Category: Equitablog

Noah Smith: Star Trek Economics: Life After the Dismal Science: “I grew up watching ‘Star Trek: The Next Generation’ (easily the best of the Star Trek shows)…

…There’s one big, obvious thing missing from the future society depicted in the program. No one is doing business. There is almost no one buying and selling, except for a few species for whom commerce is a form of traditional religion. Food and luxuries are free, provided by ‘replicators’…. Scarcity… seems to have been eliminated. Is this really the future? Is it possible? Is it something we want?… Current world annual gross domestic product per capita, in purchasing power parity terms, is only about $13,000–enough to put food on the table and a roof over one’s head. What happens when it is $100,000, or $200,000? It would seem ridiculous to limit this incredible plenty to a few people. When the world gets rich enough, a trivial tax on the rich would be enough to provide everyone on Earth with a basic income that would allow them to lead lives of leisure….

This is the basic Star Trek future. But actually, I think that the future has a far more radical transformation in store for us. I predict that technological advances will actually end economics as we know it, and destroy scarcity, by changing the nature of human desire…. All the economic questions will change. Instead of a world defined by scarcity, we will live in a world defined by self-expression. We will be able to decide the kind of people that we want to be, and the kind of lives we want to live, instead of having the world decide for us. The Star Trek utopia will free us from the fetters of the dismal science.”

• On Twitter: https://twitter.com/Noahpinion/status/628241659621449729

• @Noahpinion: A sufficiently advanced level of technology will mean the end of economics as we know it: http://www.bloombergview.com/articles/2015-08-03/star-trek-economy-and-life-after-the-dismal-science

• @delong: .@Noahpinion In the Agrarian Age, 75% of the work was getting and preparing 2000 calories a day plus essential nutrients. Now that is down to 3%. As far as the production of basic edible calories and nutrients are concerned, we are already 19/20 of the way to the replicator. Yet I see no sign of any end of the economy, not even the food economy–in fact we spent $85 on dinner for 2 at the Juhu Beach Club http://www.juhubeachclub.com Plus we are getting close to the manufacturing replicator as well…
• @mathowie: Soylent is Gruel 2.0 and everyone should live a life of righteous efficient austerity http://robrhinehart.com/?p=1331 #ick #gross #nothanks
• @hondanhon: @mathowie yeah that’s totally why in Utopian Star Trek Picard is like “Computer, Soylent 10, Hot”
• * @t0nyyates:* @delong @Noahpinion that’s optimistic given we are not sure our improvements are sustainable.
• @Apinak: @t0nyyates Exactly, global population has doubled last 40 yrs & exceeding ecological boundaries, not a straight line @delong @Noahpinion
• @kltblom: @delong @Noahpinion As I wrote last week “We have produced enough calories for all of us for a long time” – http://bit.ly/1hfViLq
• @DaLeftHook: @Noahpinion @delong .@maxkeiser and .@stacyherbert were just talking about this the other day on the @KeiserReport
• @DaveAshelman: @delong @pardoguerra @Noahpinion Yet goods & svcs are still produced based on hedonism. We as a species/society have not moved beyond that.
• @AdamPosen: Read all four parts. On automation. I agree with @delong
• @Noahpinion: delong Have you considered the possibility that the tech productivity puzzle is actually the very beginning of Trekonomics?
• @TimDuy: @Noahpinion @delong Seems like the the replicator did not diminish the Ferengi desire to accumulate latinum.
• @Noahpinion: @TimDuy @delong The Ferengi engage in commerce for religious reasons!
• * @YorkshireMao:* @TimDuy @Noahpinion @delong greed was also their religion – they needed Latinum to bribe their way into the afterlife.
• @trekonomics: @TimDuy @delong @Noahpinion But the Ferengis are not Federation, and they do change over time from John Galt to @NYTimeskrugman keynesians
• @ticketdust: @trekonomics @delong @TimDuy @Noahpinion @NYTimeskrugman This happens due to contact with HOOMAN FEMALES, so there’s hope for Gamr G8 yet.
• • @trekonomics: @ticketdust @delong @TimDuy @Noahpinion @NYTimeskrugman the puppies will never like Star Trek.
• @pardoguerra: @delong @Noahpinion Mixing apples and pears? Is http://juhubeachclub.com 2000 calories of gruel or 2000 cals w/ entertainment + signalling?
• delong: .@pardoguerra @Noahpinion I think my point is that our economy has long since moved past the horizon of the kingdom of necessity–in which we produce the necessities and conveniences of life–to the kingdom of freedom–in which we produce luxury of various kinds to suit our manifold purposes–entertainment, signaling, curiosity, aims we have decided are good to pursue for reasons that we think good and sufficient. Yet this transit from the kingdom of necessity to the kingdom of freedom has not produced the kind of structural change in our economy–and in its very existence–that John Maynard Keynes or Karl Marx expected. We have some “from each according to their ability, to each according to their needs” in the mix–and some Wikipedia-like free associations of associated associated producers, but not an overwhelming amount of that…
• @pardoguerra: @delong @Noahpinion agreed. And as long as there are tastes, status, and competition, there will be (at the very least, food) markets.
• * @czwalsh:* @delong @pardoguerra @Noahpinion Keynes thought we’d be working 3 hrs a day by now, and only by choice.
• @trekonomics: @delong @pardoguerra @Noahpinion but luxury still *very unevenly distributed in @GreatDismal words
• @trekonomics: @pardoguerra @delong @Noahpinion post-scarcity in ST is not absence of markets. In fact I’d argue reputation is ST’s main currency.
• @jmfinn: @delong @Noahpinion We’re trying to apply 20th century models of economics and governance to something that is far beyond that.

