Archive for November 2012


When should the Cameron government opt for fiscal stimulus?

Several commenters have asked me what I think about the new head of the Bank of England, Mark Carney.  I don’t have much to add beyond what’s been said by people like Nick Rowe and Matt Yglesias.  In my view the Cameron government has several options:

1.  Tell the BOE to change its policy to a 5% or 6% NGDP target for 2 years, 4% thereafter.

2.  Tell the BOE to continue with its 2% inflation target.

If they opt for the NGDP target, then fiscal stimulus would be pointless.

It they opt for the 2% inflation target, then they are essentially telling the BOE to sabotage any fiscal stimulus that might be done (Britain has averaged 3.3% inflation over the past 5 years.)

When would fiscal stimulus be appropriate for a country averaging 3.3% inflation?  Give me a minute to think about it . . .

. . . still thinking . . .

. . . don’t rush me . . .

Congratulations to the Bentley Fed Challenge team

I just heard that Bentley’s Fed Challenge team came in second in the national competition, trailing only Northwestern University.  Here are the team members:

Alfonso Martinez

Denise Klop

Spencer Tirella

Erik Larsson

Guillermo Fernandez

Brian Rogers

Josh Kulak

Dan Battista

Cody Normyle

Thomas Moore

Finishing second is a hell of a lot better than finishing 15th!

From last to first

Between 1950 and 1990 the fastest growing state was Nevada, with a 651% population increase.  The District of Columbia was last, down 24.3%.  West Virginia was the only other state that saw any decline in population.  Last year Washington DC became the fastest growing “state,” up a bit over 2%, Texas was second. Here’s Glenn Reynolds:

We don’t live in The Hunger Games yet, but I’m not the first to notice that Washington, D.C., is doing a lot better than the rest of the country. Even in upscale parts of L.A. or New York, you see boarded up storefronts and other signs that the economy isn’t what it used to be. But not so much in the Washington area, where housing prices are going up, fancy restaurants advertise $92 Wagyu steaks, and the Tyson’s Corner mall outshines — as I can attest from firsthand experience — even Beverly Hills’ famed Rodeo Drive.

Meanwhile, elsewhere, the contrast is even starker. As Adam Davidson recently wrote in The New York Times, riding the Amtrak between New York and D.C. exposes stark contrasts between the “haves” of the capital and the have-nots outside the Beltway. And he correctly assigns this to the importance of power.

Washington is rich not because it makes valuable things, but because it is powerful. With virtually everything subject to regulation, it pays to spend money influencing the regulators. As P.J. O’Rourke famously observed: “When buying and selling are controlled by legislation, the first things to be bought and sold are legislators.” But it’s not just bags-of-cash style corruption. Most of the D.C. boom is from lobbyists and PR people, and others who are retained to influence what the government does. It’s a cold calculation: You’re likely to get a much better return from an investment of $1 million on lobbying than on a similar investment in, say, a new factory or better worker training.

.  .  .

Under the original Constitutional plan, the federal government’s powers were to be few, and mostly concerned with external relations. Under those circumstances, the risk of corruption was comparatively low. Nearly all regulation would come from state governments. They might be corrupted — since they’d be the only ones worth corrupting — but problems would be compartmentalized (corruption in Rhode Island wouldn’t have much effect on Connecticut, much less Utah) and disciplined by competition with other states.

Well, it’s been quite a while since things worked that way; things started go go downhill with the federal expansion under the New Deal, and then really took off after the “regulatory explosion” under President Nixon, who created such entities as the Environmental Protection Agency and Occupational Safety & Health Administration.

It’s no coincidence that as the federal government morphed from an entity that did a few highly visible things well, to one that did a whole lot of not-so-visible things less well, respect for the federal government plummeted even as the political class’ wealth climbed.

One can envision the following five categories:

1.  Things Washington does not do, but should do (a carbon tax to reduce global warming.)

2.  Things Washington does that it should do (national defense, the earned income tax credit, etc.)

3.  Things that would be the Federal government’s responsibility if they were worth doing, but they aren’t worth doing (Sarbannes-Oxley, Dodd-Frank, and a whole lot more.)

