*The Deficit Myth* and Modern Monetary Theory

That is the new book by Stephanie Kelton and the subtitle is Modern Monetary Theory and the Birth of the People’s Economy.  Here are a few observations:

1. Much of it is quite unobjectionable and well-known, dating back to the Bullionist debates or earlier yet.  Yet regularly it flies off the handle and makes unsupported macroeconomic assertions.

2. Like many of the Austrians, Kelton likes to insist on special terms, such as the government spending “coming first.”  You don’t have to say this is wrong, just keep your eye on the ball and don’t let it distract you.

3. “MMT has emphasized that rising interest income can serve as a potential form of fiscal stimulus.”  You don’t have to believe in a naive form of Say’s Law, but discussions of demand should start with the notion of production.  Then…never reason from an interest rate change!  Overall, I sense Kelton has one core model of the macroeconomy, with a whole host of variables held fixed (“well…higher interest rates means printing up more money to pay for them and thus greater stimulus…”), and then applies that model to a whole series of quite general problems and questions.

4. She thinks “demand” simply puts resources to work, and in this sense the book is a nice reductio ad absurdum of the economics one increasingly sees from mainstream writers on Twitter.  p.s.: The economy doesn’t have a “speed limit.”  And it shouldn’t be modeled using analogies with buckets.

5. We are told that the U.S. “…can’t lose control of its interest rate”, but real and nominal interest rates are not distinguished with care in these discussions.  The Fed’s ability to control real rates is fairly limited, though not zero, and those are empirical truths never countered or even confronted in this book.

6. The absence of a nominal budget constraint is confused repeatedly with the absence of a real budget constraint.  That is one of the major errors in this book.

7. It still would be very useful if the MMT people would take a mainstream macro model and spell out which assumptions they wish to make different, and then solve for the properties of the new model.  There is a reason why they won’t do that.

8. I don’t care what the author says or how canonical she is as a source, a federal jobs guarantee is not part of MMT.

9. Just because the economy is not at absolute full unemployment, it does not mean that free resources are on the table for the taking.  Again, in this regard Kelton is a useful reductio on a lot of “Twitter macro.”

10. I am plenty well read in the “money cranks” of earlier times, including Soddy, Foster, Catchings, Kitson, Proudhon, Tucker, and many more.  They got a lot of things right, but they also failed to produce coherent macro theories.  I would strongly recommend that Kelton undertake a close study of their failings.

11. For all the criticisms of the quantity theory, I would like to know how the MMT people explain the Fed coming pretty close to its inflation rate target for many years in a row, under highly varying conditions, fiscal conditions too.

12. The real grain of truth here is that if monetary policy is otherwise too deflationary, monetizing parts or all of the budget deficit is not only possible, it is desirable.  Absolutely, but don’t then let somebody talk loops around you.

You can order the book here.

The case for a market allocation of vaccines

Or a partial such allocation, at least.  Here is my latest Bloomberg column:

The renowned economist Erik Brynjolfsson recently asked: “At least so far, I haven’t seen any one suggesting to use the market system to allocate vaccines. Not even those who strongly advocate it in other areas. Why is that?”

As one of several people copied at the bottom of the tweet, I feel compelled to take up the challenge.

I readily admit that a significant portion of the vaccines, when they come, should be allocated by non-market forces to health care workers, “front line” workers, servicemen on aircraft carriers, and so on.  Yet still there is room for market allocation, especially since multiple vaccines are a real possibility:

If you had to choose among those vaccines, wouldn’t it make sense to look for guidance from market prices? They will reflect information about the perceived value of both protection and risk. On the same principle, if you need brain surgery, you would certainly want to know what the brain surgeon charges, although of course that should not be the only factor in your decision.

And:

The market prices for vaccines could be useful for other purposes as well. If scientific resources need to be allocated to improve vaccines or particular vaccine approaches, for instance, market prices might be useful signals.

Note also that the scope of the market might expand over time. In the early days of vaccine distribution, health-care workers will be a priority. Eventually, however, most of them will have access to vaccines. Selling off remaining vaccine doses might do more to encourage additional production than would bureaucratic allocation at a lower price.

Say China gets a vaccine first — how about a vaccine vacation in a nearby Asian locale (Singapore? Vietnam?) for 30k?  Unless you think that should be illegal, you favor some form of a market in vaccines.

