Miles's Presentation at the Federal Reserve Board on May 14, 2012 (pptx)

Here is a download of the Powerpoint file for the presentation I gave at the Federal Reserve Board on May 14, 2012, as recounted in my second post “Getting the Biggest Bang for the Buck in Fiscal Policy.” It had an element of discussing Stefan Nagel’s longer presentation immediately before, a presentation based in part on his paper with Ulrike Malmendier “Depression Babies: Do Macroeconomic Experiences Affect Risk-Taking,” but ranges beyond that to a wider discussion. My most important idea in this presentation is Federal Lines of Credit (FLOC’s) as a way to provide fiscal stimulus without adding much to the national debt–an idea laid out in full detail in my academic paper about Federal Lines of Credit: “Getting the Biggest Bang for the Buck in Fiscal Policy.” As academic papers go, this one is quite accessible to non-economists.

Dissertation Topic 2: Multisector Models

McDonald’s Car

QUESTION:

Hi Miles. I am a PhD student just commencing the thesis writing process. I have been focussing on the literature that has evolved from your paper ‘Sticky Price Models and Durable Goods’. Much of the work following this paper focusses on solving the co-movement problem between durable and non-durable consumption with sticky prices, sticky wages and/or credit frictions. I would like to ask your opinion on interesting research directions in this area.  –chrisp1979

ANSWER:

Not everything the economy produces is alike in how it affects the economy as a whole. So in my view, considerably more research effort should be devoted to macroeconomic models of the economy that treat different sectors of the economy as different in important ways. And how goods relate to the time-dimension (durable like cars or nondurable like fast food) is one of the most important differences between different categories of things the economy is producing.

In giving more specific advice, I worry a little about whether my taste conflicts with the taste of those you need to appeal to. You should keep in mind that I am, in the first instance, a macro theorist.  (Indeed, early on in graduate school I thought I would grow up to be a micro theorist.) In any case, I feel we know so little about the behavior of multisector models that it is premature to try to get a particularly result.  In this area where we don’t even know very basic things from a theoretical point of view, I have thought it too bad that so many researchers rush so fast to try to get a model that has a particular result–in this case comovement of the sort you are mentioning. What I think we need is much more understanding of multisector models in general. 

I would much rather have someone study a range of multisector models that seem reasonable based on first principles and see what they do rather than just contrive something with no particular plausibility that gets this particular comovement. If you set out to understand what multisector models want to do without coercion, I think that is a valuable addition to knowledge. Better to find that a reasonable, plausible model doesn’t seem to match what is happening in the world–and so have an interesting question to mull over about what is going on in the real world that makes it act differently than the model–than to search through model space to find an unreasonable, implausible model that can match one particular fact.

In other words, I think many papers written these days (particularly in this topic area) misunderstand the task, which is to find plausible reasons that are likely to be true for why some aspect of the world is the way it is rather than some reason that could possibly explain a fact about the world.

Judgments about plausibility of assumptions are key. That is why I would rather have someone pursue a model with good assumptions (some combination of plausibility and simplicity), study it carefully to see what it does, and help the economics profession gradually learn about the mapping between various attractive assumptions and the implications that flow from those assumptions.

But given an open mind, trying to understand how the models work, multisector models are a great area, and many different models would be very interesting, worthy dissertation topics. As long as you start with what you think is a good multisector model that you study to see where it leads rather than starting with a particular result you want to get, I think I would personally find it interesting. 

An example of some good research in this area is the work of the Bank of Japan’s Nao Sudo that has focused on the input-output structure of the economy, which is a very plausible, non-forced mechanism for generating comovement between sectors. Nao’s paper is slated to come out in the JMCB.

Jobs

United States Joint Services Color Guard on parade at Fort Myer, Virginia

Jobs and the nature of work are central to the issues I laid out in my first post “What is a Supply-Side Liberal?” I am prompted to write about jobs and the nature of work today by the interesting debate about giving up freedom to get and keep a job kicked off by Chris Bertram, Corey Robin and Alex Gourevitch at Crooked Timber, answered by Alex Tabarrok and Tyler Cowen at Marginal Revolution, who in turn are answered by John Holbo. Adam Ozimek at Modeled Behavior provides clarity to the debate.  And the hive mind of Karl Smith and Adam Ozimek at Modeled Behavior asked me by tweet to weigh in. I won’t try to do a blow-by-blow, but I have some things to say. If you don’t have the energy to read the whole debate, everything I say below can be understood from just reading this litany of limitations on employee freedom from the post that started it all: Chris Bertram, Corey Robin and Alex Gourevitch at Crooked Timber.

1. Abridgments of freedom inside the workplace:

On pain of being fired, workers in most parts of the United States can be commanded to pee or forbidden to pee. They can be watched on camera by their boss while they pee. They can be forbidden to wear what they want, say what they want (and at what decibel), and associate with whom they want. They can be punished for doing or not doing any of these things—punished legally or illegally (as many as 1 in 17 workers who try to join a union is illegally fired or suspended). But what’s remarkable is just how many of these punishments are legal, and even when they’re illegal, how toothless the law can be. Outside the usual protections (against race and gender discrimination, for example), employees can be fired for good reasons, bad reasons, or no reason at all. They can be fired for donating a kidney to their boss (fired by the same boss, that is), refusing to have their person and effects searched, calling the boss a “cheapskate” in a personal letter, and more. They have few rights on the job—certainly none of the First, Fourth, Fifth, Sixth, and Seventh Amendment liberties that constitute the bare minimum of a free society; thus, no free speech or assembly, no due process, no right to a fair hearing before a panel of their peers—and what rights they do have employers will fight tooth and nail to make sure aren’t made known to them or will simply require them to waive as a condition of employment. Outside the prison or the military—which actually provide, at least on paper, some guarantee of due process—it’s difficult to conceive of a less free institution for adults than the average workplace.

2. Abridgements of freedom outside the workplace

In addition to abridging freedoms on the job, employers abridge their employees’ freedoms off the job. Employers invade employees’ privacy, demanding that they hand over passwords to their Facebook accounts, and fire them for resisting such invasions. Employers secretly film their employees at home. Workers are fired for supporting the wrong political candidates(“work for John Kerry or work for me”), failing to donate to employer-approved candidates,challenging government officials, writing critiques of religion on their personal blogs (IBM instructs employees to “show proper consideration…for topics that may be considered objectionable or inflammatory—such as politics and religion”), carrying on extramarital affairs, participating in group sex at home, cross-dressing, and more. Workers are punished for smoking or drinking in the privacy of their own homes. (How many nanny states have tried that?) They can be fired for merely thinking about having an abortion, for reporting information that might have averted the Challenger disaster, for being raped by an estranged husband. Again, this is all legal in many states, and in the states where it is illegal, the laws are often weak.

To me the ethical question of whether work requirements are morally justified is very closely tied to the economic question of whether or not those requirements are necessary for the effective production of the goods and services the job is intended to produce. To make this ethical point, let me give the example of our volunteer military–a comparison that Chris Bertram, Corey Robin and Alex Gourevitch allude to.

In my view, our volunteer military system is one of the glories of our republic. I cannot see how the drastic governmental coercion of a military draft could ever be justified if a volunteer military can do the job of protecting our country and policing the world as well as our volunteer U.S. Military has. (In this post let’s leave aside questions about the morality of decisions by our Commanders in Chief–here I am only talking about the overall effectiveness of the U.S. Military.) But as it is, men and women voluntarily choose to join the the U.S. Military. Once they join, many are sent far away from home into the face of hostile attacks. Moreover, they are all subject to a wide range of commands from superior officers and to military discipline. If they are fired–that is, dishonorably discharged–there is a due process procedure, but one that respects the needs of the military to do what it takes to be an effective fighting force. As long as the effects (both intended and collateral) of what the U.S. Military is doing on those outside the U.S. Military itself are on net positive, I don’t see an ethical problem with allowing people to choose to become soldiers and subject themselves to military orders and discipline.

