Great Blog Post on Problem with Mainstream Concept of Constant or Increasing Marginal Utility

"Thus, one cannot talk about preferences for risk independently of the real human activity that has risk as one of its attributes."

This article discusses how marginal utility and utility analysis cannot be disaggregated into risk and monetary payoff because utility analysis was devised to discuss preferences of activities (goods and services, etc.), not about preferences of singular attributes of those activities (like risk etc. which can change depending on other attributes or even depending on other activities, and therefore would make little sense to try to reduce to a static mathematical model).

Of course there are other problems even with the Austrian interpretation of static subjective utility (which arguably is the more correct since they invented it), such as the fact that even utility functions for activities can change over time, and, as mentioned in the article, mathematical utility can not be compared across people (which kind of calls into question the breadth of usefulness of utility functions to start with).

I do disagree with some statements in the post. Particularly: "....Answering such questions may be a job for psychologists, but it is not one for economists."

It's that kind of un-wholistic "I'm for me, you are for you" attitude, that we do not need anymore. Much like you can't disaggregate utility into money and risk, you cant disaggregate the study of human behavior into psychology and economics (etc.).

Planet Money Continues to be Amazing

Thank You Planet Money for delving into this issue. As usual, they let the listener draw their own conclusions - and I think most (especially younger) persons will, and hopefully they will recreate the profession.

IUPUI accepting applications for Ph.D in Economics, Fall 2010

The specialization area, and the heavily quantitative nature of the degree probably aren't my cup of tea... but for those in the Indianapolis area with strong economics and math backgrounds with interest in non-profit or health economics, here you go. Many of the teachers are exceptional - you would get a good bang for your buck here.

The N-Effect

This is a really neat study. The basic point is summed up as: "the motivation to succeed decreases as the number of [people, or, N] rises.

I can say from personal experience that strikes me as being accurate. When I used to work out at LA Fitness if it were the middle of the week and only a hand-full of people who were working out hard, I would tend to focus on them and work hard. But if I went on a busy weekend I would just do what I thought was my 'typical' workout.

This is true for classes I've been in too. In a small class of 20 or 30 people, I remember focusing on really doing my best to 'compete' with others in terms of class participation (yes, I was one of those annoying students) - because I loved the feel of 'debate' and the personal competition. Groups of us would even compare grades and we would feed off each other. But with a large lecture of 100+ students, there is little motivation to even attempt to compete/compare with so many people.

Uh Oh. Looks like the Cap and Trade Would Remain Regressive and Disproportionate (No surprise here)

US Sec. of State Clinton pledges up to $100 Billion annually to help foreign countries pay for climate change controls. "Clinton said the funding would come from a mix of public and private financing, including revenue raised from the auctioning of emission allowances under a possible U.S. cap-and-trade system still under development on Capitol Hill."

So, basically, any (or a good chunk of) government revenue raised from cap-and-trade wouldn't be filtered back to low-income Americans, or persons/geographies disproportionately affected by the cap-and-trade system. The money wouldn't even stay in the United States. A sizable chunk would go outside of the United States to poor nations - many of which have corrupt government that would more than likely waste the money or use it to further impoverish their people.

BAD policy. BAD, BAD policy.

A great textbook that I wish was more student-friendly

On a lighter note from my previous post, I recently chose my Spring-semester textbook. I decided to stay with Robert Hall and Marc Lieberman's "Macroeconomics: Principles and Applications." I chose them a few semesters ago because they seem to be a lot more thoughtful about the depth of issues than say, Mankiw. And, it is a really well-written mainstream textbook.

But, I would chose this textbook, bar none, were it not for the cluttered writing, formatting, etc. Macroeconomics in Context is amazing in that it combines mainstream economic thinking and adds in significant (but still appropriately introductory) analysis of transitional economies, environmental economics, post-Keynesian economics, and the like. In other words, it does a great job of attempting to provide a more holistic approach to economics.

But everything about the look and the feel of the text is a failure. It's verbose, the graphs are few and amateurish. In a word, I'm concerned students would be turned off and just would never read it. I hope that the people at Tufts University recognize this and clean up the text for their next edition.

In the meantime, I will continue to use portions of it in a supplemental manner.

The Classroom of Mainstream Economics

Scene: first day of first econ class

"Welcome to economics 101. By the end of this semester I hope to indoctrinate you into the cult of economics, just like my teachers indoctrinated me. But first, we must define economics.

In order to do that, you need to know some of the jargon of the trade. Does everyone know what it is to be selfish? Economics starts out recognizing that people always act for their own gains - and there is nothing wrong with that ever. Oh wait, I see a hand... what's that?... you say what about seemingly unselfish behavior and what about acts toward a common good? No No No, see I just told you economics shows us that people don't really care or need to worry about these things. See look, I'll prove it (writes a utility function on the board). See? This math equation says so. Ahem, ok, moving on....

Second, economics recognizes that there are scarce resources, and that the best way to allocate these resources is to let selfish people trade them in a market. These markets always function perfectly and in doing so, create the most efficient system possible.

That brings us to our second term: 'efficiency'. You see class, 'efficiency' is a necessary result of the indoctrination I'm teaching you today. Because selfish people are allowed to own property, and because they are allowed to freely trade in a market, society's gains are maximized. Imagine one of these markets was baking pies. Efficiency is basically giving society as much of that pie as possible.

Yes? You have another question... what's that you say? What about if you are a person that wants a piece of pie and can't afford it? No No No. You aren't understanding right. Economics doesn't have anything to say about equity or fairness or things that Europeans care about, economics talks about important things, like making sure we don't just have a blueberry pie, we have blueberry pie with lots of whipped cream. That's what's important here. See, because the more pie we have, we could, if we wanted to, allocate some of the leftover scraps to this poor person. But I kinda like whipped cream alot, so...., luckily for her economics tells us not to worry!

...Anyway, these irrational questions are making me get off topic. I need to get back to the indoctrination. But incidentally, that reminds me of one more term we need to understand: 'rationality'. Economics assumes that everyone is rational and that everyone has well-defined preferences and acts in their own best interest. ...You have another question? What if people's preferences change frequently over time or are different in different situations? I can see you really are going to need a hand in this class.... Your question is a non starter! You see, rationality and having a complete set of information --- these are just simplifying assumptions so that these awesome math equations (stare longingly) I just drew on the board can reveal to us their secrets! See, look!

If we didn't make these assumptions, I wouldn't be able to teach economics. If I wasn't able to teach economics, I wouldn't be able to indoctrinate you. Were I not able to indoctrinate you, then you won't be able to be an intelligent person - and if you aren't able to be an intelligent person, then you won't be able to indoctrinate the next generation! Do you understand now Garth?"

Do you understand now?

An Example of Band-Aid Analysis

Economics predicts Tiger Woods will play more golf than ever before.

Tiger Woods announces indefinite time off 'work'

But hey, that's the kind of predictive power you get when you ignore dumb stuff like, you know, human emotion.

On Economists and Band-Aids

I would like to attempt to answer Mike's charge (which I agree with) that economists tend to apply simplistic band-aid-like solutions to complex problems. I would argue that a carbon tax is one such overly simple solutions: Is there a social cost to pollution? "Tax it!" say (some)economists. Is there a social benefit to health care? "Subsidize it!" say (some) economists.

Of course the reason many economists are attracted to simple solutions is because 'simple' is the only course of actions their mathematical models allow. When you try to box your science into modelling all behavior as a system of digits, then the only answers you can provide will consist of the same system of digits. It is this failure of the science to incorporate a more holistic method of analysis that begets the simplicity - and why all mainstream economic analysis needs to be tempered with reality checks.

Why We Need Health Care Reform - A Real Example

I recently underwent a major surgery which I knew was going to be a huge cost (to somebody). I didn't know if it was going to be $1,000, $10,000 or $100,000. This is because, unlike most every other good or service in our mixed economy, health care does not operate via posted prices. Costs are guesstimated by consumers and are often not even in play in consumer decision-making. In that sense, there is no true 'market'.

One of the downsides I have personally experienced regarding our system is the huge amount of waste (monetary, labor, and natural resource-wise). I went to a hospital for one singular surgery. Since then (so far!) I've received 7 separate notices from my insurance company and about 5 unique bills all related to sub-costs I incurred from my overall visit. I got one anesthesia bill, one diagnostics bill, one consult bill, one surgeon bill... the lack of communication and consolidation of services, in such a technological age, is ridiculous.

Yesterday, I received my surgeon bill in the mail (post-insurance payout):

So from an original cost of about $17,000.00, I have to pay less than $800. If I didn't have this insurance, like 20+ million Americans I would either be provided this service for free - thereby skyrocketing the premiums of those that do have insurance and that do pay into the system, or, I would not even attempt to seek this service knowing I wouldn't be able to afford it, and I would be dead in a few years.