Ah. The debate continues:

David Zaring: Did The Fed Fail To Save Lehman Brothers Because It Legally Couldn’t?): “The Fed’s lawyers said, after the fact, that no, they didn’t have the legal power to bail out Lehman…

…Peter says yes they did, Philip says no, and I’m with Peter on this one–the discretion that the Fed had to open up its discount window to anyone was massive.  In fact, I’m not even sure that Dodd-Frank, which added some language to the section, really reduced Fed discretion much at all…. Here’s Peter….

The idea that 13(3) presented any kind of a statutory barrier is pure spin. There’s no obvious hook for judicial review (and no independent mechanism for enforcement), and the authority given is completely broad. Wallach calls this authority ‘vague’ and ‘ambiguous,’ but I don’t see it: broad discretion is not vague for being broad…. ‘In unusual and exigent circumstances,’ five members of the Fed’s Board of Governors could lend money through the relevant Federal Reserve Bank to any ‘individual, partnership, or corporation’ so long as the loan is ‘secured to the satisfaction of the Federal Reserve Bank.’…

Here’s Philip:

I (and most observers) read the ‘satisfaction’ requirement as meaning that the Fed can only lend against what it genuinely believes to be sound collateral…. The Fed’s assessment of Lehman Brothers as deeply insolvent at the time of the crisis meant that it did not have the legal power to lend…

I have two points to make here…

My first point is one that is obvious to an economic historian. But I do not see picked up by the lawyers. It is that central banks are government-chartered corporations rather than government agencies precisely to give them additional freedom of action. Corporations can and do do things that are ultra vires. Governments then either sanction them, or decide not to.

During British financial crises of the nineteenth century, the Bank of England repeatedly violated the terms of its 1844 charter restricting its powers to print bank notes. The Chancellor the Exchequer would then not take any steps in response to sanction it. Such a policy–of writing a charter for the central bank with the expectation that in an emergency the Bank would do whatever was needed to stabilize the economy in spite of the limitations placed on it by its charter, was clearly envisioned by the author of the 1844 charter, then Prime Minister Robert Peel, who expected to see the Governor of the Bank of England take responsibility for doing what was needed:

My confidence is unshaken that we have taken all the Precautions which legislation can prudently take up against the Recurrence of a pecuniary Crisis. It my occur in spite of our Precautions, and if it does, and if it be necessary to assume a grave responsibility for the purpose of meeting it, I dare say men will be found willing to assume such a responsibility. I would rather trust to this than impair the efficiency and probable success of those measures by which one hopes to control evil tendencies in their beginning, and to diminish the risk that extraordinary measures may be necessary…

Peel saw a choice: either (i) give the Bank of England explicit powers (and so run the risk that financiers, expecting that those powers would be used, would exploit moral hazard and so produce irrational exuberance, extravagant overleverage, and repeated frequent financial crises), or (ii) forbid the Bank of England from acting and rely on financial statesmen in the future to take actions ultra vires under the principle that in the end salus populi suprema lex. Peel chose (ii). To him and his peers, the risks that granting explicit powers would enable moral hazard appeared greater than the risks that when a crisis should come the makers of monetary policy would not understand their proper role. And the Federal Reserve banks have inherited their non-agency but corporation legal structure from the Bank of England.