On the ethical question of unfreedom at work, the only difference between the volunteer U.S. Military and other employment is (1) the high level of importance of the U.S. Military’s task, and (2) what the U.S. Military needs from its employees to be effective at its task. In my view, in jobs that are voluntarily taken, and can be voluntarily left, job strictures that are necessary for a firm to be effective at producing the goods and services it specializes in are ethically OK.

I am troubled, however, when a firm takes freedom away from its employees unnecessarily. This can easily happen, for example, when the owners of a firm are not easily able to monitor the underbosses they employ, and these underbosses use their power over the employees under them at least in part for personal gain rather than for the sake of the firm’s mission. A firm may also take freedom away from its employees out of ignorance. In our paper “The Decline of Drudgery and the Paradox of Hard Work,” which is not yet ready to circulate, Brendan Epstein and I argue that figuring out how to make jobs more pleasant without using too many resources to do so is an important dimension of technological progress. At the cutting edge, this kind of technological progress can give a firm a competitive advantage. And once any bit of technological progress has happened, the ignorance of the way things were done before becomes apparent. But many firms are nowhere near the cutting edge of the on-the-job-utility/productivity frontier; many operate far below the level of current best practice.

Since organizations involve many people, they do not always coherently pursue their declared mission. (And indeed, even individuals do not always behave coherently.) In judging unfreedom at work, I think we should judge according to an organization’s declared mission or missions. This is a little like the legal principle that things the government does should have a rational basis. An organization could declare that its mission is making profits, protecting endangered species from extinction, fostering a particular religion or political point of view, seeking truth or raising economic welfare. Whatever it declares its mission to be, it should only ask its employees to sacrifice their freedom for the sake of furthering that mission. Now if an organization declared that its mission was to make life miserable for its employees, within limits that might be allowable too, but only if the organization clearly declared that to be its mission in advance.

What is a good set of institutions to prevent organizations from taking freedom away from their employees unnecessarily? The key is to have the judgment made by others who are sympathetic to the organization’s general type of mission, and who will have appropriate deference to the organization’s specialized knowledge about what works and what doesn’t, but without ties to the organization itself. For organizations whose mission is to make a profit, I think it is important to have the judgment made by a panel of others who have met a payroll and worried about their firms going under. This may seem overly favorable to firms, but remember that it represents a higher level of due process for workers than current law in most states.   

The reason I don’t think a regular jury can adequately judge job dismissals is that it would be hard for most people to ignore the fact that something very valuable has been taken from someone who is fired from a job. It is not easy to remember that the person hired to replace the one fired gains something equally valuable. And it is not that easy for most people to appreciate how necessary is the threat of firing (or where firing is impossible, how important is the threat of some sort of demotion) at a systems level to undergird those dimensions of workplace discipline that are necessary for a firm to fulfill its missions of making a profit and effectively producing goods and services that improve people’s lives. 

Let end with a point that ties into the concerns I raised in my first post “What is a Supply-Side Liberal?” The fact that employees are willing to put up with so much for the sake of keeping their jobs indicates just how valuable jobs are to the typical employee. Economists tend to use simple models with no preexisting distortions to illustrate the benefits of low taxes. In simple models with no preexisting distortions, workers actually don't value their existing jobs much at all–they can always get another job. The fact that, in the real world, jobs are very valuable to people makes the destruction of jobs by taxes and unwise regulations much worse than if people didn’t value jobs.

The simple models are nice because what happens in the absence of taxes is clean and neat and attractive.  But the benefits of low marginal tax rates are actually much greater in more advanced models where, in ways I will discuss down the road, (a) imperfect competition is already leading firms to underproduce and (b) minimum wages, union power, occupational licensing, and the need to obtain worker cooperation lead to jobs being valuable to people, as jobs are valuable to people in the real world.

Dissertation Topic 1: Federal Lines of Credit (FLOC's)

A Depiction of “The Miracle of the Seagulls” from Mormon History

QUESTION

Miles, I greatly enjoy your blog. I am 3rd year econ phd with a burgeoning interest in the impact of fiscal policy and government expenditure during recessions. Much of the literature simply attempts to calculate a jobs or GDP multiplier, but there are many other impacts of fiscal policy. What are important costs and benefits of fiscal policy that you feel are understudied? Who are the winners and losers from stimulus expenditure? I have a particular interest in firm and worker outcomes. Thanks! – markcurti

ANSWER

The answer here is easy for me. There has been no formal modeling of my Federal Lines of Credit proposal in my second post

“Getting the Biggest Bang for the Buck in Fiscal Policy.”

 This is a serious proposal–and in my view an extremely important proposal–that deserves formal modeling, but I am not going to do that formal modeling myself. (Why don’t I do this myself? See on my CV at the sidebar the number of other research projects I have in progress–many more than the number of my publications!) So it definitely counts as understudied. Here again is the link to the full article that I have submitted to a professional economics journal laying out the proposal in some detail. I even have an NBER Working Paper by the same name that you can cite, though I recommend reading the one I link to rather than the NBER Working Paper. 

When I say “formal modeling,” I am thinking this is one place where a Dynamic Stochastic General Equilibrium (DSGE) model would be quite appropriate in order to get some sense of likely magnitudes. Since analyzing Federal Lines of Credit requires modeling borrowing constraints and heterogeneity, as well as modeling sticky prices so that aggregate demand matters for output, there would be plenty of chances to develop and show off technical skills. I would be truly delighted to have someone do this analysis. 

Since I think the corresponding National Lines of Credit are even more important for Europe than Federal Lines of Credit are for the United States, if you want to do something empirical, to me the key issue is measuring the degree of spillover in fiscal stimulus from one country in the Eurozone to another. Similarly, you could look at the degree of spillover in fiscal stimulus from one U.S. state to another given a state-level fiscal stimulus. However, in general, the amount of empirical precision available for empirical studies of fiscal policy is not great, so this may not be that promising in the end. In either case, DSGE modeling of fiscal spillovers from one Eurozone country to another or from one state to another could be useful. 

July 8, 2012 Update

For other readers, let me translate my statement “the amount of empirical precision available for empirical studies of fiscal policy is not great”:

Despite many claims, aside from military spending, there is not much evidence about the overall effects of short-run fiscal policy on the economy one way or another.  

I would be glad to have this claim contested, but I can say that I have seen a lot of economics seminars lately with empirical estimates of the effects of short-run fiscal policy that are all over the map. Valerie Ramey (who has done work on fiscal policy with my colleague Matthew Shapiro) is one of the experts on what evidence exists. Here again is what she had to say about a recent short-run fiscal policy paper by Brad Delong and Larry Summers:

Valerie’s Powerpoint file and Valerie’s writeup of her discussion. There is an active thread on Twitter from my tweeting the link to Valerie’s writeup and calling it devastating.

Now I am not so sure. There are many objections being voiced to Valerie’s discussion. Anyway, the twitter thread backs up the idea that it is hard to get definitive empirical evidence in this area. 

By the way, Mark, please leave a comment below giving some indication of your likelihood of pursuing this. If you definitely aren’t pursuing it, letting us know will reassure others that there isn’t too much competition on this research topic.

