Here are a few items that I found interesting.
1. Are you thinking what I’m thinking?
Here’s one from the odd-but-true department: we are more likely to spend old, soiled money faster than crisp, new notes. You might object that this makes no sense at all – twenty dollars is twenty dollars, right? If fact, new research from Canadian scientists show that we are more likely to spend or gamble with currency that is old and worn.
Currency Isn’t Interchangeable
We think of money as being infinitely interchangeable. Any $5 bill is equivalent to any other. Five $20 bills are the same as one $100 bill. Unfortunately, it’s not true, at least from the standpoint of human behavior. We tend to spend small bills faster than large bills. So, if your wallet is full of $5 bills you’ll likely buy more stuff than if you have the same amount of money in larger bills.
The magnitude of the difference in spending rates is startling. The Canadian reseachers found that subjects spent an average of $3.68 when given a crisp, new $20 bill, but more than double that – $8.35 – when given an old bill.
2. Excellent interview with Coase and Wang on China, and also the problem with modern economics:
Adam Smith, the founding father of modern economics, took economics as a study of “the nature and causes of the wealth of nations.” As late as 1920, Alfred Marshall in the eighth edition of Principles of Economics kept economics as “both a study of wealth and a branch of the study of man.” Barely a dozen years later, Lionel Robbins in his Essay on the Nature and Significance of Economic Science (1932) reoriented economics as “the science which studies human behavior as a relationship between ends and scarce means which have alternative uses.” Unfortunately, the viewpoint of Robbins has won the day.
The fundamental shift from Smith and Marshall to Robbins is to rid economics of its substance — the working of the social institutions that bind together the economic system. Afterward, economics has turned into a discipline without a subject matter, advocating itself as a study of human choices. This shift has been assisted by what Hayek (1952) criticized as the growing trend of scientism in the study of society, which took mathematical formalism as the only secure route to truth in the pursuit of knowledge. As economists become more and more interested in formalism and related technical sophistication, it becomes secondary whether the substantive questions that they choose to perfect their methods or to illustrate their theoretical models bear any resemblance to the real world economy. By and large, most of our colleagues are not bothered by the fact that what they profess is mainly “blackboard economics.”
We are now working with the University of Chicago Press to launch a new journal, Man and the Economy. We chose our title carefully to signal the mission of the new journal, which is to restore economics to a study of man as he is and of the economy as it actually exists. We hope this new journal will provide a platform to encourage scholars all over the world to study how the economy works in their countries. We believe this is the only way to make progress in economics.
We are very much aware that many of our colleagues whose work we admire do not share our criticism of modern economics. But our goal is not to replace one view of economics that we don’t like with another one of our choice, but to bring diversity and competition to the marketplace for economics ideas, which we hope most, if not all, economists will endorse.
3. Epistemic closure. Back in 2009 I was surprised to see conservatives warning that the Fed’s “easy money” policies would lead to high inflation. I would have expected conservatives to focus on market forecasts, which showed that inflation would remain low. Don’t conservative believe in market efficiency? Why were they making predictions that would lead to their views becoming widely discredited? I still don’t have an answer. But John Dickerson shows that conservatives in the Romney camp (and outside as well) did exactly the same thing during the recent campaign. It seems they genuinely believed Romney was winning, despite all the market forecasts showing he was losing. Originally I thought people like Karl Rove and Dick Morris understood reality, but were just playing to their audience. Now I think they were actually delusional.
4. A popular theme at the Fed challenge contest. One of my students at the recent Fed challenge in Boston told me that many of the teams mentioned nominal GDP targeting as a policy option. That’s good to hear. Apparently one team (Dartmouth?) cited Michael Woodford and me in support of NGDP targeting.
5. The Fed keeps evolving. Matt Yglesias points out that Janet Yellen is now supporting Charles Evans’ call for a more aggressive monetary stimulus. I just wish it was NGDP level targeting, not inflation and unemployment. In January Evans and Rosengren will join the FOMC. Recent statements by Dudley sound very promising. And the Board itself has 6 Obama appointees. I can’t imagine the Fed not offering more stimulus—we’ll need more stimulus even if we avoid the fiscal cliff. If we don’t avoid it, we’ll need much more monetary stimulus.
6. Take with a grain of salt. David Beckworth sent me the following:
University of Chicago undergrad Basil Halperin ran into Robert Lucas in the hall and asked him about NGDP targeting. This is what he said per Basil’s tweet:
Lucas has a mischievous sense of humor, so take that any way you wish.
7. Basil strikes again. And speaking of Basil Halperin, he was the student that recently asked John Taylor about NGDP targeting. David Beckworth reports that Taylor seemed somewhat receptive to the idea. David also has a good post on the bond vigilantes. He focuses on a rise in rates due to inflation and/or growth, whereas I focused on a higher risk premium.