Results for “multiplier”
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How Japan avoided a bond market panic

This paper explores the history of Japanese fiscal policy over the past two decades with the aim of better understanding where previous forecasts have erred. As such, Japan provides an important case study of how a country facing intense fiscal pressures can avoid a hyperinflation or financial panic. We find that there were three key forces that likely improved Japan’s fiscal situation relative to more pessimistic predictions. First, the Japanese government has shown remarkable ability to hold down per capita expenditures on social pensions and healthcare. Second, the Japanese government has been able to raise taxes substantially. Third, the remarkable monetary policy pursued by the Bank of Japan has resulted in a dramatic decline in the amount of government bonds held by the private sector.

That is the abstract of a 2017 paper by Mark T. Greenan and David E. Weinstein.  You will note that the Japanese government just announced that the Japanese economy contracted at an annualized rate of -6.3% (not a typo) last quarter.  Of course, maybe they should have just kept on borrowing money forever.  As you can see from the recent tweet of Krugman, many of the Keynesians now favor stimulative policy all the time, even at full employment, with no need for eventual consolidation.

And the next time you see a calculation of a multiplier, ask yourself if the entire time horizon is being considered.  Usually not.

Via the excellent and reality-based Wojtek Kopczuk.

Can you give away money without helping anyone?

Here is my email from Jeremy Davis:

There was an idiotic movie in the 80’s (“Brewster’s Millions”) where Richard Pryor had to burn through $30 million in 30 days in order to inherit $300 million.  There were some conditions:  “. . . after 30 days, he may not own any assets that are not already his, and he must get value for the services of anyone he hires. He may donate only 5% to charity and lose 5% by gambling, and he may not waste the money by purchasing and destroying valuable items. Finally, he is not allowed to tell anyone. . . .” [Wikipedia].

Anyhow, I was thinking of a similar movie one could make.  Awful, but perhaps instructive to students of economics.

Similar premise, similar challenge.  But my twist is that the stipulation now is that he can do whatever he wants with the $30 million, on the condition that he NOT HELP ANYBODY with the money.

I don’t believe this is possible.  Consider:

If he were to simply keep in in the bank and not touch it, the supply of loanable funds would shift to the right, lowering the cost of borrowing money, thereby helping others to improve their lives in various ways.

If he were to spend the money, he would create gains from trade, a positive-sum game.  People would consider themselves better off for having sold him a good or service . . . or they wouldn’t have.  Plus multipliers.

If he gave the money away, the recipient would doubtless consider himself better off, at least initially.

If he burned the money, he would be, albeit in a small way, helping the nation’s economy as a whole, since that $30 million represents a claim on the nation’s goods and services that now will never be called in.

I guess what I’m getting at here is that I don’t believe there’s any way a rich person can avoid helping others with his money.

Thoughts?

When fiscal policy might make matters worse

From the new 4th edition of Cowen and Tabarrok, Modern Principles of Economics:

Increased spending and tax cuts have to be paid for. Thus, increased spending and tax cuts today will tend to be followed by decreased spending or tax increases tomorrow. When tomorrow comes and spending is reduced and taxes rise, aggregate demand will fall—this is one reason why long-run or net multipliers are smaller than short-run multipliers. Ideal fiscal policy will increase AD in bad times and pay off the bill in good times, as we show in Figure 37.5. Overall, if we can spend more in bad times when the multiplier is big and tax more in good times when the multiplier is small, the net effect will lead to higher GDP overall. Economists say that the ideal fiscal policy is counter-cyclical because when the economy is down the government should spend more, and when the economy is up the government should spend less.

Although counter-cyclical fiscal policy makes sense to economists, it often
doesn’t make sense to politicians or to voters. The views of economists violate a kind of “common sense” or folk wisdom, which says that in bad times the government should spend less and only in good times should the government spend more. After all, you and I spend less when times are bad and more when times are good, so shouldn’t the government behave similarly? If the government follows the “common sense” view, however, it will tend to make recessions deeper and booms larger, thereby making the economy more volatile, again as shown in Figure 37.5.

Even when governments do spend more in recessions, as economists suggest, they often don’t follow through on the second half of the prescription, which is to spend less during booms…This usually means that there is less room for expansionary fiscal policy when it is needed.

The 4th edition is just out, here is more information.

