Strong opinions, weakly held

Tag: economics (page 2 of 10)

Scott Sumner illustrates why it’s easy to hate libertarians

Libertarian economist Scott Sumner talks about the “marshmallow test” and says that he doesn’t trust Democrats:

What do we do if Social Security needs to be trimmed in order to balance the budget? I hear lots of talk about cutting back on benefits for those who “don’t need it.” That would be people like me. Here’s why I don’t trust the Dems—I see them as the party of one marshmallow eaters. They represent people who have less self-control. I fear they will cut my benefits, but not cut the benefits of people who didn’t save for retirement. I fear they will use “wealth” as the criterion to determine who is needy and who isn’t; not lifetime wage earnings.

In my view there is nothing egalitarian about redistributing income from two marshmallow eaters to one marshmallow eaters. They’ve already had their fun when young, loading up their three car garages with all sorts of fun toys. I’ve never even had a garage.

My take on this is that Scott Sumner is a selfish bastard who’s painfully out of touch. There are plenty of people in America and around the world who were never offered the first marshmallow. The Democrats don’t do much to help them out, but Republicans and libertarians don’t seem to believe the government should help them at all. In fact, their main concern is that people with many, many marshmallows can eat them all themselves, and they justify that stance the same way Scott Sumner does. If you’re poor, it’s because you’re inferior to people like them.

Why the Internet hasn’t grown the economy

Tyler Cowen’s The Great Stagnation argues that economic growth in advanced nations is slowing because we haven’t seen any innovations in the past few decades that encourage economic growth. Ezra Klein’s review provides a solid synopsis of Cowen’s argument.

In Slate, Annie Lowrey looks at a variety of explanations for why the Internet hasn’t proven to be a GDP-boosting invention. I tend to agree with the argument that economists aren’t very good at measuring the value of the Internet:

That brings us to a final explanation: Maybe it is not the growth that is deficient. Maybe it is the yardstick that is deficient. MIT professor Erik Brynjolfsson explains the idea using the example of the music industry. “Because you and I stopped buying CDs, the music industry has shrunk, according to revenues and GDP. But we’re not listening to less music. There’s more music consumed than before.” The improved choice and variety and availability of music must be worth something to us—even if it is not easy to put into numbers. “On paper, the way GDP is calculated, the music industry is disappearing, but in reality it’s not disappearing. It is disappearing in revenue. It is not disappearing in terms of what you should care about, which is music.”

This is sort of the story of blogging as well. Or photography. Or anything else that can be delivered over the Internet at a minimal cost.

The role of the federal government

What’s the role of the federal government? Here’s one answer, courtesy of Matt Yglesias:

One of the main things the federal government does is transfer resources from high-productivity urban areas to low-productivity rural ones.

In principle, I don’t have a huge problem with this. However, I do have a problem with the fact that the people in the more subsidized areas fail to understand that this is how things work, and indeed consider themselves to be exploited by the federal government rather than exploiting it.

Mainly, I just appreciated reading that sentence. I had never really thought of things that way.

Two good posts on budget deficits

Both Matthew Yglesias and Karl Smith (guest blogging for Ezra Klein) posted today on deficit spending by the federal government. They both dismiss the idea of opposing budget deficits for reasons of morality or responsibility and instead discuss them in terms of their impact on economic growth, which is the only thing you should really care about. Debt is a tool that can be used to make you (or America) better or worse off depending on the terms of the loan and what you do with the money you borrow.

Here’s Karl Smith:

So, deficits do matter. When the economy is strong, they lead the Federal Reserve to raise interest rates, strengthen the dollar and increase imports. When the economy is weak they lead to falling unemployment and rising capacity utilization.

Matthew Yglesias points out the negative effects of deficits, which under certain conditions:

In the real world, though, deficits matter for a specific reason. If the government tries to borrow a huge amount of money, investors will start demanding generous interest rates in exchange for lending. And if investors can get high rates lending to the government, which is safe, they’ll start demanding even higher rates of non-government borrowers. That becomes a problem for the private sector. Investments that are profitable at a low rate of interest are unprofitable at a high rate of interest, so the overall pace of investment and growth declines. Bad. The Federal Reserve can, however, act to keep interest rates low. The problem with this is that Fed action to lower interest rates might produce too much inflation. Inflation, when it gets high, is not just annoying but starts to really erode the workings of the price system and thus the whole economy. Again: Bad.