A Note for Graduate Students in Economics Looking for Ph.D. Dissertation Topics

In addition to using the “Ask me anything” button for substantive economic questions, I encourage any of you who are graduate students looking for Ph.D. dissertation topics to send me a detailed description of what kinds of things you are interested in (research preferences), and I will try to think of research topics that I think are important within the range of things you are interested in doing research about. Three warnings:

1. I will almost always suggest a different topic than the one you are already working on. For this to be helpful to you, you have to be open to the possibility of a new topic. This is easiest psychologically if you are near the beginning of the process of choosing a research topic. 
2. I am likely to want to publish my reply, so in the unlikely event that many are eager to follow my advice on research topics, you may have competition on the research topic I suggest.
3. I can’t actually supervise the research long distance, only suggest a topic. And there is some chance I can’t think of anything in your area of interest. But I have many opinions in many areas.
4. When you write in, please tell me how many different tools you are prepared to use for your dissertation: mathematical analysis, empirical analysis, or computations.
5. Also, make sure you tell me something about why you were attracted to the area you mention, so I can understand your preferences better.    

Please use the “Ask me anything” button for such questions about potential research topics. You can do more than one message with the button if the length restriction binds. (Don’t use the comment section below to ask about a dissertation topic; it is for comments about the general process.)

If I write a post to answer you, please write in the comment section how likely you are to pursue the dissertation topic I suggest so that others won’t be worried about too much competition if you aren’t going to do it. In general, the comments section of one of the “Dissertation Topic n” posts is an appropriate place for economists to coordinate on doing research in the area I suggest, including economists who already have their Ph.D.

Is Taxing Capital OK?

The “Dark Satanic Mills” that Made England Rich

QUESTION

Hi Miles. As an English Literature Graduate with wider interests and intro Economics Classes, I wanted to ask you about something I read recently. Ostensibly, Joseph Stiglitz in his new book talked of a world where movement of labour was unimpeded, and cities and countries competed for the best workers; something that would be financed by taxing capital. This is deeply attractive to me, but I don’t know if it is possible, economically/demographically, even if political issues,permit. Thoughts? – workedspace

ANSWER

I haven’t read the Stiglitz book, so I will have to answer from general principles. Let me know if Stiglitz somehow has a way around the problems I will point out.

In simple economic models taxing capital has one of the biggest long-run negative effects on the economy of any tax. It looks OK in the short run, but with lower investment, the capital stock gradually declines. In this spirit you would be better off taxing land a la Henry George, since the amount of land won’t decline even if you tax it. But taxing the buildings on top of the land is like taxing any other kind of capital. (However, right now we tax houses very lightly compared to factories, so if it weren’t for the housing bubble’s aftermath, we would be better off taxing houses more and factories—which employ people—less.)

One way to tax capital some in a way that won’t hurt capital formation is to shift from labor taxation (such as Social Security taxes) to consumption taxation, since in the long run the shift to consumption taxation increases taxes on people who have the wealth to consume more than they earn. But in the shorter run, the shift to consumption taxation hits people who are temporarily having to consume more than they earn. Also, consumption taxation has a big life-cycle element. The biggest category of people who have the wealth to consume more than they earn is senior citizens. 

To return to the negative effects of capital taxation, the short-run temptation is much like the short-run temptation to have rent control. In the short run, the supply of apartments is inelastic, so rent control looks like a pure transfer from landlords to tenants, but in the long run rent control is a disaster because it makes it unattractive to build new apartments or even keep the old apartments in good repair. The stories of evil landlords not taking care of apartments that pop up under rent control are oh so predictable from economic theory.

At the beginning I said that in simple economic models, taxing capital has one of the most negative effects of any tax. That is true if the tax on capital is constant. If the government taxes capital now and promises never to tax it again, the story gets more interesting. In theory, forcing all companies to issue non-voting stock to the government worth 90% of a firm’s value would have no distorting effects, and so would be the perfect tax as long as people believed the government would never do it again. But if the government will do this once, what is to stop it from using the same logic to do it again? This is called the “dynamic inconsistency” problem.

Getting government institutions set up to block the recurrence of this ultimately self-contradictory logic behind taxing capital a lot now and promising never to do it again is actually one of the trickiest problems implicit in “Leveling Up: Making the Transition from Poor Country to Rich Country.” I think often here of the history of England. Confiscating accumulated wealth was always attractive to the king. Only the evolution of limitations on the King’s power to take accumulated wealth (the essence of the “one-time” capital tax) in the end allowed England to get the development of factories that helped it to become rich.

Note

This is the first published answer to a question using the “Ask me anything” button.

Update

There is a further Twitter discussion of this issue in this thread

. 

Miles's University of Michigan Website

With the help of the free html editor Blue Griffin on my Mac, I did some very basic improvements to my University of Michigan website. Most importantly, I put so many links leading to this blog at the top that anyone who happens upon my University of Michigan website can’t miss them!

In any case, some of you may be interested in one or more of the academic working papers on my University of Michigan website. A warning: some papers there are quite preliminary, but the key ideas should be there. Also, at this moment I am far behind in the task of putting up links to my recent working papers.  

Some of the best material on my University of Michigan website is accessible through the class links Economics 611 (“Business Cycle Theory”) and Economics 609 (“Advanced Mathematical Methods for Macroeconomics,” which focuses on mathematically characterizing value functions in stochastic dynamic programming problems).  

In other blog mechanics news, if you are at supplysideliberal.com itself, you can see that I am continuing to make improvements to the sidebar. I added a “Top 10 Posts” link and in a minute, I will change the “Miles’s CV” link at the sidebar to a link to my U of Michigan website.

My Corner of the Blogosphere: As of July 1, 2012

I find it interesting to see how the blogosphere is interconnected. Not counting RSS feed subscribers, there were 14,956 total visits to my blog between when I first had Google Analytics set up on June 3 and June 30th. Of those 9,174 were referrals from a link on some other site. I have listed the top 30 sources of referrals. I also listed the 65th, since like the 17th, it illustrates that some blogs are so big that even a comment on them can be a noticeable source of referrals. In the caption for “Mark Thoma on Rainy Day Funds for States” I wrote that Mark’s Economist’s View blog is the center of the economics blogosphere. It is indeed the largest source of referrals to my blog, followed by Greg Mankiw, Google, Twitter, and Noah Smith.

Number of Visits from Each Referral Source

1. Mark Thoma: 1558

2. Greg Mankiw (US): 1213

3. Google: 850

4. Twitter: 844

5. Noah Smith (US):  803

6. Mike Konczal (Rortybomb at nextnewdeal):   313

7. Ezra Klein (washington post): 300

8. Tyler Cowen (Marginal Revolution): 233

9. Facebook: 212

10. Scott Sumner (The Money Illusion): 202

11. Stephen Williamson: 143

12. Brad DeLong: 119

13. Karl Smith and Adam Ozimek (Modeled Behavior): 92

14. Clive Crook (theatlantic.com): 83

15. David Andolfatto: 75

16. Noah Smith (UK):  75

17. Comment on a Matthew Yglesias slate.com article: 68

Adam: Yup. Miles Kimball has an excellent post on this topic too: http://blog.supplysideliberal.com/post/25423469963…

18. Greg Mankiw (Germany): 62

19. Evilsax (DiaryofaRepublicanHater): 57

20. Real Clear Policy: 57

21. Stephen Williamson (Spain):  56

22. Greg Mankiw (UK): 52

23. Tumblr: 50

24. Greg Mankiw (Australia): 43

25. Greg Mankiw (India): 41

26. Stephen Williamson (Germany): 39

27. Greg Mankiw (Italy): 38

28. Greg Mankiw (Canada): 37

29. Noah Smith (Germany):  37

30. Noah Smith (Canada): 35

…

65. Comment on Mark Shea (patheos.com): 14

So, I as a “progressive” and a Catholic have always had a lot of suspicion of free-market Economics, be it Austrian or Chicago school. My first Economics class came as a sophomore in college after some snobby Republican sniffed at me “You just don’t understand Economics.” My plan was to make sure no-one could tell me that with a straight face again. So I took an Economics class with an extreme libertarian professor (who currently writes at this blog:

http://www.thebigquestions.com/blog/.