In a modern, advanced, society, neither scenarios should be ok. Everyone who is not classified as 'poor' that complain about the short-term increased government spending or marginal potential increases in short-term premiums... you should feel ashamed. I'm thankful that I am paying pennies on the dollar for my healthcare. I recognize the more people that pay into the system the better. I recognize that millions don't have the luxury of health. I don't mind my government investing in fixing a system that is broken. I don't mind if my taxes and/or premiums rise a little in the short-run, because I know I am helping millions of fellow Americans get something that they need to live. Besides, premiums will surely fall in the long-run as we bring others into the system, and as we actually create market exchanges, and as we begin to pay down long-term debt.

So, if you don't like particular aspects of the health care bills (I certainly take issue with parts as well), fine.... I recommend you do what I do and view these bills as a starting point of dialog. We need to pass a starting point so that we can fix the major problems. The tweaks can be done later.

Revised Modeling of State Economic Forecasting Changes...

...Nothing.

The Deadweight Loss of Christmas

....in case you didn't already think some economists were insane or out of touch or missing something fundamental (or fundamentally human) about their models....here's a paper that says we should not buy others' Christmas gifts.

Happy Cyber Monday PS ;)

Homegrown Evidence of the Truths of Minsky's ideas

As discussed before on this blog, long-ignored economist Hyman Minsky discussed cycles of booms and bust as a natural tendency of free market economies. One of the 'phases' of such economies are hyper-risky ponzi scheme financing that eventually lead to booms that bust.

Our most recent example courtesy of my hometown of Indianapolis, IN

China's Currency Manipulation

From Prof. Becker:
"The US has little to complain if China wants to hold such high levels of low interest-bearing US government assets in exchange for selling goods cheaply to the US and other countries. China's willingness to save so much reduces the need for Americans and others to save more"

But isn't that exactly the problem? China's willingness to take the place of "saver" in the US economy should (and is) be a bad thing, not a good thing, in the long-run. Sure, on its face it seems great - it allows the US to spend money on things (Chinese things) that it might otherwise not. But it's this free allowance by the Chinese that has partially contributed to the American problem of over-consumption - of houses, of debt in general. Without this allowance, perhaps some of the booming bubbles we've experienced in the last 20 years might not have happened - perhaps recessions could have more easily been avoided.

UPDATE: At least one mainstream economist agrees with me:
"Many economists, myself included, believe that China’s asset-buying spree helped inflate the housing bubble, setting the stage for the global financial crisis. But China’s insistence on keeping the yuan/dollar rate fixed, even when the dollar declines, may be doing even more harm now."

No Surprise, Change Happens Sloooowwwww in Indiana

Every time revenue forecasts came out from the State over the past year +, they have been grossly over-estimated. Now, I can understand that a severe recession such as the one were are (were) in can play havoc with forecasting - after all a shock is a shock. However, when you see the writing on the wall, and you fail to, say after the first few times it happens, change your methodology (all at a cost of State worker jobs, pay, etc.), then, in my book, you are just plain idiotic.

Now, finally, after over a year has passed, and my State has consistently way over-forecasted its revenues, it is finally changing its methodologies. The committee overseeing the change says it's working as "hard as possible" to make the changes happen. That's simply not true. Hard work implies a little gumption to take action before the shit hits the fan, not after it starts to drip on everyone's heads.

Dumbest call of the week: Belichick or economists

A lot of economists seem to make this aggregation of data mistake and of glorifying results of studies without reading about the underlying assumptions. Levitt and also apparently Prof. Mankiw are apparently applauding the Patriots' for their 'gutsy' fourth down move to go for it on their own 30 yard-line at 4th and 2. They cite a study by Prof. Romer which states that, using historical data, contrary to supposed maximizing behavior, teams are often too conservative on fourth down situations (they punt too much).

Problems abound

First, Romer analyzed 1st quarter attempts, NOT 4th quarter attempts with 2 minutes remaining. Behavior and optimal choices are and should be different in toward the end of a finite game, than early on when one failed risk taking measure might hurt you but not doom you. The risk is substantially greater at the end of the game.

From Romer himself:
"I am implicitly assuming that a team that wants to maximize
its chances of winning should be risk-neutral over points scored. Although
this is clearly not a good assumption late in a game, I show in
Section IV that it is an excellent approximation for the early part.
...direct evidence about the impact of points on the probability
of winning suggests that risk neutrality is an excellent approximation
for the early part of the game. Because teams adjust their play late in
the game on the basis of the score, one cannot just look at the distribution
of actual winning margins."

Second, Romer actually used third downs to estimate what 'would have' happened on fourth downs since fourth down attempts are so rarely attempted. The assumption of course is that third down plays and results would be similar to fourth down plays and results, which I don't necessarily agree with.

Finally, the study is analysis which uses simulation estimation, which means it is wholly dependent on the author's underlying assumptions and judgments of behavior - ie. it is inherently subject to bias. It can model behavior of a 'typical' NFL team based on a host of assumptions, but it can not take into account the specific variables in a specific football game (like Colts V. Patiots).

Make no mistake, Bill Belicek made a dumb move.

This Just In: Incentives Work

http://www.msnbc.msn.com/id/33949428/ns/business-real_estate/

The Conservative Idiot

As someone who teaches, and someone who likes economics, and as someone that is gay, I find this more than slightly disturbing:
http://bertchapman.blogtownhall.com/2009/10/27/an_economic_case_against_homosexuality.thtml

I could point out the obvious flaws in his argument(s) - though "flaws" are really too weak a word here - academic dishonesty is more like it. Or I could point out the number of obvious economic net benefits of wanting to accept gay "lifestyles" (and by "accept" I mean not having the State treat them/us as third class citizens or to have to live in fear of fellow man) as opposed to just opposing it and hoping the "lifestyle" goes away.

But I won't. I'll just let you read and soak in the fact that I received my B.S. in economics from the same institution that that this Dr. Bert Chapman now teaches.

I guess Purdue lets anybody teach nowadays.

Mankiw 1, Krugman 0

http://gregmankiw.blogspot.com/2009/11/taking-out-trash.html

It's ALIVE

Now...expect to hear powerful voices go on and on about dangerous inflation (which isn't going to happen people).

Mainstream Economists Deserve Their Fall From Grace

Couldn't agree more. Hat-tip to Mike Moffatt

Pointless Public Option

"We need this option because the insurance companies have failed to meet their obligation" to the public"

...Bologna.

The main reason our system has failed to meet obligations is because our system has failed to provide competition in the market - our system fosters oligopoly formation in the health insurance industry. So of course insurance companies will try to extract super-rents from consumers. But, so long as reform promotes increased competition amongst private insurers both within States and between States, that in and of itself will bring enough competition. We won't need a government run health program to add one more competitor to the mix then.

Obama gets this point. He sees competition as the important issue, not the public option. He understands that we don't necessarily need a public option to get to competition. So, either the left wing doesn't believe reform can increase competition, or they do believe it they just have another agenda....

A Curious Post by Delong

Delong posts a Bush-era finding on the benefits of cap and trade. Part of it compares cap and trade to 'emissions fees' (tax) - and finds, for some of the same reasons I've mentioned on this blog, that a tax has certain downsides compared to cap and trade.

See this (bold is something I've discussed before):
"As mentioned previously, one problem with emission fees is that it is difficult to know beforehand at what level to set the fee to achieve the desired pollution reduction. This might require periodic adjustments of the fee level, and such adjustments would introduce uncertainty that could interfere with firms' planning decisions. The emissions fee does, however, allow the government to set with certainty the marginal cost of emissions reduction. For each emission fee there is a corresponding allocation of permits that would achieve the same results; however, it is difficult to know beforehand what the market price for permits will be once trading actually takes place."

The reason the post is curious is that it was released by Bush economists lead by Greg Mankiw, who everyone knows know has the complete opposite position (favors taxes over cap and trade).

Posner and Keynes, sitting in a tree...

I never thought I'd see that day, that Chicago-school idolater Richard Posner became a Keynesian (not to be confused with NEW Keynesian - which isn't real Keynesianism anyway). The day has come.

One of the most poignant quotes from his "New Republic" article:

"Baffled by the profession's disarray, I decided I had better read The General Theory. Having done so, I have concluded that, despite its antiquity, it is the best guide we have to the crisis. And I am not alone in this judgment."

A couple things strike me: (1) I was saddened (though not altogether shocked) that someone so intellectual had never even bothered to read Keynes' opus before. (2), happiness that someone who I have, in the past, deemed intellectually brainwashed could muster enough fortitude to break through the mainstream economic morass.