In any case, there is much more at the link.  Overall I found it striking how few people took up Erik’s challenge.  Whether or not you agree with my arguments, to me they do not seem like such a stretch.

Wednesday assorted links

Will science funding be revolutionized?

The National Science Foundation (NSF) would get a sweeping remake—including a new name, a huge infusion of cash, and responsibility for maintaining U.S. global leadership in innovation—under bipartisan bills that have just been introduced in both houses of Congress.

Many scientific leaders are thrilled that the bills call for giving NSF an additional $100 billion over 5 years to carry out its new duties. But some worry the legislation, if enacted, could compromise NSF’s historical mission to explore the frontiers of knowledge without regard to possible commercial applications.

The Endless Frontiers Act (S. 3832) proposes a major reorganization of NSF, creating a technology directorate that, within 4 years, would grow to more than four times the size of the entire agency’s existing $8 billion budget. NSF would be renamed the National Science and Technology Foundation, and both the science and technology arms would be led by a deputy reporting to the NSF director. (NSF now has a single deputy director; the slot has been unfilled since 2014.)

And:

Passage of the legislation could significantly alter how NSF operates. In particular, agency officials would have the authority to adopt some of the management practices used by the Defense Advanced Research Projects Agency (DARPA) within the Department of Defense, known for its agility and focus on tangible, deadline-driven results. “The new [technology] directorate can run like DARPA if NSF wants it to,” says one university lobbyist familiar with Schumer’s thinking.

One provision would expand NSF’s ability to use outside experts hired for short stints. At DARPA, new program managers are expected to propose significant changes to the research portfolios of their predecessors, with the best new ideas receiving generous funding. In contrast, NSF’s core disciplinary programs change very little from year to year.

The bill has some degree of bipartisan support, and of course I will be following this issue.  Here is the full story, via J.

Stansbury and Summers on the declining bargaining power of labor

In one of the best papers of the year, Anna Stansbury and Larry Summers present what is to me the best non-“Great Stagnation” story of what has gone wrong, and I have read many such accounts.  Here is their abstract:

Rising profitability and market valuations of US businesses, sluggish wage growth and a declining labor share of income, and reduced unemployment and inflation, have defined the macroeconomic environment of the last generation. This paper offers a unified explanation for these phenomena based on reduced worker power. Using individual, industry, and state-level data, we demonstrate that measures of reduced worker power are associated with lower wage levels, higher profit shares, and reductions in measures of the NAIRU. We argue that the declining worker power hypothesis is more compelling as an explanation for observed changes than increases in firms’ market power, both because it can simultaneously explain a falling labor share and a reduced NAIRU, and because it is more directly supported by the data.

There is a good deal of critical thinking about how different macroeconomic trends fit together, and a willingness to consider disconfirming evidence, so I do recommend you read through this one.

I have five main worries about the argument:

1. Rather than labor losing bargaining power, I think of the key development as “management measuring the marginal product of labor more precisely.”  Admittedly that does lower the bargaining power of the majority of workers, given the 20/80 rule, or whatever you think the proper proportions are (Stansbury and Summers themselves presumably are underpaid, but in general wage dispersion has been going up in high-skilled sectors).

A minority of highly productive workers have much more bargaining power than they did before, which doesn’t quite fit the “lower bargaining power per se” hypothesis.  And under my interpretation, easier unionization may not be much of a solution, since the problem here is the actual reality of who produces what.  Consistent with my view, labor’s share is not really down if you consider the super-talented labor/owners/capitalists who start their own companies.  That is a return to labor as well.

2. It is a noted advantage of the Stansbury and Summers approach that is explains the now-lower natural rate of unemployment.  The puzzle, I think, is to explain both lower NAIRU and the slower labor market matching observed over the post-2009 labor market recovery.  Their hypothesis seems to predict a higher degree of worker desperation, and thus quicker matches, than what we actually observed.

If you think, as I do, that employers are now better aware of the diversity of worker quality, and that only ex post do they learn that quality, employers will be more careful upfront, which probably does slow down matching speeds, thus fitting the data better.

