About Economics

Thoma Wonders If Recessions and Depressions Are Necessary

2009-07-11T16:16:07Z

Why do I think this is unnecessary? The entry and exit of firms driven by innovation and the development of new products can be part of a full employment equilibrium, that is, cycles are not needed to clear out old firms and spur innovation.

I think he's right. I examine the data and discuss the argument in more detail here: Are recessions good for the economy?

Why Stimulus Does Not Stimulate

2009-07-11T12:13:29Z

Great paragraph from Winterspeak:

I think they oppose the stimulus because it does not "stimulate". When the "stimulus" was first touted, it was rejected because it was too slow, and the money was targeted towards political interests, not households, and therefore would not help the economy. Here we are months later, and the stimulus has come too slowly, and has gone to political interests, not households, and how not helped the economy. Unemployment is nearing 10%, and continuing to rise. If the Obama tries to get another stimulus, it again will be too slow, and send money to political interests, not households. Critics were right the first time, and they are still right.

But don't tell that to Paul Krugman:

Fiscal expansion bothers people because it violates the dogma that government is the problem, not the solution, whereas monetary policy has become accepted as a mainly technocratic thing without political implications.

That must be it Paul. It would explain why that folks in favour of a "statist" policy such as raising gas taxes are also in favour of stimulus. Well, that is except for me and Mankiw and dozens of other economists.

I sometimes wonder how on earth did this guy win a Nobel prize? But then I re-read his early work - it is truly Nobel worthy. Has Paul Krugman become the economics equivalent of Willie Mays with 1973 Mets, falling down in the outfield while trying to make a play?

Is Contingent Stimulus Legislation a Good Idea?

2009-07-10T07:44:33Z

From Justin Fox:

I wonder if Congress could enact some sort of contingent stimulus legislation: If the unemployment rate passes 11%, then $XXX billion goes to some predetermined range of programs. If it doesn't, then the money remains unspent.

Naaah, that'd be too sensible.

I am always hesitant to disagree with people who are likely smarter than me, but I think Justin's idea is far from sensible. It gets the timing of the issue wrong - he might as well be saying "If we get into a car accident, then we'll put on our seatbelts". Stimulus spending needs to be made well before the economy bottoms out. That is, it needs to be based on leading indicators. Unfortunately, the unemployment rate is a substantially lagging indicator.

Wait.. Slow Stimulus Spending is a Feature, Not a Bug?

2009-07-09T20:43:33Z

A follow-up to a post from earlier today. From The Economist:

AS CRITICS of the administration's stimulus policy have intensified their attacks, arguing that continued poor economic performance means that fiscal policy has failed, defenders of the policy have been at pains to point out that not very much of the stimulus package has yet found its way into the system. Perhaps 10% of the total resources of the bill have been deployed, and most of the boost from stimulus will be delivered between now and late 2010.

The last sentence should end with 'at which point the economy will have already been in recovery for 18 months'.

The reason that we can conclude fiscal stimulus is not working is not because "continued poor economic performance means that fiscal policy has failed". It is just as easy to argue that the economy would be much worse in the absence of fiscal stimulus. There are just too many confounding factors to rely on just GDP figures.

We can conclude that fiscal stimulus has not worked because the entire argument about how fiscal stimulus works is incoherent and ignores real world facts

A Second Stimulus? Doesn't There First Need to Be an Initial Stimulus?

2009-07-09T20:24:48Z

The Wall Street Journal on the possibility of a second round of stimulus spending:

Most economists believe the U.S. doesn't need another round of stimulus now despite expectations of continued severe job losses.

Just eight of 51 economists in The Wall Street Journal's latest forecasting survey said more stimulus is necessary, suggesting an average of about $600 billion in additional spending. On average, the economists forecast an unemployment rate of at least 10% through next June, with a decline to 9.5% by December 2010.

How much of the first stimulus package has been spent? According to NBC very little as of the end of June:

According to our calculations, roughly $53 billion or one-third of the $150 billion in fiscal stimulus money available for this year has been spent as of June 19. As a percentage of the $479 billion in total stimulus funds, that represents only 11.1 percent.

In Canada the situation is worse - government spending actually fell between March 2008 and March 2009!

Why are we even discussing a second stimulus package when the first stimulus package has barely been implemented?

Any economist who thought about the problem for even two seconds would realize how unlikely it is that the stimulus would be spent in a timely manner. Fortunately back in mid-to-late 2008 I spent some time thinking about the problem - see: What Are The Key Ingredients of Fiscal Stimulus and Fiscal Stimulus - Unlikely To Work in the Real World.

A Successor to the Pigou Club.. Club Wagner?

2009-07-09T11:15:17Z

A recent piece in Economix proposing a follow-up to the Pigou Club:

With this post, we announce the formation of Club Wagner. Itâ��s a (fictional) organization of people willing to acknowledge a basic economic reality: Taxes in the United States must rise.

