Archive for August 2010


Breaking news from Japan

Hot off the presses (I need one of those Drudge sirens on top):

TOKYO (AP) — Japan’s central bank has decided to ease monetary policy amid a strong yen and growing political pressure to take action on the faltering economic recovery.

The decision came during an emergency board meeting called by Bank of Japan Gov. Masaaki Shirakawa.

To boost liquidity, the central bank will expand a low-interest loan program for financial institutions to 30 trillion yen ($354.7 billion) from 20 trillion yen.

THIS IS A BREAKING NEWS UPDATE. Check back soon for further information. AP’s earlier story is below.

TOKYO (AP) — The Bank of Japan is holding an emergency meeting Monday as political pressure mounts for the central bank to ease monetary policy in the face of a surging yen.

In a statement on its website, the bank said the meeting is scheduled for 9 a.m. in Tokyo (0000 GMT; 8 p.m. EDT Sunday). The bank had been expected to convene Sept. 6 at a scheduled two-day policy board meeting.

The news sent Japanese stocks soaring. The Nikkei 225 stock average finished the morning session up 3.1 percent at 9,265.39.

Didn’t some Fed people recently say an aggressive move could hurt markets, by scaring people into thinking the Fed saw serious problems with the economy?  It’s late, I’ll try to dig up a quotation tomorrow, and add an update.  (BTW, I doubt the BOJ action will have much effect, so I wouldn’t be surprised if stocks fall back at some point.  My hunch is that they rose merely because the BOJ seems to have woken up.)  And speaking of Drudge, he linked to this sorry article from the NYT:

In a much-anticipated speech on Friday, Ben Bernanke, the Federal Reserve chairman, reiterated his vow to do more to boost the economy if conditions worsened. He did not seem particularly convinced that anything the Fed could do would be enough.

Actually just the opposite.  He said there was plenty they could do, but that they weren’t going to do it out of fear it would boost inflation too much.  Isn’t the NYT supposed to be our best paper?  If he thought the policy would have little impact on AD and inflation, they’d definitely do it with unemployment at 9.5%.

Tlon, Uqbar, and Guugu Yimithirr

I’m surprised Tyler Cowen didn’t link to this NYT story:

But then a remote Australian aboriginal tongue, Guugu Yimithirr, from north Queensland, turned up, and with it came the astounding realization that not all languages conform to what we have always taken as simply “natural.” In fact, Guugu Yimithirr doesn’t make any use of egocentric coordinates at all. The anthropologist John Haviland and later the linguist Stephen Levinson have shown that Guugu Yimithirr does not use words like “left” or “right,” “in front of” or “behind,” to describe the position of objects. Whenever we would use the egocentric system, the Guugu Yimithirr rely on cardinal directions. If they want you to move over on the car seat to make room, they’ll say “move a bit to the east.” To tell you where exactly they left something in your house, they’ll say, “I left it on the southern edge of the western table.” Or they would warn you to “look out for that big ant just north of your foot.” Even when shown a film on television, they gave descriptions of it based on the orientation of the screen. If the television was facing north, and a man on the screen was approaching, they said that he was “coming northward.”

.   .   .

In order to speak a language like Guugu Yimithirr, you need to know where the cardinal directions are at each and every moment of your waking life. You need to have a compass in your mind that operates all the time, day and night, without lunch breaks or weekends off, since otherwise you would not be able to impart the most basic information or understand what people around you are saying. Indeed, speakers of geographic languages seem to have an almost-superhuman sense of orientation. Regardless of visibility conditions, regardless of whether they are in thick forest or on an open plain, whether outside or indoors or even in caves, whether stationary or moving, they have a spot-on sense of direction. They don’t look at the sun and pause for a moment of calculation before they say, “There’s an ant just north of your foot.” They simply feel where north, south, west and east are, just as people with perfect pitch feel what each note is without having to calculate intervals. There is a wealth of stories about what to us may seem like incredible feats of orientation but for speakers of geographic languages are just a matter of course. One report relates how a speaker of Tzeltal from southern Mexico was blindfolded and spun around more than 20 times in a darkened house. Still blindfolded and dizzy, he pointed without hesitation at the geographic directions.

