Archive for December 2009


Naughty and nice films of the noughties

I’d like to take a break from economics and do a post discussing my favorite movies of the past decade.  I know what you’re thinking: “He’s trying to imitate his favorite blogger.”  I admit that I don’t have Tyler Cowen’s sophisticated taste in art, but as I’ve gone full blast all year with this blog, perhaps you’ll allow me one self-indulgent post.  Feel free to skip over this, indeed I encourage you to.  After all, you’re paying (with your time) for my views on money, not movies.
Den ganzen Beitrag lesen…

Will the experts save us from catastrophe?

This is from a touching story about the last two survivors from WWI:

In old age both men had an urgent message, so urgent that it almost exhausted their small supply of breath. “War’s stupid,” said Mr Allingham. “Nobody wins. You might as well talk first, you have to talk last anyway.””T’isn’t worth it,” said Mr Patch. “War isn’t worth one life.” They did the job they were asked to do”””for 18 pence a flippin’ day.” And they knew that the German enemy, too, were fighting under compulsion. From the first day, Mr Patch made a pact with his mates on the Lewis gun that they wouldn’t shoot to kill, only to wound. As far as he knew, he kept his pledge. Even the German who tried to bayonet him in no-man’s-land was only to be brought down with bullets in the leg. Similarly Mr Allingham, billeted with a German family after the Armistice, gave them the two precious oranges he received from Dorothy for Christmas. “We were all victims,” said Mr Patch.

At 110 Mr Allingham went to Germany to meet Robert Meier, aged 109. For his birthday, Mr Meier””who was to die three months after they met””had been photographed grinning broadly in the spiked helmet of a Dreckfresser, literally a mud-eater, a German infantryman. He had last worn that gear on the Western Front. Chicken soup and oatflakes, he said in his sprightly way, had kept him going since. Side by side, the two old men were wheeled to the local war memorial, where they laid a wreath and, for a long, gentle moment, shook hands.

Mr Patch, too, went abroad at 106 to meet Charles Kuentz, aged 107. He took a bottle of Somerset cider; Mr Kuentz, who was to die the next year, brought a tin of Alsatian biscuits. Mr Kuentz had fought at Passchendaele, some few hundred yards from the British lines. He had been conscripted at 19, straight from grammar school, and he too, until the age of 100, had refused to talk about the war. They went together to the German cemetery at Langemarck, where 44,000 Germans were buried, and Mr Patch laid a wreath. He had got better at doing that; on the first occasion he’d been asked to he had simply sat and cried. At Langemarck, on impulse, he picked up an acorn from the ground and gave it to his “enemy”. “Now we are friends,” said Mr Kuentz.

This got me thinking about the British, American, French, and German leaders who killed those millions of young men.  And the European intellectuals of 1914, virtually all of whom supported the war.  And how in the halls of government in 1914 anyone with my anti-war opinion would have been regarded as an idealistic fool, not worth listening to.

As I get older I am more and more inclined to think we put too much faith in the authorities.  Or perhaps I should just say that I do, as this blog has lots of commenters who are skeptics.  I must admit that while I have been advocating NGDP futures targeting since 1986, I assumed the Fed would be smart enough to prevent a decline in NGDP even with the sort of ad hoc quasi-inflation targeting regime in place since the 1980s.  In the last year my respect for authority, which was never very high, has fallen to a new low.  As I read each interview in the Big Think, it becomes more and more obvious that the experts don’t have a clue as to what went wrong, nor how to fix the problem.  Indeed they don’t even agree with each other, and none of them agree with me.  Here are two more, with nothing about the Fed letting NGDP fall at its fastest rate since 1938:

Every so often I read about the amazing progress in biotech, how the technology to do genetic engineering keeps getting cheaper and more powerful every year.  Or how we are close to the point where any scientist will be able to use low cost equipment to create a deadly virus that spreads as easily as the common cold.  Well, actually I don’t read that observation, it’s just the thought that goes through my mind when I read the other stuff.

And then there is that particle accelerator in Switzerland.  New and unheard of energy will be released as they smash particles together at ever higher speeds.  Of course only a lunatic would think that these experiments are opening a Pandora’s box; potentially creating a black hole that could swallow the Earth.  After all, the experts assure us that (according to the laws of physics circa 2000) the machine is perfectly safe.

I don’t doubt that the machine is perfectly safe according to the laws of physics circa 2000.  But that’s not what worries me.  The laws of physics circa 2000 are almost completely different from the laws of physics circa 1900.  Here is what I wonder; is there any chance that something could go wrong according to the laws of physics circa 2100?  And where do I go to get that question answered?

Does this have anything to do with monetary policy?  Well, moving from the 4% trend inflation of the 1980s to the 2% trend inflation of the 2000s does produce efficiency gains, but also slightly increases the chance that the economy will slip into a liquidity trap.  As of 2007, most experts thought that a liquidity trap was highly unlikely, even though it had already happened in Japan.  I also thought it unlikely.  So the small gains from slightly lower inflation were thought to outweigh the fact that 4% inflation would prevent liquidity traps, and the associated devastating fall in NGDP and high unemployment that is often associated with liquidity traps.  Of course we now know they were wrong.  Ex post there was 100% chance of a liquidity “trap” in this decade.

