A Partisan Nonpartisan Blog: Cutting Through Confusion Since 2012
The tag line at the bottom of Pieria’s cover page is from the post itself:
Repealing the zero lower bound has some costs, but those costs should be weighted against the benefits: not only ending recessions, but also ending inflation.
Those words refer to my first column on electronic money: “How Subordinating Paper Currency to Electronic Money Can End Recessions and End Inflation.”
An early working title was “The Most Self-Destructive Idea in America."
John Stuart Mill makes an eloquent argument for freedom of desire in On Liberty, chapter III, “Of Individuality, as One of the Elements of Well-Being,” paragraph 5:
To a certain extent it is admitted, that our understanding should be our own: but there is not the same willingness to admit that our desires and impulses should be our own likewise; or that to possess impulses of our own, and of any strength, is anything but a peril and a snare. Yet desires and impulses are as much a part of a perfect human being, as beliefs and restraints: and strong impulses are only perilous when not properly balanced; when one set of aims and inclinations is developed into strength, while others, which ought to co-exist with them, remain weak and inactive. It is not because men’s desires are strong that they act ill; it is because their consciences are weak. There is no natural connexion between strong impulses and a weak conscience. The natural connexion is the other way. To say that one person’s desires and feelings are stronger and more various than those of another, is merely to say that he has more of the raw material of human nature, and is therefore capable, perhaps of more evil, but certainly of more good. Strong impulses are but another name for energy. Energy may be turned to bad uses; but more good may always be made of an energetic nature, than of an indolent and impassive one. Those who have most natural feeling, are always those whose cultivated feelings may be made the strongest. The same strong susceptibilities which make the personal impulses vivid and powerful, are also the source from whence are generated the most passionate love of virtue, and the sternest self-control. It is through the cultivation of these, that society both does its duty and protects its interests: not by rejecting the stuff of which heroes are made, because it knows not how to make them. A person whose desires and impulses are his own—are the expression of his own nature, as it has been developed and modified by his own culture—is said to have a character. One whose desires and impulses are not his own, has no character, no more than a steam-engine has a character. If, in addition to being his own, his impulses are strong, and are under the government of a strong will, he has an energetic character. Whoever thinks that individuality of desires and impulses should not be encouraged to unfold itself, must maintain that society has no need of strong natures—is not the better for containing many persons who have much character—and that a high general average of energy is not desirable.
Unfortunately, John Stuart Mill undercuts his argument for freedom of desire by implicitly attacking the desire for indolence and passivity. In modern American culture as well, two of the desires we are the most ready to denigrate is the desire to watch TV (which in recent years has been the medium for some of our greatest works of art) and for sleep–which can be one of the most beautiful forms of indolence and passivity. (I found it entertaining to see the varied google search results for the phrase “I’ll sleep when I’m dead.”)
I often fail in my resolutions. But I value happiness enough that ever since my psychologist colleague Norbert Schwarz impressed upon me the high marginal product sleep has in producing happiness, I have made an effort to get more sleep. I have not regretted those efforts. And my wife Gail and I just finished a “Prison Break” marathon.
I posted Kai Krause’s map showing the true size of Africa in May, 2013. I discovered that back in November 2010, “G.D.” in the Economist had responded to the Kai Krause map with a map of his own. I find it even more beautiful than the Kai Krause map, both visually and conceptually.
Here is the full text of my 1st Pieria exclusive “Going Off the Paper Standard,“ now brought home to supplysideliberal.com. It was first published on October 9, 2013.
If you want to mirror the content of this post on another site, that is possible for a limited time if you read the legal notice at this link and include both a link to the original Pieria exclusive and the following copyright notice:
© October 9, 2013: Miles Kimball, as first published on Pieria. Used by permission according to a temporary nonexclusive license expiring June 30, 2015. All rights reserved.
This post is in part a response to Izabella Kaminska’s Alphaville post "Gold, paper, scissors, lizard, e-money.” I was delighted to see her reaction to this post in a tweet saying
Going off the paper standard - by @mileskimball http://www.pieria.co.uk/articles/going_off_the_paper_standard … Well argued response to queries I posed.
