A slightly off-center perspective on monetary problems.
I will eventually get to monetary policy, if anyone can last through my wandering political observations. I am going to try to show that some of my intellectual opponents are confusing the world as it is with the world as they want it to be.
The New Yorker recently published a wonderful article on health care in McAllen Texas, America’s poorest metro area. Only in America would the government spend a fortune insuring certain poor people, and nothing on others:
In 2006, Medicare spent fifteen thousand dollars per enrollee here, almost twice the national average. The income per capita is twelve thousand dollars. In other words, Medicare spends three thousand dollars more per person here than the average person earns.
. . .
I was impressed. The place had virtually all the technology that you’d find at Harvard and Stanford and the Mayo Clinic, and, as I walked through that hospital on a dusty road in South Texas, this struck me as a remarkable thing. Rich towns get the new school buildings, fire trucks, and roads, not to mention the better teachers and police officers and civil engineers. Poor towns don’t. But that rule doesn’t hold for health care.
Suppose McAllen was an independent country with universal health care. How much would it cost the government to insure the entire population? If independent, McAllen would be poor relative to the US, but it certainly wouldn’t be poor in any absolute sense. My guess is that it would come in somewhere around Portugal or Slovenia. And I would also guess that it would spend less insuring the entire population than we now spend insuring the relatively small share of the population covered by Medicare.
Suppose your family’s balance sheet has shrunk. How do you rebuild it? I suppose you could consume less and/or work more. Now suppose you are a country and your balance sheet has shrunk, how do you rebuild it? Wouldn’t the answer be the same?
If I faced a depleted balance sheet the last thing I would do is go on vacation, or switch from a full time job to a part time job. If anything, I’d want to start working overtime. But maybe this commonsense view is wrong. Consider the following observation from The Economist:
And as investors’ panic recedes, so credit markets are beginning to function. This will not be enough to spur a vibrant recovery in America, where households must painfully rebuild their balance-sheets.
In a post on the New Deal from last December Paul Krugman presented an interesting graph from a paper by Gauti Eggertsson. The graph showed investment soaring in the first four months of the Roosevelt administration. I don’t know the exact numbers, but I do know that industrial production rose by 57% over that four month period. Krugman then links to an AER paper by Eggertsson with the following abstract:
This paper suggests that the US recovery from the Great Depression was driven by a shift in expectations. This shift was caused by President Franklin Delano Roosevelt’s policy actions. On the monetary policy side, Roosevelt abolished the gold standard and””even more importantly””announced the explicit objective of inflating the price level to pre-Depression levels. On the fiscal policy side, Roosevelt expanded real and deficit spending, which made his policy objective credible. These actions violated prevailing policy dogmas and initiated a policy regime change as in Sargent (1983) and Temin and Wigmore (1990). The economic consequences of Roosevelt are evaluated in a dynamic stochastic general equilibrium model with nominal frictions.
A new paper by Tyler Cowen presents an interesting new take on the economic crisis. Building on the insights of Fischer Black, Tyler argues that:
In essence, the story of the current financial crisis can be told in three broad chapters: (1) the growth of wealth, (2) the decision to opt for risky investments, and (3) the underestimation of a new source of systemic risk.