My Conversation with Larry Summers

Larry was in superb form, and we talked about mentoring, innovation in higher education, monopoly in the American economy, the optimal rate of capital income taxation, philanthropy, Hermann Melville, the benefits of labor unions, Mexico, Russia, and China, Fed undershooting on the inflation target, and Larry’s table tennis adventure in the summer Jewish Olympics. Here is the podcast, video, and transcript.

Here is one excerpt:

SUMMERS: Second, the VIX — people tend to underappreciate this. The volatility of the market moves very much with the level of the market. The reason is that if a company has $100 of debt and $100 of equity, and then the stock market goes up, it’s 50/50 levered.

If the stock market goes up by $100, then it has $100 of debt and $200 of equity and it’s only one-third levered. So when the stock market goes up, its volatility naturally goes down. And the stock market has gone way up over the last 10 months. That’s a factor operating to make its volatility go significantly down.

It’s also the case if you look at surprises. The magnitude of errors in the consensus estimates of company profits or the consensus estimates of industrial production or what have you, numbers have been coming in close to consensus to an unusual degree over the last few months.

I think all those things contribute to the relatively low level of the VIX, but those are more in the way of ex post explanations. If you had told me everything that was going on in the world and asked me to guess where the VIX would be, I would expect it to have been a little higher than it is right now.

And:

COWEN: If there’s an ongoing demand shortfall, as is suggested by many secular stagnation approaches, does that mean monopoly cannot be a major economic problem because that’s from the supply side, and that the supply side constraint isn’t really binding if you think of there as being multiple Lagrangians. Forgive me for getting technical for a moment. Do you see what I’m saying?

SUMMERS: That wouldn’t have been the way I’d have thought about it, Tyler, but what you’re saying might be right. I think I’d be inclined to say that, if there’s more monopoly, there’s more money going to monopoly firms where there’s a low propensity to spend it, both because the firms don’t invest and because the owners of the firms tend to be rich or endowments that have a low propensity to spend.

So the greater monopoly power, to the extent that it exists, is one factor operating to raise savings and reduce investment which contributes to demand shortfalls and secular stagnation.

I also think that there’s likely to be less entry in competition in markets that aren’t growing rapidly than there is in markets that are growing rapidly. There’s a sense in which less demand over time creates its own lack of supply.

And:

COWEN: What mental qualities make for a good table tennis player?

SUMMERS: Judging by my performance, qualities that I do not possess.

[laughter]

SUMMERS: I think a deft wrist, a certain capacity for concentration, and a great deal of practice. While I practiced intensely in the run-up to the activity, there were other participants who had been practicing intensely for decades. And that gave them a substantial advantage.

Recommended!

If you think you know someone who is very smart, Larry is almost certainly smarter.

Who wants more coal company pollution in water streams?

That is one of the news stories of the end of this week, namely that the Trump administration eliminated a previous Obama administration ruling on this, see Brad Plumer for details.  That sounds horrible, doesn’t it?

I took a look at the cost-benefit study (pointed out on Twitter by Claudia Sahm, or try this link, and please note it was prepared by consultants, not by the government itself).  I spent some time with these hundreds of pages, and they are not always easy to parse (my apologies to the authors for any misunderstandings).  Anyway, I quickly came upon this and related passages (p.45, passim):

In summary, the Final Rule is expected to reduce employment by 124 jobs on average each year due to decreased coal mined while an additional 280 jobs will be created from increased compliance activity on average each year.

Of course those “newly created jobs” are a cost, not a benefit, and should be switched to the other side of the ledger.  That is not what this study did.  And if I understand p.4-31 correctly, this study is using a multiplier of about 2.  This approach is completely wrong, and if it were right Appalachia would love a lot of this coal regulation for its job-creating proclivities, but of course the region doesn’t.

The claimed annual benefit from the changes, from the side of coal demand (not the only effects), is $78 million, fairly small potatoes.  Note the study doesn’t consider what are commonly the most significant costs of regulation, namely distracting the attention of managers and turning companies into legal and regulatory cultures rather than entrepreneurial cultures.  The study does mention uncertainty costs from regulation, although I could not find any quantification of them.

Furthermore, I am not able to scrutinize the introductory section “SUMMARY OF BENEFITS AND COSTS OF THE STREAM PROTECTION RULE” and figure out the final assessment of net benefits for the rule and where that assessment might come from.  I find that worrisome, and paging through the study did not put my mind at ease in this regard.