For almost a year now I have been advocating the use of negative interest rates for brief periods of time to cut recessions short without:
My most direct attempt to make the case for including negative interest rates in the monetary policy toolkit is my Quartz column “America’s Big Monetary Policy Mistake: How Negative Interest Rates Could Have Stopped the Great Recession in Its Tracks.” I wrote that column in recognition of the political challenge of persuading people of the benefits of brief periods of negative interest rates during serious recessions.
In addition to the political challenge of persuading people of the benefits of brief periods of negative interest rates as an alternative to long slumps, the additions fiscal stimulus makes to national debt, QE, or unending inflation intentionally engineered by the central bank, there are technical challenges in making negative interest rates deeper than a few score basis points possible. I have been on a tour of central banks and their affiliates around the world—the Bank of England, the Bank of Japan, Denmark’s National Bank, and the Bank of France already, and head to the Fed on November 1, 2013—to explain how to deal with this technical challenge.
In all of these interactions with central bank economists and policy-makers, there has been no serious dispute about the technical feasibility of eliminating what economists call the “zero lower bound on nominal interest rates.”
The two key measures for eliminating the zero lower bound and making sharply negative interest rates possible are:
Because the paper currency deposit fee that commercial banks face changes over time, it can make the effective rate of return on paper currency negative when expressed in terms of electronic money. And this negative rate of return on paper currency is achieved without any need to keep track of when the paper currency was withdrawn. A longer interval between withdrawal and deposit of the paper currency occasions a bigger change in the deposit fee over that interval, and that is enough.
As long as paper currency earns a rate of return lower than the central banks target interest rate, the only forces that will limit how low the central bank can push interest rates are forces that are part and parcel of the recovery of the economy from a recession. Interest rates will only be able to go a few hundred basis points at most into negative territory before businesses ramp up their building of factories, buying of machines, and development of new products, households ramp up their purchases of cars, other consumer durables and houses, and financial investors send money to seek higher returns abroad, generating capital outflows—which, by a central identity of international finance, will increase net exports. All of these effects of lower interest rates are entirely standard and well understood from hundreds of instances in which central banks have lowered interest rates in situations where they had high enough inflation that the zero lower bound did not bind.
It might seem that the time-varying fee on the deposit of paper currency with the central bank would disadvantage paper currency playing field between paper currency and electronic money. It is straightforward to implement negative interest rates on electronic accounts as a “carry charge.” It takes a little more engineering to yield the equivalent of a negative interest rate on paper currency. Engineering that effective negative interest rate with a paper currency deposit fee that gradually increases over the course of a few quarters does not necessarily make paper currency unattractive in an environment where all other interest rates are also negative. The negative interest rate on paper currency simply makes it so that there is no place to hide from negative interest rates except through activities that stimulate the economy by raising productive investment, raising consumption or raising net exports. (Of all such activities, increased mining of gold in those countries that have viable gold deposits may be one of the least attractive from a policy point of view, but increased mining of gold would also stimulate the economy.)
A month ago, in my blog post “The Path to Electronic Money as a Monetary System,” I laid out in some detail how a transition to an electronic money system with a time-varying paper-currency deposit fee could work in practice. Trying to make each step as clear as possible, I ended up with 18 steps, all of which I consider advisable, but not all of which are absolutely necessary in order to eliminate the zero lower bound. Here is the short version of those 18 steps:
In what represents an important step forward for this proposal, Izabella Kaminska gave detailed, largely favorable, reactions in her Alphaville post “Gold, paper, scissors, lizard, e-money.”
I will let you see for yourself the many positive reactions Izabella expresses, and her excellent descriptions of what I am proposing. Let me limit myself here to responding to the points at which Izabella questions the approach I am recommending. I have her words in bold, my answers in regular type:
In case I misunderstood one of Izabella’s concerns or missed something entirely, let me make the general point that there are a variety of different approaches that can eliminate the zero lower bound. The two big engineering issues for monetary policy are (a) eliminating the zero lower bound and (b) putting financial stability on such a solid foundation with high equity requirements that central banks need not worry about the effects of interest rate policy on financial stability. Anything that can achieve those two objectives is likely to be a big improvement over current policy.