Let’s hope the experts in biotech and physics are better at doing cost/benefit analysis than the economists who run monetary policy.  In particular, let’s hope they do a better job of weighing small but certain gains against vast losses that are deemed highly unlikely.  Let’s hope they don’t suffer the cognitive bias of placing an excessively small subjective probability on “unknown unknowns.”

Oh, and don’t forget that 2012 is barely 2 years away.

PS.  Robin Hanson has a much better example here.

PPS.  I plan one more post (off topic), and then a vacation.

The Cleveland Fed is getting close

The previous post linked to Mark Thoma, and here is another interesting post by Mark.  It contains a very good article discussing the advantages of price level targeting over inflation targeting.  That is something I have been emphasizing all year.  But there is just one problem:

One drawback of a price-level target is that it necessitates stimulating the economy whenever prices fall””no matter what the cause. For example, an expansion driven by a positive supply shock would naturally put downward pressure on prices and upward pressure on the real rate, but few economists believe that monetary policy accommodation is helpful in such a situation. An inflation target can potentially be changed, to respond to unusual economic conditions,but a price-level target has the advantage of responding according to a very simple and easy-to-understand rule.

Hmmm, supply-shocks.  Anyone want to guess how Bill Woolsey or George Selgin or I would respond to this “drawback” if the Fed bothered to ask us for advice?

PS.  If you don’t have time to read the whole thing, skim down to the graphs.  It is a good way of visualizing the difference between inflation and price level targeting.

HT.  Leigh Caldwell

We need more inflation because we need more AD

Mark Thoma has a new post over at where he asks why so many economists are now criticizing Bernanke for failing to raise the Fed’s inflation target.  At one point he challenges economists who do favor higher inflation to come up with a model that would justify this policy.  Thoma doesn’t think that new Keynesian models featuring price stickiness are applicable to the current crisis, which he says is caused by banking problems, not price stickiness.  
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The worst of both worlds

We lost.   They won.

We are:

Progressives who favor a single-payer system

Libertarians who favor HSAs

Moderate economists who favor cost control to free up money for other societal goals

They are:


Pharmaceutical companies


Private prepaid health plans (for some odd reason referred to as “insurance companies”)

Medical device makers

And many other special interest groups

Kausfiles summed it up perfectly:

Today’s left and right anti-Reid activists have a common enemy in corporatism, the easy alliance between Big Government and entrenched, favored too-big-to-fail businesses (Aetna, AIG …. ) that threatens to give us all the inequality of capitalism with all the dynamic innovation and accountability of socialism.

I’m no health care expert, and don’t even know the details of the bill.  The issue that concerns me is health insurance.  I’d like to switch to a system where people paid for the overwhelming majority of their health care expenses out of pocket, like any other service.  Something like the plan Brad DeLong once proposed (but without the regressive sin taxes.)  The way to achieve this is with a combination of HSAs and catastrophic insurance.  According to the Wall Street Journal, the new bill effectively outlaws HSAs, by mandating coverage of all sorts of wasteful procedures, such as the scam of using expensive medical equipment to test for all sorts of possible diseases someone might have, even when there is no scientific evidence that the tests are helpful.

At first I discounted the WSJ report, as their editorial page has a right-wing bias and can be unreliable on occasion.  But my last glimmer of hope was extinguished when the more liberal LA Times confirmed the WSJ report.

Is there any good news in the report?  I hope one of you can cheer me up.  I heard that the tax on “Cadillac plans” survived.  That could be significant, but only if it is not indexed to inflation.  I suppose we’ll have to wait for the final committee compromise, but right now it doesn’t look good.

There is a lot of talk in the press about all the cost containment experiments in the bill.  We already have a good mechanism for experiments—it’s called “states.”  Remember the Massachusetts plan?  One of my commenters disagreed with me when I said that the Massachusetts plan outlawed HSAs.  He claimed they were allowed.  Maybe so, but this debate is now a moot point, as the Federal plan will supersede all state experiments, and Massachusetts will have to give up its HSAs.

You might think HSAs are a side issue; after all they only cover 4% of workers.  Yes, but they covered only 1% in 2006.  The medical industrial complex is made up of very smart people.  They currently rake in 16% of GDP, and the percentage is rising rapidly.  They weren’t going to stand by and allow the adoption of a system that spends only 5% of GDP in Singapore.

Sometimes I think the two political extremes blew an opportunity.  Let Medicare take over catastrophic insurance for everyone, and let HSAs cover 95% of health care bills.  Then provide a subsidy to low income workers’ HSAs.  Voila, no private insurance companies.  But realistically, how likely was it that a bunch of idealistic single-payer and HSA advocates were going to beat a $2.2 trillion dollar industry?  Once they started to pressure those Democratic “moderates” then all the talk about “bending the curve” seemed to disappear.  And the Republicans probably thought “why should we help the Democrats win a big bipartisan victory.  If we demagogue Medicare maybe we can win the mid-tern elections.”

But don’t despair.  No matter how powerful the medical-industrial-complex appears today, history shows that no special interest group is invincible (except lawyers, obviously.)  Remember back in the 1950s when 35% of workers were unionized?  I’m sure most people at the time thought that they were also politically untouchable.  Now they are down to about 7% of the private sector workforce.  Perhaps someday we’ll have drugs that can prevent or cure diabetes and cancer, and eventually the patents will expire and they’ll become generics.  Technology is probably our best hope for preventing the medical-industrial-complex from eventually swallowing the entire economy.