Another glimmering quote:

"Keynes wanted to be realistic about decision-making rather than explore how far an economist could get by assuming that people really do base decisions on some approximation to cost-benefit analysis."

So true Professor, so true.

If this is a foreshadowing of how economics, and mainstream economics, might go, I only wish I was born today, so that I could grow up in an academic economics environment a little more accepting of real thought, and a little less accepting of trying to make everything fit a 'rational' mathematical model.

As if there's any wonder why banks are failing....

Here's one reason: they provide multi-million dollar loans with no proof of collateral other than someone's signature.

Health Care - It's Not Free (Duh), But It Can Be Provided Equally

Mankiw writes in the New York times that health care is not free - that is the main point of his article. He points out that, "At some point, someone in the system has to say there are some things we will not pay for." Great. That may or may not be true, but that has no bearing on whether such restrictions can be applied equally.

First, as long as we are willing to transfer resources from outside the health care industry to inside it, and/or we are willing to make the health care industry actually work (increase competition etc), there becomes an increasing possibility that we can pay for quality healthcare - for everyone.

Second, I have doubts that the mainstream econ talking point about health care technology as the real base reason for the skyrocketing costs. The reason is that the price trajectory should eventually FALL because of this invention, not rise. Like every other industry, when new technologies are introduced prices are usually quite steep, but then they almost always dramatically fall as costs of using recently 'released' technology falls. So why don't they in the health care industry?

1. The patent system creates monopoly power and encourages companies to focus on the 'next big technology' as opposed to focusing on improving on existing products. So, it's not the technology that is a base cause, it is the patent system. This is the 'dark' irony of the our patent system: it is supposed to encourage invention, but the very act of encouraging invention by creating monopoly power actually makes the market unsustainable.

2. Unlike every other developed country on Earth, the US allows direct commercial marketing and advertising for the newest technology/drugs which, when combined with the fact that consumers have no incentive to think about cost (since it's going to be passed on in many cases to insurance companies as Mankiw points out), consumers demand the next best thing - no matter the cost.

So maybe it's not the technology by itself that is the issue. Maybe it's the infrastructure that we've created that is the problem.

Notre Dame Gets Screwy

This is indeed strange timing for Notre Dame to be dissolving its Heterodox department (and extremely unfortunate). Hat tip to Brad DeLong for the link.

Well-Being Vs. Happiness

One thing that does strike me as interesting from the AEA survey, which Robert Whaples (author) also finds interesting in his concluding remarks:

"However, “happiness” does not seem to mean the same thing as “well
being”—and the vast majority of economists (88 percent) are optimistic that
continued economic growth in economies like the U.S. does yield ever greater
levels of well being."

Indeed, when asked if "Economic growth in developed countries like the U.S. leads to greater levels of happiness", nearly 20% thought not. However, when asked if "Economic growth in developed countries like the U.S. leads to greater levels of well-being", only 3% thought not.

This actually makes sense to me. Many people conflate the two terms: happiness and well-being. But while they might be similar if not identical concepts, they are different things from a measurement perspective. And because economists are so data-driven (likely too much so), most probably look at data that suggests happiness isn't really affected by income over time and go with that. The problem is, that is likely a problem with measuring happiness, not a real effect.

Well-being can be measured by things like health, levels of education, life-expectancy and can be compared across nations and across time. Happiness, while presumable directly linked with well-being, is a purely subject measure from a group of people at a given point in time.

So consider my doppleganger that existed in 1920. He wasn't expected to live as long as me today, he didn't have the same availability of quality education, technology, health services. By all measures, his level of well-being was lower. But the problem is, he only lives once and only in one timeframe. The only way he can self-reportedly measure his own happiness is against those of his contemporaries. So, let's say he rates himself a 4 out of 5.

Now consider me, today. Thanks to economic growth, my well-being has increased (I have better technologies, I can expect to live longer, etc). But I have the same problem as my doppleganger because I too cannot compare myself across time. I certainly cannot judge my happiness level today on how happy or unhappy my doppleganger had it 80 years ago - I have no idea what his happiness was like back then. I can only judge how happy I am, as my doppleganger did, by comparing my present condition across my present contemporaries and across my real history (how happy I was yesterday). I too rate myself a 4.

So, my well-being has increased, but my happiness hasn't - or rather, it probably HAS... I just have no way of measuring that when I do a survey.

It is for this reason that studies that try to measure self-reported happiness, in my opinion, do so in vain. To the degree that measures of happiness does change over time, I suspect it really reflects large societal cultural changes - changes in race or sex relations, changes in social norms etc....

Most mainstream economists believe X, therefore, so should you?

Mankiw points out that roughly 4/5 of mainstream economists believe tariffs and like policies generally should be eliminated. He always makes a point to flaunt these statistics as if to say, "because most people believe this, so should you." But it's exactly this indoctrination by economists that I think is not only harmful for the profession in that is promotes group-think (or no-think), but it harms our whole society by painting things in black and white, as opposed to the more realistic shades of gray.

New Fuel Efficiency Standards Outlined

Obama outlines new standards

UPDATE: Prof Mankiw - hypocritical?

Mankiw is ok with 'invading' the market and charging higher taxes on gasoline, but when it comes to tires that could be deadly to American consumers and when it comes to placating a 10% growth-rate country that has little to no regulation of safety in its supply chains... all of a sudden he dashes to the typical pro-market line of 'free trade'. Gas taxes sap the income of Americans and make it hard in these severe economic times given the necessity of gasoline consumption of thousands of Americans. Temporary Tarrifs sap the income of 10%-growth China and add to American coffers - until Chinese behavior changes when the tariff can be lifted. Does Mankiw not believe there is a negative externality to Chinese tires sold in the US? Perhaps the cost is negligible, but perhaps not. But perhaps the signal to China is priceless....

http://gregmankiw.blogspot.com/2009/09/victory-for-protectionists.html

In Support of Chinese Tires Tariff

Ordinarily I would not be in favor of the significant tariffs recently supported by President Obama against the import of Chinese tires. Indeed, the argument that this 'saves American jobs'is for the most part, hogwash. It helps the American tire mfg. industry for sure but as anyone that's taken an intro macro course knows, the affects on the aggregate economy is just shifting resources from one group to another (in presumably inefficient fashion).

However, there is a legitimate argument, given the well known fact that Chinese imported tires are UNSAFE. Google chinese tires and you will find a plethora of links about recalls of Chinese tires by various States and by their own government. There is a reason their tires are so cheap, and the reason (which is the same reason why many of their products are so cheap) is because the Chinese cut safety corners in order to beat the market.

So, this tariff in this case in reality is simply a Pigou tax on a negative externality: the higher probability of lack of safety being passed on to consumers. The Chinese are not internalizing this cost, and consumers often are unaware the tires are safe at the time of purchase. So, I applaud the Obama administration for sending a signal to the Chinese, and for course-correcting a likely market failure.

I await Prof. Greg Mankiw's approval as well, since he's in bed with Pigou taxation.

Clunker Program Confusion

From Gary Becker:
"To be sure, some cars would be purchased under the program that would not have occurred during the next 18 months, if at all. But if the goal of the program is to help stimulate the economy by subsidizing consumer spending, why limit it to individuals who own old cars? Why not give vouchers to all consumers that they can spend for a limited time period on many durable goods, such as computers, printers, TV sets, washing machines, and refrigerators? If that seems like too obvious a straight handout, the government could require consumers to turn in old computers or other durable goods in exchange for new ones. Of course, as with the cash-for car clunkers subsidy, many consumers under this more general clunker program would simply alter when they purchased the new durables to take advantage of the subsidy. The net result would again be subsidies that produced little net increase in spending."

First off, kudos to Dr. Becker for completely doing a 180 within the span of a paragraph. I don't buy the argument that this is just simply shifting consumption up a couple months. Regardless, even if this does just shift SOME consumption up a few months or a couple years - it's still stimulus NOW isn't it? We all know crowding out is a factor in the long-run regardless of how/why that crowding out occurs (though I would disagree on how much of a factor it is with Gary Becker given the slack in capacity utilization/demand). I do agree though, that if the government truly supported the program, the program should have been broadened. And I agree that the administration of the program has been a train wreck.

My Health Care Idea: Healthline.com and Healthbitz.com

This week, Obama signaled that he might be open to doing away with the 'public' health plan option. I applaud that. While Obama said that the public plan was/is but "one small piece" of the puzzle, while that may be true as far as the overall idea for reform goes, that is not true as far as cost. The plans in the House etc. that include a public option are costly by CBO estimates in large part due to a new public health option and the bureaucracy around it.

