This one Goes to Eleven
Here’s a great metaphor from Paul Krugman’s The Return of Depression Economics:
A microphone in an auditorium always generates a feedback loop: sounds picked up by the microphone are amplified by the loudspeakers; the output from the speakers is itself picked up by the microphone; and so on. But as long as the room isn’t too echoey and the gain isn’t too high, this is a "damped" process and poses no problem. Turn the dial a little too far to the right, however, and the process becomes explosive; any little sound is picked up, amplified, picked up again, and suddenly there is an earsplitting screech. What matters in another words, is not just the qualitative fact of feedback, but its quantitative strength.
Aside from the obvious parallels – feedback, the crash as an ear-splitting screech, the way everyone is always surprised – this metaphor has something else going for it. It doesn’t make a lot of sense to look for the X,Y,Z "causes" of the crash because when feedback is present X,Y,Z may not be a problem even though X,Y,Z + epsilon creates a disaster.
How did Nazi fiscal policy work?
Please do not think I am trying to call anyone, or any advocate of active fiscal policy, a Nazi. The point is that Nazi fiscal policy did drive a recovery in measured gdp, so it is worth knowing how and why. Robert J. Gordon has some answers (NBER; I don’t see an ungated copy):
Tooze confirms previous findings that relatively little of the
expansion in public expenditures took the form of public works like the
autobahns, while over 80 percent consisted of spending for rearmament.
Abelshauser (1998, p. 169) calls this “military Keynesianism on a large
scale.”
Furthermore real wages were falling not rising:
The previous literature has emphasized the Nazi policy of holding down real wages as a contribution to the rapid expansion of employment, the opposite of the perverse wage†increasing policies of Roosevelt’s NRA. Indeed, Barkai shows that the share of German wage income in national product declined from 64 to 59 percent between 1932 and 1936, while the increase in profits was “quite spectacular” (p. 196). Likewise, Abelshauser (p. 148) reports that the income share of the bottom half of the income distribution fell from 25 to 18 percent between 1928 and 1936.
In other words, Nazi fiscal policy boosted measured gdp rather than driving a recovery with higher real standards of living. Even putting the brutality of the Nazi regime aside, this should not count as an example of successful fiscal policy. I’ll look at some other historical examples soon but — at the risk of sounding like a broken record — I wish to stress my conclusion that the evidence in favor of government spending as effective fiscal policy is weak.
Addendum: On fiscal policy more generally, Mark Thoma has many comments.
Tyrone runs monetary policy
Tyrone barely knows enough technical macroeconomics to bark out an opinion, much less defend it or specify coherent policies. Nonetheless he suggested that I pass the following along to Ben Bernanke:
It seems there is not enough lending. People would lend more if interest rates were higher or at least I think I learned that in Econ 101. So let’s raise interest rates. I’ve also heard we have banks buying T-Bills and the Fed and government buying claims to real businesses. Can that be true? Isn’t that backwards? If they aren’t working properly, why not just recall all the T-Bills? (Didn’t General Motors do something like this once? It seemed to work out for them.) Then the banks would have to invest somewhere. Give a bonus to any bank that does something real. Let the others rot. (Tyrone then called up Trudie, who told him: "Have the Fed announce it will go massively short in the T-Bill futures market, sometime in the near future and without further warning. That would scare people out of government assets.")
What about that guy who set up the phony investment company? Can the Treasury make a new one of those, only bigger? He took money away from people and gave it to charities and the needy and the arts and higher education. That sounds like stimulus so why are we sending him to jail? Wasn’t he ahead of the curve?
Why don’t we increase the tax deduction for donations to any charity which manages to expand its spending on overhead or is the word infrastructure? For every dollar given, let the donor deduct more than a dollar from taxes. That’ll get the money out of the banks of those rich people and into the hands of real Americans. Still, it’s not as good as the phony guy who’s been doing this for twenty years. I guess we’re all trying to catch up to him. It seems he had help from his family but Bernanke does not. Makes all the difference.
Tyrone tells me, by the way, that soon he will try his hand at a restaurant review. It can’t be any worse than this.
Assorted links
2. Robert Mundell sponsors a Chinese chess tournament
S.C. Tsiang, prophet
Or should I have called this post "zero nominal rates of interest"?
The JSTOR link is here. In 1969 Tsiang wrote that if the Fed pays interest on reserves, or nominal interest rates in loan markets approach zero, money (if you can still call it that) dominates all investment assets. The only equilibrium involves the government holding all of the economy’s real capital. In other words, Milton Friedman’s old recipe for an optimum quantity of money can never be realized in anything resembling a decentralized economy.