Among approaches that achieve those objectives, the main way that I would sort through them is to favor approaches that have a greater chance of adoption. Given what little I know or suspect about the politics of electronic money at this point, that makes me lean toward approaches that are as close to the current monetary system as possible, in which as many as possible of the changes that are necessary to make substantially negative interest rates possible can be carried out in a way that would seem technical and even boring to those of the general public who do not work in the financial sector.
The exchange rate between electronic money and paper currency would be salient to the general public, but I have argued that this would be politically tolerable because banks would begin offering paper currency at a discount for a substantial period of time before the deposit charge hit the level of 3% or so that would induce retail shops to have a paper currency price higher than the electronic money price. The negative interest rates themselves will always be salient, and the case for them must be made forthrightly. But the technical measures needed to make negative interest rates possible can, I believe, be sold as part of the transition to a modern, electronic money system, if the negative interest rates themselves can be sold politically.
Link to a New York Times review of American Colossus by reviewer John Steele Gordon
In his book American Colossus: The Triumph of Capitalism 1865-1900, H. W. Brands writes this, quoting from his earlier book Masters of Enterprise: Giants of American Business from John Jacob Astor and J.P. Morgan to Bill Gates and Oprah Winfrey(p. 59) and from Joseph Frazier Wall's Andrew Carnegie(p. 337):
Carnegie obsessed over cost because it was the one part of his business he could control. “Carnegie never wanted to know the profits,” an associate said. “He always wanted to know the cost.” Carnegie himself explained: “Show me your cost sheets. It is more interesting to know how well and how cheaply you have done this thing than how much money you have made, because the one is a temporary result, due possibly to special conditions of trade, but the other means a permanency that will go on with the works as long as they last.” (p. 93)
This spirited Twitter discussion of negative interest rates serves as a useful compendium of issues that I need to address as I have time.
Let me point out one big victory in this discussion that you might not otherwise notice: every one of the participants in this discussion takes for granted that the zero lower bound is a policy choice–not a law of nature, and discusses it seriously as a policy choice.
Icon for the Red Banker blog (which also appears in Wikipedia article on the “Commercial Revolution”)
Frederic Mari blogs as the Red Banker. He gives a positive take on my first post “What is a Supply-Side Liberal?” in his post “Supply Side Liberalism: The Interesting Case of Dr. Kimball and Mr. Miles.” However, Frederic questions whether limited government is politically possible, saying
People oppose government spending but support all of its public good provision.
Here I wished he had discussed my central proposal for keeping the burden of taxation down while providing abundant public goods: a public contribution system that raises taxes rates, but lets people avoid 100% of the extra taxes by making charitable donations focused on doing things the government might otherwise have to do. These two posts lay out how a public contribution system would work:
Also, my post
is best understood in this context.
I discuss a few other ideas for how to reduce the burden of taxation based on the ways in which human psychology departs from over-simplified views of homo economicus in this popular post:
The bottom line is this: In my book, it isn’t Supply-Side Liberalism without a serious effort to lower the burden of taxation for any given level of revenue, using everything we know about human nature.
Here is the full text of my 31st Quartz column, “You should expect panic when the Fed makes a mess of explaining its plans," now brought home to supplysideliberal.com. It was first published on September 19, 2013. Links to all my other columns can be found here.
If you want to mirror the content of this post on another site, that is possible for a limited time if you read the legal notice at this link and include both a link to the original Quartz column and the following copyright notice:
© September 19, 2013: Miles Kimball, as first published on Quartz. Used by permission according to a temporary nonexclusive license expiring June 30, 2015. All rights reserved.
Back in June, Ben Bernanke told the press:
If the incoming data are broadly consistent with this forecast, the Committee currently anticipates that it would be appropriate to moderate the monthly pace of [asset] purchases later this year.
That sentence was interpreted as signaling a tightening of the path of monetary policy, and rocked markets around the world. Bernanke and other members of the US Federal Reserve’s monetary policy committee made great efforts to fight that perception of tighter policy intentions, but it is only with yesterday’s announcement that
… the Committee decided to await more evidence that progress will be sustained before adjusting the pace of its [asset] purchases
the markets have been convinced that the Fed intends to continue to use the “quantitative easing” provided by buying long-term government bonds and mortgage-backed assets to stimulate the economy until things look better.