4.  Things that Washington does that should obviously be done at the local level (Department of Education, highway spending, and a whole lot more.)

5.  Things Washington does that should not be done at any level (OSHA, FDA, War on Drugs, and a whole lot more.)

Although Washington should do more in a very few areas, overall we’d be far better off with a much smaller capitol city.

PS.  West Virginia should not completely give up hope for the future.  Eventually the Washington DC megalopolis will grow so large that its suburbs will spread into the hills of West Virginia.

Voting and lotteries

Here’s David Henderson:

Before going to UCLA to do graduate work, I had been reading books and articles by Gordon Tullock, James Buchanan, and Anthony Downs. They had shown that the probability of affecting the outcome of a typical election was so close to zero that the expected value of voting was substantially less than its cost. Therefore, they concluded, there was no point in voting, no matter which way you would vote, even in a close election.

David goes on to show the folly of this sort of economistic thinking.  People vote because it’s the right thing to do.  I know my vote won’t sway a Massachusetts election, and I vote.  My economist friends know their vote won’t sway the election, and they vote.  It’s discouraging that David and I seem to be in the minority, lots of economists think there is some sort of mystery as to why people vote.  They vote because they get utility out of doing their civic duty.  Why is that so hard to understand?

Here’s Alex Tabarrok:

Poor people often do things that are against their long-term interests such as playing the lottery, borrowing too much and saving too little. Shah, Mullainathan and Sahfir have a new theory to explain some of these puzzles.

I don’t see lotteries as posing any sort of puzzle.  Indeed it seems to me that poor people should buy lottery tickets.  Suppose you were stuck in a deadend job, and had little hope for a better future.  Wouldn’t it be rational to spend a few bucks a week on lottery tickets, to buy some hope?  Life without hope for the future is very difficult.  If you’ve never experienced it consider yourself lucky.

My general view is that economists should not focus on explaining why people do certain things.  Rather they should explain how changes in costs and benefits affect how often people do those things.  My colleague David Gulley has done studies using a rational expectations model that shows people respond rationally to changes in the expected payoff from lotteries.  I have no doubt that people would also respond rationally to a tax on voting, or a penalty for not voting.

Which one doesn’t belong?

About 6 weeks ago I was notified by Foreign Policy magazine that I would make their list of “100 Global Thinkers” this year.  I didn’t mention this in the blog because I assumed it must have been some sort of mix-up on their part.  But sure enough there’s my name on the list.  And not in the high 90s, where I expected to be.  (Who’s that other person at 15  . . .  some guy named Ben Bernanke.)

Thursday I leave for Washington DC and get to meet the other 99 (or that portion of global thinkers that shows up at the dinner.)  Hillary Clinton will be the speaker.  I’ve never actually met anyone famous, so this will be interesting.  There are also some events during the day—seminars with foreign policy experts.  Foreign policy is one of my many weak areas, perhaps my weakest.

We were asked to fill out a form with questions such as what were the three best books we had read over the past year.  I should have mentioned Javier Marias’s Your Face Tomorrow, but forgot that I had read it.  It’s also a book that is loosely related to foreign policy.

Found out today that the gala event requires business attire.  I suppose that means a dark suit.  I checked in the closet and my only business suit (not worn in 25 years) had some holes, and was a bit tight around the waist.  So I bought my first suit in 30 years or so.

I’ll be very busy between now and the end of the year, with an enormous amount of grading to do.  So I’ll probably do less blogging, and may be very slow in responding to emails.

PS.  Travis sent me the link for my testimony on Capitol Hill with David Beckworth.

PPS.  Tyler Cowen was on last year’s list.  He told me that most of the politicians don’t show up for the dinner.  And two people could not show up because they were in prison (not in the US, needless to say.)  Fortunately one of them has been released, and now tops the FP 100 list.  A great woman.

PPPS.  Narayana Kocherlakota was number 10 on the list.  Quite of few others made it as well, although I haven’t had time to work through the entire list.

Now that I’m looking at the complete list, maybe I shouldn’t have bought the cheapest suit in the store.

Update:  This link has all 100 plus faces in an easy to read screen that scrolls down (see bottom of page.)