I couldn’t help it, I liked him (still do). He would indulge me after class in long conversations about trade, taxation, redistribution, utility theory, etc. I also discovered that I really liked Economics. One Economics class became two, two became a double major, and a double major in Math and Economics became a three year stint in a PhD program in another “conservative” Economics department. Now I would call myself a “supply-side liberal.”

http://blog.supplysideliberal.com/post/23959666073/what-is-a-supply-side-liberal

I still believe strongly that our society has a basic responsibility to minister to the poor, provide health care for the sick, educate the young (all of them!), and so on. However, I now believe (and the evidence for this appears overwhelming) that taxation and regulation have real manifest costs to economic growth, which is necessary for social welfare for rich and poor alike. I think it’s irresponsible to consider a policy without considering those costs.

I am also quite irritated with the self-entitled attitude so many wealthy people appear to have. Accusations of “class war” from the wealthy to the poor are absurd. The wealthy in this country have it great. They will continue to have it great no matter who runs our government. Their concerns have no relevance to me, it’s how our policies impact their actions that I consider relevant. As one more link (and beware of profanity), I think this video sums up their point of view quite well.

The physical geography of visitors to supplysideliberal.com is also interesting. It shows how international the blogosphere is. Here is the breakdown of visits by city:

1. New York: 936
2. Ann Arbor: 667
3. Washington: 650
4. London: 313
5. Chicago: 293
6. Toronto: 154
7. Seattle: 149
8. Los Angeles: 142
9. San Francisco: 142
10. Boston: 134
11. Sydney: 118
12. Houston: 114
13. Cambridge: 111
14. Borlange, Sweden: 101
15. Philadelphia: 100
16. Minneapolis: 98
17. Singapore: 94
18. Arlington: 93
19. Bonn: 92
20. Columbia, MD: 92
21. Tucson: 91
22. Montreal: 90
23. Berlin: 89
24. Austin: 87
25. Miami: 83
26. Paris: 75
27. Melbourne: 74
28. San Diego: 71
29. Atlanta: 71
30. Canberra: 67
31. Nei-Hu (near Taipei): 63
32. Ottawa: 60
33. Berkeley: 59
34. Dunn Loring: 58
35. Brisbane: 57
36. Oakland: 55
37. Buenos Aires: 54
38. Goteborg: 54
39. Portland: 53
40. Bethesda: 52
41. Jakarta: 51
42. Barcelona: 49
43. Hong Kong: 49
44. Vienna: 45
45. Copenhagen: 45
46. Madrid: 43
47. Amsterdam: 43
48. Munich: 42
49. Staten Island: 42
50. Dallas: 42

Top 10 Posts on supplysideliberal.com as of July 1, 2012

Here are my top ten posts based on pageviews reported in Google Analytics through July 1, 2012 (not counting 10,251 pageviews of the homepage of my blog):

1. Balance Sheet Monetary Policy: A Primer: 2213
2. Trillions and Trillions: Getting Used to Balance Sheet Monetary Policy: 849
3. Is Monetary Policy in Thrall to Wallace Neutrality? 795
4. Mark Thoma: Laughing at the Laffer Curve: 699
5. What is a Supply-Side Liberal? 678
6. Thoughts on Monetary and Fiscal Policy in the Wake of the Great Recession: supplysideliberal.com’s First Month: 608
7. Leveling Up: Making the Transition from Poor Country to Rich Country: 564
8. Avoiding Fiscal Armageddon: 526
9. Wallace Neutrality and Ricardian Neutrality: 345
10. Future Heroes of Humanity and Heroes of Japan: 291 

An Upgraded Sidebar for supplysideliberal.com

My daughter Diana Kimball and I have upgraded the sidebar. Those of you who read supplysideliberal.com on an RSS feed might want to go to supplysideliberal.com’s actual website once to see what is available on the sidebar.  Here are some changes:

1. We put the “Archive” link near the top, since I use it a lot to get the links needed to reference earlier posts. The “Archive” link is also the only easy way to get links for old link posts whose title leads to a reference rather than my post itself.  (I have vowed to avoid link posts from now on.)
2. I added a link to “A More Personal Bio: My Early Tweets.” This includes some very early tweets about my personal objective function as well as about some early family background and background relevant to my blogging. You can also see a few pictures of my hobby of using Magnetix to do three-dimensional geometry.  
3. There is a link to the June 2012 Table of Contents, a post that also includes a retrospective of my blog’s first month.
4. As an experiment, I have enabled Tumblr’s “Ask me anything” button. The rules are that you can ask me anything, but I will choose whether or not to answer. (For example, I am not going to answer tumblrbot’s question about “my favorite inanimate object” since that is too extraneous to the purposes of this blog.) I especially welcome questions about real world economic issues that might get me thinking of possible future posts.

The Euro and the Mediterano

View from the Greek island of Santorini

Before the Eurozone was formed, many economists warned that it would cause problems because it is impossible to have one monetary policy that is right for all the economies of a diverse set of countries. And having one currency means having one monetary policy. But the symbolism of a common currency for the project of binding Europe together politically seemed too valuable to give up. So the varied countries in the Eurozone (the blue countries in the map below), have had a one-size-fits-all monetary policy–eleven of them since January 1, 1999, and others since they joined the Eurozone later on. (The last to join was Estonia, in January 1, 2011.)

Now, in 2012, countries such as Portugal, Spain, Italy and Greece could use more expansionary monetary policy than what is right for Germany and some other countries in the North of the Eurozone. Getting back an independent monetary policy requires getting back one’s own currency and so requires exiting the Eurozone. But it is hard to exit the Eurozone in an orderly way–and exiting in a disorderly way risks causing another financial crisis. The aim of this post is to propose an orderly way to restore some degree of monetary policy independence to the different parts of the Eurozone. It might roil financial markets too, so I am not necessarily advocating it, but I see it is preferable to any country simply exiting the Eurozone.

So my objective here is to design a minimum-distance modification to the Eurozone that adds some ability to adjust monetary policy independently for different parts of the Eurozone. The basic idea is “one central bank, two currencies.” In this plan, the Eurozone remains together and the European Central Bank (ECB) continues to determine monetary policy for the entire Eurozone. But the ECB now decides monetary policy for both a “North Euro” and a “South Euro.” The North Euro and the South Euro start out with an exchange rate of 1 to 1, but ultimately are allowed to drift apart in value.

One could easily go further by having one central bank for the North Euro and another central bank for the South Euro, but the policy of “one central bank, two currencies” would help assure the markets that the monetary policy of the South Euro wouldn’t go wild. In the ECB, there could be an informal understanding that the views of those from the relevant countries had a greater weight in setting the monetary policy for those countries, but the official voting rules would be as now: votes from the entire Governing Council of the ECB would apply to both the monetary policy for the North Euro and the monetary policy for the South Euro. In this context, we are in the realm of the second, third or fourth best.  One can’t expect a perfect setup given the original economic sin (which might have been an original political virtue) of setting up the Eurozone as it is in the first place.

The official names of “North Euro” and “South Euro” are helpful to make clear that legally they are both “Euros” (which, of course, doesn’t really solve the legal mess that dividing currencies creates). But I am imagining that the press and the public would soon use a different naming convention: that the “North Euro” would end up being called just the “Euro” by almost everyone, while the “South Euro” would end up being called the “Mediterano.”

