The monetary economics of Scott Sumner

by  Tyler Cowen in

Here is my latest column, on the monetary proposals of Scott Sumner.  You probably know Sumner from his blog TheMoneyIllusion and in my view he has become possibly the most astute commentator on monetary policy at this time.  Excerpt:

The Fed has already taken some unconventional monetary measures to
stimulate the economy, but they haven’t been entirely effective.
Professor Sumner says the central bank needs to take a different
approach: it should make a credible commitment to spurring and
maintaining a higher level of inflation, promising to use newly created
money to buy many kinds of financial assets if necessary. And it should
even pay negative interest on bank reserves, as the Swedish central
bank has started to do. In essence, negative interest rates are a
penalty placed on banks that sit on their money instead of lending it.

Much
to the chagrin of Professor Sumner, the Fed has been practicing the
opposite policy recently, by paying positive interest on bank reserves
– essentially, inducing banks to hoard money.

The Fed’s balance
sheet need not swell to accomplish these aims. Once people believe that
inflation is coming, they will be willing to spend more money.

In
other words, if the Fed announces a sufficient willingness to undergo
extreme measures to create price inflation, it may not actually have to
do so. Professor Sumner’s views differ from the monetarism of Milton Friedman by emphasizing expectations rather than any particular measure of the money supply.

There are more excellent posts on Scott's blog than I am able to link to.  Read through it all, if you have any interest in these topics. 

One thing I learned from a systematic reread of Sumner is that he isn't quite the advocate of quantitative easing that I had thought.  All things considered, he seems to favor QE over doing nothing, but he also thinks that a truly credible commitment to future inflation can get us there without much painful-for-the-Fed's-balance-sheet QE being required.

While I think there is a very good chance Sumner is correct, my reread of his blog also gave me a better sense of, if he is wrong, why he is wrong or maybe incomplete is a better word.

In very general terms, think of our government, or central bank, as being able to do some good things by creating credibility, the rule of law being one example.  In this particular case the Fed could use its credibility to guarantee two to three percent price inflation annually or more exactly some target for nominal GDP growth.

One point is that bureaucracies tend to hoard credibility rather than to spend it.  That still could mean Sumner's advice is correct and this is simply why the Fed doesn't follow it.  There is, however, a deeper worry.  One possibility is that a weakened Fed cannot today precommit to delivering on two to three percent.  Let's say that Congress gets upset along the way, for whatever reason.  The Fed has then put its credibility on the line, including for the longer future, and that credibility is utterly refuted.  Ouch.  More technically, combine the two ideas of self-fulfilling prophecies and nested games.

Maybe the Fed is too risk-averse but there's also the possibility that the Fed is prudent in its unwillingness to stick its neck out.  Maybe the Fed has credibility only as long as it doesn't try to spend it (try modeling that).  This would bring us into the literature on creative ambiguity and signaling.

Another possibility is that, instead of Congress intervening, markets simply don't respond.  Sumner's theory makes sense to me, but how certain can we be?  The Fed again is putting a lot of longer-term credibility on the line.  Maybe the best the Fed can do is a kind of "inch-along" promise, which probably won't be very effective, as we are observing.

Perhaps the key question is just how credible a central bank can be, relative to its (possibly unjustified) risk aversion.

I now read Sumner much more as a "theorist of credibility," and thus as an implicit game theorist, than I used to. 

Interpreting life expectancy statistics and other health care issues

by  Tyler Cowen in

Matt Yglesias and Paul Krugman weigh in on interpreting life expectancy statistics across the U.S. and the Netherlands.  The fact under consideration, from a few days ago, is that the U.S. has low life expectancy overall but superior life expectancy after you reach the age of 65.

One way to interpret this data (re: Yglesias and Krugman) is to think that the U.S. should spread Medicare to its entire population.

Another interpretation is that spreading Medicare to the entire population would lead to higher expenditures on the health of the young and lower expenditures on the health of the old, for better or worse.  "Medicare for everyone" doesn't simply replicate current Medicare outcomes across a broader swathe of the population.  Medicare works as well as it does, in part, because not everyone is on Medicare or something comparable.  The U.S. split system makes Medicare, at the same time, both more effective in terms of outcomes and more costly in dollar price terms.

In this country the old don't seem willing to accept losing their privileged "first in line" position, namely Medicare for them and few others.  And Congress won't let some egghead committee come along and cut the waste out of Medicare.  The immediate results of the current proposed plan would thus be greater health care expenditures overall, pressures on doctor supply a' la Massachusetts, an even more severe long-term insolvency for the whole system, combined with an unclear resolution for all these escalating pressures.  I don't see many people on the pro-Obama side simply coming out and admitting these increasingly obvious truths, although Andrew Sullivan deserves credit on this score.

You may or may not think that's a good deal overall and perhaps you still think it's a good deal if you assign a high enough priority to covering more of the uninsured.  Or maybe (Kevin Drum has made this argument) you think it's the only path toward long-run cost control.  But if you think it's a bad deal overall, it doesn't mean you are in denial about the fundamental facts of U.S. health care supply or for that matter in denial about the cross-sectional comparisons with Europe.  Choosing French health care institutions for the United States has never been on the table, not even in evolutionary terms.