How does this work? The convention of communicating with geographic coordinates compels speakers from the youngest age to pay attention to the clues from the physical environment (the position of the sun, wind and so on) every second of their lives, and to develop an accurate memory of their own changing orientations at any given moment. So everyday communication in a geographic language provides the most intense imaginable drilling in geographic orientation (it has been estimated that as much as 1 word in 10 in a normal Guugu Yimithirr conversation is “north,” “south,” “west” or “east,” often accompanied by precise hand gestures). This habit of constant awareness to the geographic direction is inculcated almost from infancy: studies have shown that children in such societies start using geographic directions as early as age 2 and fully master the system by 7 or 8. With such an early and intense drilling, the habit soon becomes second nature, effortless and unconscious. When Guugu Yimithirr speakers were asked how they knew where north is, they couldn’t explain it any more than you can explain how you know where “behind” is.

And this:

In coming years, researchers may also be able to shed light on the impact of language on more subtle areas of perception. For instance, some languages, like Matses in Peru, oblige their speakers, like the finickiest of lawyers, to specify exactly how they came to know about the facts they are reporting. You cannot simply say, as in English, “An animal passed here.” You have to specify, using a different verbal form, whether this was directly experienced (you saw the animal passing), inferred (you saw footprints), conjectured (animals generally pass there that time of day), hearsay or such. If a statement is reported with the incorrect “evidentiality,” it is considered a lie. So if, for instance, you ask a Matses man how many wives he has, unless he can actually see his wives at that very moment, he would have to answer in the past tense and would say something like “There were two last time I checked.” After all, given that the wives are not present, he cannot be absolutely certain that one of them hasn’t died or run off with another man since he last saw them, even if this was only five minutes ago. So he cannot report it as a certain fact in the present tense. Does the need to think constantly about epistemology in such a careful and sophisticated manner inform the speakers’ outlook on life or their sense of truth and causation? When our experimental tools are less blunt, such questions will be amenable to empirical study.

All this reminds me of Borges:

Hume always noted that Berkeley’s arguments would not admit the least rebuttal, that they created no conviction. That opinion is entirely truthful in its application to the earth; entirely false in Tlön. The nations of that planet are – congenitally – idealists. Their language and the derivations of their languages – religion, letters, metaphysics – presuppose their idealism. The world for them is not a competition of objects in space; it is a heterogenerous series of independent actions. It is successive, temporal, not spatial. There are no nouns in the conjectural Ursprache of Tlön, from which the ‘present’ languages and dialects come: there are impersonal verbs, qualified by monosyllabic suffixes (or prefixes) with adverbial value. For example: there is no word which corresponds to the word ‘moon’, but there is a verb that would be in english ‘mooning’ or ‘to moon’. ‘The moon shone over the water’, one would say ‘hlör u fang axaxaxas mlo’, that is in its order ‘upward (hacia arriba), behind lasting-flowing it was mooning’. (Xul Solar translates with brevity ‘behind the onstreaming, it mooned’. ‘upa tras perfluye luno’.)

the previous refers to the language of the austral hemisphere. In the boreal hemisphere (whose Ursprache there are very few details about in the eleventh volume), the primordial cell is not the verb, but the monosyllabic adjective. nouns are formed of an accumulation of adjectives. One does not say ‘moon’, one says ‘aerial-bright over round-dark’ or ‘vaguely oranging skyful’ or some other aggregation. In the chosen example the mass of adjectives correspond to a real object; the fact is purely fortuitous. In the literature of this hemisphere (as in the subsistent world of Meinong) ideal objects abound, summoned and dissolved in a moment, according to poetic necessities. Mere simultaneity at times determines them. There are objects composed of two ends, one of a visual character and the other auditory: the colour of the east and the remote cry of a bird. There are many of them: the sun and the water upon the chest of a swimmer, the vague tremulous pink that you see with your eyes shut, the feelings of a person who lets the rivers and dreams carry them. Those objects of the second degree can combine themselves with others; the process, by means of certain abbreviations, is practicably infinite. There are famous poems composed of just one enormous word. This word constitutes a poetic object created by the author. The fact that no-one believes in the reality of nouns paradoxically makes it so they are unending in number. The languages of the boreal hemisphere of Tlön possess all the names of the indo-european languages and many more.

HT:  Lorne Smith

Why is the government trying to force me to divorce my wife?

Over the next few months I plan to explain my deep hatred for the income tax.  What most bothers me about the tax is not the amount that I pay (although I believe my wife and I pay more than usual for people with our incomes) but rather the sheer insanity of the entire system.  We can certainly afford to pay our tax, so I am not trying to plead poverty.  What bothers me is that I must spend several days each year just doing the paperwork.  This year I finally relied on HR Block, and had to pay $610 dollars for the privilege.  I read that in Sweden the government simply sends you a bill.