Of all the plans out there, I like parts of the bi-partisan Wyden-Bennett plan.
One of the big benefits of such a plan is that it encourages private competition, creates federal oversight, but would also create State-run collectives - all insurance would be purchased in a State pool, as opposed to at the individual consumer level.

I like all but the last component. While the cost to the Federal government may be low, the cost to States, and the varying ways that States could administer the pools, makes this problematic. We don't want States competing with each other on health pools.

I think there is a way we can keep the 'pool' idea but still allow individuals to make their own choices (at maximum competition - across State lines and providers etc). One way would be to, instead of creating a State-run pool, create a Federal run set of pools - but that would undoubtedly cost a lot

A better option would be to take the government involvement and oversight ideas of Wyden-Bennett and merge it with Sen. Baucas's plan for a Non-profit Co-op. So, instead of pooling individuals by geography, people would be pooled nationally by the co-ops. Customers wouldn't chose their health plan - the co-ops would negotiate rates in the private market. But customers would instead choose what co-op they would be part of. The 'Wyden' part of this comes in so far as the Feds (or States) would then regulate a set of websites that provide information about all the various co-ops nationally (on price and history of service etc). It's the best of both worlds - competition amongst insurance groups due to the Co-op, and competition amongst co-ops due to the pool - all while eliminating potentially harmful competition amongst State governments.

So how should this be structured?

One way would be for the government to run the co-op site, but that could be costly. A better way would be for, in addition to the Feds providing 'seed' money for co-op formation, it would provide 'seed' money to companies like priceline.com, orbitz.com which already have infrastructure and knowledge in place to run sites that can show customers the best deals (quality and price). Only, instead of planes and hotels, they would be 'selling' information about the best co-op plans available. The government would of course need to provide oversight to not just the co-ops but also these health information databases - but the cost would be much smaller than the government actually 'running' these programs.

Bubbles beget Bubbles: The great Wine Bubble

A financial system out of control begets a housing bubble. But little attention is paid to the fact that a housing bubble by itself cannot cause economic hardship/ruin. It must, by definition 'infect' an entire economy (national and/or global). It does this by creating bubbles in other industries. A housing bubble makes people richer (artificially), and this richness leads to other spending of fancy which leads to other bubbles...like the great wine bubble of the 2000s. There is certainly a correlation here.

Cite: "Wine Spectator" magazine, Sept 30, 2009 issue

Evidence we need to expand 'clunkers' program to other goods and services

Cash for clunkers has been wildly succesful as stimulating demand for new autos, but overall retail sales fell in July, despite many people expecting it to rise. This is more evidence that we need to take the Cash for Clunkers model and formulate it across different industries. This would not necessarily spend more money than has already been committed - but would rather serve to speed the spending up and put it in a place that has a proven record of stimulative success.

Defending Cash for Clunkers

"While on the surface the program may be seen as an economic stimulus initiative at work, no one should be fooled into believing that this is a carefully designed, long-term strategic answer to the worst economic contraction to occur in the United States since the Great Depression. And most notably, the supposedly strong response to the program actually betrays its supercilious essence. For one thing, four of the the five most popular cars being purchased under "cash for clunkers" are foreign brands, meaning the impact on the domestic auto industry is minor at best."

First, no one ever said it was a 'long-term strategic answer' to anything. Economic stimulus, by its very nature, is a short-term issue. And cash for clunkers is but one part of this 'answer.'

Second, the most popular vehicle being purchased is a Ford. Additionally, helping Honda and Toyota helps their suppliers, who are often some of the same suppliers of GM, Ford, etc.... Further, there are myriad Honda and Toyota plants in the US - and they hire Americans. Finally, the 'stimulus' of this program is not just the initial purchase of the vehicles, but the subsequent spending that occurs.

Posner on Stupid Fat People

http://www.becker-posner-blog.com/archives/2009/08/health_reform_a.html

So, according to Dr. Posner, the key to the health crisis is to educate stupid fat people. If only they knew or could comprehend with their little pea-brains, he seemingly surmises, would they then stop eating their Ho-Ho's and Big Mac's.

Posner can be, and is in this case, absurd.

I'm pretty sure that even the most idiotic of idiots are aware that like, omg, I could like get fat and stuff if I super size my meal along with a box of Little Debbies.

Education is not the issue - there's plenty of education. Will power, self control - these things are important but that's not just about education - that requires a complete change in psyche and behavior. Plus, food is an addiction, and no amount of education can totally reverse that.


I'm at least glad he's talking about health care costs - I agree that is the crux of the health debate. I actually agree with most of his last paragraph about needing to discriminate sales taxes based on food purchases varying in calories / fat. We need to incentivize people to be thin, and punish those that eat out of had. That won't necessarily change fat people's psyches right away, but numerous studies show that higher prices, even on addictive behaviors, reduce the consumption of those behaviors.

Answer: Cash for Clunkers is Best Stimulus Ever

http://www.foxnews.com/politics/2009/08/04/clunkers-programs-environmental-impact-debate/

Screw the environment (tongue - in - cheek)!

This is not about the environment - that is just a guise created by some politicians to tac on another stimulus plan. And boy is it one....$1 billion spent by consumers in a week! More money committed! We shouldn't stop there. We need to make any as-yet uncommitted ARRA funds do the work that this clunkers program is doing. Start getting this money out the door now, not a year from now. We need to extend the clunkers program to things other than autos: home appliances (like fridges and ACs), computers, etc. This program has shown it be the single best stimulus ever - by urging consumer spending at rapid-fire pace and volume. It just makes sense to expand it not just to other consumer goods, but potential investment goods/inputs as well.

Cash for Clunkers is a Dud or Best Stimulus Ever

It is being rumored that the US DOT is pulling the plug on the program due to the FAILURE of the federal government to be able manage this stimulus program. That's right, you guessed it... the bureaucracy is creating a backlog so that so many dealers are involved in the program that the government doesn't know how much money it's committed.

This, like all the rest of the fiscal stimulus, due to its hasty debut on the national scene, is failing to meet the needs of the public, and creating huge lags.

What's so unnerving about this is that dealer's have already made all these promises, people have already planned their purchases, etc. ... all because of this program - which the government may abruptly stop because it can't handle it.

Story here

On the other hand, the program has been so well used that it may turn out to be the quickest way the government has spurred consumer spending ever! In that case, maybe they should just spend all the rest of the stimulus money via 'trade in' rebates - for all sorts of new goods. Could be the best stimulus ever.

Whatever Queeny Wants, Queeny Gets

Apparently scores of British economists decided they should apologize to the Queen for the financial crisis. I applaud that. Mainstream economists should own up to their massive failure. Such honesty would, of course, never come forth in US.

But, I disagree that the failure to predict the crisis was a failure of "collective imagination." It wasn't the lack of realizing the problem by itself that failed to stall the crisis, it was the complete lack of acknowlegment of scores of others that DID realize there was a problem (and of those that WERE speaking about it) by mainstream economists. It wasn't the lack of collective imagination. It was an abundance of collective segregation and of (by keeping out heterodox voices), of collective arrogance (for thinking other fields and lesser accepted models had nothing to offer).

I Changed My Mind (I'm Back). "The Problem with Public Institutionalism."

First off, I've decided to cut my 'hiatus' short. I just can't stay away ;).

Ok, let's dive right in. Those who follow my blog probably know that I lean slightly liberal, though much less so on the fiscal side of the spectrum than it may seem at a distance. To this point, I've been thinking about the hazards of public ownership and operation of institutions that are pivotal to a healthy economy (things like health care, education - one of which is going to become more public, the other already is largely public).

In a world where public institutions are prevalent and perhaps even dominate a society (not in the US, but hypothetically speaking), there is a serious problem when major recessions happen. As most introductory econ students learn, according to mainstream econ, recessions eventually end due to lower price expectations in the future (etc.).

But, I read the news today, and 5 of the top 10 local headlines are about how various major public schools (Purdue, Ball State, Vincennes....) are all hiking tuition (by almost 4%). In a world where short-term inflation is essentially 0%, that is scary. They are forced, nevertheless, to hike prices (as most all public schools are forced to do short of teacher layoffs) because they receive the bulk of their funding from government (State, etc.). But in recessions, States get less revenue, so less money flows to schools (or to public funded health care, or whatever service you can think of). And unlike private industry, the level of many services 'demanded' by the public is forced to be roughly constant (ie. the public expects such services to be maintained even in recession). It is only logical, therefore, to predict that, contrary to the private market adjustment, prices (and price expectations) will RISE for public-funded goods. So, while private industries (motor vehicles etc.) are slashing prices, public funded institutions are 'fighting' the recovery by raising prices.

In a largely public-funded world where the self adjusting properties of aggregate supply/demand breakdown, what is the solution? The only solution is government intervention --- which furthers the problem.