My second point is that Bernanke, Geithner, and their company at the head of the Federal Reserve in 2008 really, really, really want their decision not to have rescued Lehman in the fall of 2008 to have been a judgment call that went wrong.

They really do not want to have let a situation develop in which there is a systemically-important financial institution that they cannot support. Should any systemically-important financial institution ever approach a state in which the central bank could not support it in an emergency, the most elementary principles of central banking command that such an institution be resolved or shut down immediately.

To fail to do so is complete and total central banking malpractice.

On about four of the seven days in a week, my view is that the problems lumped under the heading of “secular stagnation” are primarily monetary-financial problems. Now comes Barry Eichengreen to review the case that these problems are at their root instead of also technological-fundamental. And I must say he has raised the frequency of my view that the problems are primarily monetary-financial from four days a week to five.

On the days when I think the problems lumped under the heading of “secular stagnation” are primarily monetary-financial problems, I think:

1. A failure of financial regulation has left us with a set of financial intermediaries who are untrustworthy and untrusted.
2. As a result, they cannot mobilize the risk-bearing capacity of society as a whole to any sufficient degree.
3. And, as a result, they cannot credibly promise to bear risk themselves and thus to stand behind claims that the securities they issue are low-risk.
4. Thus we see a very large spread–because of the shortage of mobilized risk-bearing capacity on the one hand and the shortage of safe assets issued on the other–between the equilibrium risky real return on investments in capital (say 5%/year) and the equilibrium real return on safe assets (say -3%/year).
5. But, with an inflation target of 2%/year, the real market rate of return on safe assets cannot fall below -2%/year.
6. Hence sometimes we have depression and low employment, as realistic assessments of real returns promised by investment in physical, intellectual, and organizational capital are not high enough to divert enough finance from safe assets with a real yield of -2%/year to reach full employment.
7. Hence in order to reach full employment we need unrealistic assessments of real returns promised by investment in physical, intellectual, and organizational capital: we need bubbles.

Note that in this view secular stagnation can be solved in any of three ways:

1. A higher inflation target that would allow for the possibility of a real safe interest rate of -4%/year would make it straightforward to induce enough finance to fund enough investment in physical, intellectual, and organizational capital to carry the economy to full employment.
2. Better financial regulation to create a financial sector that could actually mobilize the–enormous–risk-bearing capacity of society as a whole would shrink the wedge between safe and risky required rates of return from its current 8%/year or so down to something like 3%/year, or less.
3. Alternatively, a government that took on responsibility through its spending for maintaining full employment could do the job that the private sector’s shortage of risk tolerance is keeping it from doing–and in the process process it could create enough safe assets that the private sector would be eager to finance risky investment in physical, intellectual, and organizational capital as well.

But there is a view–powerfully argued by Larry Summers, if not in a manner that makes it easy for me to grasp–that a higher inflation target or a better mobilization of societal risk-bearing capacity would not be adequate solutions. What we have, instead, is a fundamental imbalance between investments that can be undertaken profitably and the savings that households and dynasties wish to hold. Such an imbalance could only be solved, the argument goes, by the government’s taking on the role of spending more and providing more savings vehicles, by income redistribution to lower the savings rate, or by policies that raise the return on investment.

Barry Eichengreen takes a look at factors that could be driving such a technological-fundamental rather than monetary-financial imbalance, and finds them thin:

Barry Eichengreen: Secular Stagnation: The Long View: “I distinguish four potential explanations…

…a rise in savings rates due to the emergence of emerging markets, a decline in investment due to a dearth of attractive investment opportunities, a decline in the relative price of investment goods, and a decline in the rate of population growth….

[In] the United States in the nineteenth century… savings rates headed back down… [after industrialization]… a hint as to what is likely to happen to savings in emerging markets…. [The] decline in the relative price of investment goods… may be reversed in the future…. Hansen’s logic was that slower population growth meant that capital had less additional labor to work with on the margin, resulting in lower returns and lower investment. What Hansen did not emphasize was that slower population growth and greater longevity also imply lower savings rates on life-cycle grounds….