Then there are the perverse incentives created by the tax.  Today I’ll discuss the marriage penalty.

Why is there so little discussion of the marriage penalty in the press?  And why do both political parties seem to favor it?  I can’t answer these questions, but will try to speculate anyway.  I’d also appreciate your thoughts.

I first became aware of this problem after I got married.  I noticed that the combined income of my wife and I pushed us up into higher tax brackets.  Initially the problem was trivial.  But as we got older and got promotions our income rose into the upper middle class range (low 6 figures) and then it became very noticeable.  Suddenly we had to pay the AMT, although if we were single we would not earn enough to trigger an AMT tax.  The official 15% capital gains tax rate became a joke, as the realization of significant capital gains can push you into the AMT, which can dramatically affect the tax on your non-capital gains income.  I won’t bore you with all the confusing details, but I am shocked each year when I compute how much lower our total tax would be if we were both single.

Indeed the new health care bill makes the marriage penalty even worse for married couples earning between $250,000 and $400,000.  Contrary to what Obama says, workers making $130,000 (married to each other) might have to pay higher taxes as a result of the health care bill.  So it isn’t just the “rich,” the upper middle class will also be affected.  Under the bill a cohabitating couple where each person makes $200,000 from interest, dividends, or rental income will pay an extra $5900 in taxes if married, but no extra taxes if “living in sin.”

You might think this is just some sort of unfortunate “glitch” in the tax code, and that it will be fixed once the authorities become aware of it.  I think they already are aware of it.  The marriage penalty has been around for decades; it would have been fixed if the government wanted to fix it.  But why would the government be so opposed to people getting married?  Isn’t marriage generally considered a good thing?  My theory is that both parties want to fix it, but they can’t agree on how to do so, so nothing gets done:

1.  The Republicans might prefer a flat tax, which would avoid the problem of people getting pushed into higher tax brackets after they get married.  But the Dems consider that sort of tax regime to be insufficiently progressive (especially given the regressive nature of payroll taxes.)

2. The Dems might be willing to allow married people to file as a single person, but Republicans oppose that because they think it would favor working moms over stay at home moms.  I.e. consider two families that live next door to each other.  In one family both husband and wife make $100,000.  In the other family the husband makes $200,000 and the wife is a homemaker.  Under current law they pay the same amount of taxes, and I think Republicans are OK with that.  If married people were free to file under the single person’s tax rates, then the family with two people each making $100,000 would pay less taxes than the person making $200,000.  Actually, that seems very fair to me, as a family with someone making $200,000 plus a homemaker is much better off economically than a family where each spouse makes $100,000.  In the latter case they still have all the chores to do at home, or else they’d have to hire maids and nannies.

Here is the bottom line.  The government is discriminating against people according to their marital status.  Two families that live side by side, each with two adults earning $130,000, might each pay very different amounts of taxes.  The family where the two adults are legally married pay more taxes than the next door neighbors, who might tell all their friends and relatives that they are married, but in fact secretly got a divorce and are now living in sin.  Does that seem fair?

BTW, this isn’t just a problem that affects the upper middle-class; low income workers also face a large implicit marriage penalty, as benefits like the EITC get phased out much more quickly if two low income people get married.  Indeed in percentage terms this probably affects them much more than me.  (Interestingly, as the marriage penalty got worse for low income workers, their marriage rate fell.)

My wife and I would be better off getting divorced.  Unfortunately, women tend to be rather sentimental about marriage.  So it may not be easy for me to convince my wife of the logic of this argument.  But here’s something I can say for sure.  If we did get divorced to save $80,000 to $100,000 in taxes over our lifetime, you’d never know about it.  It would be between us and the IRS.

As a good libertarian I oppose having any government policies hinge on whether people are married or not.  (I.e., governments should not recognize marital status.)  I believe all upper-middle class libertarian couples should stay single, to help “starve the beast.”  Let’s hope Megan McArdle’s recent ceremony was just for show, and that they “forgot” to have it formalized at City Hall.

Gay men may actually benefit when gay marriage is legalized at the Federal level, as the social pressure to get married is lower than for heterosexual couples.  So they will be able to more easily choose the marital status that best fits their particular tax status—assuming that society doesn’t start pressuring gays to get married.  Unfortunately, Americans often seem to want to either ban things or mandate them—with no in-between option of freedom.