Now, I know how this works.  Many of you probably are thinking that we need to do whatever is possible to attack or shrink the coal industry, because of climate change.  Maybe so!  Maybe we want to stultify the coal companies, for reason of a greater global benefit.  But a) there is still a role for evaluating individual policy changes by partial equilibrium methods and reporting on those results accurately, and b) “putting down the coal companies,” as you might a budgie, is not what the law says is the proper goal of policy.

Imagine holding an attitude that places the Trump administration as the actual defenders of the rule of law!  Besides, don’t get too worked up (p.174):

Our analysis indicates that there will be no increase in stranded reserves under any of the Alternatives.

There is, however, a very small decline in annual coal production (pp.5-20, 5-21) from the rule that had been chosen.  Water quality is improved in 262 miles of streams (7-26), in case you are wondering, that’s something but hardly a major impact and that almost entirely in underpopulated parts of the country.  All the media coverage I’ve seen implies or openly states a badly exaggerated sense of total water impact, relative to this actual estimate (are you surprised?).  Returning to the study, there is also no region-specific estimate of how large (or small) those water benefits might be, at least not that I could find (again, maybe I missed it, but I did find some language suggesting that no such estimate would be provided).

Chapter seven calculates the benefits of the resulting carbon emissions, but after reading that section my best estimate for those marginal benefits is zero, not the postulated $110 million.  The “social cost of carbon” is actually an average magnitude, and it does not measure benefits from very small changes.  Again, you might think there is an imperative to consider “this policy is conjunction with numerous other anti-coal changes,” but that is not what the law stipulates as I understand it and furthermore it hardly seems that many other anti-coal regulatory changes are on the way.

If it were up to me, I would not have overturned the coal/stream regulations, and my personal inclination is indeed to fight a war on coal.  But if you look at the grounds for evaluation specified by law, and examine the cost-benefit study with even a slightly critical mindset, we don’t know what is the right answer on this individual policy decision.  The study outlines nine different regulatory alternatives and it is not able to conclude which is best, nor is the quantitative thrust of the study aimed toward that end.

Mood affiliation aside, to strike this regulation down, as the Trump administration has done, is in fact not an indefensible action.

On a more practical political level, Trump wishes to send a signal to Appalachian voters that he is looking out for coal and looking out for them.  This is actually a very weak action, and it was chosen because for procedural reasons it was quite easy to do.  The more you complain about it, the stronger it looks, and that’s probably a more important fact than any of the particular details of this study.  Whether you like it or not, the coal debate is not really one that favors the Democrats.

Addendum: Here is the CRS paper, which seems to be derivative of other work, most of all this study.

Which kind of countercyclical fiscal policy is best?

Miguel Faria-e-Castro, on the job market from NYU, has a very interesting paper on that question.  Here are his findings:

What is the impact of an extra dollar of government spending during a financial crisis? How important was fiscal policy during the Great Recession? I develop a macroeconomic model of fiscal policy with a financial sector that allows me to study the effects of fiscal policy tools such as government purchases and transfers, as well as of financial sector interventions such as bank recapitalizations and credit guarantees. Solving the model with nonlinear methods allows me to show how the linkages between household and bank balance sheets generate new channels through which fiscal policy can stimulate the economy, and study the state dependent effects of fiscal policy. I combine the model with data on the fiscal policy response to assess its role during the financial crisis and Great Recession. My main findings are that: (i) the fall in consumption would had been 1/3 worse in the absence of fiscal interventions; (ii) transfers to households and bank recapitalizations yielded the largest fiscal multipliers; and (iii) bank recapitalizations were closest to generating a Pareto improvement.

Bank recapitalizations — just remember that the next time you hear someone talking about “G” in the abstract.

See also this new Alesina NBER paper, indicating that the how of fiscal adjustment is much more important than the when.  No tax hikes!

Which macroeconomic theories will rise and fall in status because of Donald Trump?

It seems likely that Trump and a Republican Congress can agree on some big mix of tax cuts and spending.  Furthermore, there are plenty of rumors that Trump may push on the independence of the Fed and the ten-year yield leaped upon his election.  So odds are it will be a stimulus with some degree of monetary accommodation, and in that case even tax cuts for the wealthy can serve as an effective form of QE into the assets the wealthy invest in.