Future Heroes of Humanity and Heroes of Japan

from Cool Data Graphs

Noah Smith has a new post, “‘Science’ Without Falsification is No Science,” that questions whether macroeconomics is an empirical science based on solid data. Noah’s post is attracting attention. For example, Mark Thoma comments on it in his own post “'Science’ Without Falsification.’

Noah points out that macroeconomists have been arguing over the same things for a long time with no resolution; only decisive central bank actions have provided "experimental” evidence strong enough to convince most macroeconomists of something they didn’t already believe. Just so, massive balance sheet monetary policy on the part of the Bank of Japan could put to rest the idea that balance sheet monetary policy doesn’t work. The Bank of Japan has amazing legal authority to print money and buy a wide range of assets, and has the rest of the government actually pushing for easier monetary policy. So they could do it. They just need to buy assets chosen to have nominal interest rates as far as possible above zero in quantities something like 30% or more of annual Japanese GDP. Japan needs monetary expansion, particularly if it is going to raise its consumption tax, and would be doing the world a huge service by settling the scientific question of whether Wallace neutrality applies to the real world.

I spent two weeks at the Bank of Japan in each of May 2008 and May 2009 precisely because I think there is no central bank in the world that could do more to help the world economy as a whole, as well as Japan’s, by improving its monetary policy. I know that some on the Bank of Japan’s monetary policy committee do not think that printing money and buying massive quantities of assets will work. But the value of experimentation in economic policy is vastly underrated: trying a policy of “print money and buy assets” on a massive scale such as 30% or more of the value of annual GDP is the way to find out. And there is no country in the world for which the possible side effect of permanently higher inflation would be more harmless.  The Bank of Japan has officially set an inflation target at 1%, which is 1% higher than where Japan is at, and there would be nothing terrible about having a 2% inflation target, like the inflation targets for the Fed and the European Central Bank. So the Bank of Japan should do it. If the Bank of Japan shifts to such a decisive policy, those pushing for this approach on its monetary policy committee will ultimately go down in history as heroes of humanity as well as heroes of Japan. That statement is written with every ounce of seriousness and passion I am capable of. 

Health Economics

The caduceus, symbol of Hermes, Greek god of medicine

I am slow to post about health care because I don’t know the answers. But then I don’t think anyone knows the answers. There are many excellent ideas for trying to improve health care, but we just don’t know how different changes will work in practice at the level of entire health care systems.

Much of the political heat over health care reform has to do with the perception on both sides that the Affordable Care Act (Obamacare) is a move in the direction of redistribution. As a mode of redistribution it has many of the same issues as other modes of redistribution.  Redistribution is good, but when financed on a massive scale by the government, it can also be a budget buster. The extent to which this budget-busting aspect of a large amount of additional redistribution can be muted by extra efficiencies wrung out of the health care system is simply unknown.

An aspect of our public policy even before the affordable care act has been favoring health care expenditures relative to other forms of consumption.  In particular, people have long been able to pay for health insurance–but not most other forms of consumption–with pre-tax dollars. I think this can be justified by the fact that most of us are seriously bothered by thinking of others suffering without adequate medical care much more than we are bothered by thinking of others not being able to take family trips or having a small house or car. So it is worth something to us if others tilt their spending toward health care more than they would without any push toward health care spending in the tax system. As an example of a less subjective externality from health care, I think people’s psychological problems often cause them to act in ways harmful to their friends, extended families and coworkers, so I think it is appropriate for policy to tilt people’s spending toward any form of psychological care that can be shown to be effective at improving how people treat others around them along with whatever other effects it has. (Tilting should not be allowed to totally suppress price signals that indicate that some forms of psychological care require many more resources to provide than others.)

This principle of subsidizing what benefits others besides the one choosing how much health care to use is helpful in showing what forms of health care should not be favored. For example, plastic surgery for people who already look OK has at best mixed effects on how others feel. Am I misremembering the former Italian Prime Minister Silvio Berlusconi wanting to subsidize plastic surgery for the benefit of his own viewing pleasure? But those who are in social competition may feel worse off, and I think this externality is stronger than the Berlusconi externality. So, depending on the strength of different externalities, it may make sense for public policy to discourage plastic surgery for people who already look OK rather than encourage it. The ethical status of envy of others’ plastic-surgery enhanced looks–let alone the Berlusconi externality–is not an easy question, but at least one can say that the argument for using policy to tilt people towards spending on plastic surgery is muddy at best, and the default should be no tilt.

On wringing efficiencies out of the health care system so that we can hope to afford the large amount of additional redistribution in the Affordable Care Act, to me it seems crucial to have a great deal of experimentation rather than a one-size-fits-all approach. On the constitutional question of what the Federal Government can do and what States should be left to decide, Greg Mankiw refers to a previous Mankiw post saying that from an economic point of view taxes, subsidies and fines can all be equivalent. The 16th amendment to the constitution gives the Federal Government breathtaking power:

The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.

But what the Federal Government can do in relation to the States is not the same as what is should do.  Supreme Court Justice Louis Brandeis, in a dissenting opinion in 1932 said: 

It is one of the happy incidents of the federal system that a single courageous State may, if its citizens choose, serve as a laboratory; and try novel social and economic experiments without risk to the rest of the country.

This has come to be known as the “laboratories of democracy” principle, which I have always found very attractive. In the case of the Affordable Care Act, I believe that whether we are ultimately able to wring efficiencies out of the health care system depends on how much state-level experimentation is allowed. And that in turn is largely a matter of how the next President (whoever that turns out to be) interprets the Affordable Care Act. So even though I think it unlikely that the Affordable Care Act can be repealed, given the difficult designed in by our founders of getting any new legislation through Congress, it matters whether a President is elected who will give many waivers to states to try different experiments with health care. I hope that journalists–and others who get the chance to ask questions of the two major candidates–press them on this question of how freely they would give waivers for states to try various experiments if, as is most likely, the Affordable Care Act is not repealed.    

There is an obvious role for the economics profession in such state-level experimentation on how to deliver health-care. The government needs to ensure that there is adequate data collection in relation to these various experiments, and economists need to analyze that data. More generally, with health care spending at 17.4% of US GDP and rising, we need more economists working on health care issues than ever. In addition to current health economists redoubling their efforts, it is high time for economics departments around the country to give more prominence to health economics in graduate training than they have, so that there will be more health economists in the future. And I hope that where they reasonably can, empirical economists (and theorists) who do not now think of themselves as health economists tilt their research agendas toward figuring out health care. I stand by my statement that no one knows the answers for health care. But I hope someday that will no longer be true.  

Thoughts on Monetary and Fiscal Policy in the Wake of the Great Recession: supplysideliberal.com's First Month

This post will serve as the Table of Contents for the first month of supplysideliberal.com.  But it is more than that. It is a chance to reflect on questions such as

Where have I been coming from in the posts so far?

Why am I here writing a blog?

Where am I going from here?

Only the most important reflections come before the Table of Contents proper. Lesser musings come after the Table of Contents.  

The most important thing to say about where I have been coming from is that all the posts are meant to last. I try to make each major post and most minor posts count as parts of overarching arguments that  extend over many posts. And I hope that the whole is greater than the sum of the parts, so that anyone who reads the entire thread of posts in a given topic area will learn something they wouldn’t have learned from reading each post in isolation.

I think of blogging as an art form that I am undertaking seriously as a beginning novice.  My lodestone for literary structure here is my favorite television series Babylon 5.  In Babylon 5, the first season seems episodic, but in fact each episode lays part of the foundation for the narrative arc that picks up in earnest with the second season.  Some of the charm of a blog is in its unexpected turns as a blogger interacts with others online.  I want to have that and an overall progression.  