I suppose some of my more conspiratorial readers think that Obama is increasing the marriage penalty because gays are an important part of the Democratic coalition.  Please spare me!  That would be about as likely as the first African-American President paying for health care with a tax that only hits white people.

PS.  I do know that many gays are actually hurt by being forced to file as single.

PPS.  I am one of what Joe Biden calls the “super-rich” who will be hit by the planned expiration of the Bush tax cuts for upper income people, and I make well under $150,000.  So much for Obama’s promise not to raise taxes on people making less than $200,000.  My income is a bit more than a Boston cop, but a lot less than a Massachusetts turnpike cop.  I guess a Boston cop who is married to a highly-skilled nurse is also “super-rich.”  Again, the money doesn’t bother me, I have plenty since I am a high-saving nut.  What bothers me is the thought that when I retire I’ll be paying more taxes or getting less Social Security benefits to help those “unfortunate” guys who made just as much as me, but never saved anything.  The guys who have garages filled with expensive toys.

More on fiscal stimulus

I got some really astute comments on the last post, and wanted to do a follow-up.  Some commenters wanted to defend Krugman, which isn’t really necessary, as my criticism was more directed at the Obama administration.  I regret not making that clearer.  I actually differ with Krugman on only one small point regarding fiscal stimulus; the likely monetary policy counter-factual:

1.  Krugman holds monetary policy constant in his analysis, and estimates fiscal multipliers on that basis.

2.  I assume the Fed has an approximate inflation target (or range), and may offset the impact of fiscal stimulus with more or less unconventional QE.

I’m certainly not claiming I am 100% right, just suggesting there may be more ambiguity to multipliers that people assume.  For instance, in the Jackson Hole speech Bernanke got pretty impassioned (for him) at one point.  He suggested that inflation was a bit lower than the Fed’s target, and that any further disinflation would be very unwelcome.  He also suggested that were this to occur, more monetary stimulus would definitely be called for on both inflation and growth grounds.   There were some comments pretty clearly directed at the hawks.  To me, it looked like Bernanke was drawing a line in the sand; this much disinflation but no more.  We are at 1% on the core rate, and I think anything lower will lead to another March 2009-style QE.  Recall that at that time forecasts were really bleak, and the Fed did act fairly aggressively (albeit not as much as I would have liked.)  I think there is a sort of “Bernanke put” at 1% core inflation.  He’s more conservative than he used to be, but he’s not as conservative as the hawks.  In my view we’d have 1% core inflation today if there’d been zero fiscal stimulus.  That implies an effective multiplier of zero, even if the theoretically true multiplier is 1.6.

Both Krugman and I were pessimistic about fiscal stimulus, and we both think it has failed to do what was needed.  The only difference is that he argues that the $800 billion that was done did have a clear effect.  After I wrote the post I noticed another possible flaw in his argument, although I will leave it up to my Keynesian readers to tell me whether I am right or wrong.  I had thought the Keynesian model predicted that the direct effect of demand stimulus measures was on nominal final sales, and that the effect on RGDP was more indirect (depending on the SRAS curve, trade balance swings, and inventory adjustments.)  I looked at the BEA data and found that (unlike real GDP) the final sales growth rates look pretty flat over the last 4 quarters, both real or nominal:

1 Gross domestic product     1.6 5.0 3.7 1.6
2 Less: Exports of goods and services 12.2 24.4 11.4 9.1
3 Plus: Imports of goods and services 21.9 4.9 11.2 32.4
4 Equals: Gross domestic purchases     3.0 3.0 3.9 4.9
5 Less: Change in private inventories
6 Equals: Final sales to domestic
1.8 0.2 1.3 4.3
7    Final sales of domestic product 0.4 2.1 1.1 1.0
8    Gross domestic purchases, current
4.3 5.1 6.2 5.0
9    Final sales to domestic purchasers,
current dollars
3.3 2.2 3.5 4.4

Which is the correct line to look at from a Keynesian perspective?

A commenter named Ted pointed out another problem.  Newer Keynesian models such as Woodford and Eggertsson predict stimulus will start working when it is announced, not when the money is actually spent.  I don’t know if the estimates Krugman cites took that into account.  Perhaps someone else knows.