A fourth explanation… is a dearth of attractive investment opportunities…. I like to distinguish… “range of applicability” and “range of adaptation.” Range of applicability refers to the number of different sectors or activities to which the key innovations can be productively applied…. Promising innovations like new tools (quantum computers), materials (graphene), and processes (genetic modification) that would seem to have a broad range of potential applications. They point to the scope for robotics to supplement human brain and muscle power in a wide range of activities…. Range of adaptation refers to how comprehensively economic activity must be reorganized before positive impacts on output and productivity growth materialize…. Thus, the steam engine had an immediate positive impact… because… its application… did not require widespread reorganization of economic activity elsewhere…. In contrast, electricity and the internal combustion engine required much more widespread adaptations before their positive impact on productivity could be felt…

Must-Read: Paul Romer: Freshwater Feedback Part 1: “Everybody Does It”: “The freshwater sympathizers agreed… that [Robert] Lucas and [Benjamin] Moll strategically refrained from verbal disclosures about some of the properties of the underlying mathematical formalism…

…Where we disagreed was whether this was a sign of behavior by the authors that is wrong. In effect, their response was caveat emptor; this is what all economists do…. We agreed about what about what Lucas and Moll did but we disagreed about what other economists do…. Freshwater economists believe that we are already in the noncooperative adversarial equilibrium, so it is wrong to express disapproval of economists who are simply engaging in the type of behavior that is rational in that equilibrium…. When the freshwater types say ‘everybody is following the adversarial method,’ what they may honestly be saying is that ‘everybody I know is following the adversarial method and they all believe that everyone else is doing this too.’… To me, the facts seem to be that freshwater economists are following a coordinated strategy based on the adversarial method yet that many other economists are still committed to the scientific method…

Must-Read: Ben Bernanke: Reconstructing Macroeconomics: “Bringing financial markets into macroeconomics is obviously critical…

…I think back at the work I did–that I was involved with academically–and in some ways we had taken steps in that direction… on the role of credit in the Great Depression… the financial accelerator… and so on. But… details really matter…. The decline in wealth associated with the tech bubble bursting [in 2001] and the decline in wealth associated with the decline in house prices as of, say, late 2008 was about the same–maybe even more on the [2001] stock [market] bubble.

From a standard macro model or even one elaborated with financial factors, you would not have really thought that the housing bubble would have been more damaging than the stock bubble. Now the reason it was more damaging, of course, as we know now, is that the credit intermediation system, the financial system, the institutions, the markets, were far more vulnerable to declines in house prices and the related effects on mortgages and so on than they were to the decline in stock prices. It was essentially the destruction of the ability of the financial system to intermediate that was the reason the recession was so much deeper in the second than in the first. To understand that, you really have to know the details of how banks and individual institutions are exposed to housing and to mortgages, in ways that the institutions themselves did not fully understand at the time…

Must- and Should-Reads:

• Must-Read: Paul Krugman: Fire Phasers
• Charles Kenny: “Donald Trump is wrong: Immigration isn’t a problem—it’s the solution to a shrinking, aging U.S. population…”
• Must-Read: Michael Derby: Dallas Fed Struggles to Fill Fisher’s Big Shoes
• Must-Read: Jaume Ventura and Hans-Joachim Voth: Debt miracle: Why the country that borrowed the most industrialised first
• Must-Watch: Alan Krueger: Labor Force Participation: <(https://vimeo.com/134932856)>
• Must-Read: Steven Greenhouse: Jeb Bush ‘Should Be Embarrassed’ by His Overtime Pay Claims
• The Reminiscences of Mr. Clarence Bullwinkel
• Patrick Young: High School Student [Rebecca Fried] Proves Professor Wrong When He Denied “No Irish Need Apply” Signs Existed
• E. Glen Weyl: Price Theory
• Must-Read: Jérémie Cohen-Setton, Joshua K. Hausman, and Johannes F. Wieland: Supply-Side Policies in the Depression: Evidence from France
• Must-Read: Ezra Klein: On Paul Krugman’s theory of hipsters
• Must-Read:Harold Pollack, Bill Gardner, and Timothy Jost: Valuing Medicaid
  Must-Read: Paul Krugman: The Euroskeptic Vindication
• Daniel Alpert: Dan Alpert’s Two Cents
• Worth Attending If in Town: Bernie Sanders: Conference on the Greek Debt Crisis

Might Like to Be Aware of:

• George Akerlof, Janet Yellen, and Michael Katz: An Analysis of Out-of-Wedlock Childbearing
• I’d like to know my Uber rating
• Shrimp Saganaki
• Daniel Alpert
• Janis Ian: Bill Cosby spread lesbian rumors about her as a teen, tried to blacklist her from TV
• Chris Black
• Emily Asher-Perrin: J. K. Rowling’s Real Life is More Incredible Than Any Fiction
• American Economic Review

Must-Read: Noah Smith: Growth Fantasy of Tax Cuts and Small Government: “Jeb Bush says that if he’s elected president he wants to get us to sustained gross domestic product growth of 4 percent a year…

