Knowing and Making

Here's  a little something  on fiscal stimulus. It contains a suggestion I've seen from Tyler Cowen and Scott Sumner, among others: ...while the zero bound does not bind, the Fed might nonetheless be reluctant to engage in the appropriate amount of monetary expansion, and that a fiscal boost is therefore required. A potential response to this is that if the Fed has chosen the unemployment rate with which it is satisfied, it will simply offset any fiscal measures to push unemployment below that level. That's only true if the Fed is assumed to be a simple (rational?) agent acting with just one lever: controlling the money supply in order to choose a balance between inflation and unemployment. However, it's very plausible that the Fed is  not  happy about the current unemployment rate, and recognises that it could and perhaps should increase inflation (or NGDP) to fight it. But it is  also  worried about its long-term credibility (as Ben Bernanke indicates i...

Menzie Chinn attempts a valiant defence of fiscal stimulus against innumerate accusations from Richard Posner and others. Posner, to be fair, has corrected his arithmetic now and restated a few of his points in a more nuanced way. However Chinn is now having to fight a battle against his own anonymous commenters, who say things like: So explain to me still, how an 89B (regardless of interest expense) is a good investment if we only get a 39B return. It seems even if we got a multiplier of 2, we'd still only be at 80B and that is still a negative return. It seems like we're just delaying the pain. This comment misunderstands the nature of stimulus and imposes a meaningless standard on the "return" on government spending. Here is what has actually happened: The government borrows $89 billion. Savers have handed over an asset ($89 billion in cash) in return for another asset ($89 billion of government bonds). The government gains an asset ($89 billion cash) and create...

Many of you will have noticed Paul Krugman's continuing demands for a bigger fiscal stimulus - he thinks it should be around double the size proposed by the administration. If nothing else, we have to give him credit for being consistent, right? Well...maybe not. You see, I came across an old article where he was, as usual, insisting that the stimulus should be doubled...but only to $600 billion! A double-take. Could it ever be true that the administration was proposing only a $300 billion stimulus? Yes it could - in fact in the early days of the election campaign Obama's proposal was for a stimulus of $60 billion . No wonder Paul originally supported Hillary. I thought it would be interesting to run a comparison of Paul Krugman's desired stimulus versus the stimulus proposed (and eventually passed) by the Obama administration. Here it is (click on the graph for a larger version). The red line is the administration's efforts and the blue is what Paul wants: The red lin...

I'm guesting at missmarketcrash this week, so half my postings will be over there. But my loyal readers needn't miss out, because I'll come up with some slightly more theoretical musings here. Then again, if you prefer what I write on her blog, please say so, as it will be a bit more whimsical (if you don't count my Apprentice postings) and a bit less rigorous than here. Today's posting over there is about Michael Savage - kind of - but more about the uniqueness of names and whether that's an economic commodity. I think the £50 billion intervention of the Bank of England today deserves note, so that's what I'll discuss at home. It wasn't expected, and indeed the BBC reported it at face value: "Bank of England provides £50 billion boost to economy" evidently before letting their economics editors loose on it. Once Stephanie Flanders had her say, it was translated into "a QE surprise". Quantitative easing, as it's called, was ...

According to today's City AM newspaper in London - which holds itself up as the City's second best financial paper: Chancellor Alistair Darling will hold back from a new fiscal stimulus programme in next month's Budget, he signalled yesterday. Addressing foreign journalists, Darling hinted that tax cuts and spending programmes would instead be introduced... It doesn't say where the foreign journalists were from, but I suspect they spotted the surreality in this statement a bit sooner than City AM did. The actual statement is rather less egregious than the above mangling of it.