At their current levels, taxes are too low to cover the kind of government that Americans have made clear they want â�� a government that includes Medicare, Social Security, a strong military and numerous other programs.

I have been thinking a great deal about this proposed Club Wagner and I am not sure how I feel about it. I don't know if such a club is even necessary - given high debts and deficits and an aging population, there is no question that tax rates will rise in the near future. So is such a club even necessary? The basic questions to me seem to be more of 'which taxes will rise' and 'when will tax rates rise'?

Anyhow, I would love to get your thoughts on Club Wagner.

Considering Applying for a Ph.D. in Economics?

2009-07-05T16:20:57Z

I have been getting a number of e-mails from students considering doing a Ph.D. in economics. I love hearing from so many of you! I have created a little primer which I hope will assist you in your decision - Ph.D in Economics - Tips for Applying to and Succeeding In Grad School.

Long Run Inflation and Technological Development - Part III

2009-06-29T16:54:36Z

I have commented in the past that it is impossible to measure inflation over long-periods of time (see here and here). Inflation "is an increase in the price of a basket of goods and services that is representative of the economy as a whole", but due to technological and taste changes, a representative basket of goods in 1979 is radically different than in 2009 and there is no objective way to compare the two.

It is an obvious point, but I think it is one economists all too often forget. That's why I was delighted to see the article Giving up my iPod for a Walkman:

When the Sony Walkman was launched, 30 years ago this week, it started a revolution in portable music. But how does it compare with its digital successors? The Magazine invited 13-year-old Scott Campbell to swap his iPod for a Walkman for a week.

Note that the "cannot measure inflation over long periods" argument does not claim the current goods are necessarily better. Just that they are different. Bring back the World Hockey Association!

Candidate for 2009's Worst Economics Article

2009-06-29T08:23:44Z

I have read The sardine economy five times and I still cannot tell if it is sheer economic idiocy or an absolutely brilliant piece of satire. I am afraid it is probably the former, which saddens me as it is read by a fellow Canadian. (h/t: Worthwhile Canadian Initiative)

We are given a disclaimer that the author is not an economist:

I am not an economist. Even as an undergraduate, I didn't take one class in economics or political science. Instead, I took courses that had more relevance to real life and were of more practical use: The Idealism of Plato, Medieval Proofs of the Existence of God and The Dialectics of Hegel.

But apparently the author is no historian either, as he gives us this gem:

The Great Depression came to an end, not because of strategies formulated by economists, but by the outbreak of the second world war (when the generals started placing orders for obsolete weaponry of the type that had been used in the first world war.)

The Great Depression was really two downturns - a severe depression between 1929-33 and a deep but short downturn in 1937-38. The U.S. economy was growing at a 9% a year clip for the 3 years before they joined the war. Furthermore, most of the U.S. growth came from internal growth, rather than being export driven (so it was not because the U.S. was selling arms to other countries). The timing simply does not work, and had the author bothered to do any research, he would know how fallacious this claim is.

And what does he base this assertion on? The fact that the Dow Jones did not reach 1929 levels until 1954. But Teitel himself argues that stocks and financial markets do not represent the 'productive economy'. Which makes me wonder if this truly is a brilliant piece of a satire.

He rails against financial instruments and states:

When a large part of the gross domestic product of a country consists not of doing something useful but producing financial transactions, that country's economy becomes a house of cards waiting to collapse.

Which is a fair enough opinion. But then he goes on to add:

In Canada, where I live, the federal and one provincial government committed to General Motors the obscene amount of C$10.5bn, or 40% of all the corporate taxes it is estimated the federal government will collect in 2009.

What on earth does this have to do with exotic financial instruments? If you believe in "a real economy based on productive labour" then can you not make an argument that the government should help out failing industries based on 'productive labour'? I was against the GM bailout (I happen to live in the province Teitel is referring to) - I just don't understand the author's logic here.

Maybe I do not understand the logic because unlike Teitel I am not lawyer. I am curious to know if he considers his profession to be 'productive labour'.

Financial Arbitrage, Bernie Madoff and Free Lunches

2009-06-26T09:48:30Z

Although we all would like to earn arbitrage profits, there probably aren't too many real-world opportunities to do so. I guess I am one of those people who believes the efficient market theory is approximately correct. Or the version I like to tell my students - "There may be individuals who can generate riskless excessive returns. But chances are, you're not one of them." Ed Glaeser argues that the searches for these profits leads people into getting suckered by scam artists such as Bernie Madoff:

If the lesson of the current crisis were that there were plenty of opportunities for arbitrage, then ordinary investors might conclude that they can beat the market, either by finding loopholes themselves or by investing with money managers who are skilled enough to beat the market. This type of logic led so many to trust their money with Bernie Madoff and his ilk. If an investment seems to good to be true, then you have to wonder if it is really just a Ponzi scheme.