…I’m highly skeptical, and I’m far from the only one. But there are some true believers… John Cochrane, for example, has a long list of structural reforms that he thinks will do the trick. Now some of these are probably good ideas, and some are probably bad. But… belief that we can reform our way to sustained higher growth… boils down to faith and hope. There are many cases where that faith and hope has turned out not to be justified. For example, there is the case of the… American Legislative Exchange Council, a think tank comprised of state senators and representatives from a number of large corporations… Arthur Laffer…. Every year, ALEC produces a report called ‘Rich States, Poor States,’ in which it ranks states according to how business-friendly their policies are…. Alec lists 15 factors that it claims boost state growth rates. These boil down to low taxes, low levels of government spending and light regulation… the ideas John Cochrane describes, and that pro-free-market economists have been promising us will boost growth since time immemorial…. Shrink the state, cut taxes and the economy will grow.

But do the policies work? Empirical evidence suggests that they don’t deliver. Menzie Chinn… found… ALEC rankings didn’t predict a state’s growth within one year, three years or six years…. Supposedly pro-business policies, of the type constantly urged on us by conservative think tanks and rightward-leaning economists, are just not that effective in generating growth…. Don’t believe that Jeb Bush can deliver on his 4 percent growth promise simply by lowering taxes and easing regulation. As for the more radical steps John Cochrane suggests… many of these radical free-market policies would deliver a lot of economic and social disruption for very little actual growth.

Must-Read: Paul Krugman: Fire Phasers: “Jeb Bush doesn’t just want Americans to work more hours; he also wants to ‘phase out’ Medicare….

…Fact-checking organizations please note, by the way. The next time Democrats say that Republicans want to destroy Medicare, and Republicans start screaming that this is a lie, remember that when talking to their own people like Jeb themselves call what they’re proposing a plan to, yes, end Medicare…. The original idea… was that Medicare… a single-payer system of government insurance… could not act to control costs…. There was much sneering and scoffing at the… Affordable Care Ac[‘s] cost-saving measures…. But we’re now five years into… a spectacular slowdown in the growth of health costs, with the historical upward trend in Medicare costs…. How much credit should go to the ACA? Nobody really knows. But… the case that universal health insurance is affordable has never looked better. It’s amazing, isn’t it? Who could have imagined that conservatives would keep proposing the exact same policy despite strong evidence that they were wrong about the facts? Oh, wait.

Must-Read: Richard Fisher became President of the Federal Reserve Bank of Dallas in April 2005. He spent ten years as a regional bank President. I cannot think of a single case in which he was pulling the Federal Reserve Open Market Committee toward a more correct assessment of the current economic situation and of the major risks to it. And I cannot think of an episode in which, after events had proved his views of major risks erroneous, he ever marked his beliefs to market in any substantive ways.

Surely that is worth mentioning at least once in an article about the Dallas Fed? Can anybody make a case to me that Wall Street Journal reporter Michael Derby’s failure to even whisper this in his article is any way professional?

Michael Derby: Dallas Fed Struggles to Fill Fisher’s Big Shoes: “The Federal Reserve Bank of Dallas is taking its time picking a new president….

…Former president Richard Fisher stepped down March 19…. His exit was long anticipated…. ‘It’s beyond bizarre’ a new president hasn’t been named yet, said Danielle DiMartino Booth, who served as a close adviser to Mr. Fisher when they were both at the bank…. ‘Richard Fisher rose to the status of being a deity in Texas,’ Ms. Booth said. ‘People associate the success of the state’ with him, and it is ‘very difficult’ to find a new leader who can maintain that sort of profile, she said….

He was known for a brash public style as president. He made his case against the Fed’s easy money policies in speeches invoking high and pop culture, warning repeatedly about frothy financial markets and arguing in vain for higher interest rates. His predecessor Robert McTeer, operating under the nickname of the ‘Lonesome Dove,’ was known for opposing rate rises—sometimes via haiku. The Dallas Fed has ‘a tradition of having an outspoken leader,’ said Ethan Harris, chief economist at Bank of American Merrill Lynch. Those with knowledge of the process say the Dallas Fed is seeking a replacement who will carry on that tradition….

Some critics from labor unions and local community groups say they are disappointed by the lack of openness…. Not all think the bright light of transparency is a cure all. Lou Crandall, chief economist for Wrightson ICAP, said wanting to know more about the process is a ‘fair point.’ But he warned ‘you don’t want a lot of public jockeying over this.’