What this means is not that certain institutions (like health care etc) shouldn't be at least partially public ran/funded. What it suggests is that, in aggregate, there is a limit by which we take on more and more risk of destroying market mechanisms with our meddling.

Hiatus

Folks,

You may have noticed I haven't posted anything in a month and a half. I have decided to take an indefinite hiatus from my econ blog. I'm taking this action for a couple reasons: (i) I'm a bit burnt out from blogging and all the research etc. that entails, and (ii) my workload is such that i don't feel I'd be able to currently keep up blogging at a decent level.

If and when I decide to relaunch, I will let everyone know! Thanks everyone! I've appreciated commenters and general visitors alike.

an undergrad econ degree

"A degree in economics," he [a recently graduated student] said, "doesn't really prepare you to understand the economy very well."

Pollution Regulation

Score.

Cap And Trade is a Costly Lunch

I've always been against carbon taxes, and I've only been slightly kinder to at least the theoretical idea of a (permit auctioned) US cap and trade system.

Generally speaking, I've been slightly kinder to cap and trade since it allows adjustments to made on 'quantities' of emissions as opposed to 'price.' A number of economists disagree that that is better, but to me it makes sense to control the quantity since that is the ultimate aim of such a policy. Then, if the policy is too costly or not costly enough, changes could be made in the emissions cap easily and gradually. If we instead controlled the price, we could set some price via a guesstimate as to the social efficiency gained, but it would be just that, a guesstimate with myriad assumptions. If we set the price too high (low), it would need to be continually graduated downward (upward) until it became socially and politically acceptable. Letting government control the price would only serve to increase inflation and economic uncertainties. By controlling quantity, price can be determined in the market (hopefully subject to only mild fluctuations). Beyond that, the psychological effect of cap and trade on the consumer, and the political feasibility of it, make it a better choice than a carbon tax.

But I've only been slighly kinder, having said that, since an auctioned cap and trade policy would still have some of the negative side effects of a gas tax (distributional issues, regional issues, regressivity potential, "feed" the beast problems, etc.).

Nevertheless, it is likely that we will see (perhaps this year) some form of cap and trade happen in the United States. It is also nice to see that the Congressional Budget Office is really looking hard at the costs and benefits of such a policy. But noteworthy in their analysis are the huge 'unknowns' - the variability in terms of the kinds of benefits and costs this would mean for the US.

If I were a legislator, I would vote against cap and trade by noting that the Reinvestment and Recovery Act signed by President Obama already provides billions of dollars to supporting alternative technologies to oil-based ones. Subsidizing a change in the infrastructure of the US (toward a green infrastructure) while simultaneously gradually increasing fuel efficiency standards, in my opinion, is the correct approach to the problem of climate change. Though, my only fault is that the spending, by necessity of the recession, means that little study or thought was made as to what types of green technologies and infrastructure we should support. I hope that will change in the future as the US recovers.

But I'd vote against cap and trade for a second reason. The reason would be that I would be a legislator for the State of Indiana. As the CBO document discusses, the midwest would likely be hit the hardest under cap and trade. Consider that we have relatively little public transportation (compared to say the East Coast), we have the largest density of oil-demanding industry (manufacturing, coal, etc), AND we have the double-whammy of being the region hit the hardest by the current recession. A cap and trade policy, depending on how potential government revenues would be distributed, would likely throw Indiana and its neighbor States into an economic tailspin - which could, potentially, injure the already suffering auto industry even more, which could, in turn, negatively reverberate across the nation.

What I'm reading

I've long believed that theories of nominal wage stickiness and price stickiness, while useful in part, really seemed to miss the big picture. Turns out that back in 1999, a piece was written by little known economist Truman Bewley that took a more "all encompassing" heterodox approach to asking why firms prefer layoffs to wage cuts in a recession. By surveying hundreds of actual business people (as opposed to just looking introspectively to the Ivory Tower for answers), and by understanding common sense psychology, he came up with the "Morale" theory of wage rigidity - which for my money, makes the most sense in reality as to why wages are sticky.

Morale theory basically states that firms hold nominal wages rigid in recessions primarily to avoid demoralizing workers and reducing their overall job satisfaction, thereby avoiding the long-run negative such demoralization and disruption to existing employees can have on a corporate culture.

It's something that I've been thinking about for a while and discussing in my macro class, but something I never knew was already researched. So I was excited to learn of Mr. Bewley's contribution, and sadly, don't understand why mainstream econ isn't incorporating his work more on the macro side (actually, I have a hunch why they haven't, as readers of my blog can probably guess my feeling). So, I was equally excited to find this paper, which statistically seems to validate Mr. Bewley's ideas.

Incentives Matter, Except for When They Don't

From Mankiw:
http://gregmankiw.blogspot.com/2009/05/should-us-tax-corporate-income-overseas.html

It seems Dr. Mankiw is all about supporting green taxes, and doing away with many post-Keynesian principles in support of market activity because as he says both directly and in his text book, "incentives matter." Well it seems his recent post, which peddles research suggesting that the decision to locate overseas causes increased domestic activity as well (as opposed to REPLACING this activity), seems to just throw the whole 'incentives' idea out with the bath water.

I work in location-based incentives. Let me tell you, costs matter. Relative costs across borders matter. They aren't the be all end all as many development businesspeople would have you believe, but they are important. I don't buy the whole idea that foregin operations is a compliment to domestic operations. I haven't read the paper yet (can I get a free copy?), but I bet there is a huge correlation vs. causation issue here. Just because a firm gets big and ships overseas, and this is (DUH) correlated with increased domestic operations as well, does NOT imply that the relative cost difference due to the foreign tax shelters is what is causing this increased domestic production. The whole concept is ludicrous and smacks of political pandering, not economics.

But beyond that issue, "welfare economics" is stupid...the entire field is a waste of time because it starts out with assumptions about welfare that pretty much every person based in reality knows is stupid - like the idea that you can't compare utilities across people (ie. fairness is not important to welfare since fairness cannot accurately be incorporated into utility). BAM... welfare econ is useless. You need to think outside the box whenever you mention the word "welfare" because economics is NOT where you go to find such answers.

Credit Card Companies Need Checked

Today Obama meets with execs of many major credit card companies to discuss his administration's ideas for new regulations to control some of the anti-consumer behavior of the companies (some of which I have personally experienced and I have written about in the past).

Here is just some back and forth I saw while browsing the web today:

XXXX wrote:
So I guess it's OK for credit card companies to raise your interest rate on purchases already made? How would you like it if you had a contract with someone to do some work on your house and they decided to charge you more simply because they wanted more money out of you? How is that fair play?

YYYY replied:
Yes. If it wasn't in the contract that they could raise the rate, then they can't legally do that, if it was, I must have agreed to it. So yeah, that's fair.

XXXX makes one of many valid points against predatory lending practices conducted by credit card companies. YYYY uses a typical (private party economics) argument as a response. IE., as long as presumably rational parties agree to a contract (in this case the company and the credit user), then there's nothing to see here... move on. Well folks, I hear that argument a lot (esp. from people with econ backgrounds), and I'm here to say it is shit. It's the typical "I don't really feel like thinking more than at a cursory level" response. Contracts are fine tools - and, in fact, contracts (that work in all senses of the word) underly almost all of economics as one of the largest assumptions the field makes. The problem is, like many assumptions in economics, it's not the complete reality. Contracts (implicit or explicit) are not made in a vacuum where all parties equally know what they are agreeing to, where no one has more power over the other, etc....

The truth is credit card companies have huge advantages over the consumer because they have 100% control over the language of the contract. Try it out - next time you sign up for a credit card, call them up and ask if you can have any of the myriad terms they wrote in their favor changed or removed - they will likely reply "no, that is industry standard." "Industry standard" is another way of saying the industry controls all terms and you get no say. Credit cards are necessity goods in our society - having little or no credit will come back to bite you. Credit card companies know this so they use that to extract power from consumers.

And that is even assuming you know what the terms are to begin with. Have you read the terms of your credit card? I have - I work with lawyers and legal statutes all day so I have a pretty decent grasp of these things - but I doubt the typical consumer is even halfway fluent in legalese.

Oh, and as I type this, hundreds of credit users are receiving small but pivotal changes in their terms (perhaps their interest rate is being quadrupled), but they probably won't ever see it, because it was thrown in the trash just like the other 8 mailings from the same credit card company they received during the week promising 'incredibly' low rates (restrictions apply, see fine print for details after eye surgery).

Having said what I've had to say, I don't ever want to hear that tired, ridiculous, idiotic argument in favor or "free" market (ie. continually abusing) credit card companies.

Brad DeLong Posts Another Goody

http://delong.typepad.com/sdj/2009/04/john-kay-weighs-in-calling-for-a-practical-macroeconomics.html


Agree.