I agree with Justin Wolfers, writing in Bloomberg, that the way Bernanke talked in June about “tapering” off asset purchases was a serious mistake, only partly rectified by the Fed’s announcement today. But the real fault lies with an approach to monetary policy that relies so heavily on communicating the Fed’s future intentions.
Monetary policy’s dependence on what the Fed calls “communications” is problematic because members of the Fed’s monetary policy committee don’t even agree on what war they are fighting. Some view the battle as one of fighting back from a close call with the possibility of another Great Depression. Janet Yellen, the clear frontrunner to succeed Ben Bernanke now that Larry Summers has bowed out, is in this camp. Some just want to make sure monetary policy doesn’t contribute to another financial crisis. Still others worry about avoiding the inflationary mistakes of the 1970s. It is hard for a many-headed beast to signal a clear direction.
Secondly, the Fed’s approach of talk therapy is problematic because it is hard to communicate a monetary policy that is strongly stimulative now but will be less stimulative in the future. As I discussed in a previous column and in the presentation I have been giving to central banks around the world, adjusting short-term interest rates has an almost unique ability to get the timing of monetary policy right. Unfortunately, the US government’s unlimited guarantee that people can earn at least a zero interest rate by holding massive quantities of paper currency stands in the way of simply lowering short-term interest rates. Without being able to cut short-term rates, the two choices left are (a) stimulative both now and later or (b) not-so-stimulative either now or later. Since the appropriate level of monetary stimulus now and a year or two from now are likely to be different, it is easy to see how the Fed’s thinking—and the market’s interpretation of the Fed’s thinking—could oscillate between focusing on getting the right level of monetary stimulus now, and getting the right level of monetary stimulus later.
My own recommendations for the Fed are no secret:
Sometimes we think of faith as something optional, and something directed toward the supernatural. Not so. Faith is unavoidable, and faith directed toward the supernatural is a small part of all faith.
As for many discussions of faith, the starting point for my discussion of faith are the words of the (unknown) author of the Epistle to the Hebrews. Using William Tyndale’s translation with modern spelling, Hebrews 11:1 reads
Faith is a sure confidence of things which are hoped for and a certainty of things which are not seen.
In my book, the more evidence we have to go on and the less faith we have to depend on, the better. That is, I disagree with the words the resurrected Jesus is reported to have said to a doubting Thomas (John 20:29, Tyndale):
Thomas, because thou hast seen me therefore thou believest: Happy are they that have not seen and yet believe.
Rather, happy are they who have much evidence to base their choices on. But choices–to act, or not to act–often have to be made when evidence is scarce. That is where faith comes in.
One might be tempted to think of faith as a Bayesian prior. But it isn’t that simple. In Bayesian decision-making, “prior beliefs” are left unexplained. But in the real world they come from different ways of responding to and reasoning about past experience. New data sometimes simply updates prior beliefs within the same paradigm, as Bayesian theory suggests. But other times, new data upends the thin tissue of reasoning and reaction that was crucial for the formation of those prior beliefs, resulting in a much bigger change in views than straightforward Bayesian updating would imply. And sometimes additional reasoning–in the absence of any additional data whatsoever–can dramatically change one’s views.
A simpler point is that what is prior to one set of events is posterior to earlier events. Putting both points together, faith is what one believes at a given moment in time, however one has managed to cobble together those beliefs.
In situations where one is willing to think of one choice as inaction, with costly actions having debatable benefits, one can distinguish between a “belief in nothing” that leads one to continue in inaction, and a “belief in something” that leads one to act. When proponents of action say “Have faith!” they are advocating a belief in a high enough marginal product of action to make it worth the costs. That is very much the perspective of the Lectures on Faith, which were once part of the Mormon canon, but now enjoy only semi-canonical status. (The full text of the Lectures on Faith can be found here.) Let me quote a passage from the Lectures on Faith that has stuck with me, again modernizing the spelling:
If men were duly to consider themselves, and turn their thoughts and reflections to the operations of their own minds, they would readily discover that it is faith, and faith only, which is the moving cause of all action, in them; that without it, both mind and body would be in a state of inactivity, and all their exertions would cease, both physical and mental.