3. If you play down market power, and postulate a fall in the share of labor, you might expect investment to be robust, but measured investment clocks in as mediocre.  The authors discuss this point at length on pp.45-46 and offer multiple rebuttals, but I suppose I still think the first-order effect here ought to be stronger than what we (seem to) observe.

4. If corporate profits are so high, how is this consistent with the persistently low demand postulated by Summers’s “secular stagnation” hypothesis?  The paper does consider this question very directly on p.56, but I genuinely (just as a matter of grammar) do not understand the answer the authors are suggesting.  Here goes:

A fair question about the labor rents hypothesis regards what it says about the secular stagnation hypothesis that one of us has put forward (Summers 2013). We believe that the shift towards more corporate income,that occurs as labor rents decline,operates to raise saving and reduce demand. The impact on investment of reduced labor power seems to us ambiguous, with lower labor costs on the one hand encouraging expanded output and on the other encouraging more labor-intensive production, as discussed in Section V.So,decreases in labor power may operate to promote the reductions in demand and rising gap between private saving and investment that are defining features of secular stagnation.

I suppose I had thought of low rates of profit as a (though not the?) defining feature of secular stagnation, but again I may not have understood this passage correctly.

5. Matt Rognlie found that the decline in labor’s share went to housing and land ownership, not capital.

In any case, here is a whole paper full of economics, go and enjoy it.

Our regulatory state is failing us

You don’t think airlines can just provide hand sanitizer to passengers, do you? On Tuesday the FAA wrote to American Airlines granting permission, and the letter they sent (.pdf) offers a window into process the airline had to go to in order to secure the government’s blessing.

Tuesday’s correspondence came from the FAA’s American Airlines Certificate Management Office in Irving, Texas. Imagine having a local office of a federal agency dedicated to your business, with its own letterhead.

American wanted permission to provide “personal use quantities of hand sanitizer gel and sanitizing wipes to customers prior to boarding and/or distributed during flight.” That means there would be hand sanitizer on the aircraft, and that falls within the FAA’s jurisdiction.

Before writing for permission, a team from American Airlines held two separate meetings with FAA inspectors, from two separate FAA offices – the airline’s direct regulators in their certificate management office, and also with the Office of Hazardous Materials Safety. The purpose of these meetings was “to discuss the 14 CFR part 5 required safety risk assessment” required to have hand sanitizer on board.

Passengers and crew are permitted to carry hand sanitizer, consistent with 49 CFR §175.10. And shippers can carry hand sanitizer, consistent with 49 CFR §173.150(g). For the airline to carry and distribute it, though, 49 CFR §175.8 (a)(4) requires permission of the Administrator of the FAA.

And:

The FAA issued a finding that American’s proffered plan to offer hand sanitizer to passengers “meets conditions for FAA approval allowed in 49 CFR §175.8 (a)(4).” Even so, the specific products that the airline sources for use must be “approved by the AA Chemical Review Board (CRB) to meet the above CFR limitations and will be tracked on an internal reference list.”

Furthermore, permission is contingent on “mitigations and procedures included in the AA RWM ‘Corp SMS and Team – 200512- 01 / Hand Sanitizer in Amenity Kits and Snack Bags’ [being] “completed and complied with.” Any deviations require advance coordination with the dedicated FAA Certificate Management Office for American Airlines “prior to any further flights that provide personal use quantities of hand sanitizer gel and sanitizing wipes to customers.”

A small matter, yes, but indicative of the larger whole.  Here is the full post from Air Genius Gary Leff, via Lama.

A weird Lancastrian method for reopening higher education

I’m not sure this could work, but everyone else is doing weird ideas, so let’s consider another one.

Remember Lancastrian methods of education from 19th century England?  Part of the idea was to keep small group size, and economize on labor, by having the students teach each other, typically with the older students instructing the younger.

Here is my suggestion: have students use an app to arrange in-person meetings, in groups of five, for periods of a few weeks running.  Social distancing and masks can be applied as conditions at the time dictate.  The app will match students on the basis of stated interests, and sometimes by other methods too, such as levels of mathematical sophistication or if you wish cultural diversity.  The app also will tell them where to meet on campus, all classes being held outside.

Some classes would be led by professors, but there are not enough professors to go around so many others would be led by the more senior or otherwise better informed students.  Professors and TAs could rotate across various groups if so needed.

