions for profit maximization that will cause some firms to exit the industry (reduce output) and thus the net effect on spending is more ambiguous.
Krugman implicitly assumes that a regulation is like a broken window but as far as costs are concerned a regulation (regardless of its ultimate benefits) is worse, it’s more like an increase in the rate of window-breaking. An easy way to see the point is to think of the regulation as a tax where the tax revenues are earmarked for a particular type of spending. Yes, the spending may be stimulative but even in a liquidity trap the taxing is not. Thus, the Keynesian (i.e. stimulus) case for cost-increasing regulations is more difficult to make than the case for increased government spending.
Addendum: See also Bob Murphy on a second, related problem in Krugman’s argument. See also Russ Roberts.
Where are the green energy jobs?
David Brooks writes:
Recently, Aaron Glantz reported in The Times on some of the disappointments. California was awarded $186 million in federal stimulus money to weatherize homes. So far, the program has created the equivalent of only 538 full-time jobs. A $59 million effort to train people for green jobs in California produced only 719 job placements.
SolFocus designs solar panels in the United States, but the bulk of its employment is in China where the panels are actually made. As the company spokesman told Glantz, “Taxes and labor rates” are cheaper there.
There’s a wealth of other evidence to suggest that the green economy will not be a short-term jobs machine. According to Investor’s Business Daily, executives at Johnson Controls turned $300 million in green technology grants into 150 jobs — that’s $2 million per job.
Sunil Sharan, a former director of The Smart Grid Initiative at General Electric, wrote in The Washington Post that the Smart Grid, while efficient and environmentally beneficial, will be a net job destroyer. For example, 28,000 meter-reading jobs will be replaced by the Smart Grid’s automatic transmitters.
A study by McKinsey suggests that clean energy may produce jobs for highly skilled engineers, but it will not produce many jobs for U.S. manufacturing workers. Gordon Hughes, formerly of the World Bank and now an economist at the University of Edinburgh, surveyed the landscape and concluded: “There are no sound economic arguments to support an assertion that green energy policies will increase the total level of employment in the medium or longer term when we hold macroeconomic conditions constant.”