Robert Peston is revisiting the argument for the Bank of England buying shares in private companies - proposed by me in December and (the slightly more eminent) Roger Farmer in January. He points out that the Hong Kong government did this in the late 1990s, during the Asian financial crisis, and succeeded in both supporting the market and making a big profit when they resold the stakes a couple of years later. Stephanie Flanders has a good piece about Tim Geithner's position and particularly about the IMF and other possibilities for fiscal burden-sharing between G20 countries. Meanwhile Paul Mason has an excellent summary of the issues to be dealt with by the G20 conference in a few weeks: Far from the emergence of a harmonised and increasingly unified world economy [globalisation] has produced a lopsided and malformed structure that is now falling apart. The low paid worker in Detroit cannot buy his new pair of trainers unless the low paid worker in Shenzhen a) makes them, b) d...

Robert Peston's article today about Chinalco highlights an important point which few economics commentators have discussed. For the last nine months oil prices have been falling substantially. The developed economics spend so much money on oil that this makes a huge difference to the money available in our pockets. As a fair estimate we can say that world oil consumption is about 80 million barrels a day. Taking the lowest figures it's reasonable to say that last summer, the world was spending $12 billion a day on oil. Now, with a barrel of oil at $44 the figure is less than $4 billion. This $4 billion every day is now sitting in our pockets - exactly as if it came to us from a VAT or payroll tax cut. This is equivalent to a $3 trillion per annum fiscal stimulus paid for not by our own government but by oil exporters. How nice of them. (Caveats: some oil is provided on long-term contracts rather than spot price, so the movements won't have such impact; and the oil exportin...

I've posted the following over at Worthwhile Canadian Initiatives : JKH: I'll have a go at that (no doubt Nick will add more insight too). The multiplier effect depends on the extent to which Ricardian equivalence holds. If it holds perfectly - i.e. people expect all increase in income to be eaten up by future tax increases - then the multiplier effect should in theory be zero. However, the truth of Ricardian equivalence also depends on the multiplier effect! Full Ricardian equivalence is based on the idea that national income will not be affected by a stimulus. If instead the stimulus does increase income, then future tax revenues will be increased automatically, partly offsetting the marginal tax rises that are expected. And does the stimulus increase income? Well, that depends on the multiplier effect! Although I haven't worked out the mathematics, I expect there would be at least two stable equilibria: one where Ricardian equivalence is complete and self-fulfilling, an...

There were two traders who used to cross the desert in Kenya, carrying incense from one city to another and metalwork back the other way. The trip was a long and hot one, and they travelled with two camels each and always with just a bit more food and water than they strictly needed. For many years their trade carried on successfully - occasionally with a sandstorm, once losing some goods and camels to a thief, but never with a real crisis. Their wealth gradually accumulated, and they were able to expand their caravan to six and eventually ten camels; but no matter how rich they became, they never forgot to carry an extra waterskin and packet of cured beef: they were wise enough to know that riches cannot stop you dying of thirst. But still it came to pass that on one difficult trip, the wind was strong and they had to camp for an extra day; when they reached the next oasis it was dry; and the spare water was soon gone. With three days to walk to the next water, and the sun stronger th...

Stephanie Flanders expresses an opinion which seems to reflect the conversation throughout most economics blogs, as well as - she suggests - in the City. That is, we are either due for severe deflation or high inflation - nothing in between. Interestingly, the deflation story mainly comes from the authors of the blogs, while the runaway inflation opinion is mostly in the comments. You might say that shows which opinion reflects economic orthodoxy, but not necessarily which one is more likely to be accurate. The most likely scenario may in fact be "both" rather than "either". Deflation in the short term, which we hope will be arrested by the immense monetary and slightly-less-immense fiscal stimuli coming out of most rich-country governments. Followed by inflation in a couple of years, which central banks will try to contain by mopping up excess money supply - with no consensus on their likelihood of success. Most economists would say that the inflation is a price w...

It's been accepted by most analysts for years that the global car industry has substantial overcapacity and that factory closures, or even closures of whole companies, are needed. Now BMW is cutting 850 jobs at its Mini plant - even though Mini sales are up this year. So is this a good thing? Probably not - at least not right now - because it causes a reduction in aggregate demand, and that means reduced GDP growth, or a deeper recession. But that's true of capacity reductions at any time. So why would it have been good before and not good now? What is the difference? The first thing to understand is why a cut would have been desirable. Let's imagine that, in more normal times, a car company (Chrysler for example) shuts down. The immediate beneficiaries of a company closing would be the other car companies. With less competition they could sustain higher prices; some people who would have bought Chryslers will now buy other cars, boosting both revenue and profits at the re...