And yet 80% of economists are Democrats, many top economists signed a petition opposing Trump, and I can’t think of a single top economist who has endorsed Trump.  So clearly something has to give, and here are some theories that may rise or fall in status:

1. “The multiplier is high.”  That seems ready to decline in status.

2. “Even wasteful expenditures can boost demand and help pull us out of secular stagnation.”  Ditto.  “We need to do stimulus right” will make a comeback.  And I see “the distributional effects of stimulus really matter” lurking around the corner.

3. “Tax cuts aren’t as good as government spending.”  That actually may rise in status, especially if Congress gets the bargain they want — lots of tax cuts — rather than what Trump wants.

4. The notion of how a credibly irresponsible leader can improve macro performance won’t get cited as much.

5. Austrian-like theories of how there can be a boom in the short run, yet with great long-run dangers, will return to prominence, albeit with modifications to the original Austrian story.

6. Criticizing countries with trade surpluses will decline in status.

7. The efficient markets hypothesis will decline in status.  It imposes too much discipline on our judgments of leaders and their policies.  The more certain we are of our own judgments, the more that evidence contradicting those judgments should be downgraded.  Right?

Don’t get me wrong, I think most (not all) of these moves will be “economists coming to their senses,” and thus good news.  But let’s be clear about what is going on.  While I don’t expect many instances of people making claims they do not believe, in terms of what gets emphasized, stressed, and repeated, macroeconomic discourse is about to change.

A simple parable of crowding out

Think tank X decides to expand its policy output on urban economics, so it hires some new scholars in the area.  That means fewer people teaching urban economics in academia, or maybe fewer people driving Uber.

It also means more computers in the think tank sector and fewer computers elsewhere.

Or make the example corporate.  Microsoft hires more economists, so fewer economists work for banks.

None of this has to involve higher interest rates, whether on government securities or corporate bonds, yet still there is an opportunity cost from the new decisions.  Do interest rates have to go up every time resources are switched across sectors?  No.  Will there in general be a significant “multiplier” from these sectoral shifts?  I say that question is a category mistake, but if you insist the multiplier could easily be negative rather than positive.

There is some upward wage pressure from these labor reallocations, and you could consider such wage changes as evidence for this crowding out.  Note three points.  First, real wages have been rising as of late.  Second, the sectoral shift also could cause some wages to fall.  Third, a lot of wage groups have seen falling real wages since 1999-2000, at least as we measure wages by traditional means.  The “rising wage” pressure therefore may take the form of “wages fell less than otherwise.”  Pointing at stagnant wages for an economic group therefore is not, in the recent environment, evidence for no crowding out of labor.

These are all simple points, but they are being forgotten in today’s discussion.  A good rule of thumb is to start by viewing the problem in real terms rather than focusing on “finance capital.”  As the point applies to labor, so does it apply to tractors.

Here is an earlier post on related topics.

Does inefficient risk-bearing change the opportunity cost of government borrowing?

Let’s say the private sector is using a hurdle rate of five percent and the government a rate of one percent.  (Those numbers are illustrative only.)

Furthermore say the private sector uses five percent because it faces private risk which is in fact not social risk from a welfarist point of view.  In other words, the private sector ought to use a one percent hurdle rate, even though it does not, but people worry about their own portfolios rather than the broader social portfolio of projects in toto.  If the private sector switched to the one percent rate, of course, it would invest much more and lower the marginal rate of return on capital from five percent down to one percent, adjusting for all the required adjustments (taxes, transactions costs, etc.).

In such a world, if a new government project displaced private capital, the opportunity cost would be one percent at the margin.

But we are not in such a world, even if you think we ought to be.  If a new government project displaces some private sector capital, the marginal cost there is still five percent.

You can read Brad DeLong’s take on my post yesterday on the opportunity cost of extra government projects.  Brad longs for that cross-sector equalization down to one percent on both sides of the ledger and he makes many fine points.  But there is nothing in his argument which rebuts, or even tries to rebut, the claim that, given current imperfections the marginal opportunity cost is still five percent.

So the message of my original post stands as well, and you will note that is simply the mainstream micro take on this question which has been around since the 1970s, with the commonly understood answers pretty much crystallized by the early 1980s.