Were this class to go back and reflect upon the history of their lives, from the period of their first recollection, and ask themselves, what principle excited them to action, or what gave them energy and activity, in all their lawful avocations, callings and pursuits, what would be the answer? Would it not be that it was the assurance which we had of the existence of things which we had not seen, as yet? Was it not the hope which you had, in consequence of your belief in the existence of unseen things, which stimulated you to action and exertion, in order to obtain them? Are you not dependent on your faith, or belief, for the acquisition of all knowledge, wisdom and intelligence? Would you exert yourselves to obtain wisdom and intelligence, unless you did believe that you could obtain them? Would you have ever sown if you had not believed that you would reap? Would you have ever planted if you had not believed that you would gather? Would you have ever asked unless you had believed that you would receive? Would you have ever sought unless you had believed that you would have found? Or would you have ever knocked unless you had believed that it would have been opened unto you? In a word, is there any thing that you would have done, either physical or mental, if you had not previously believed? Are not all your exertions, of every kind, dependent on your faith? Or may we not ask, what have you, or what do you possess, which you have not obtained by reason of your faith? Your food, your raiment, your lodgings, are they not all by reason of your faith? Reflect, and ask yourselves, if these things are not so. Turn your thoughts on your own minds, and see if faith is not the moving cause of all action in yourselves; and if the moving cause in you, it it not in all other intelligent beings?
Let me apply this idea to Jill’s decision of whether to go to college and learn economics or not. Some consequences of college might be relatively easy to discern, such as the costs, and if she is relatively well informed, the likely effect on her future wage. But what about the benefits learning economic analysis might have for her future decision-making? A tempting approach to analyzing Jill’s problem would be to think of her computing what her life would be like (or a probability distribution thereof) if she does go to college, as well as what her life would be like if she doesn’t go to college, compare the two to see which one she prefers, and make that choice. But in this case, Jill can't compute what her life will be like if she goes to college and learns economics because she doesn’t know now the analytical tools that could influence her life in critical ways if she does go to college and learn economics. In other words, she can’t make a fully rational choice (according to the demanding standards of most economic models) of whether or not to go to college without knowing the very things that she would be learning in college. But if she knew those things already, she wouldn’t need to go to college!
The Handbook of Contemporary Behavioral Economics: Foundations and Developments, page 343 points to the more general conundrum of which Jill’s problem is an example:
The inability to formulate an optimization problem that folds in the cost of its own solution has become known as the “infinite regress problem,” with Savage (1954) appearing to be the first to use the regress label.
Another good example of the infinite regress problem is the decision of which lines of research to pursue. The issue is stark in a decision of whether or not to undertake a research project in mathematical economic theory. There is no way to make a fully rational decision according to the demanding standards of most economic models because the most economic models assume that information processing (as distinct from information acquisition) comes free, but the issue is precisely whether one’s own finite thinking ability will allow one to find a publishable theoretical result within a reasonable amount of time. Therefore, one must make the decision according to a hunch of some sort–or in other words, by faith. The analogy that makes one believe that a proof might exist is not itself the proof, and may fall apart. But that analogy makes one willing to take the risk. Except in cases where undecidability of the sort that shows up in Goedel’s theorem comes into play, the only fully rational probability that one could find a proof would be either 0 or 1, because one would already know the answer. But that just isn’t the way it is when you make the decision. You have some notion of the probability you will be able to find a proof–a probability that by its nature cannot have a firm foundation, yet still guides one’s choice: faith.
Growth theory faces a similar problem. It would be a lot easier to form a sensible probability distribution for future technological progress if one actually knew the technology already. Someday, economists studying the economics of other planets under the restriction of Star Trek’s (often violated) Prime Directive of non-intervention may be able to do growth theory that way. But we 21st century economists must do growth theory in ignorance of scientific and engineering principles that may be crucial to future economic growth. It would be nice to know the answers to questions such as how hard it is to make batteries more efficient, for example, or whether theoretically possible subatomic particles that could catalyze fusion exist or not. (My friend, theoretical physicist James Wells, has worked on the theory. The right kind of heavy, but relatively stable negatively charged particle could do it by taking the place of electrons in hydrogen atoms and making the exotic hydrogen atoms much smaller in size.) If it were all just a matter of getting experimental results, the economic model might be standard, but what if just thinking more clearly with the evidence one already has could make it possible to get to the answer with one decisive experiment instead of an inefficient series of 100 experiments.