Posner Misses the Point

From his blog:

"Bubble behavior is exhibit number 1 to the claim by some behavioral economists that stock market investors often act irrationally. For example, buying in a rising market or selling in a falling one (both illustrating what is called "serial momentum" or "momentum trading") is said to illustrate "herding" behavior."

I disagree with his premise. Behavioral economists do point to herding behavior and momentum to explain bubble formation and collapse, but I don't think many would necessarily deem the behavior at the individual level as "irrational." Many try to avoid such useless terms - behavior is not necessarily rational or irrational, it just is. Nevertheless, the behavior can be deemed to be quite "rational" for precisely the reason Posner cites: uncertainty. In an uncertain environment, people see trends and observe the behavior of the herd and calculate subjectively that they can potentially beat the market provided they can 'exit' in time. I don't think many behavioral economists would say there is anything irrational about that - it's just a gamble. It is long-run inefficient (and 'irrational' if you want to use that word) at the aggregate market level - but since people don't act like the Borg, the term itself is rather useless in this case.

Volatile Prices - Blame the Auto Industry and the Government

I posted this on my intro macro class website:

Consumer prices have been, at least according to the CPI data which we discussed in class has numerous biases and flaws, volatile to say the least these last few months. BLS has released March data on prices. Prices (seasonally adjusted) fell in March.

You will notice that prices however have been CONSISTENTLY rising (or remaining stagnant) over the last few months once you exclude energy prices. Energy prices are likely fluctuating wildly due to the increased uncertainty regarding the automotive industry. Price stability is one of the goals of the Fed, as we learned since price changes influence expectations. Unfortunately, the Fed has limited control over prices in the energy sectors of the economy. This also suggests, though, that an 'orderly' bankruptcy of GM and Chrysler COULD help stabilize energy prices. Right now we are in limbo since one minute we are bailing out the autos and the next we are giving them ultimatums (of course that is just my opinion - I'd love to hear yours!)

http://www.bls.gov/news.release/cpi.nr0.htm


"The index has decreased 0.4 percent over the last year, the first 12 month decline since August 1955.

On a seasonally adjusted basis, the CPI-U decreased 0.1 percent in March after rising 0.4 percent in February. The decrease was due to a downturn in the energy index, which declined 3.0 percent in March after rising 3.3 percent the previous month. All the energy indexes decreased, particularly the indexes for fuel oil, natural gas, and motor fuel. The food index declined 0.1 percent for the second straight month to virtually the same level as October 2008. The food at home index declined 0.4 percent, the second straight such decrease, as the index for dairy and related products continued to decline."

Talkin' Bout a Revolution

There needs to be a revolt in economics. I'm not talking about a movement from within - the heterodox fields regarding post-Keynesian and institutionalist thinking etc are covering that at an increasing pace. No, I'm talking about the everyday Joe who is going to, or already has, lost his job because of the misleading "facts" purported by, and the downright intellectual ineptitude coming from, mainstream economic thought over the last few decades.

Joe should be angry, and he should be angry at the economists.

The more I think about it, the more mad I get at my profession (or at least the field in which I was schooled).

This crisis can be summed up easily:
Bubbles are naturally occuring. Most economists dismissed the housing bubble as just "what you get when your economy is doing really well and people have more income to live out their American dream in owning a home." In other words, economists took the classical economics line of laissez-faire it's-just-the-glorious-market approach, and they ignored any talk of something going askew.

But these same economists (including Greenspan, and even Ben Bernanke said it back in 2005,....)are NOW saying, oh, well, sorry, there really was - guess we should have listened to the realists in the world.

I challenge you to google "is no housing bubble" in 'google.' It will come up with scores of economists and people with real authority that said as much. Why should we look to these same people now? Why does the profession continue to rely on the unrealistic physics-wannabe modeling of mainstream economics?

Why do we continue to kid ourselves? Yes, the tide is turning (finally) but when I say "we" I mean everyone - why isn't the entire populace outraged? Why aren't they banging at the gates of the Ivory Tower - nay, why aren't they burning it down?

There Can Be a Difference Between "Stimulus" and "Investment"

...But a lot of people, especially Republicans, are either blissfully unaware of this distinction or secretly believe that "stimulus" as a goal is pointless (or some combo thereof).

I suppose a bridge to nowhere in Alaska was fine for Sarah Palin and many Republicans (she was for it before she was against it, or vice versa, I forget her lies cause she's so unimportant now)but a bridge connecting two campuses at the Microsoft HQ - now that's taking things to far (sarcasm please).

The point of stimulus is to spend money quickly and get it flowing through the economy so that others can spend it on goods, services, machines, buildings... and the like. All this is good for boosting demand, GDP, and employment for a time.

"Stimulus" is not meant to always go to the best "long-run" investment projects. Although I certainly agree that to the degree that such worthy projects (infrastructure, education etc) meet the criteria for timeliness etc. we should do those first, I disagree that we should ignore other projects where plans are already in the works and that can be started very quickly (like the MS Bridge).

Microsoft was not planning on building that bridge this year - they didn't want to fund the whole thing. We are creating spending and jobs that otherwise would not exist without the federal money. But let's just assume Microsoft did already plan on paying for it all this year, that does not mean the stimulus is worthless since that frees up money for Microsoft to invest in other things. Either the money goes to fund a bridge, or it goes to fund some other Microsoft project (hopefully other than just paying MS execs).

A Sad State for Econ

Mankiw:
"In other words, whether you want to help an ailing grandmother or an ailing economy, you need start by mastering some first principles, which do not change in response to current events."

I could not disagree more, sir.

If you go into something assuming the principles are correct when on their face evidence shows you that there may be huge chunks of theory that don't match reality, then you are kidding yourself.

Changes at Sallie Mae

Sallie Mae is restructuring the terms of its student loans and will now require students to pay interest while they are still in school (as opposed to continuing to defer cost until post-graduation). This saves money in the long-run on each loan, and is likely necessary in this economic climate. Nevertheless, it has the bad side-effect of being temporally regressive (ie. taking money from students and their families when they can least afford it - before the student can earn a real income). And of course, this has a bigger negative impact on already poor families compared to rich ones.

I think it has some merit still, for the following reasons:

1. Students have grown lazy - this will act as an incentive for students to seek out internships and part-time jobs. It will bring accountability back into college life.
(Note: this could be debated - it's just as possible that students will turn toward credit card checks with much higher ballooning interest rates to pay off their student loan interest while in school - that would ironically make the lending markets in aggregate worse off).

2. The potential savings on interest gained over the lifetime of the loan is a big plus.

3. This will improve Sallie's cash flow, and if the stimulus regarding education spending offsets some or all of the negative upfront cost to families, the overall impact of Sallie's move and the stimulus could be a huge plus.

Where Will We Be Three Years From Now: Interest, Oil and Inflation

I told my online friend and fellow econ lover Jeff Reisberg I'd do a post about policy and the dollar exchange rates in the context of the crisis.

Should we be concerned, in light of the Fed just deciding yesterday to flood the market with more money by buying up even more long-term treasuries and mortgage securities? IE, the Fed is expanding its tool box to influence longer-term (riskier)interest rates, since it can no longer focus on the short-term rates it directly controls as interest rates on those securities are now at the 0 bound.

The policy makes sense from a stimulating the economy standpoint. More money for lending, lower economy-wide interest rates to stimulate borrowing and spending. The lower interest rates, however, make saving less attractive. This is true for our residents and foreigners that may want to put some money in our financial markets. So, as a consequence, should the Fed continue this policy of quantitative easing (as I'm sure it will), we can expect a further decreasing of the value of the dollar (which, like other financial assets, is now less attractive). Gold is more attractive (as a semi-substitute for the dollar). Oil is also attractive as it, as a potential investment, is also a semi-substitute for dollar-backed financial assets.

This stimulus only enhances the fiscal stimulus the Obama administration is attempting. As I've discussed in the past - I'm skeptical as to monetary policy's benefit at this point given the amount of hoarding and paying down of past debts going on (as opposed to new spending).

But a greater concern is the long-term issue of inflation. Everyone knows that any demand stimulation causes some degree of inflation in the future. But my concern is not with inflation from the demand side, but I am concerned about the stagflation spiral we could be in for three or four years from now.

Consider a world where the market is flooded with money, a world where months and years of spending have stabilized output and employment but prices are rising - presumably back to normal (though potentially going beyond). Consider this world where oil demand is stabilized along with the rest of the economy, but oil becomes doubly attractive due to the incredibly depreciated dollar. In this world we trade one bad for a potential other - we fix our financially broke low demand economy only to replace it with oil prices not just going back to the rapid levels we were at before the crisis, but now to a level of growth even faster due side effects of policy.

