Is it 1937 again?

by  Tyler Cowen in

There are many commentaries on David Leonhardt's article today on whether we should be raising taxes and cutting government spending, as was done in 1937.  Yet I don't see anyone — at least not today — talking about monetary policy during 1936-7.  A bit earlier, David Beckworth stepped up to the plate:

Is the Federal Reserve (Fed) making a similar mistake to the one it made in 1936-1937? If you recall, the Fed during this time doubled the required reserve ratio under the mistaken belief that it would reign in what appeared to be an inordinate buildup of excess reserves. The Fed was concerned these funds could lead to excessive credit growth in the future and decided to act preemptively. What the Fed failed to consider was that the unusually large buildup of excess reserves was the result of banks insuring themselves against a replay of the 1930-1933 banking panics. So when the Fed increased the reserve requirements, the banks responded by cutting down on loans to maintain their precautionary level of excess reserves. As a result, the money multiplier dropped and the money supply growth stalled…

The second link in this post offers the critical figure.  If monetary policy is sufficiently accommodative, I do not see that we are risking a 1937-8 repeat.  In 1936-7, monetary policy was not just insufficiently expansionary, it was absolutely draconian.  Read this paper too.  Here is Scott Sumner.

As the stimulus is pulled away, there is a reasonable chance that the Fed will be more accommodative.  Remember, the monetary authority moves last.

I do not see why we are discussing this issue without placing monetary policy at the center of the analysis.

Jarda Borovicka writes to me

by  Tyler Cowen in

In the whole discussion about whether the U.S. should borrow more now when the interest rates are low, I miss one crucial thing – what happens when the debt comes due?

Risk-free debt is really risk-free only when the maturity also coincides with terminal repayment. But assume that the U.S. borrows an extra trillion of dollars now, due in 10 years (the average debt duration of the U.S. debt is something like 4 years?). Sure, the interest rate is low, but the borrowing is cheap only as long as we assume that during the 10 years the U.S. repays this whole extra debt, compared to what would have happened in the baseline world.

If not, the U.S. will need to refinance this debt in 10 years, and potentially at much higher interest rates. There is a potentially very large risk looming. Greece has experienced this the hard way – it collapsed not because it necessarily needed new borrowing but because it had to roll over the old borrowing at impossibly high rates.

And I have not heard the advocates of more borrowing to suggest any credible offsetting mechanism that would lead to repayment (not replacement with other borrowing) of this extra debt at or before maturity. But then the idea "let's borrow now because it's cheap" becomes seriously flawed.

I would compare those who advocate such outright borrowing without committing to credibly repay at maturity to people who fall for teaser mortgage rates and are rather negatively surprised to see the rate adjust later. It is interesting though that there seems to be a large positive correlation between people who advocate government borrowing because rates are low NOW, and those who call for protecting consumers against reckless lenders who tease them with a low temporary rate. To quote a famous Canadian singer, Isn't it ironic?

How Germans use bees

by  Tyler Cowen in

Airports in Germany have come up with an unusual approach to monitoring air quality. The Düsseldorf International Airport and seven other airports are using bees as “biodetectives,” their honey regularly tested for toxins.

…Beekeepers from the local neighborhood club keep the bees. The honey, “Düsseldorf Natural,” is bottled and given away as gifts.

The article is here and I thank David Wessel for the pointer.

Secession

by  Alex Tabarrok in

In advance of July 4, Patri Friedman and co-bloggers are discussing secession (remember, we call it the American revolution they call it secession) at Let a Thousand Nations Bloom.  Here is Patri on secession as a startup: 

America did not merely secede and copy the governing documents or style of the United Kingdom. Rather, it innovated, creating a system based on the English Common Law, yet different, one with explicit checks and balances to restrain government, and with no place for a monarch. It was an experiment with a more radical form of democracy than existed anywhere in the 18th-century world.