All students are given free iPads, connected to campus wireless, and sometimes those iPads would serve as collective blackboards for the small groups.

Central admin. or departments could impose curricular structure in advance, or within a topic area particular assignments might be generated by “Unconference” methods, for instance the students might agree to read a particular book or essay, or to all learn a particular skill.  To the extent overseeing faculty are scarce, you can try having the students themselves finding the relevant teaching materials.  Very good groups would have the option of continuing for further weeks.

Start in August, keep on going until its gets too cold, they did it at Valley Forge and people learn in the desert and tropics too.  Many of the meetings can be short — say 45 minutes — and you can privilege the more valuable majors with locations in the shade.  Put up as many tents as you can.

Every class has a supply of back-up YouTube material, and associated testing, for when the weather is bad, or for when the semester has to end.

For the final semester grade each student writes a 20-25 pp. paper about what he or she learned through these units.  Professors and sometimes TAs would grade those papers, and do note this is not an insuperable grading burden.  It rewards the “did you learn anything useful at all?” approach, rather than “did you manage to sit and suffer through through all of your boring classes?”.

I suspect it feels too much like chaos to a university administrator, but perhaps that is an argument in its favor?

You will note that this method, for all of its learning uncertainties, has two big advantages.  First, it really does prioritize the health of everyone involved.  Second, students still have lots of contact with each other and get to enjoy some version of the campus experience.  The interactive groups might even provide a more engaging campus experience than did the status quo ex ante, keeping in mind that some schools will combine this method with the abolition or radical paring down of dorms.

Addendum: Hand out free diapers, all other plans have that issue too.

Three myths about federal regulation

By Patrick A. McLaughlin and Casey Mulligan, Patrick of course being from GMU/Mercatus:

Despite evidence to the contrary, three common myths persist about federal regulations. The first myth is that many regulations concern the environment, but in fact only a small minority of regulations are environmental. The second myth is that most regulations contain quantitative estimates of costs or benefits. However, these quantitative estimates appear rarely in published rules, contradicting the impression given by executive orders and Office of Management and Budget guidance, which require cost-benefit analysis (CBA) and clearly articulate sound economic principles for conducting CBA. Environmental rules have relatively higher-quality CBAs, at least by the low standards of other federal rules. The third myth, which is particularly relevant to the historic regulations promulgated during the COVID-19 pandemic, is the misperception that regulatory costs are primarily clerical, rather than opportunity or resource costs. If technocrats have triumphed in the regulatory arena, their victory has not been earned by the merits of their analysis.

Here is the link to the NBER working paper.

Rewatching *Dirty Harry* (no real spoilers)

Released in 1971, as usual with San Francisco movies one can see the reach of NIMBY — the city doesn’t look much larger or busier today.  The subtext of the film is that law and order is collapsing, yet San Francisco was far cleaner back then and street harassment never is presented as a risk.  Even the red light district of 1971 seemed better kept than many of the nicer parts circa 2020.

You can see how much the debate has shifted from “how the police treat the guilty” to “how the police treat the innocent.”

It is startling to see actual San Francisco children in the movie — they did not seem to be hired extras.

Yana was shocked that Clint Eastwood did not direct the movie, I was amazed when he started directing.

Overall it held up remarkably well I thought.  Virtually every scene is good, and its ability to offend both sides (and indeed other sides too) remains evident.

Monday assorted links

1. The rage of research.

2. Summers on Alesina.

3. China-India thread.

4. “Historically, immigrant men were more likely to be employed than native men. The COVID-related labor market disruptions eliminated the immigrant employment advantage. By April 2020, immigrant men had lower employment rates than native men.”  Link here.

5. Further evidence that violent media content lowers violence.

6. “…the more infectious people believe that COVID-19 is, the less willing they are to take social distancing measures, a finding we dub the “fatalism effect”.

7. “Formula E driver Daniel Abt was disqualified and ordered to pay £8,900 to charity for getting a professional gamer to compete under his name in an official esports race.

8. What the development of penicillin tells us about coronavirus vaccines.  The piece makes several interesting points about speed.

Vaccine Testing May Fail Without Human Challenge Trials

In Why Human Challenge Trials Will Be Necessary to Get a Coronavirus Vaccine I asked, “What if we develop a vaccine for COVID-19 but can’t find enough patients–healthy yet who might get sick–to run a randomized clinical trial?” Exactly that problem is now facing the Oxford vaccine in Britain.