I'm here to tell you this world is not possible, for a few reasons:

1. The Fed has said, and they certainly have the power, once stabilization occurs, they will quickly reduce the money supply back in line with normal growth - the dollar therefore should adjust back to normal accordingly.

2. The demand for the dollar will likely remain high, even DURING the stabilization course - this will mean the dollar will NOT crash - it may slowly depreciate, but it will not likely be as dramatic as some doomsdayers assume.

3. A good chunk of the Obama administrations policies and indeed the stimulus package, is to ween the US off of its oil dependency. Other countries (like China) are starting to realize that oil is not a sustainable energy source for a developed economy. So, one would think that the rate of growth in global oil demand will be markedly slower post-recovery.

So, in end, I am not at all concerned about policy impacts on the dollar or oil prices or anything else. I am more concerned about the inability of monetary policy to do what it does well in normal times - stabilize.

Since economists like Mankiw and others like to post blog comments and graphics that make it seem like the modest increase in top-tier marginal tax rates under the Obama proposal is just 'shocking,' I'd like to offer up this (thanks Moveon.org):

DeLong is On His Game

Just wanted to point to a really good post by Brad DeLong regarding the sometimes laughable anti-Keynes economists out there. There are legitimate reasons to be concerned about government debt and all this spending, but to completely disavow Keynes at this point in time just smacks as out of touch. I've said this months ago at the onset of the crisis, and I'll say this again, new-classical economics, in all its extreme forms, is dead. Economics as a field had better start coming up with a different paradigm, or risk falling into the land of irrelevancy. The field can start by incorporating already existing models from heterodox schools which, if weren't ignored in the first place, may have helped prevent this all from happening to begin with.

Galbraith on Monetarism

James K. Galbraith on the irrelevancy and, at its worst, economy-damaging theory of monetarism.
http://utip.gov.utexas.edu/papers/CollapseofMonetarismdelivered.pdf

"...dated Fall 2007. The article, by Professor Goodfriend, is entitled, “How the World Achieved Consensus on Monetary Policy.” It therefore represents a statement of the highest form of expression of economic groupthink we are ever likely to find. Let me quote further, just so the message is clear. Goodfriend writes: “According to this “inflation-targeting principle,” monetary policy that targets inflation makes the best contribution to the stabilization of output. ... [T]argeting inflation thus makes actual output conform to potential output.” Further: “This line of argument implies that inflation targeting yields the best cyclical behavior of employment and output that monetary policy alone can deliver. Thus, and here is the revolutionary point delivered by the modern theoretical consensus–even those who care mainly about the stabilization of the real economy can support a low-inflation objective for monetary policy. ...[M]onetary policy should [therefore] not try to counteract fluctuations in employment and output due to real business cycles.”

...such easy monetary accommodation to the real economy has done wonders so far hasn't it?

Household Debt to GDP

I've started incorporating this into my Macro class:
Notice the spikes and the two peak points - hardly a coincidence. Thanks to Prof. David Beim of Columbia.

The Confusing, if not downright stupid, Republican Response to Obama's speech

Here's the basic Republican 'point' (as it were) as set forth by Louisiana Gov. Jindal immediately following Obama's speech:

1. Democrats' plan is a lot of spending (true, it is)
2. Spending increases debt and potentially burdens future generations (Ok fair 'nuff)
3. We (Repubs) would like to have seen tax cuts instead (.....Ok now you've lost me)

Why am I lost?

Because the implicit point 4 is as follows:

4. Tax cuts DON'T increase debt and potentially burden our future (which is a crock of doo doo)

There are a only a few ways in which point 4 is valid, and each of them is equally ridiculous:

1. Jindal and the Republicans want to decrease taxes AND simultaneously decrease government spending. This is ridiculous because this, for all intents and purposes, would virtually nullify any fiscal simulus effect.

2. Jindal is a follower of Arthur Laffer and believes that Republican orchestrated tax cuts would increase growth so much so as to make future revenues actually exceed the increase in the debt. This is the magical la-la land where Dick Cheney inhabited - the land of pigmies, fairy tales, but not a whole lot of reality or trade offs.

3. Jindal and the Republicans just don't believe in fiscal stimulus in general and the tax cut idea is just the same old LONG-run supply-side tax cuts they've tried to push before. They perhaps think that if they can market them as "stimulative" that maybe they'd have a snowball chance in hell of gaining support. In other words, if this point is the reason, Republicans are purposely misleading or at the very least using the vulnerability of the American people for their political gain.

...I personally think point 3 is the most likely. It is nevertheless, just as offensive as the first 2.

A little optimism.

Consumer confidence down, stock market down (related), Fed outlook fairly gloomy, BUT:
on a more optimistic note.....

Could these numbers be blips? Take CPI for instance. It is fairly common I believe for price changes to be more volatile in recession, but given the depth of their fall in recent months, I would not have expected the .4% gain in January. The question then is, is this a sign of monetary policy working, or a glitch in the way BLS measures the data, or a reflection of economic uncertainty?

...I have no idea. No question that the monetary policy (particularly the non-traditional stuff) has had some significant benefit. But there's also no question that it is not doing everything that economists hoped it would.

Consumer Confidence at Record Low

From the AP:

"The New York-based Conference Board said Tuesday that its Consumer Confidence Index, which was down slightly in January, plummeted more than 12 points in February to 25, from the revised 37.4 last month. That was well below the 35.5 level that economists surveyed by Thomson Reuters expected. The index, which had hovered in the high 30s over the past few months, broke new lows since it began in 1967. A year ago, the consumer confidence reading stood at 76.4."

Subtext:
Economists are still too optimistic - it's systemic, it's problematic, and it is a direct result of many of them being beat over the head with 'classical' models that emphasize efficient markets and the short-lived nature of downturns. These same models add no emphasis on how market psychology can create a downward spiral....

Unemployment Benefits and stimulus

A Moody's study shows you get the largest immediate bang for a stimulus (federal) buck when you expand unemployment insurance benefits.

Obama today defended his modest expansion:

“there are some very legitimate concerns” about the potential expansion of unemployment coverage to part-time workers. But that accounts for only $7 billion of a $787 billion program – a “fraction of the overall stimulus package” and not even the biggest potential expansion of unemployment insurance.

I think using this as a carrot to States is appropriate. I would be leery of forcing States to do this outright, but tying $X to it seems perfectly reasonable. Conservatives are crying foul about how this stimulus package seems more about spending than about jobs. DUH - that's the whole points of a Keynesian stimulus - the idea that in these kinds of crises, you need the spending first to jump start the jobs and output creation. Trying to 'create' planned spending solely out of jobs creation has limits when people and companies just hoard the earnings.

In support of eliminating gas tax in favor of national VMT

I support eliminating retail gasoline taxes and implementing a nationwide VMT tax.

VMT has not been implemented in many places (other than major Urban areas) mostly because the technology to implement either didn't exist or was deemed too expensive.
But, as our technological proficiency grows (esp. in the realm of GPS and computers in general etc.), this becomes less of an issue.

A VMT tax has many advantages over all other forms of externality-adjustments: increased regulation, increased gas tax, Carbon trading.

I've discussed why I oppose increased gas taxes nationally before, but another reason to oppose them relative to a VMT tax is the VMT tax tackles the externality directly: it is a direct tax on driving (the direct cause of congestion and pollution etc.). A gas tax is a tax on those things indirectly but such an effect is muted as part of this is offset by increased driving after consumers start substituting toward higher-MPG vehicles. Gas taxes (like regulations and carbon trading) incentivize better-gas-mileage production and consumption, but a VMT tax would be the same regardless of what kind of car is causing the externality.

This seeming strength of the VMT tax is also it's biggest weakness. We WANT to incentivize higher MPG cars and trucks and the technology behind it. We WANT to incentivize alternative energy other than gas. Gas taxes, regulation, and carbon trading can do this, but a VMT tax alone can not.

This potential downside can be offset if at least part of the VMT tax goes directly to support government spending on green infrastructures, alternative energies, and the like. Of course another way around this is to implement a "carbon"-adjusted VMT tax, taking into account vehicle type and charging a higher tax rate on larger vehicles or on "luxury" gas guzzlers per mile traveled. This could get a bit muddy and confusing to the consumer though, and could incentivize less safe vehicle production at the private level, so I prefer the former option which would allow the government to decide this directly.

The VMT would reduce 'frivolous' driving, increase bike trail use etc, increase demand for local produce consumption etc., reduce pollution.... Down the road, these devices could be installed in all new vehicles at minimal cost of marginal production (I mean they can put GPS in a little phone now).