Sullivan put it very well a few days ago.  He noted that Obama — a master communicator — can't convince most people that the proposed reform is a good deal for them because…it isn't a very good deal for most people. That includes some of the people receiving new coverage, such as those receiving the new forced employer mandates.  (NB: Their wages will go down and they really need the money!  In the shorter run their wages won't go down and some of them will lose their jobs, even with phase-in a few years from now.  I'm still waiting for good Democratic economists to condemn this idea but I fear there is so much fixation on a "victory vs. defeat" framing of the struggle, and desire to skirt the CBO, that this isn't receiving the critical analysis it ought to.)

This desire to claim and promote a more universal distribution of benefits is one reason why you see so much attention paid to the public plan option.  The competing public plan at least offers the promise that some part of the proposed health care reforms will benefit virtually everyone.  My view is that a public plan would soak up many high-risk cases, benefit those cases and few other people, and that overall a public plan is superior to mandates, not Satan incarnate, but not a cure-all for the system as a whole by any means.  Advocates remain oddly silent as to what in concrete terms the public insurer will be instructed to maximize and how that fits in with pressures to extend coverage to more people.

Plan supporters are quite willing to admit "it's not nearly as good as what we wanted," but they're in denial about how truly bad the proposed reforms are in absolute terms or as a matter of economic logic and by that term I mean the economic logic of good Democratic economics, not extreme libertarianism.

In the meantime, repeat this sentence after me: if we don't solve the costs problem, in egalitarian terms things will only get worse, no matter how many people we cover.

The Republicans on this issue are (mostly) very bad and hypocritical but that doesn't give the Democrats license to proceed without a solution.

Gelman’s Good Advice

by  Alex Tabarrok

Andrew Gelman offers some good advice on writing up your results for a research paper: 

1. Start with the conclusions. Write a couple pages on what you've found and what you recommend. In writing these conclusions, you should also be writing some of the introduction, in that you'll need to give enough background so that general readers can understand what you're talking about and why they should care. But you want to start with the conclusions, because that will determine what sort of background information you'll need to give. 

2. Now step back. What is the principal evidence for your conclusions? Make some graphs and pull out some key numbers that represent your research findings which back up your claims. 

3. Back one more step, now. What are the methods and data you used to obtain your research findings.

4. Now go back and write the literature review and the introduction.

5. Moving forward one last time: go to your results and conclusions and give alternative explanations. Why might you be wrong? What are the limits of applicability of your findings? What future research would be appropriate to follow up on these loose ends?

6. Write the abstract. An easy way to start is to take the first sentence from each of the first five paragraphs of the article. This probably won't be quite right, but I bet it will be close to what you need.

7. Give the article to a friend, ask him or her to spend 15 minutes looking at it, then ask what they think your message was, and what evidence you have for it. Your friend should read the article as a potential consumer, not as a critic. You can find typos on your own time, but you need somebody else's eyes to get a sense of the message you're sending.

Bottom line?  Readers are "potential consumers," make it easy for them to buy.  And don't think that marketing is below you.  It isn't.  Marketing can expand the market for what is profound and deep as well as for what is fun.  

Puffins

by  Tyler Cowen in

I've had a few reader requests to blog puffins.  My interest in puffins dates from a visit to Iceland in the early 1990s, where I went on a lovely mini-quest to track down a colony.  Here is a YouTube of puffins.  Here is a longer and more scenic video of puffins in Iceland.  Here is the sound of puffins, UK puffins at least. 

"The fresh heart of a Puffin is eaten raw as a traditional Icelandic delicacy."

But that is not for me.  I am interested in puffins for a few reasons: a) they appear unlikely, b) they often seem to be anticipating something, and c) nature has produced them.

Here is a collection of poems about puffins.  None seems good.  Here is a Russian video about Puffincat.  It is recommended.  Here are postage stamps featuring puffins.

On this site if you scroll down you will see pictures of albino puffins, among other delights.

Here are twenty-six questions about puffins, along with answers; e.g.,

The greatest natural predator
of the puffin is the Great Black-backed Gull.  This gull can catch
adult puffins in mid-air. 

Currently puffins are not at serious risk of extinction.

Sentences to ponder

by  Tyler Cowen in

Jason Kottke reports:

The collective optimization of individual driving routes by drivers using realtime traffic maps slows everyone down.
That is, everyone picking the "fastest" route on the map results in
overall slowdowns. Interestingly, the solution to this problem may be
to remove some roads so that drivers have fewer options for route
optimization.

Here is more.  To how many other problems can this point be applied?

