Confessions of a Supply-Side Liberal

A Partisan Nonpartisan Blog

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Allison Ross: Many Don't Carry Much Cash Any More

As you can see from the link above, for most people, it might not be that big a deal if paper currency were demoted, as I advocate in my column “How Subordinating Paper Money to Electronic Money Can End Recessions and End Inflation.” For those who actually use paper currency a lot, the system I advocate would help them financially because it would lead to lower inflation, and therefore a lower implicit tax on paper currency. And of course, other than those who use it for illegal purposes, those who use paper currency for a large share of their transactions are more likely to be borrowers than lenders, so they would benefit in the short run from the low interest rates possible when the safest interest rates are negative. And in the long run, they would benefit along with everyone else from a more stable economy.   

Filed under money emoney

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Q&A on Electronic Money and International Finance

Question: I can’t resolve a question I have about breaking the ZLB with electronic money, and it’s driving me nuts.

I re-read a couple of your posts that mention a kind of ‘first-mover’ advantage in breaking the zero lower bound: not only does a first-mover get the usual stimulus from lowering the interest rate, but the fact that it is the only country in the world that can offer such a low interest rate is likely to boost demand further.

I’m struggling with the effect on the supply of loanable funds within the first-moving country. Essentially, as the central bank lowers the interest rate, and economy-wide interest rates fall, won’t some investors begin to look abroad for better risk-reward alternatives? I know that it’s not costless or riskless to transfer to a different currency, but it seems that the central bank’s effectiveness in unilaterally changing interest rates would be hampered by the existence of outside options: either some interest rates will remain high or some agents will begin to ‘cash out,’ if you’ll pardon the pun, and move their money abroad. 

I hope it’s clear what I’m trying to ask. Would you help me figure out what I’m missing?

Answer: Great question. I am using logic from Mankiw’s textbook treatment of international finance, which I lay out in my post "International Finance: A Primer."

Basically, when people start investing abroad because rates of return are higher abroad, that is a capital outflow, and that is why exports go up. Capital outflows put domestic currency in the hands of those abroad. They don’t really want it, so exchange rates adjust until that currency (whether physical or virtual) makes its way back to its home country to buy exports. “Moving money abroad” is a stimulus to exports, because goods follow money.  

The only way an outside option would cause trouble is if firms starting setting prices and wages in a foreign currency. It is crucial that sticky prices and/or wages (or at least most of them) be set in terms of the electronic dollar (or whatever the domestic electronic currency unit is called). 

In my electronic money seminar, I make the point that, when they occur, negative interest rates on paper currency are not meant to disadvantage paper currency. What those negative interest rates on paper currency do is make it so there is nowhere to hide from the negative interest rates except by spending the money. You can send your own funds abroad, but then the person who took your dollars in exchange for their own currency now can’t hide from the negative interest rates except by spending the dollars. In that situation, by sending dollars abroad, you haven’t eliminated the hot potato of dollars earning a negative interest rate from the world, you have only made it someone else’s problem. The only escape from those negative interest rates is to spend the money, so someone—you or someone further down the chain—will be driven to spend it.  

Follow-up Question: Ok. In other words, this kind of behavior (bailing on the domestic currency) will just lead the exchange rate to adjust until some form of interest rate parity is achieved again. Is that the right?

Answer: No. There might continue to be an interest rate difference. But the international flow of funds to the higher interest rate stimulates exports through its effect on the exchange rate. 

Filed under money emoney

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Paul Krugman: That 80s Show

Here is the key passage, but the whole thing is eminently worth reading:

What actually happened in the 80s, however, was that central banks — most famously the Fed, but also the Thatcherite Bank of England and others — drastically tightened monetary policy to bring inflation down. And inflation did indeed come down — eventually. But along the way there were deep recessions and soaring unemployment, which went on much longer than you could justify with any plausible story about the monetary shock being unanticipated.

This was very much a vindication of more or less Keynesian views about the economy, and the 80s were in fact marked by the New Keynesian comeback.

