Knowing and Making

In an intriguing example of pricing an externality, Barack Obama has announced a plan to tax American banks based on their reliance on the wholesale finance markets. On a related subject, Nick Rowe has a neat analysis of finance as magic - the magic of borrowing short and lending long, sharing risk and creating liquidity. To make this magic work in a more stable fashion, it's understandable that governments would want to encourage banks to move from wholesale to deposit finance. Assuming it works, what are the effects of this move likely to be? The coordination game between multiple owners of capital will work better, for two reasons. First, because no individual will have as much power as they do now. Second, because the more finance is provided by millions of depositors (instead of a few hundred managers of wholesale capital) the more statistically predictable their behaviour is likely to be. Even when there are herd changes in depositor behaviour, the movement of a larger...

While the Americans don't want a British-style healthcare system, it seems that some Brits are very keen on American-style healthcare rhetoric. After Alan Duncan's hilarious outburst we now have Chris Ayres in the Times . Claiming that Obama should abandon his plans to replicate the NHS, in favour of a scheme that "combines the best of both systems". Now anyone who is listening honestly to the debate, or has looked at the healthcare bill being proposed, couldn't possibly think that Obama is proposing a universal, public-funded and public-supplied health sector. If anything, the main criticism of the proposal is it doesn't go far enough towards this goal. The main content is still a public insurance plan - no public ownership of hospitals or provision of services, and no single-payer system. If a British writer (based in the US) can't tell the difference between the US plan and the NHS, despite writing more than one article comparing them, why is he stil...

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...

Hal Varian in the WSJ (via Mark Thoma and Marginal Revolution) has touched on a topic I have been thinking about for a while: how is the fiscal stimulus best spent? On consumption or investment? There are essentially two tools available for the stimulus: tax cuts and government spending. And there are five main sources of demand in the economy: private consumption, private investment [optionally divided into business and residential investment], government consumption, government investment and exports. I am not going to address all ten combinations, but focus on private investment - should we promote it, and if so, which are the best tools to do so? I am a priori neutral between tax cuts and spending; tax cuts are good because they let people allocate spending by efficient private choice; spending can be good if it achieves public goods that are not best purchased in the marketplace. My intuition, like Hal's, is that private investment is important. But is there a clear argument...

This article is from October, but germane to my discussion of fiscal salesmanship. Cass Sunstein: Wall Street's Lemmings : Why policymakers need to understand psychology as much as economics to solve the financial crisis. A couple of comments below the article point out that psychology is not the only  cause of the financial crisis, but Sunstein is not claiming that. Undoubtedly it makes a big contribution and turning it around (he uses the example of Roosevelt, maybe the best fiscal salesman ever) is within the powers of politicians - Barack Obama of course being the one most capable of it, for many reasons.

It seems it is not too presumptuous now to celebrate: Iowa : Obama New Mexico: Obama Pennsylvania : Obana Ohio : Obama Virginia : Obama Colorado : Obama Congratulations to President Barack Obama - the next leader of the most influential, unusual, innovative, and democratic nation humanity has had.

VOTING INSTRUCTIONS (US citizens only): 1. Go to the polling booth 2. Vote DRINKING INSTRUCTIONS (everyone else - Americans also allowed): Obtain one bottle of Kentucky bourbon (try and find one with a red neck). If you don't drink bourbon (you elitist), a bottle of "Mac"allan will do; if you don't like whisky at all, you can drink cachaca as it is made from sugar (Mc)cane. You then need six bottles of champagne or Cava (preferably with blue labels and not "too European"). Make paper caps for them, marked: Virginia, Pennsylvania, Ohio, Florida, Missouri, North Carolina. If you feel especially confident (and thirsty) you can add bottles for Georgia, Indiana and North Dakota (if you're an Obama fan) or Colorado, New Mexico and New Hampshire (if you're a McCain fan). These are known as the 'swig states'. Whenever a swig state is declared officially - or if the result is called by the TV channel you're watching - it's time to have a dri...

A suggestion for Barack Obama's team: if John McCain doesn't show up for the debate this evening , why not get Warren Buffett onstage with Obama to explain the crisis and talk through pragmatic solutions for it? I'm sure he can take the evening off from sorting out Goldman Sachs. Virtually nobody is trusted more by the public on these matters than Buffett, and he's already endorsed and advised Obama during the campaign. It might be pretty good for Obama's image as a safe pair of hands.