An Oxford University vaccine trial has only a 50 per cent chance of success because coronavirus is fading so rapidly in Britain, a project co-leader has warned.

…Hill said that of 10,000 people recruited to test the vaccine in the coming weeks — some of whom will be given a placebo — he expected fewer than 50 people to catch the virus. If fewer than 20 test positive, then the results might be useless, he warned.

As I wrote, “A low infection rate is great, unless you want to properly test a vaccine.” Challenge trials have issues of external validity and they take time to setup properly but they produce results quickly and they can be especially useful in whittling down vaccine candidates to focus on the best candidates.

1DaySooner now has over 25 thousand volunteers from over 100 countries.

Vaccines: Billions in Costs, Trillions in Benefits

Bloomberg: As sections of the global economy tip-toe toward reopening, it’s becoming clearer that a full recovery from the worst slump since the 1930s will be impossible until a vaccine or treatment is found for the deadly coronavirus.

Consumers will stay on edge and companies will be held back as temperature checks and distancing rules are set to remain in workplaces, restaurants, schools, airports, sports stadiums and more.

China — the first major economy consumed by the virus and the first to emerge on the other side — has been able to revive production but not demand. The lesson for other economies: it’ll be a stop-start path back toward normal.

There’s also the risk of new flare-ups. Some 108 million people in China’s northeast region have been put back under varying degrees of lockdown amid a new cluster of infections. Doctors there are also seeing the coronavirus manifest differently, suggesting that it may be changing in unknown ways.
In South Korea – where the virus was controlled without a hard lockdown – consumer spending remains weak as infections continue to pop up.

…Harvard University professor Carmen Reinhart, who is the incoming chief economist of the World Bank, had a similar message. “We’re not going to have something akin to full normalization unless we (a) have a vaccine and (b) — and this is a big if — that vaccine is accessible to the global population at large,” she told the Harvard Gazette.

The virus is being beaten back and there are reasons for optimism but I agree with Reinhart that we won’t get full normalization without a vaccine. The world economy is on the order of $90 trillion and the IMF is projecting a 3% decline instead of an expected 3.3% increase so a loss to the world economy of around $6 trillion in 2020. Growth will probably return in 2021 and there will be some catchup but the IMF projects a cumulative loss of 9 trillion. Ending the pandemic early could generate hundreds of billions, even trillions, in output–that’s why Susan Athey, Nobel laureate Michael Kremer, Chris Snyder and myself advocate for going big on vaccines. It’s billions in costs and trillions in benefits. Warp speed ahead!

That was then, this is now

Ali Akbar was two years younger than Robu [later named Ravi Shankar], but a couple of years ahead in his musical training.  He has been through a brutal regime: Baba had even tied him to a tree and beaten him when his progress was unsatisfactory.  Although Baba had arranged for Ali Akbar to marry at the age of fifteen, he still expected him to remain celibate — married to music.  Twice Ali Akbar ran away.  Ultimately the harsh discipline brought out his talent and made him into a master of the sarod, although one wonders about the emotional cost.

That is from Oliver Craske’s Indian Sun: The Life and Music of Ravi Shankar, which I am quite enjoying.

Stockholm City’s Elderly Care and Covid19

Upwards of 70 percent of the Covid19 death toll in Sweden has been people in elderly care services (as of mid-May 2020). We summarize the Covid19 tragedy in elderly care in Sweden, particularly in the City of Stockholm. We explain the institutional structure of elderly care administration and service provision. Those who died of Covid19 in Stockholm’s nursing homes had a life-remaining median somewhere in the range of 5 to 9 months. Having contextualized the Covid19 problem in City of Stockholm, we present an interview of Barbro Karlsson, who works at the administrative heart of the Stockholm elderly care system. Her institutional knowledge and sentiment offer great insight into the concrete problems and challenges. There are really two sides the elderly care Covid19 challenge: The vulnerability and frailty of those in nursing homes and the problem of nosocomial infection—that is, infection caused by contact with others involved in the elderly care experience. The problem calls for targeted solutions by those close to the vulnerable individuals.

That is the abstract of a new paper by Charlotta Stern and Daniel B. Klein.