Note that I'm NOT supportive of a VMT tax that would actually be a net increase taxes on consumers (for the same reasons I'm against a gas tax in general. I'm saying we should replace our existing gas tax with a VMT tax over the long-run - and that this in and of itself could create social efficiency gains over a gas tax.

UBS Bank Should Be Shut Down, Not Just Fined

This is disgusting. This bank shouldn't just be fined, it needs to be shut down and its assets seized by the federal government, liquidated via public auction whereby other more reputable institutions can bid on the assets, the proceeds of which should be paid to taxpayers via a tax-cut.

When will we learn that these slaps on the wrist of huge financial entities that shield rich people from paying their fair share do nothing to solve the problem of corporate corruption over the long-run.

Mike Moffatt on Immigration as stimulus

I completely agree with him on this.

I have before on this blog advocated immediate (not just a 'path' to) granting of US citizenship to foreigners who graduate from a U.S. institution of higher learning with a graduate degree. I still think this makes sense, not just for short-term reasons like Mike notes, but also for long-run growth not to mention the cultural and diversity value such a policy might provide.

Selective Mankiw

Mankiw says we live in a land of make believe where economists agree on most of the important issues of the day. Hardly. I use this survey (which Mankiw I know has posted in the past) in my class when I teach macro - he just so happens to have pulled issues where economists agree on specific things. There are plenty where they don't. Either way, I for one have never put much weight behind whether or not scientists agree on this or that. ---especially when the economists you are asking all have the same mainstream bend. That just begs for bias.

How Do You Know That Our Recession Is the Worst Since The Depression?

When this happens.

Richard Lugar, Gas Taxes, and Matt Tulley of the Indy Star

Apparently Indiana Senator Richard Lugar supports a gas tax. I don't.
I take more issue with the Indianapolis Star's Matt Tully's stated opinions that he offers without data to back it up:

"In the Indianapolis area, more people were suddenly carpooling, biking to work and, imagine this, even taking the city bus. Many people began to consolidate their weekend chores into fewer trips and to cut down on unnecessary drives."

Just how many is "more?"

I provide you two datasets:
Vehicle Miles traveled (VMT) did fall by 5% from summer 2007 to summer 2008.

Gas prices rose by 40% or so from summer 2007 to summer 2008.

Lugar essentially wants to go back to where we were (in terms of VMT) a year and a half ago. Will he still think this was a good idea when gas goes back up to $3, $4 a gallon (before tax)?

Was the 5% drop in miles traveled during the period really due to just the gas price increase, or could it have been the expectations of a slowing economy as well? Is all the interest in hybrid vehicles due just to gas price increases, or could it be our general "green" consciousness is growing?

Is such a small VMT drop worth the huge price distortion and potential regressiveness during times of economic crisis? I think not. I certainly don't think we can trust our government to just cleanly and smoothly deliver the gas tax hike back in the form of payroll tax reduction etc. There's certainly no reason to think they'd do so without transferring wealth from one class of citizen to another. It's just not worth the disruption. There are less traumatic ways to support the environment.

Ponzi and Minsky, and Arnold Kling's view

And yet continued evidence in support of Hyman Minsky's theories:

"I think that what happened last fall — the drastic market behavior — just put these guys in a position, you know, the cockroaches came out of the wall"

Arnold Kling agrees Minsky may have got at least part of this whole mess right. But he questions why we should bail out the "fools" that fell for such schemes. I think perhaps he forgets that many of those "fools" were hard working Americans that were either unsophisticated investors, or indirect (but nevertheless just as effected) innocent bystanders.

Much Better

This Indiana economist seems much more reality-based than some others in the State:
http://www.insideindianabusiness.com/newsitem.asp?id=33785

As an aside, Indiana's previously eternally optimistic economist has changed his tune recently. ...literally just weeks after saying "it's [recession] going to come and go pretty quickly." ...Either that or one of the two media sources grossly misquoted him.

Republicans' odd definition of "waste"

Apparently Republicans think helping our environment is a waste:

(buidling zero-emissions coal plant that, while cost ineffective now, could be much more viable in the future)
(tax credit for hybrid purchases)
(funding for green technologies domestically and for our military)


...and they think programs to help Americans' get healthy is wasteful:
(money for smoke cessation programs)
(money for CDC and STD prevention programs)
(money for alcohol and drug cessation programs)

...
I mean I could just go on and on here! Their argument against the current stimulus is ridiculous. I'm not saying that every single spending item is closed for debate - it's not. But it seems the Republican leadership is completely unwilling to work with the arm-extending Obama administration and they are grasping at straw to convince folks that the stimulus needs to be redrawn - and wasting valuable time in doing so. Frankly, they are succeeding in this stall tactic to some degree - but that just cements in my mind just how completely ideologically and how completely un-pragmatic the Republican leadership is. And it is to everyone's detriment.

The Irony of the Strong Dollar

The dollar remains strong in the face of our economic woes in large part because our currency is viewed as a safe-haven in times of global financial crisis (such as now). The irony of this is that when you combine worldwide demand for dollar growth, and the worldwide tendency to hoard currency / save and not spend (on US goods or assets), what you get is the increased likelihood that the appreciated dollar will make our recession longer and harder than it might otherwise need be. Particularly if the recession improves faster abroad than in the US (which may be likely since the US was the major source of the downturn and the many other countries are only being affected indirectly)we may see some of our trading partners start turning, at least during some transitional timeframe, to countries with less expensive currency: only furthering our export issues.

Over time one would think the financial cloud would clear, spending would resume and dollars would be used for their purpose, but this won't happen over night. There will be a transition with x number of economically-improving countries that will shift from buying from the US to buying from cheaper-currency countries, and y number of less-improving countries that will continue to hoard dollar currency for a time.

Treasury Sec. Geithner believes in a strong dollar as a signal of confidence in the US market, but it seems that this is causally backwards. The strong dollar isn't signaling confidence, it's the already existent confidence in the dollar relative to other currencies that is causing the strong dollar. The sustained strength of the dollar will have little to no impact on US market confidence, particularly if the rest of the US data continues to plummet.

DeLong Clarifies

...What can I say, the man is on a role. It's refreshing to hear someone making sense in the econ profession.

Right Idea, Incomplete Reason

I like this post by DeLong. I think there is something to his point, though I think there's a much simpler reason why people against government spending may be incorrect, and it lies not in their assumptions about the velocity of money per se, but in their assumptions regarding the relationship between income and spending and the tendency to hoard in times of crisis.

The whole point of the Keynesian revolution was to point out that in a dynamic (time and reality based) model with inventories etc., income and output in a given period do not always have to equal spending. And that, even when they do become equalized, spending (or total demand)can have a positive effect on output precisely because complete crowding out at best takes a long time to occur and, more realistically, never happens.

This is particularly true now since a significant portion of money in the private sector is NOT being spent or loaned - it is being HELD. I don't know how many times I need to say this. Money being HELD is NOT being used for consumption or investment, by ANYONE - it represents idle capacity. So, it only makes sense that we allow our federal government who is WILLING to spend our money to borrow our money that we are not using, and spend it on projects that will benefit us both in the near term and in the future.

On Obama Allowing States to Decide Auto Emissions

Generally, while I think it's a step forward, I have to disagree that letting each individual state choose emission standards is the best idea or option. First, notice that those states like California, Vermont, Washington, etc. that are green-conscious in general. Most (other) states have, and always will, compete against each other for business-friendly and sales-friendly (for tax revenue)environment.

States currently fight each other over who has lower taxes, who can attract the most jobs, etc. States also will fight over who has the least burdensome emission standards. So, while some states or regions like California may increase standards, the nationwide average increase won't likely be as much as it could be if there were a national standard across the board. This will lead to some very large distortions.

Car companies are correct - this could lead to the most cost-effective outcome being that the same model of car is produced slightly differently in manufacturing and distribution clusters located in the midwest (sold in the midwest without heavy standards) than say in the Western or New England area where they have to sell to a large number of people with tougher standards.

What you'll end up with is akin to what Indiana ended up with when it allowed each individual county to set chose its daylight savings time and Eastern vs. Central time standard. What we have now is that the whole state is on the same page via daylight savings, but we still have the problem that there are many counties that are eastern time while their neighbors are central time - which still poses problems for businesses despite the adoption of DST.

A song for our times

I'd like to share this wonderful song - recorded by Ryan Stotland from Montreal. I think it's great - good synopsis about the financial crisis and just a well crafted and performed folksy-sounding song overall!

As an aside, I write and record music in my spare time too.... I'm wondering how many finance / econ junkies are out there that are 'secretly' amateur songwriters! If I find others I think I'll form a band. I mean there's the standup economist, why can't there be a kick-ass economics band! Jonas Brothers better watch out ;).