As to my motivations for beginning a blog, there are many personal motivations that I will talk about in due course. But I know that the one thing that has given me some sense of urgency to start now rather than wait until later is seeing the world economy flounder in the wake of the Great Recession. It is galling to see the world suffering below the world’s natural level of output when, in my contrarian view, getting sufficient aggregate demand is fundamentally an easy problem compared to the long-run challenge of balancing concerns about tax distortions against the value of redistribution and other government spending.

On where I am going from here in this blog, let me say that I have the titles of many potential posts kicking around in my head, each potential post struggling for primacy so it can be the next one written. They can’t all win at any given moment, and I don’t think I can maintain the pace I have kept so far, let alone increase that pace. And responding to other things currently going on in the blogosophere and in the news takes a certain degree of precedence. But there is a lot coming. 

The Table of Contents below is organized by topic area. Monetary Policy comes first because responding to other bloggers and to events has led to the most posts in that area. Monetary policy is one way I believe we have plenty of tools to get sufficient aggregate demand. The other way to get sufficient aggregate demand is through Short-Run Fiscal Policy. But in everything I say about short-run fiscal policy, I worry a lot about the effects on the national debt and work to find novel ways to minimize those effects.  The third topic area heading is Long-Run Fiscal Policy–the issues that motivate the title of my blog.

The last substantive heading is Long Run Economic Growth. I am not a growth theorist or a growth empiricist, and so am not qualified to say as much as I would like to be able to say about Long Run Economic Growth. But Long Run Economic Growth is arguably the most important subject in all of Economics. I have often thought that if I had started graduate school just a few years later, I would have focused on studying economic growth in my career, as my fellow Greg Mankiw advisee David Weil has to such good effect.  

Under the last two headings in the Table of Contents, I organize posts on Blog Mechanics and Columnists, Guest Posts and Miscellaneous Reviews. (I put many reviews under the relevant substantive heading because they help to understand the thread of the argument.) I will talk more about these aspects of the blog and about blog statistics after the Table of Contents.  

TABLE OF CONTENTS: FIRST MONTH

Monetary Policy

Balance Sheet Monetary Policy: A Primer

Stephen Williamson: “Quantitative Easing: The Conventional View”

Trillions and Trillions: Getting Used to Balance Sheet Monetary Policy

Karl Smith of Forbes: “Miles Kimball on QE”

Scott Sumner: “‘What Should the Fed Do?’ is the Wrong Question”

Is Monetary Policy Thinking in Thrall to Wallace Neutrality?

A Proposal for the supplysideliberal Community’s First Public Service Project: a wikipedia Entry on “Wallace Neutrality”

Mike Konczal: What Constrains the Federal Reserve? An Interview with Joseph Gagnon

Going Negative: The Virtual Fed Funds Rate Target

The supplysideliberal Review of the FOMC Monetary Policy Statement: June 20th, 2012

Justin Wolfers on the 6/20/2012 FOMC Statement

Should the Fed Promise to Do the Wrong Thing in the Future to Have the Right Effect Now?

Wallace Neutrality and Ricardian Neutrality

Future Heroes of Humanity and Heroes of Japan

The Euro and the Mediterano

Short-Run Fiscal Policy

Getting the Biggest Bang for the Buck in Fiscal Policy

Reihan Salam: “Miles Kimball of Federal Lines of Credit”

National Rainy Day Accounts

Leading States in the Fiscal Two-Step

Mark Thoma on Rainy Day Funds for States

Long-Run Fiscal Policy

What is a Supply-Side Liberal?

Can Taxes Raise GDP?

Clive Crook: Supply-Side Liberals

Why Taxes are Bad

A Supply-Side Liberal Joins the Pigou Club

“Henry George and the Carbon Tax”: A Quick Response to Noah Smith

Avoiding Fiscal Armageddon

Mark Thoma: Laughing at the Laffer Curve

Health Economics

Long-Run Economic Growth

Leveling Up: Making the Transition from Poor Country to Rich Country

Mark Thoma: Kenya’s Kibera Slum

Blog Mechanics

Miles’s Tweets

Miles’s Curriculum Vitae

Comments on supplysideliberal.com

Notice of Revocable Permission to Reproduce Content from this Blog with Appropriate Attribution to this Blog and Notice of Miles Spencer Kimball’s Copyright

@mileskimball on twitter

suppysideliberal.com on Facebook

Columnists, Guest Posts, and Miscellaneous Reviews

An Early-Bird Tweet from Justin Wolfers

Noah Smith: “Miles Kimball, the Supply-Side Liberal”

Gary Cornell on Andrew Wiles

Diana Kimball on the Beginnings of supplysideliberal.com

Gary Cornell on Intergenerational Mobility

supplysideliberal.com Takes on a Math Columnist: Gary Cornell on the Financial Crisis

Diana Kimball: Recording Skype Conversations on a Mac

Mike Sax: Review of (Some) Economics Blogs

Let me say a few words about blog mechanics, columnists, reviews and blog statistics.   The most important blog mechanics are indicated by links at the sidebar. But the posts under Blog Mechanics provide a little more detail. On all the blog mechanics, I owe a great debt to my daughter Diana Kimball. 

I have already said it in several posts, but let me say again that those who are not following my tweets are missing a lot. I have been having a lot of fun engaging with the news of the day and with other people’s tweets. And I routinely tweet announcements of new posts appearing on the blog itself.

Among the Miscellaneous Reviews, the one I recommend most highly is Noah Smith’s.  I owe a lot to Noah’s encouragement and help with this blog. I see this blog as part of the Noahpinion universe.  

On blog statistics, I will do a separate post a little later on traffic sources, which is interesting because it helps show the shape of my corner of the blogosphere.  My first post was on Memorial Day, May 28, 2012, exactly one month ago. I didn’t get Google Analytics set up until a few days later, so those statistics are from Sunday, June 3 on (and end at midnight last night). Google Analytics reports 20,386 total pageviews, 13,392 visits, and 7,411 unique visitors. I got some help “grep"ing to verify that the Google Analytics statistics do not include the now 593 subscribers receiving the posts on Google Reader unless they also click separately from Google Reader. Together with the 62 Tumblr subscribers, that adds up to 655 subscribers, plus some number of subscribers on Facebook that I can’t separate out from other Friends and however many subscribers I have on other platforms I don’t know about. Finally, I have 353 Twitter followers. The mismatch between that and the number of subscribers to the blog itself is why I have been making a point of recommending following my tweets.

To me, this past month has been a heady time. The excitement of starting a new blog that has been so generously welcomed has caused me some of the most pleasant insomnia that I have ever experienced. One of the reasons I expect to slow my pace somewhat is that once that enthusiastic insomnia wears off, I will have less time to blog.   

Update: I added posts from the rest of June, 2012 to the Table of Contents above so that from now on monthly tables of contents can be based squarely on calendar months.  

Mike Sax: Review of (Some) Economics Blogs

It is always interesting to read reviews. Google Analytics helped me find Mike Sax’s very interesting review as a significant source of referrals. I thought I would share this with you. Let me give a disclaimer: the opinions about other blogs are Mike’s, not mine.  Consider my level of endorsement the same as if I had approved it as a comment. Also, the title of Mike’s blog, “Diary of a Republican Hater” does not apply to me. I like Republicans very much and I like Democrats very much. I hope that each side feels I agree with them on those views that they think can most clearly be defended by rational argument. Thanks to Mike for permission to reprint this review:

NGDPLT, ‘Wallace Neutrality" and Related Matters

I can now stand out of a limb and say that the start of Miles Kimbal’s Supply Side Liberal blog is a very positive development for all of us who want a better and deeper understanding of all matters Econ. Since the crisis one positive has been a veritable flowering of Econ blogs along the lines of what the French Salons were back in the 18th century for intellectual discourse on the news of the day. 