Addendum: Here is me, from the comments: “It is amazing how much “free lunch” economics one can read in these comments. Of course we should in fact apply multiplier analysis to the percentage of previously unemployed resources targeted by the new project, and a higher hurdle rate to the rest. You can argue over what is the percentage mix here, but please don’t pretend scarcity is no longer a ruling economic principle.”

Paul Krugman on Brexit and falling investment

I think there is a pretty simple story here.  Brexit increases uncertainty, both in the mean-preserving sense, and in the “very bad outcomes are now more likely” sense, and that lowers investment.  That in turns shifts back the aggregate demand and aggregate supply curves, and a recession may result.  Less than a year ago, MIT economist Olivier Blanchard published a major paper on capital inflows being expansionary, and now of course we are seeing the reverse.  Toss in some negative wealth effects for further transmission.  I was at an event in The City a few days ago where the anecdotal data about postponed or cancelled deals seemed pretty overwhelming, and this is consistent with what one reads in the papers as well, not to mention with basic economic theory.  It is true of course that we don’t know how large these effects will be, but the more purely British measures of equity value are still down quite a bit.

Krugman is usually an exponent of the “don’t make things too complicated” approach, but here in this blog post he wants to…make things too complicated:

Second, doesn’t this argument imply a later investment boom once the uncertainty is resolved in either direction? That is, once Prime Minster Farage and President Le Pen have engineered the demise of the EU, there’s no reason to wait, and all the pent-up investment comes roaring back, right? But I haven’t heard anyone arguing that the contractionary effect of Brexit will be followed by a compensating boom once things settle down.

Third, doesn’t this argument suggest essentially the same effects from any policy negotiation whose end result isn’t known? Why don’t we say that the possibilities of TPP or TTIP are contractionary, because firms have an incentive to postpone investment decisions until they know whether these agreements actually happen? Somehow, though I’ve never heard anyone argue for the depressing effects of pending trade liberalization.

It is true investment might bounce back if Brexit were essentially undone, but that is hardly an argument for Brexit.  The UK economy is about 85 percent services, those are currently “passported” into the rest of the EU, and it is very very hard to negotiate a new free trade agreement for services in anything like a timely manner, even when passions are not inflamed and there are no considerations of punishing other possible EU-defecting countries.  So if you read someone writing “…after Brexit, the UK will face an average tariff rate of only xxx…” that is a sign they are not thinking hard enough about how trade agreements for services really work.

(Note also the subtle point that when financial and business services are being sold, the difference between “FDI falling” and “trade and exports falling” is quite a subtle one.  Most of all, the traders of these services are investing in ongoing relationships.  The decline of trade and the decline of investment are two ways of talking about the same contractionary process, it is not as if FDI falls, the exchange rate falls, and then trade then rises to pick up the slack, at least not in the UK-EU context.  What is happening is that a negative shock to both trade and investment is coming up front, and then the British pound falls; the second-order response to that currency decline won’t undo the initial problem.)

On whether the same macroeconomic logic applies to other trade agreements, many investors may be playing “wait and see” before doing more FDI in say Vietnam.  But still the very prospect of TPP in the meantime should not be lowering the chance of such investment in Vietnam because TPP represents some chance of a positive-sum advance.  The potential loser is more plausibly China, and one does read about this effect.  Investors may be less likely to set up plants in China because they are waiting on news about the options in lower-cost Vietnam.  Of course given the relative sizes of China and Vietnam, this is unlikely to be a very large effect, but it does exist and it is already discussed.  In contrast to that example, the EU is by far the biggest trading and FDI partner for the United Kingdom, and the prospective trade change is negative-sum rather than positive-sum.

What is most striking about Krugman’s post is how many Krugmanisms are completely absent from it.  I mean recent Krugmanisms, this isn’t some kind of 1990s nostalgia (not today at least).  Here are a few Krugmanisms which appear to be missing in action:

1. The EU is quite indecisive, it just kicks the can down the road and doesn’t resolve much uncertainty.  Why not expect the same when dealing with the uncertainty from Brexit?

2. Just apply the AD-AS model quite simply, and follow it where it leads you.

3. How about increasing returns to scale?  A lot of the UK exports to the EU are finance and business services, both areas which are plausibly based on clustering and scale economies.  An initial whack to a clustered IRS sector can have quite significant long-run consequences, even if some or maybe even all of the initial penalty is reversed.  This is part of what Krugman won a Nobel Prize for, admittedly I am hearkening back to the 90s and indeed 80s here but Krugman has cited this argument many times much more recently.  This is also another reason why higher trade won’t make up for the investment shortfall, because the investment shortfall stifles the prospects for future high value-added trade.