Here is Jeff Hummel’s post on paying interest on reserves. Here is today’s headline on the Fed and the federal funds rate. Note that for Chiang, either zero nominal interest rates or interest on reserves was enough to cause the problem; did he imagine we might someday have both?
Help!
Markets in everything China fact of the day
This is from the excellent Seth Roberts, now in Beijing:
The 2008 China International Petroleum Equipment and Technology Exhibition concluded last Friday in the eastern city of Dongying. 3000 guests from over 40 countries attended and everything appeared to run smoothly. Yet the majority of the foreign delegates were hired just to make the event look "international". Among the 200 fake delegates was Jez Webb, The Peking Order‘s energy correspondent.
Most guests had responded to an ad on theBeijinger.com with the curious title: “Free trip to Shandong, 200 foreign visitors invited (Be paid)”. We would, depending on our age, receive between 600 and 700 RMB (£60-70) for two days “work” – two 6 hour bus journeys to and from the city, full board in a luxury hotel and a couple of hours walking round an exhibition, pretending that we were involved in the petroleum industry.
You’ll note the monopsony market structure behind the offer. The story is full of interesting further detail.
Markets in everything, Xmas edition
Company offers to wrap your Christmas purchases just as badly as you could do it yourself
So says Kat, my source on this story. It’s called "Crapwrap":
Firebox.com is paying 20 of its male forklift truck drivers and
warehouse assistants to wrap presents as quickly as possible, using
ugly brown duct tape and very little care.And the $9 service, cheekily called CrapWrap, has attracted more than 500 customers since it launched last week.
This way she’ll think you did it.
…Parcels can even be dispatched in brown paper with a shoddily-tied pink ribbon.
Kevin Smith, 29, is proud to be the worst wrapper at the company’s London warehouse.
He said: "I am rubbish. We’re not given any instructions. I’m just
asked to make a hash of it using lots of brown tape and making sure
there are rips and untidy folds."It’s nice to get away from the normal work: cleaning, packing and moving stuff around. Wrapping is a good distraction."
What is the best kind of fiscal policy shock?
Hot off the presses from the NBER, from Andrew Mountford and Harald Uhlig, the evidence is mounting:
We propose and apply a new approach for analyzing the effects of fiscal
policy using vector autoregressions. Specifically, we use sign
restrictions to identify a government revenue shock as well as a
government spending shock, while controlling for a generic business
cycle shock and a monetary policy shock. We explicitly allow for the
possibility of announcement effects, i.e., that a current fiscal policy
shock changes fiscal policy variables in the future, but not at
present. We construct the impulse responses to three linear
combinations of these fiscal shocks, corresponding to the three
scenarios of deficit-spending, deficit-financed tax cuts and a balanced
budget spending expansion. We apply the method to US quarterly data
from 1955-2000. We find that deficit-financed tax cuts work best among
these three scenarios to improve GDP, with a maximal present value
multiplier of five dollars of total additional GDP per each dollar of
the total cut in government revenue five years after the shock.
The emphasis is mine. I’m not saying you have to believe this paper in all its details (I don’t), but over the next year you will continue to hear talk about the wonders of government spending as fiscal policy. The science isn’t there. Here are ungated versions of the paper.
Keynes’s General Theory, chapter six
Keynes does all this huffing and puffing about terms and finally he stumbles into his mention of Hayek. Hayek had written some now-obscure articles about net investment and measures of the capital stock, reprinted in Profits, Interest, and Investment. (Here is an excellent Lawrence H. White essay on this part of Hayek’s thought.) Keynes wants to show he doesn’t have to worry about these debates. Keynes is also trying to liberate himself from his previous (1930) two-volume Treatise on Money, a disappointing work. At the end of section (i) you get the clincher: "For this reason, and also because I no longer require my former terms to express my ideas accurately, I have decided to discard them — with much regret for the confusion which they have caused."
Again, in part ii the bombshell comes, unannounced. Keynes decides that he will declare savings to be a "mere residual." Consumption and investment alone will determine income and savings is defined as whatever is left over to make the national income equations balance.
At the time this was considered by many to be an enormous sleight of hand. The Austrian and Swedish traditions focused on the question of whether planned savings was going to equal planned investment and what happens if not. Keynes has just banished such questions to the woodshed and he has done so by a terminological maneuver.
Whether or not you think that the Austrian and Swedish traditions lead anywhere fruitful, Keynes is on shaky ground here. He is using definitions to favor one causal account of macro over another. That’s not right. You can still make a plausible argument that Keynes is right on empirical grounds that planned savings is not an important force for understanding business cycles. But so far no such empirical argument has been clinched.