Many as I do read Sumner’s Money Illusion and other MMers like Nick Rowe, Lars Christensen, et al as well of course as the “Saltwater” guys like Krugman and Delong. Then of course you have the MMTers-today’s Post Keynesians-at places like Economic Perspectives and the Center of the Universe-Walter Mosler’s blog. Another good one is Cullen Roch who is even within MMT heretical breaking up into yet another school-MMR. There are many others I’m not mentioning that are tremendous-Noahpinion, Bill Woolsely…

Through all of it what I’ve personally sought certainly is for true teachable moments-I want to learn and understand the marcro and monetary system better. Of course whether you are reading an MM blog, an MMT or a New Keynesian blog of course the author usually has a strongly advocated point of view. This is not a problem as far as I’m concerned-I too have a point of view. I’m basically I’d say a Post Keynesian though I’m not sure I’m ready to embrace the MMT tag-it seems somewhat cultish too me.

I think it can’t be denied that if any one person comes closet to epitiomizing the flowering of Econ since 2009 it may be Sumner himself. Certainly no one doubts his point of view but I don’t see how you can deny he’s been a “tree shaker.” I use that phrase thinking of what Jesse Jackson used to say-“I’m a tree shaker not a jelly maker!”

This doesn’t mean Sumner’s right. I think it’s still very open to question whether he’s right about NGDP level targeting working exactly the way he assures us it will. But no doubt he has captured the imagination of many Econ bloggers no doubt. 

What NGDPT has going for it is for one thing the “vaccuum effect.” No other theory in the Macro world right now is so suggestive, intuitive, and has such reach in terms of explanatory power. It does remind in me in some way of Chomsky’s linguistic revolution in the 60s. Whether he was right or not, Chomksy couldn’t be beaten because no one else could suggest a system that seemed to explain so much. Here I can’t but think of Kuhn's Structure of Scientific Recvolutions. 

In this way Sumner is very much like his hero-he is Friedman 2.0 in the sense that his NGDPLT idea is probably the most intuitive and trendy single monetary idea since Friedman’s 3% money supply growth rule. 

Still as Noah Smith has suggested, intuitiveness is not in itself proof of truth. Friedman’s Rule was also highly intuitive and yet it was a disaster. That doesn’t mean I can tell you right now what might be the hole in NGDPLT. I’m not certain there is one that it will go as badly askew as Friedman’s Rule just that it could. 

As I understand Noah, this is the problem with going by intuition alone and why models are also helpful. They offer us a way to check ideas without the trial and error of seeing whether or not it fails empirically. David Andolfatto recently dida post that used the OLG model to test NGDPLT that-depending on which assumptions are used, doesn’t get it done. As to whether or not OLG is an acceptable model, well that’s of course another discussion but Andolfatto suggests that those who have a problem should read a Woodford piece that shows its soundness. 

“Even though the model delivers a plausible interpretation of some recent macroeconomic developments, a NGDP target is not an obvious solution. But of course, as I said, the model is highly abstract. It is likely missing some features of the real world that NGDP target proponents think are important. If this is the case, then I’d like to hear what they are, and how these elements might be embedded in the model above. If nothing else, it would be a contribution to the debate if we could just get straight what assumptions we are making when stating strong propositions concerning the desirability of this or that policy.”

http://andolfatto.blogspot.com/2012/06/ngdp-targeting-in-olg-model.html?showComment=1338923968907#c1452928314545044264

My reservations of NGDP come more on the side of MMTers like Dan Kervick. What I can’t help but noitce is that Sumner insists on the idea that the fiscal multiplier is zero if the central bank does it’s job. This certainly makes it reasonable to ask if he has a political agenda. But what Kervick and company argue is that what is considered “monetary” vs. “fiscal” operations is itself a political question on the level of definitions. You could say that it’s the Morgan Warstler version of NGDPLT-what it offers is simply backdoor austerity. In addition I think there’s a case to be made that monetary and fiscal policy refer to different parts of the body so to speak. You could argue that monetary policy pertains largely to the financial system-the stability of banking-while fiscal policy relates to the real economy. 

His big question right now is “Wallace Neutrality” a term quite honestly that I’m not too familiar with but seems based on its use to be related to the liquidity trap:

“Although I plan to keep tight editorial—and for the most part, authorial—control over this blog itself, in a broader sense I view supplysideliberal as a collective enterprise. I hope readers of this blog will gel into an online community that goes beyond this blog. This will be a community of thoughtful people who do not all think alike; they need not be “Supply-Side Liberals” by the definition given in my first post “What is a Supply-Side Liberal? Anyone who comes to this website frequently belongs to the supplysideliberal community (which means, for example, that the 535 people who have put this blog on their RSS feeds automatically qualify)." 

"It is my hope that in some way, the supplysideliberal community becomes something more than just this blog. But it is good to take things in small steps, even if the small steps follow each other in quick succession. So I have a proposal for a medium-sized undertaking as our first collective project outside of this blog: bringing into existence a wikipedia entry on “Wallace Neutrality.”

"If you think this is a good idea, the key step will be to get the entry started, which I think can be done based on Noah Smith´s post “Does Steve Williamson Think Printing Money Can´t Cause Inflation?” and the comments on my post “Is Monetary Policy Thinking in Thrall to Wallace Neutrality?”Once the entry is started, it can be revised in the light of further comments on this blog, reading of one or more of Wallace´s papers, etc. Because of the importance of highlighting the assumption of Wallace Neutrality behind much of the discussion of monetary policy during our current economic troubles, I believe this would be a great service to the world.”

“Could one of you take the lead on this?”

“I definitely can´t do it all myself. In terms of my personal priorities in relation to monetary policy, in the next while I will be writing about how people’s views on Wallace neutrality inform their views on current monetary policy debates, and what I think should be done given my belief in departures from Wallace neutrality. In setting out the nature of Wallace neutrality itself, I need help. I think a wikipedia entry would be a great way to collate our collective wisdom on this. And I think it would be a great start toward our becoming something more than just this blog”

So Wallace Neutrality evidently informs an answer to Noah’s question about Stephen Williamson not thinking monetary policy can cause inflation among others. So if so it would seem to offer some pretty high stakes. 

I myself don’t know much about starting a Wiki paper-it isn’t hard but hopefully this will give us a real opportunity for a meeting of the minds. I probably could start a Wiki paper-it’s easy. We’ll see if others have an interest. 

Mark Thoma: Laughing at the Laffer Curve →

In my first post “What is a Supply-Side Liberal?” I wrote

I believe the harm to the productive performance of the economy caused by taxes and regulations is serious (though seldom serious enough that a reduction in taxes would raise revenue).

Mark Thoma’s post (title above is a link) shows that the weight of informed opinion is behind my parenthetical remark. I can verify that since I started econ grad school in 1982, having attended many economics seminars and having had many informal discussions with economists, I have never in person heard an academic economist argue that tax cuts raise revenue, with the possible exception of Larry Lindsey (Greg Mankiw’s and my boss when we were both section-leaders in Harvard’s Ec 10). Larry Lindsey argued that cuts in capital gains tax rates would cause investors to change the timing of capital gains realizations enough that cutting capital gains tax rates would raise revenue now–implicitly at the expense of revenue later, though he didn’t emphasize that.  

One reason that tax cuts don’t raise revenues is that the effect of taxes on GDP is itself complex, and can go either way. See my posts “Can Taxes Raise GDP?” and “Why Taxes are Bad.” If marginal tax rates can be cut both now and in the future it raises efficiency (a good thing) but it will typically make people feel richer as well, so that work hours won’t go up much, if at all (also a good thing).  