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John Stuart Mill Fails to Treat Children as Hyperrational

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Image source: “5 Dangerous Things You Should Let Your Kids Do”

Models in which human beings are always maximizing their utility perfectly are the simplest kinds of models. But it is hard to maintain that children are always maximizing their own utility perfectly. In a discrete-time model, it is easy to have an initial period in which someone is not nonrational, followed by later periods of full rationality. But In continuous time, there are likely to be an in-between period in which some types of decisions are close to full rationality, while other decisions are far from fully rational in advancing self-interest. (For example, this post on the Edutopia blog talks about the “hyperrational adolescent brain,” but is about anything but.)

In On LibertyChapter IV, “Of the Limits to the Authority of Society over the Individual” paragraph 4, John Stuart Mill has to face the lack of full-scale rationality on the part of children, using the phrase “self-regarding virtues” to talk about the kind of rationality that allows one to advance one’s own interest. He writes:

I am the last person to undervalue the self-regarding virtues; they are only second in importance, if even second, to the social. It is equally the business of education to cultivate both. But even education works by conviction and persuasion as well as by compulsion, and it is by the former only that, when the period of education is past, the self-regarding virtues should be inculcated. Human beings owe to each other help to distinguish the better from the worse, and encouragement to choose the former and avoid the latter. They should be for ever stimulating each other to increased exercise of their higher faculties, and increased direction of their feelings and aims towards wise instead of foolish, elevating instead of degrading, objects and contemplations. But neither one person, nor any number of persons, is warranted in saying to another human creature of ripe years, that he shall not do with his life for his own benefit what he chooses to do with it.

Notice that in American custom, we tend to add to the kind of deference John is recommending for another adult’s decisions in regard to that adult’s own life, a deference for a parent’s decisions in regard to that parent’s own children. But the logic is unavoidably weaker for deference to parent’s decisions about their own children than it is for an adult’s decisions regarding his or her own life. 

One interesting area where our culture is shifting in regard to parent’s decisions about their own children is in our attitudes towards spanking. When I was a child, we children took the possibility of spanking (including many elaborated threats of spanking) and sometimes the reality of being spanked for granted. Not long into my experience as a father myself, I realized that social tolerance of spanking was waning. And nowadays, parents who spank their children often have a niggling, if perhaps exaggerated, fear that child-welfare arms of the government (“Social Services”) will punish them.   

John Stuart Mill allows for the possibility that compulsion might be necessary in bringing up children. And I find it hard to rule out the possibility that there may be situations in which some form of corporal punishment for a child may be the best available option. But compulsion (of which corporal punishment is only one type) should only be used when absolutely necessary, since it tends to have unwanted side effects. For example, in "John Stuart Mill Argues Against Punishing or Stigmatizing, but For Advising and Preaching to People Who Engage in Self-Destructive Behaviors," I wrote

…punishing and stigmatizing may often be ineffective because the elements of a riven psyche one wants to encourage may have trouble seeing a punisher or stigmatizer as friendly.  

Filed under religionhumanitiesscience

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Money is the most powerful secular force in the world. … Money is linked to everything—safety, health, relationships, creativity and spontaneity, social belonging. It’s the one thing that intersects everything, and as soon as I’m talking about money, all the family dynamics come out.
Brad Klontz, author of Mind Over Money, as quoted in Clutch by Paul Sullivan, p. 196.

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Fields Medal Winner Maryam Mirzakhani’s Slow-Cooked Math

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Maryam MIrzakhani, First Women to Win the Fields Medal

Going beyond the usual news articles such as these two, 

Quanta magazine gives a more in-depth treatment of the the work of the first woman to win a Fields Medal, which is aptly described as the Nobel Prize of mathematics:

I know about this article thanks to Mary O’Keeffe's Facebook post on my wall. Mary points out that Maryam describes herself as pursuing what I have called “slow-cooked math” (most recently in my Quartz column "How to turn every child into a ‘math person’"): 

Mirzakhani likes to describe herself as slow. Unlike some mathematicians who solve problems with quicksilver brilliance, she gravitates toward deep problems that she can chew on for years. ‘Months or years later, you see very different aspects’ of a problem, she said. There are problems she has been thinking about for more than a decade. ‘And still there’s not much I can do about them,’ she said.


Mirzakhani doesn’t feel intimidated by mathematicians who knock down one problem after another. ‘I don’t get easily disappointed,’ she said. ‘I’m quite confident, in some sense.

Her slow and steady approach also applies to other areas of her life.”

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