In the second to last paragraph Keynes realizes that in his system savings does not and cannot constrain investment. He notes that if animal spirits were wild enough, the price of output could fluctuate between zero and infinity. Neither interest rates nor savings plans perform any of their traditional constraining or equilibrating functions. At least Keynes realized how far out on a limb he was going.
Due to popular request, we’ll resume with the Keynes symposium in January but take a break for the close of the semester.
Discover your Inner Economist, Italian edition
Here is one place to buy it and here. Here are other relevant purchase sites. I believe it is available in both hardcover and paperback, although don’t hold me to that claim.
The mid-title — Scopri l’economista che è in te — still resembles "Discover Your Inner Economist." But now the book has a new lead title : "No Crac" ["No Nonsense"?] and a new subtitle, something like "How to survive the great depression and be happy," or so I am told by Maria Pia Paganelli.
Assorted links
Very good sentences
In my experience, use of the word "classy" means the opposite of what the speaker intends.
The link is here.
The best sentence I read yesterday
Yes, I am skeptical of most medicine because on average it seems folks who get more medicine aren’t healthier. But I’ll heartily endorse one medical procedure: cryonics, i.e., freezing folks in liquid nitrogen when the rest of medicine gives up on them.
Here is the full post and of course that is Robin Hanson. The post has another very good sentence:
It seems far more people read this blog daily than have ever signed up for cryonics.
Here is Robin’s excellent post on why cryonics is unpopular. Here is Bryan Caplan’s. My current view is this: one’s attention is extremely scarce and limited, as are one’s affiliations. Insofar as you have the luxury of thinking "bigger thoughts," those thoughts should be directed at helping others, not at helping oneself. The real opportunity cost of cryonics is not just the money but whatever else you would have done with that intellectual energy.
Furthermore the universe (or multiverse) may be infinite, so in expected value terms it seems my copies and near-copies are already enjoying a kind of collective immortality.
There is an anthropic effect insofar that only people who are not regularly tortured have the luxury of thinking about cryonics. But not all worlds have to be so peaceful. What probability of future torture would cause us to wish to die forever rather than be resurrected? And should I therefore be scared by the idea of an infinite universe? Do Darwinian selection pressures — defined in the broadest possible way — suggest it is worth spending energy on making entities happy? Or do most entities end up as suffering slaves?
Addendum: Robin responds.
Keynes’s General Theory, chapter five
Part i shows that Keynes had digested the Austrians, and especially the Swedes, far more than he let on. He goes through considerable machinations to show that his main argument is consistent with the Swedish long vs. short-run, ex ante vs. ex post analysis that ruled Stockholm at the time, as found in Myrdal, Lindahl, Ohlin and others. For all of Keynes’s periodic dismissiveness of his precursors, I read him as actually quite intimidated by them. In this section he’s "looking for their approval," if only in his own mind.
In Part ii Keynes presents two bombshells, more or less from out of nowhere:
a) For the short-run, the common default expectation is that "recently realized results will continue"; this precludes entrepreneurial creativity and creation as a way out of a bad situation. You’ll note the influence of Cambridge epistemology here, namely that we do not recreate our entire basic picture of the world de novo every day. G.L.S. Shackle is mostly a Keynesian but on this issue his emphasis on the creative imagination of the individual is a significant revision of Keynes.
b) Long-term expectations do not adjust smoothly but rather become more bullish or bearish in volatile leaps.
Furthermore a) and b) are held together, which implies at some margin a sharp disjunction between the short-run and long-run. I do not regard Keynes’s two assumptions as absurd, but they are hardly a "general theory." Note that you need a) to choke off various processes of recovery and you need b) to get investment demand to be so volatile in the first place. Let’s say you think b) is reasonable, then in my view you should also believe in possible "cascade" effects which can pull you out of a downturn in the short run. But for Keynes, no.
Here is a comment on last week’s session. Chapter six will be going up this afternoon. On short vs. long-term expectation, Felix Salmon has some good points.
Why is the New Springsteen Album Coming out in January?
Why is the new Springsteen album, Working on a Dream, coming out on January 27? Christmas is the big selling season. Wouldn’t lots of people want to buy this album for the holidays? Moreover, albums that debut early in the year are less likely to make the end of the year "best of the year" lists since they are soon forgotten.
True, there is surely a mixed strategy equilibrium in which some albums debut in January. After all, since most albums, like movies, will aim for a holiday release this gives the ones that come out after the holidays more shelf space and radio time all to themselves. Thus, it can’t be an equilibrium for all albums to debut at Christmas. But which ones should? Knowing that the Springsteen album is coming in January does that give us a signal of quality? Can you work out the equilibrium?