From the comments: who lives longer?

by  Tyler Cowen in

Adam reports:

At birth, someone living in the Netherlands can expect to live 2.35
years longer than someone born in the US, but at age 65, the difference
is reversed, and someone living in the US can expect to live 0.4 years
longer than someone living in the Netherlands. This difference can be
explained by assuming that semi-socialized health care is better for
young and worse for old people, or, at least as likely, different
policies are not the main cause of the difference

Sources: CDC national vital statistics 2004,
www.cdc.gov/nchs/data/nvsr/nvsr56/nvsr56_09.pdf and RIVM 2007
levensverwachting, www.rivm.nl/vtv/object_document/o2309n18838.html (in
Dutch)

One interesting feature of this data is that it can be used to argue for a number of different points of view.

*Imperial*, by William Vollmann

by  Tyler Cowen in

It is glorious in its 1100 pp. plus of text, analytical diatribes, love stories, monomaniacal rants, ecological analyses, and unevenly eloquent prose.  I'm on p.206 and so far it's a first-rate book on the Mexican-American border (Imperial is a county in California), low lifes, the desperation of America's empty spaces, and this is from an author who issues books like others do blog posts.

Suddenly I turn the page and see a heading: Warning of Impending Aridity.  Some text follows:

This book represents my attempt to become a better-informed citizen of North America.  Our "American dream" is founded on the notion of the self-sufficient homestead.  The "Mexican dream" may be a trifle different, but requires its kindred material basis.  Understanding how these two hopes played out over time required me to cultivate statistical parables about farm size, waterscapes, lettuce prices, etcetera.  I have harvested them (doubtless bruising overripe numbers on the way), and now present them to you.  Some of them may be too desiccated for your taste.  If you skip the chapters devoted to them, you will finish the book sooner, and never suspect the existence of my arithmetical errors.  As for you devotees of Dismal Science, I hope you will be awestruck by my sincerity about Mexicali Valley cotton prices.

Jason Kottke has an excellent post on Vollmann's book, with links and excerpts.  One description is: "Just write that it's like Robert Caro's The Power Broker," she said, "but with the attitude of Mike Davis's City of Quartz"…but even that turns out to be inadequate:

Imperial is like Robert Caro’s The Power Broker with the attitude of Mike Davis’s City of Quartz, if Robert Caro had been raised in an abandoned grain silo by a band of feral raccoons, and if Mike Davis were the communications director of a heavily armed libertarian survivalist cult, and if the two of them had somehow managed to stitch John McPhee’s cortex onto the brain of a Gila monster, which they then sent to the Mexican border to conduct ten years of immersive research, and also if they wrote the entire manuscript on dried banana leaves with a toucan beak dipped in hobo blood, and then the book was line-edited during a 36-hour peyote séance by the ghosts of John Steinbeck, Jack London, and Sinclair Lewis, with 200 pages of endnotes faxed over by Henry David Thoreau’s great-great-great-great grandson from a concrete bunker under a toxic pond behind a maquiladora, and if at the last minute Herman Melville threw up all over the manuscript, rendering it illegible, so it had to be re-created from memory by a community-theater actor doing his best impression of Jack Kerouac. With photographs by Dorothea Lange.

How's that for the best sentence I read last night (it's from Sam Anderson)?  As Vollmann himself once said: 'I used to think the Imperial Valley was hot, flat and boring,'

You can buy it here.  Here is an Imperial slide show.

Coincidence? I think not.

by  Alex Tabarrok

From a very good piece in the NYTimes on lobbying:

One of the largest sources of campaign contributions to Senate Democrats during this year’s health care debate is a physician-owned hospital in one of the country’s poorest regions that has sought to soften measures that could choke its rapid growth.

According to the Times, the hospital has been quite successful in its efforts.  And where is this powerful hospital with all the lobbying money located?  Why in the metropolitan area of McAllen, Texas.  McAllen, Texas?   Hmmm…now where I have heard that name before? 

Keep this in mind when you hear promises of Medicare savings from Washington.

South Korea fact(s) of the day

by  Tyler Cowen in

The household savings rate in South Korea
will have plummeted from a world-beating 25.2 percent in 1988 to a
projected world low of 3.2 percent in 2010, according to the OECD.

Here is much more.  In fact:

South Koreans work more, sleep less and kill themselves at a higher
rate than citizens of any other developed country, according to the
OECD. They rank first in time spent online and second to last in
spending on recreation, and the per capita birthrate scrapes the bottom
of world rankings. By 2050, South Korea will be the most aged society
in the world, narrowly edging out Japan, according to the OECD.

And here's one problem with aggregate savings rates:

…South Korea ranks first in per capita spending on
private education, which includes home tutors, cram sessions and
English-language courses at home and abroad.

An obsessive pursuit of educational achievement, it seems, is one of
the driving forces behind the low savings rate. About 80 percent of all
students from elementary age to high school attend after-school cram
courses. About 6 percent of the country's gross domestic product is
spent on education, more than double the percentage of spending in the
United States, Japan or Britain.

Markets in everything

by  Tyler Cowen in

This one is from Jacqueline:

"Tap water?" said Alison Szeli, 26, picking up the clear plastic bottle
with orange letters: "Tap'd NY. Purified New York City tap water."

She studied the description: "No glaciers were harmed in making this
water." She compared prices: Smartwater cost $1.85. Tap'd NY was 35
cents less.

I suspect this will seem odder to you, the older you are.