So if Krugman wasn’t my real target, who was?  It was those who advocated fiscal stimulus and ignored monetary stimulus.  You can’t have it both ways.  The economy is in a mess.  We aren’t recovering after having run up extra deficits of $800 billion.  One can’t point to 3% growth and say; “See, the policy worked.”  If we had known this was going to happen, then I would have had much more success making my argument for monetary stimulus 20 months ago.  Think about it.  Almost everyone on the left is now pushing for more monetary stimulus.  The reason is obvious–we’re floundering.  Whether Krugman predicted that or not isn’t the issue, the issue is that if the policy elite in this country had had a crystal ball in early 2009, and saw this coming, the debate would have been far different.  For one thing, the Obama administration would not have let 3 Fed seats lie empty for 20 months.  (Something I warned them about.)

Several commenters pointed out that you’d expect a slow recovery in a liquidity trap.  Precisely; which is why we need the Fed to use the 4 remaining policy options Bernanke assures us they have.  The grand fiscal adventure was merely a long and fruitless diversion, and 20 months later we have arrived back where in my view we’ve been all along–waiting for monetary policy to get NGDP growing at an adequate rate.

Time to start moving . . . except that now we have to wait until November when Bernanke gets reinforcements.

Is this really all they expected?

I was puzzled by a recent Paul Krugman post that argued the current recovery is about all we should have expected from the puny $800 billion stimulus package.  I found this confusing, as during the first 4 quarters of recovery growth has averaged 3%, which is less than what I would have expected with no stimulus at all.  (Note, essentially the entire world has been recovering over the last year, regardless of fiscal policies.)

Krugman shows a bar graph depicting rising and then declining expenditures on stimulus over the past 18 months, and then compares it to a fairly similar looking bar graph showing rising and then falling RGDP growth rates.

[BTW, I would argue that he should be showing NGDP, not RGDP growth, as stimulus is supposed to directly boost AD (NGDP), and the effect on RGDP depends on both the size of the AD increase, and also any concurrent supply-side factors.  But he’d get a similar correlation.]

As I read his post, he seems to be implying that we shouldn’t be surprised that the economy seems to be grinding to a halt, as the stimulus is now ending.  But I thought the proponents of stimulus had some sort of natural rate model in mind, where RGDP tends to grow 3% per year long term regardless of what is done, and that fiscal stimulus is a way of returning to trend more quickly by stimulating private spending.  The idea was to give the economy a shot in the arm, and once the effects wore off we’d get the normal 3% growth.  Indeed perhaps a bit more that 3% if we were still below trend, as long run wage and price flexibility give the economy a sort of self-correcting mechanism.

But instead we have only grown at trend during the recovery, and we now seem to be slowing even further.  Yes, the stimulus was smaller than Krugman wanted, but this is roughly the sort of pattern I would have expected:

1.  Krugman’s $1.3 trillion stimulus:  7% RGDP growth during brisk recovery, 3% thereafter.

2.  Actual $800 billion stimulus:  5% RGDP growth during a slower and longer recovery, 3% thereafter.

Isn’t that the basic idea?  Remember that RGDP grew 7.7% in the first 6 quarters of the 1983-84 recovery, with deficits of only 6% of GDP, not the 12% we have now.   Now you could argue that this cycle is different.  Maybe banking problems give the economy extra headwind.  Fair enough.  But I still don’t see how that supports Krugman’s point.  He’s seems to be saying this is exactly what Keynesian demand-side theory would suggest.  But it isn’t, as growth should be much faster.

I’m not ruling out that stimulus may have helped on a ceteris paribus basis.  And I suppose Krugman would argue that the correlation he finds supports that notion.  But I must admit that I don’t have much sympathy for any Keynesians reading Krugman and assuming that this shows fiscal stimulus “works.”  Those banking headwinds were well understood when the predictions were made in early 2009.  Indeed the subsequent banking crisis has turned out to be far milder than the IMF forecast at that time (which is why banks are able to repay almost all their TARP loans, something that wasn’t initially expected.)  So if Keynesians are claiming it worked, are we to believe that in early 2009 they were promising us no recovery at all for the expenditure of $800 billion?  I say “no recovery” because we are not recovering if we are merely growing at trend.  We are treading water.

To be fair, Krugman is not one of those Keynesians claiming success, he thinks the stimulus was way too small.  Thus my post is actually directed more at the administration than Krugman.   But he does seem to be claiming that we got about what you’d expect from an $800 billion stimulus.  And thus the question in title of this post.

PS.  In my last foray into multiplier economics I misinterpreted the long run multiplier, so it is possible I have missed something simple here.  What do you think?