And it was an incredibly successful experiment, as the combination of that innovative rule-set and the empty frontier resulted in America growing rapidly in population, wealth, and influence. During the open immigration periods of the 19th century, some years saw over a million new immigrants arrive “yearning to breathe free”. As a result, the new American state had influence far beyond its shores.

This influence occured in two major ways. First, America served as a test of the brand-new American Constitution, and the Founding Fathers’ philosophy about the role of government. By showing that it worked well in practice, political philosophers, politicians, voters, and revolutionaries around the world were (slowly) convinced that this was the best government technology to be had. Second, America dramatically outcompeted existing states, based on the simple metric of net migration. Those million+ people a year who went to America can be thought of as customers of government services voting with their feet, which means that other countries were losing market share.

You may not be used to thinking of government in this sort of economic and business framework, but it is a core part of our philosophy here at Let A Thousand Nations Bloom, and we find it provides a unique and refreshing angle on government. In this case, it shows us the invisible, long-term effects of the American Revolution.

They are covering a lot of other related material such as the optimal size and number of nations this week as well.  Here is a guide.  On a related point, I argued earlier for The Great State of Northern Virginia.

Finally, don’t forget: If at first you don’t secede, try, try again.

What is vacation good for?

by  Tyler Cowen in

Drake Bennett writes:

They found that in all three cases, the respondents were least happy about the vacation while they were taking it. Beforehand, they looked forward to it with eager anticipation, and within a few days of returning, they remembered it fondly. But while on it, they found themselves bogged down by the disappointments and logistical headaches of actually going somewhere and doing something, and the pressure they felt to be enjoying themselves.

A recent Dutch study had a more striking finding. Looking not at vacation memories, but measuring general happiness level through a simple three-question questionnaire, the researchers found that going on vacation gave a notable boost to pre-vacation mood but had hardly any effect on post-vacation feelings. Anticipation, it seems, can be a more powerful force than memory.

Here is much more.  I liked this sentence:

The most effective way to inoculate a vacationer against the deadening power of adaptation, however, may be the most counterintuitive – to break it up, to interrupt it with real life.

In other words, bring work.  I call it "taking a work vacation."

For the pointer I thank David Archer.

Barbados vs. Grenada, the demand for own-goals, 1994

by  Tyler Cowen in

There was an unusual match between Barbados and Grenada.

Grenada went into the match with a superior goal difference, meaning that Barbados needed to win by two goals to progress to the finals. The trouble was caused by two things. First, unlike most group stages in football competitions, the organizers had deemed that all games must have a winner. All games drawn over 90 minutes would go to sudden death extra time. Secondly and most importantly, there was an unusual rule which stated that in the event of a game going to sudden death extra time the goal would count double, meaning that the winner would be awarded a two goal victory.

Barbados was leading 2-0 until the 83rd minute, when Grenada scored, making it 2-1. Approaching the dying moments, the Barbadians realized they had no chance of scoring past Grenada's mass defense, so they deliberately scored an own goal to tie the game at 2-2. This would send the game into extra time and give them another half hour to break down the defense. The Grenadians realized what was happening and attempted to score an own goal as well, which would put Barbados back in front by one goal and would eliminate Barbados from the competition.

However, the Barbados players started defending their opposition's goal to prevent them from doing this, and during the game's last five minutes, the fans were treated to the incredible sight of Grenada trying to score in either goal. Barbados also defended both ends of the pitch, and held off Grenada for the final five minutes, sending the game into extra time. In extra time, Barbados notched the game-winner, and, according to the rules, was awarded a 4-2 victory, which put them through to the next round.

The full story is here and I thank Solomon Gold for the pointer.  Angus also blogged this story, with video evidence as well.

How hard is economics?

by  Tyler Cowen in

Brad DeLong discusses a recent short essay by Kartik Athreya; Matt Yglesias chips in, as does Scott Sumner.

My view is a little different than Brad's.  I would say that economics is really, really, really, really, really, really, really hard.  And that's leaving out a few of the "reallys."