Just as with the standard approach to human capital, we often look at technological progress from the outside, in a relatively bloodless way: a shifter in the production function changes. But the inside story of most technological progress is that in some sense we were doing something stupid, but now have stopped being stupid in that particular way. I say “in some sense” because–while our finite cognition is painful–it is possible to be smart in recognizing our cognitive limitations and making reasonable decisions despite having to walk more by faith that we would like in making decisions that depend on technologies we don’t yet know exist.
A central life decision is whether to attempt to better one’s life by making an effort to do so. Information acquisition and learning how to process information are themselves costly, so the initial decision of whether to do the information acquisition and other learning that are a logical first step must be made in a fog of ignorance. Some people are lucky enough to have parents who instill in them confidence that effort to gain knowledge, learn and grow will be well rewarded in life, at least on average. It is good luck to have that belief, because it seems to be true for most people. But believing that it is true for you–that your efforts to better your life will be rewarded–must be an act of faith. For you are not exactly like anyone else. And even knowing that most people are similar in this regard is a bit of knowledge that might cost you dearly to acquire if you are not so lucky to as to have your parents, or someone else you trust tell you so.
If you decide that it is not worth the effort trying to better your life, you will not collect much evidence on the marginal product of effort, and so there will be precious little that could provide direct evidence to change your mind. In such a low-effort trap, it will not be hard evidence about your own marginal product of effort that switches you from believing in an external locus of control (outside forces govern outcomes with little effect of own effort) to an internal locus of control (own efforts have an important effect on quality of outcomes). If you escape the trap of believing in an external locus of control, it will be by believing some kind of evidence or reasoning that is much less definitive.
I do not believe in the supernatural. So for me, faith is not about the supernatural. Yet still we must walk by faith. Walking by the light of evidence is better, but such is not always our lot.
Not only must we sometimes walk by faith–whether we like or not–so must others. It matters what kind of faith we instill in those around us, to the extent we have any influence.
To me, faith in progress and human improvability–both individually and collectively–is a precious boon. It is not enough for us to have that faith. Many are caught in what I believe to be the trap of believing they can not better their lives. I believe it is important for them to have faith in progress and human improvability as well. If you believe in progress and human improvability as I do, let us together seek for better and better ways of transmitting that faith to those who do not yet believe.
When my column “Don’t Believe Anyone Who Claims to Understand the Economics of Obamacare” appeared, Robert Graboyes sent me a link to his October 2, 2013 post in the Mercatus Center’s “McClatchy Tribune” blog also emphasizing the importance of innovation: “Paging Dr. Jobs.” (Here is a link to the article in the Dallas Morning News.) I liked it so much I asked to reprint it here. He kindly gave me permission. Here it is. One action Robert caused me to take is that I bought the Kindle edition of “The Innovator’s Prescription” by Clayton Christensen, Jerome Grossman, and Jason Hwang.
American health care has no Steve Jobs or Bill Gates. No Jeff Bezos, Elon Musk, Burt Rutan, or Henry Ford. No innovator whose genius and sweat deliver the twin lightning bolts of cost-reduction and quality improvement across the broad landscape of health care. Why not? Either we answer that question soon and uncork the genie, or we consign our health care to a prolonged, unaffordable stagnation.
America leads the world in health-care innovation — but not the innovation that sends costs plunging and unleashes previously undreamed-of quality improvements. That kind of innovation occurs only in isolated pockets of health care. In the aggregate, health care spending rises rapidly and relentlessly.
If implemented as planned, the Affordable Care Act ensures the health-care industry will never have the flexibility it needs to generate a Steve Jobs. Tightly constricted, top-down micromanagement will deprive health care of the oxygen essential to attract and incentivize cost-cutting innovators. This suffocating environment predated the ACA, but the law worsens things considerably by tightly controlling providers, patients, and employers.
Unfortunately, advocates of decentralized, market-oriented approaches have never offered the electorate convincing alternatives to centralized, bureaucratic command and control.