Synthesising the whole stimulus debate into a few lines, there seem to be a small number of messages: Stimulus is good because it gets idle resources producing something Stimulus is bad because it moves productive resources into less productive use Stimulus is bad because its cost has to be paid back, reducing future efficiency Stimulus won't work because rational consumers will save as much as the government spends Stimulus is good/bad because government spending is efficient/inefficient These messages are not necessarily contradictory - some of them are orthogonal. The truth of each assertion all depends on your model of how the economy works - and especially on one big factor: how much friction is there? In an economy without friction, much of the argument would disappear. Idle resources would be immediately reallocated to some other use, since there is always somebody with savings that they could switch to consumption. Prices would adjust. Resources would always go to the most ...

According to the Sunlight Foundation , nobody (outside of the ten-person committee that negotiated it) has yet been allowed to see the stimulus bill which the House and Senate have agreed. This includes the members of the House and Senate who are supposed to vote on it today! I know that I've argued that cognitive limits and imperfect information act as a constraint on economic efficiency; and no doubt also on political efficiency. But that doesn't seem like a good reason not to publish the bill. Maybe they have slipped in that clause on a stimulus for bloggers and they want to get it passed before the twitter crowd start asking for their own version.

Before it's too late and the Senate bill passes, I'd like to make a pitch on behalf of all hard-working bloggers out there: let's see some of that stimulus program come to those who really deserve it. Us . Here's why it makes perfect economic sense for bloggers to be subsidised, and why we can help the world out of an impending crisis. Blogging has a high multiplier effect . This arises from the fact that most blog postings are read only by other bloggers. Thus, utility from blogs increases as the square of the number of participants. Therefore, if we can attract 100% more people into blogging by paying them, we will increaes activity by not only 100%, but 300%. If you figure comments into this, the effect becomes cubic and we get a 700% increase (however, note that in some blogs the comments have negative utility). High multiplier effect: check Blogging is an unskilled profession . Let's be honest - for every Nobel prize winner , there's a  nutter  or  nonentit...

H.R. 1, the stimulus bill passed by the House of Representatives which you can read at this excellent site , actually contains the following text: SEC. 1110. USE OF AMERICAN IRON AND STEEL.  (a) IN GENERAL. None of the funds appropriated or otherwise made available by this Act may be used for a project for the construction, alteration, maintenance, or repair of a public building or public work unless all of the iron and steel used in the project is produced in the United States.  (b) EXCEPTIONS. Subsection (a) shall not apply in any case in which the head of the Federal department or agency involved finds that (1) applying subsection (a) would be inconsistent with  the public interest;  Therefore, a willing administration official would be able to exempt all purchases of iron and steel from the Buy American clause by stating either that the public interest is served by buying the cheapest or commercially most attractive materials available; or that protectionism in general is not in th...

A story of how the bank bailout money is providing an indirect stimulus to the economy. Or would do, except that political pressure is stopping the bank from spending it! I think Greg Mankiw posted a similar question last week: Scenario 1 : A bank receives $20,000 of bailout money and hires Joe the Plumber to refurbish its bathroom. Scenario 2 : A bank receives $20,000 of bailout money and lends it to Ted the Lawyer, who hires Joe the Plumber to refurbish his bathroom. Which has the greater macroeconomic effect? At the time I thought Mankiw was implying they were equivalent, but it felt like a trick question. I guess the answer might  be that $20,000 of bailout, by increasing bank capital, actually enables (say) $100,000 or more of new lending. In which case Scenario 2 is preferable. However, I have to ask: is Bank of America supposed to suspend all marketing activities during the course of the recession? Surely their marketing people have done some kind of analysis and decided this i...