It's so hard that experts don't always do it well.  The experts are constantly prone to correction by non-experts, by practitioners, by people who are self-educated economic experts but not professional economists, and by people who know some economics and a lot about some other field(s).  It is very often that we — at least some of us – are wrong and at least some of those other people are right.  Furthermore those other people are often more meta-rational than a lot of professional economists.

Even very simple problems can be quite hard, such as why nominal wages are sometimes sticky or why particular markets don't always clear, in the absence of legal impediment.  Why doesn't the restaurant charge more on a Saturday night?  You can imagine how hard the hard problems are, such as what level of public expenditure is consistent with an ongoing and workable democratic equilibrium.

Putting aside agreement and ideology, and just focusing on how one understands an issue, I'll take my favorite non-Ph.d. bloggers over most professional economists, six out of seven days a week.  Not to estimate a coefficient, but to judge public policy, thereby integrating and evaluating broad bodies of knowledge?  It's not even close.

The economics of Berlin

by  Tyler Cowen in

The city continues to deindustrialize:

Most of the problems date back to the end of World War II when most large companies moved their headquarters to West Germany — for example, Siemens moved to Munich and the banking industry fled to Frankfurt.

After German reunification in 1990, East German industry collapsed when state subsidies were cut. Also, Berlin failed to stop spending at a rate it was used to, especially when federal payments were slashed in 1995 from almost 8 million euros to 2 million euros.

As a result, since 1991, Berlin's debt has risen nearly six-fold, from 10 billion to 61 billion euros, giving it the highest per capita debt level of any state in Germany. The city has lost about 100,000 industrial jobs since 1990.

Here is the full story.  Here is a related article.  This also explains why Berlin finds it so hard to privatize its arts support; the private sponsors simply are not there.

As I've noted before, neither land nor labor are remarkably scarce here, and so most items and apartments are very cheap, especially by European standards but even by south German standards.  Could it be that marginal cost pricing reigns at the retail level?

The cheapness makes Berlin a magnet.  I am told that large numbers of people — especially foreigners — live here part of the year but earn most of their money elsewhere.  Think of a twenty-something writing a novel or a dancer or singer in training.

Did you know that only about forty percent of the German population is employed?  I would be surprised if it were that much in Berlin.  You can view that figure as a realization of (temporary) utopia, the result of screwy anti-work economic policies, or a bit of both.

I thank Sebastian T. for the pointer and also Ines for a useful discussion.

Sensory branding from Singapore Airlines

by  Tyler Cowen in

Singapore airlines is the pinnacle of sensory branding and offers a full scale assault on our brains. Like any other airline, Singapore airlines employs common consistent visual themes. Unlike other airlines the company incorporates the same scent, Stefan Floridian Waters, in the perfume worn by flight attendants, in their hot towels, and other elements of their service. Flight attendants must be physically attractive and wear uniforms made from fine silk which incorporates elements of the cabin decor. The airline strives to make every customer interaction both appealing, and, equally important, consistent from encounter to encounter. It's no wonder the airline is perennially at the top of travelers' preference rankings.

There is more here and I thank Shane for the pointer.

Assorted links

by  Tyler Cowen in

1. The Berlin subway slide, video.

2. I've been saying similar things to Bryan Caplan.

3. Chinese multiple currency names and what they mean.

4. Tim Harford reviews The Age of the Infovore.

5. The tents are falling apart in Haiti.

6. Sumner and Caplan on wage stickiness.  On the same topic, here is another perspective.  Clearly wages are to some extent sticky in nominal terms.  But if people who work on commission and tips are out of work in large numbers, or if truly flex-wage workers are being laid off, why see wage stickiness as the #1 culprit?  (Scott isn't following through the logical implications of his cyclicality point.)  In economies with truly flexible wages, people are forced to retreat into household production in down times and that is perhaps a better parable for America today.  No one will hire them, flexibility or not.  Plus if workers are irrational by focusing on the nominal rather than the real values, it's easy enough to trick them by cutting real benefits and working conditions, thereby saving the employer money.  Real wage flexibility should be enough to keep them at work, yet it isn't.