Archive for April 2009


Does Bryan Caplan believe in free trade?

I may do a longer post on utilitarianism on Sunday, but since a recent post by Bryan Caplan perked my interest, I thought I would get a brief head start today.  The context was a debate between Bryan Caplan and Robin Hanson on liberty vs. efficiency.  Although Robin was defending efficiency and not utilitarianism, Bryan’s argument in his blog post is exactly the sort of argument that many philosophers make against utilitarianism, so I will respond on that basis.  I should say that just as with my defense of the efficient markets hypothesis, I am not so much pro-utilitarian, as I am unimpressed with arguments against utilitarianism.  Indeed, on Sunday I will express some of my own reservations with utilitarianism.

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“There’s every risk of an overshoot”

Because of the bloated monetary base there has been much concern recently about the supposed risk of future inflation.  There are at least four important misconceptions associated with this issue, and I’ll try to address all four in this post.  The first misconception is that it will be difficult to pull the excess reserves back out of circulation after the economy recovers and interest rates rise to a more normal level.  As Hall recently pointed out, if we continue to pay interest on reserves it would not be necessary to pull those reserves out of circulation in the future, just pay enough interest for banks to want to continue holding them.  But for the moment let’s assume that’s not feasible.  In the following quotation from the WSJ, Kenneth Rogoff expresses a widely held fear:

“It’s very difficult to pump this money in and pull it out later,” says Kenneth Rogoff, a professor of economics at Harvard University. “There’s every risk of an overshoot.”

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“Some economists”

Robert Hall and Susan Woodward posted an essay on the subject of interest on reserves:

Raising the reserve interest rate is a contractionary measure.  A higher interest rate on reserves makes banks more likely to hold reserves rather than increasing lending. The Fed’s decision to raise the reserve rate from zero to 75 basis points just as the economy entered a sharp contraction in activity is utterly inexplicable. Fortunately, the Fed lowered the reserve rate subsequently, but the continuation of a positive reserve rate in today’s economy is equally inexplicable.  Some economists have proposed that the Fed charge banks for holding reserves, an expansionary policy worth considering. With the Fed funds rate at around 15 basis points, it would take a charge to restore the differential that drives banks to lend rather than hold reserves. Were the Fed to charge for reserves, they would become the hot potatoes that they were in the past, when the reserve rate was zero and the Fed funds rate 4 or 5 percent. Banks would expand lending to try not to hold the hot potatoes and the economy would expand. There is no basis for the claim that the Fed has lost its ability to steer the economy. (However, the Fed would have to go to Congress to get this power, as it did to get the power to pay positive interest on reserves.)  [italics in original]

BTW, I am not suggesting that they are referring to this blog, as I’m sure other economists are also making this argument, but I’d like to think we might be having some impact on the conversation.  I sent an email to Robert Hall a couple weeks ago.

Thanks to Dilip for two very helpful links.  This one, and yesterday’s link to Brad DeLong.  BTW,  Andrew Sullivan just linked to the global warming post.  Make that three, Dilip just sent me the link below.

Update:  Mark Thoma just linked to the Hall and Woodward idea here.  Mark calls their essay “good, but wonkish,” although it’s not clear if that refers to the interest penalty idea.

Why I don’t like IS-LM (reply to DeLong)

My normal Sunday post will have to wait, as Brad DeLong has a recent post where he asks why I don’t like IS-LM.  Since I get annoyed when people don’t take my open letters seriously, I can hardly ignore his post.  Plus it’s a very good question.  Because I don’t have complete confidence in any of my answers, I will go for quantity rather than quality.  But I’ll say right up front that I doubt there are any theoretical flaws in the IS-LM model.  As Brad DeLong puts it:

But I have not yet seen a theory of nominal spending or real output determination that does not have an IS-LM representation…

I think he is probably right, and most of my reply will be on pragmatic grounds, not theoretical.  Nevertheless, let me start off by taking a stab at a theoretical argument.

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Mass Suicide

Films like Downfall and Letters from Iwa Jima depict the cult of suicide, the tendency of people in cult-like groups to want to take others with them when they end their lives.  The most famous American example was Jim Jones’ religious cult.  What made me think of this issue was, of course, the recent G-20 meeting in London.  I was all set to do a clever piece on the G-20’s announced policy of strongly discouraging countries from engaging in competitive devaluations, when I saw that Barry Eichengreen beat me to it.  His piece is well worth reading, but was written before the G-20 meeting, so he was unaware of just how little sympathy they would show for his suggestion that competitive devaluations should be encouraged.  Not only did they not encourage them, they issued a communique which positively discouraged competitive devaluations.

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