Update: Scott Sumner pointed out to me that the disagreement of economists with the statement

A cut in federal income tax rates in the US right now would raise taxable income enough so that the annual total tax revenue would be higher within five years than without the tax cut.

indicates that the overwhelming majority of economists don’t believe that tax cuts can raise revenue for Keynesian reasons either.  (And actually, disagreeing with this statement means not believing that the combination of supply-side and demand-side effects of tax cuts is enough to lead to an increase in tax revenue.) On the question of whether tax cuts can raise revenue for Keynesian reasons, see Valerie Ramey’s Powerpoint discussion of a recent paper by Brad Delong and Larry Summers.

supplysideliberal.com on Facebook

Thanks to Diana Kimball’s technical assistance, Facebook is now another way to subscribe to this blog and my twitter activity at the same time.  Almost all my Facebook activity will consist of whatever is forwarded from my blog and my twitter activity, so you won’t have many extraneous things to wade through.  

There are some photos posted by others, which I think is a plus, especially right now when you can see pictures of me and my son Jordan in front of architecture by the amazing Gaudi in Barcelona. (Jordan is an undergraduate studying Economics at Ohio State University. Jordan is 19 and Diana is 25.)

If you want to subscribe to this blog and my twitter activity on Facebook, just search for Miles Kimball and request me as a friend.  I will routinely approve friend requests as soon as I get a chance.

Mark Thoma on Rainy Day Funds for States

Mark Thoma, Professor of Economics at the University of Oregon and Author ofthe Blog Economist’s View, which is the Center of the Economics Blogosphere

I have to apologize to many in the blogosphere for not having been a regular blog reader in the past and so not being aware of posts preceding mine that are clearly relevant to my posts and so deserve acknowledgement.  Unfortunately, writing this blog on top of all my other duties as an economics professor and in my private life also doesn’t leave me a lot of time for reading everything out there that I ideally should be reading.  So please do let me know of things out there that are highly relevant to my posts and I will make an effort to acknowledge them–assuming I agree that they are highly relevant.  This post is an acknowledgement of an article by Mark Thoma that is extremely relevant to one of my posts.  Mark let me know by tweeting about his prior article with @mileskimball included in the tweet. 

Back in October 26, 2010, Mark Thoma suggested in the Fiscal Times that the Federal Government help states out financially in return for states setting up rainy day funds.  (I have to apologize to many in the blogosphere for not having been a regular blog reader in the past and so not being aware of many things that people have said.)  This is very similar to my proposal in “Leading States in the Fiscal Two-Step."  So (assuming that, like Ben Bernanke, Mark thinks more fiscal stimulus is in order at this point) both Mark and I are calling for this kind of action.  One difference in our proposals is that I am suggesting that the Federal Government effectively require the states to repay the money given them now, and then go beyond that to accumulate positive balances in their rainy day fund.  Thus, my proposal will not add to the Federal Government’s debt in the end, while Mark’s will. 

Also, note that since my proposal works through changing the timing of Federal Medicaid Contributions, the Federal Government can easily do it unilaterally, and the effective rainy day fund requires no state legislative or executive action in order to come into existence. 

Wallace Neutrality and Ricardian Neutrality

Neil Wallace, Discoverer of Wallace Neutrality; Robert Barro, Ricardian Neutrality Revivalist

Scott Sumner posted a speedy reply to the question I posed for him in “Should the Fed Promise to Do the Wrong Thing in the Future to Have the Right Effect Now?  His answer, like mine, is "No!”

On the whole, it turns out that the two of us are in relatively close sympathy. On my side, I certainly think that the Fed should be clear about its medium-term objective, in the spirit of nominal GDP targeting, though there are some details to come in my upcoming post “Optimal Monetary Policy: A Primer” that will diverge from overly simple versions of nominal GDP targeting. As for shorter-run targets to get to a medium-run target in the spirit of nominal GDP, near Wallace neutrality means that the changes in quantities needed to be on target for a given effect on nominal GDP can change dramatically as key assets reach the zero lower bound.  (See my post“Trillions and Trillions: Getting Used to Balance Sheet Monetary Policy.”)  So especially when the zero lower bound is an issue, I think stating things in interest rate terms (despite the complexities that entails) has some advantage over stating things in terms of asset quantities.

On Scott’s side, he clearly states he does not believe that Wallace neutrality is an accurate description of the real world:

In theory Wallace is right and Kimball is wrong, but in practice Kimball is right, because the conditions for Wallace neutrality to hold would probably never occur in the real world.  This will take some explanation, so bear with me.

I wouldn’t quite say I am wrong in theory, but it is true that simple theoretical models definitely “want” to have Wallace neutrality.  It takes some doing–on the research frontier–to theoretically model departures from Wallace neutrality like those that I believe exist in the world.  This is a great research area for graduate students looking for a research topic.  It is worth many dissertations because it is not good enough to have a departure from Wallace neutrality in your model, it needs to be plausible as a description of why the real world departs from Wallace neutrality.  Since different economists will have different judgments about how realistic various alternative mechanisms are, it will be good to have many different models of departures from Wallace neutrality, using different mechanisms. 

In terms of how economic theory works, let me draw a history-of-economic-thought analogy between Wallace neutrality and Ricardian neutrality.  Ricardian neutrality is the proposition that for a given path of government purchases, tax rebates won’t have any important effect on the economy because the tax rebates lead to higher government debt, which unavoidably leads to higher future taxes to pay for that debt, which in turn leads, according to the theory, to enough extra private saving to pay for those extra taxes, which is exactly enough extra saving to satisfy the government’s extra borrowing needs.  Despite the complexity of this story, simple macroeconomic models very much “want” to have Ricardian neutrality.  But in the history of 20th century economic thought, most economists immediately disbelieved Ricardian neutrality as a description of the real world when Robert Barro revived interest in Ricardian neutrality.  These disbelievers were very successful when they set out to find cogent reasons why Ricardian neutrality might not hold in more realistic models.  (However, the tendency of simple models to exhibit Ricardian neutrality has ensured that an important minority of economists still believe to this day that it is an accurate description of the real world.) 

The difference in the theoretical status of Wallace neutrality as compared to Ricardian neutrality is that we are earlier in the process of putting together good models of why the real world departs from Wallace neutrality.  Studying theoretical reasons why the world might not obey Ricardian neutrality was frontier research 25 years ago.  Showing theoretical reasons why the world might not obey Wallace neutrality is frontier research now. 

Let me make one last point.  Scott mentions various ways to stimulate the economy when the fed funds rate is already at zero:

Consider all the “foolproof” escapes from the liquidity trap.  My NGDP targeting idea, Svensson’s currency depreciation, Friedman/Kimball’s massive QE, etc.

It turns out that every single one of these require a departure from Wallace neutrality.  I will talk about the purchases of foreign assets that make Svensson’s proposal work in a future post about international finance.  Here I want to point out that NGDP targeting to work also needs either (a) implicit promises to overstimulate the economy in the future to get stimulus now OR (b) departures from Wallace neutrality.  In particular, it seems to me that if nominal GDP targeting were combined with a rule that the Fed would only purchase short-term Treasury bills that it would indeed work through (a) implicit promises to overstimulate the economy in the future.  (I will explain how I am defining “overstimulating” in my upcoming post “Optimal Monetary Policy: A Primer.”)  But if the Fed is willing to contemplate purchases of other assets that still have a positive interest rate, then nominal GDP targeting would work by (b) implicitly committing to buy enough of those other assets to head toward the nominal GDP target, even if it take trillions and trillions of dollars worth of asset purchases.  That is very close in spirit to the kind of thing I am recommending.