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Tuesday, March 31, 2009

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).

Sunday, March 22, 2009

A Sad State for Econ

"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.

Friday, March 20, 2009

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.

Thursday, March 19, 2009

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.

Monday, March 16, 2009

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

Wednesday, March 11, 2009

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.

Monday, March 9, 2009

Galbraith on Monetarism

James K. Galbraith on the irrelevancy and, at its worst, economy-damaging theory of monetarism.

"...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?

Tuesday, March 3, 2009

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.