He then goes on to point out that the conditions under which it is bad for the federal government to engage in deficit spending are not currently in effect.

This is why just about every credible economist I read says that what the government needs to do is borrow money to stimulate the economy now and make a credible promise that it will cut the deficit later. For example, here’s Nouriel Roubini a couple of weeks ago:

The Obama administration did the right thing early, and avoided another depression. He is still doing the right thing now in pointing out the risks of early austerity. And he is limited by an unco-operative Republican party trapped in a belief in voodoo economics, the economic equivalent of creationism. Even so, he and his party have been unwilling to tackle long-term entitlement spending. Two years in, and this means the US remains on an unsustainable fiscal course.

The result will soon be the worst of all worlds: neither short-term stimulus nor medium-term fiscal sustainability.

Expanding consumer surplus in the digital era

Matthew Yglesias makes an astute point about how digital technology makes it easier to create things that promote the general welfare without necessarily creating wealth:

Consequently, the realm of activities with gigantic divergence between measured GDP and welfare value is vastly expanding in ways that I don’t think policymakers and civil society donors are yet responding to in fully appropriate ways. The case for finding ways to directly and indirectly subsidize the creation of such goods is extremely strong. But more generally, I think we should expect the significance of this kind of thing to expand in the future.

The negligible marginal cost of producing multiple copies of digital works is the enabling factor. I think so many people get caught up in the mentality of “monetization” that they fail to step back and look at the sheer number of interesting, entertaining, and useful works that are now being produced simply because people find it fulfilling or entertaining to produce them.

Why the economy needs stimulating

Modeled Behavior explains our fundamental economic dysfunction, with charts:

This is a failure of our basic institutions of production. The job of the market is to bring together willing buyers with willing sellers in order to produce value. This is not happening and as a result literally trillions of dollars in value are not being produced.

Let me say that again because I think it fails to sink in – literally trillions of dollars in value are not being produced. Not misallocated. Not spent on programs you don’t approve of or distributed in tax cuts you don’t like. Trillions of dollars in value are not produced at all. Gone from the world entirely. Never to be had, by anyone, anywhere, at any time. Pure unadulterated loss.

This is what has bothered me for months — the opportunity cost of having so much human and industrial capacity idle. We live in a world where many, many things are needed and wanted by people, and the capacity to produce them exists but is going unused. I don’t know if another round of government spending will help or if that’s what we should do, but “stimulus” is exactly the right word for what needs to happen.

His main point is that this loss should bother everyone to the extent that they’re willing to move beyond their political hobby horses and look for a solution. That isn’t happening.

Nudges won’t save us

Few theories have grabbed my imagination the way behavioral economics has, and I’m not alone in that. One of the big stories when President Obama was elected was that his administration was going to use behavioral economics to painlessly solve a variety of problems. Last week, economics professors George Loewenstein and Peter Ubel wrote an op-ed for the New York Times throwing some water on the idea that we can nudge our way into solutions for big problems. Here’s the conclusion:

Behavioral economics should complement, not substitute for, more substantive economic interventions. If traditional economics suggests that we should have a larger price difference between sugar-free and sugared drinks, behavioral economics could suggest whether consumers would respond better to a subsidy on unsweetened drinks or a tax on sugary drinks.

But that’s the most it can do. For all of its insights, behavioral economics alone is not a viable alternative to the kinds of far-reaching policies we need to tackle our nation’s challenges.

For what it’s worth, studies show that taxes are more effective than subsidies in changing people’s behavior.

One proposal to fix the federal budget

University of Delaware economics professor Laurence Seidman has a proposal that’s too sensible to ever be adopted for fixing the federal budget. Here’s his description of the problem:

The worst federal budget policy is the one we’re now following: ignoring the looming large future deficits while refusing to enact temporary fiscal stimulus to combat the recession. As long as Congress and the president refuse to tackle the large looming future deficits, financial markets and the public will rightly stay nervous.