4. The gravity equation.  The pound has depreciated, but the EU is the UK’s natural trading partner, for reasons of distance, and the UK is unlikely to make up the difference by exporting more to the rest of the world.  Export adjustment from currency depreciation won’t in general neutralize the impact of investment-destroying and EU-trade-destroying policy changes.

5. What about the multiplier?  Isn’t the multiplier HUUGE in economies at the zero bound?  And isn’t that the UK?  And Cameron already has announced, plausibly in my view, that the UK won’t be meeting its forthcoming revenue targets.  Won’t that result in a form of additional austerity sooner or later?  With yet further multiplier-based negative macroeconomic consequences?

Where is the multiplier?  I want my Paul Krugman back!

Going broader lens here, and moving away from Krugman, what I notice is many of the less academic Keynesians becoming less and less comfortable making arguments about deficient or contracting investment.  C + I + G + X is ever so slowly morphing into C + G + X, at least in popular discourse.  That is odd, because Keynes himself was most concerned with the instability of investment.  It seems that these days however to worry about investment is to sympathize with capitalists, and perhaps to even wish to keep more resources in their hands.

I want my investment back!  It is no accident that Keynes’s solution was to nationalize investment, not to redistribute away from capital per se.  But nationalizing investment isn’t very popular these days, and so the vitality of capitalism and capitalists once again becomes — or should become — an important issue.

Optimal tax policy for a Keynesian recession?

This paper offers recommendations for how the design of labor income taxes should change during recessions, based on a simple model of a recessionary economy in which jobs are rationed and some employees value working more than others do. The paper draws two counter-intuitive conclusions for maximizing social welfare. First, subsidize non-employment. This draws marginal workers out of the labor force, creating “space” for those who really need jobs. Second, subsidize employers for hiring, not the employees themselves. The problem during recessions is having too few jobs; subsidizing employers creates more jobs, while subsidizing employees confers benefits on those who already won the job lottery. Tax policy in the recent recession has done a poor job of following these recommendations.

Recommendations or reductios?  It still seems that extensions of unemployment insurance somewhat raised the rate of unemployment (if only by a small amount), contrary to many Keynesian predictions.  The implied multiplier in that data seems to be zero, as Garett Jones has pointed out.  And do hiring and wage subsidies still make sense, as opposed to job search subsidies, if unemployment follows from matching problems rather than traditional aggregate demand deficiencies?  Unclear, to say the least.

The paper is from Zachary D. Liscow and William A. Woolston, via the excellent Kevin Lewis.

On what grounds will Keynesians reject Marco Rubio’s fiscal policy?

I am myself of the belief that we are fairly close to full employment, with full employment likely on the way, and our growth problems stem from the supply-side, not from the demand-side in the Keynesian sense, at least not circa 2015.  For those reasons, I am skeptical of any plan to cut taxes without offsetting spending cuts or some other kind of offsetting fiscal adjustment (how about selling off some federal land?).

But on what grounds should the prevailing Keynesian approach reject the fiscal policies of Marco Rubio?  In the context of discussing Rubio, Paul Krugman writes:

So now we have candidates proposing “wildly unaffordable” tax cuts.

But what’s wrong with that?  In most demand-side liquidity trap and secular stagnation models, there is a shortage of safe assets and that is a major problem which requires remedy.  Rubio’s plan, as I understand it, would raise the budget deficit and by a lot because it is unlikely to prove self-financing in the Lafferian sense.  By current Keynesian views, that should be a feature not a bug.

You might rather the deficit be increased by cutting taxes for the middle class, or by building productive infrastructure, but still the Rubio plan would be better than just sitting tight and doing nothing.

Furthermore the wealthy will take their new surplus of funds and invest most of it and maybe spend some of it too.  That boosts aggregate demand, and…if you think the multiplier still is high…well, you can see where this is heading.

Are we all ready to turn “C + I + G” into a mere “C + G”?  I hope not.

And while the Fed is legally constrained from buying corporate bonds and other non-zero-ROR assets, wealthy people most certainly are not, so they could spend their Rubio tax cuts on equity, venture capital, and the like.  In essence we would be using wealthy people, and fiscal policy, to make asset swaps which the central bank cannot.  So liquidity trap arguments should not make this tax cut impotent and arguably they should necessitate it all the more.  You might even (heaven forbid) wish to target the tax cut toward the wealthy, if they are the most likely to take cash and buy relatively risky assets with it.  Right?

So by the standards of the current New Old Keynesianism, what exactly is wrong with Marco Rubio’s fiscal plan?  Except that some other plan might be better yet.  Inquiring minds wish to know.

Is this the most effective development program in history?

I will turn the mike over to Chris Blattman:

It’s a business plan competition for $50,000, and I think it’s a contender.

In 2011 the Nigerian government handed out 60 million dollars to about 1200 entrepreneurs, and three years later there are hundreds more new companies, generating tons of profit, and employing about 7000 new people.

David McKenzie did the incredible study.

24,000 Nigerians applied, the government selected about 6,000 to get some training and advice to develop their plan, the plans were scored, and about 1,200 were funded. They got an average of $50,000 each. Fifty thousand US dollars! Who the hell thought this was a good idea?

All the highest scoring plans got funded automatically, but McKenzie worked with the government to randomize among the runners up.

The results are amazing. Looking just at the people who had no firm to begin with, 54% of the control group have a firm after three years, compared to 93% of those who got the grant. And these firms are bigger. Just 11% of the control group have a firm with at least 10 employees, compared to 34% of those who got the grant. They’re more profitable too.

If you are the President of a developing country, one of the great problems that will occupy your thoughts is: how to get more people jobs? How to grow domestic businesses? Even I, Mr. Cash, did not think big grants would be the answer.

These entrepreneurs are not the deserving poor, to be sure, but the employees are more likely to be. They made $143 a month, so they probably weren’t the poorest of society. But 7000 people earning $7 a day they might not have earned otherwise—that is something. And this ignores the multiplier: the expansion of suppliers, the people employed by the 7000 employees spending that money, the taxes collected by the state, and so on.

Two other things occur to me:

  1. What if, in 10 years, we learn that after all the struggle to build infrastructure and services and other stuff was bullshit, and ALL ALONG we should have just been funneling more cash to the middle and bottom. I do not believe the cashonistas should go so far, but today I wonder.

  2. I should start responding to all the emails I get from Nigerians promising me $50,000 in cash.

The incidence of the ACA mandates

Here is Mark Pauly, with Adam Leive and Scott Harrington (NBER), this is part of the abstract:

We find that the average financial burden will increase for all income levels once insured. Subsidy-eligible persons with incomes below 250 percent of the poverty threshold likely experience welfare improvements that offset the higher financial burden, depending on assumptions about risk aversion and the value of additional consumption of medical care. However, even under the most optimistic assumptions, close to half of the formerly uninsured (especially those with higher incomes) experience both higher financial burden and lower estimated welfare; indicating a positive “price of responsibility” for complying with the individual mandate. The percentage of the sample with estimated welfare increases is close to matching observed take-up rates by the previously uninsured in the exchanges.

I’ve read so many blog posts taking victory laps on Obamacare, but surely something is wrong when our most scientific study of the question rather effortlessly coughs up phrases such as “but most uninsured will lose” and also “Average welfare for the uninsured population would be estimated to decline after the ACA if all members of that population obtained coverage.”  The simple point is that people still have to pay some part of the cost for this health insurance and a) they were getting some health care to begin with, and b) the value of the policy to them is often worth less than its subsidized price.

You will note that unlike say the calculation of the multiplier in macroeconomics, the exercises in this paper are relatively straightforward.  They also show that people exhibit a fairly high degree of economic rationality when it comes to who signs up and who does not.

It has become clearer what has happened: members of various upper classes have achieved some notion of “universal [near universal] coverage,” while insulating their own medical care from most of the costs of this advance.  Those costs largely have been placed on the welfare of…the other members of the previously uninsured.  So we’ve moved from being a country which doesn’t care so much about its uninsured to being…a country which doesn’t care so much about its (previously) uninsured.  I guess countries just don’t change that rapidly, do they?

I fully understand that Obamacare has survived the ravages of the Republican Party, and it was barely attacked in the recent series of debates, and thus it is permanently ensconced, and that no better politically feasible alternative has been proposed.  At this point, the best thing to do is to improve it from within.  Still, there are good reasons why it will never be so incredibly popular.