He suggests three things, the first is a “normal unemployment balanced budget rule” for Congress. It would require the annual federal budget to be balanced if the unemployment rate is 6%. The second is a set of changes to entitlement programs that would avert their future budget-busting growth. And the third is a set of stimulus programs pegged to the unemployment rate:

At the same time, Congress should enact a set of temporary tax cuts and expenditures to stimulate the economy. This legislation must contain a phase-down schedule so that these temporary measures are phased out as the unemployment rate, which is currently over 9 percent, falls below 9 percent, then 8 percent, then 7 percent, and are completely terminated when the unemployment rate falls to 6 percent. Note that these temporary measures would have no effect on NUBAR, because they would be completely terminated when the unemployment rate falls to 6 percent.

It’s the kind of idea that would work if we had two parties that were interested in restoring economic growth and fixing our future budget problems. Instead we have one party that wants the economy to stay broken for political reasons, and another party that prioritizes avoiding perceived political risk over actually fixing problems.

The state of liberal economic thinking the economy

Brad DeLong captures the general line of thinking in an article for The Week, entitled Keynes & Co. have lost the stimulus argument. In it he explains why he’s pessimistic about our current economic situation, things the government can do to restore economic growth, and why the government probably isn’t going to do any of those things. Here’s his summary of the current situation:

The good news is we have avoided another Great Depression. But it seems ill-advised for Barack Obama to stand up on a Friday morning in early July and say that the economy is “headed in the right direction” (even if, as he said, “we are not headed there fast enough”) and to highlight “the sixth straight month of job growth in the private sector.” The employment-to-population ratio has been flat since November. Over the past six months–since the downturn ended–the U.S. economy has not been recovering from its near-depression, and not been putting a greater and greater portion of its potential labor force to work. Rather, it has been bumping along the bottom. There is a big difference between the economy getting “better” and the economy “no longer getting worse rapidly.”

Ultimately, I come down on Krugman/DeLong side in this debate. There are specific things the government needs to do to get the deficit under control (or, alternatively, it could just do nothing), but those are structural changes to the federal budget. In the meantime, we need economic growth.

One case against further stimulus

If you, like me, read a lot of liberal blogs, you see people arguing every day that the best thing the government can do right now is spend more money to stimulate the economy and restore economic growth. For example, it’s become clear that the spending in the stimulus bill in 2009 has been offset fully by the contraction in government spending at other levels that resulted from falling tax revenues. And the general argument is that as long as interest rates are low for government bonds, we should take advantage and borrow money to prop up the economy. I find this argument persuasive, so I’m on the lookout for solid counterarguments.

Analyst John P. Hussman, in a long (and important) article arguing that the economy is not really in recovery and that the worst is yet to come, describes a pattern that we’re seeing right now:

From an inflation standpoint, is important to recognize the distinction between what occurs during a credit crisis and what occurs afterward. Credit strains typically create a nearly frantic demand for government liabilities that are considered default-free (even if they are subject to inflation risk). This raises the marginal utility of government liabilities relative to the marginal utility of goods and services. That’s an economist’s way of saying that interest rates drop and deflation pressures take hold. Commodity price declines are also common, which is a word of caution to investors accumulating gold here, who may experience a roller-coaster shortly. Over the short-term, very large quantities of money and government debt can be created with seemingly no ill effects. It’s typically several years after the crisis that those liabilities lose value, ultimately at a very rapid pace.

Reinhart and Rogoff continue, “Episodes of treacherously high inflation are another recurrent theme. Indeed, there is a very strong parallel between our proposition that few countries have avoided serial default on external debt and the proposition that few countries have avoided serial bouts of high inflation. Even the United States has a checkered history. Governments can default on domestic debt through high and unanticipated inflation, as the United States and many European countries famously did in the 1970’s.

“Early on across the world, the main device for defaulting on government obligations was that of debasing the content of the coinage. Modern currency presses are just a technologically advanced and more efficient approach to achieving the same end. In many important episodes, domestic debt has been a major factor in a government’s incentive to allow inflation, if not indeed the dominant one. If a global surge in banking crises indicates a likely rise in sovereign defaults, it may also signal a potential rise in the share of countries experiencing high inflation. Inflation has long been the weapon of choice in sovereign defaults on domestic debt and, where possible, on international debt.”

This is why many smart people are talking about inflation even though we’re currently experiencing deflation. On one side, we have the risk of inflation or default down the road if we keep borrowing money now. On the other side, we have the risk of a deeper, more painful recession and less economic growth down the road if we go with austerity. And we have two parties in Congress who are making decisions about what to do based on their immediate political future rather than the long term interest of the country. We are so screwed.

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