If the ACA crumbles, market-oriented health care reformers have one more chance to articulate a vision. A quick Internet search already churns up chatter (some gleeful, some mournful) about replacing a failed ACA with a single-payer system. Decentralizers will need to formulate and articulate — quickly — why American health care never produces a Steve Jobs and how markets could usher in cost-cutting innovation. Importantly, their narratives would need to ring true to people who are not already persuaded that markets can function in health care.
To illustrate the conceptual and rhetorical rut we are in, imagine if people in early 1964 had discussed computers the way we in 2013 discuss health care. (At that time, computers were mostly room-size mainframes costing millions in 2013 dollars, at least). Discussing computers as we today discuss health care, all the parties in 1964 would agree there is a “computer crisis” — out-of-control prices, a widening gap between haves and have-nots. Only rich companies, they fret, can afford computers.
Some would offer an array of solutions: The government could become the sole manufacturer of mainframes. Alternatively, the government could become the sole purchaser of mainframes — using its great market clout to force IBM to sell its mainframes for, say, $950,000 rather than $1 million. Or the government could tightly regulate mainframe manufacturers — prohibiting them, say, from charging more than $900,000 for a computer.
Others, conversely, would argue that the answer to the hypothetical computer crisis is a more open market. We need more stores, they say, in which to buy mainframes. Mainframe stores in every shopping mall — and a greater capacity to buy and sell mainframes across state lines.
Apolitical business end-users would seek to band together in purchasing cooperatives — demanding as one that IBM moderate its mainframe prices.
Meanwhile, the industry would still be mainframes, mainframes, mainframes all the way down. No minis, micros, laptops, or smartphones. In fact, in our allegorical world of 1964, everyone would agree to laws and regulations and institutions that virtually forbid the emergence of a Steve Jobs or Bill Gates.
Let’s return, now, to 2013 and health care. To unleash innovators, we have to recognize what leashes them in the first place. Consider some candidates: Medicare’s reimbursement formula muffles prices and distorts resource allocation in ways that impact private insurance. Tax laws effectively bind employees to their employers’ health plans. State regulations protect insiders through scope-of-practice regulations, protectionist licensing, and certificate-of-need requirements. The structure of medical education (heavily influenced by state regulations) locks obsolete management practices in place. Tort law discourages heterodox innovation. Even more challenging, fixing one of these at a time may not do the trick.
Building the case for market solutions in health care, then, demands that market advocates think large. For inspiration, they should look beyond their usual array of reading sources. Cost-cutting innovation, also known as “disruptive innovation” is brilliantly described in “The Innovator’s Prescription” by Clayton Christensen, Jerome Grossman, and Jason Hwang.
A key insight from that literature is that cost-cutting innovation almost always comes from the supply side, not the demand side. It emerges from the protean genius of previously unknown people who see our wishes and hopes before we ourselves do. Tellingly, most of today’s policy prescriptions from the left, right, and center focus on the demand-side incentives. But the problem is that consumers can’t visualize what the disruptive innovations in health care will be — any more than they could have known in 1964 how the laptop, smartphone, and internet would soon restructure their lives.
Message to market enthusiasts: The clock is ticking. One more chance to get health care right may be in the offing. There’s no time to waste. And you had best learn to persuade those who don’t already agree with you.
Monetary policy and fiscal policy are not equally good as ways to stimulate the economy. Traditional monetary policy (that is, lowering the short-term interest rate) has two key advantages over traditional fiscal policy:
My subtitle “Expansionary Monetary Policy Does Not Raise the Budget Deficit” is a quotation from Alan Blinder’s October 25, 2010 Wall Street Journal op-ed “Our Fiscal Policy Paradox,” where Alan also points to the political difficulties of using discretionary fiscal for macroeconomic stabilization:
The practice of monetary and fiscal policy is fraught with difficulties, but the central concept is straightforward, compelling and, by the way, 75 years old: The government should push the economy forward when unemployment is high and slow it down when inflation threatens.
To do so, governments normally have two principal sets of weapons. Fiscal policy means moving some taxes or elements of public spending up or down to either propel or restrain total spending. In the United States, such decisions are made politically, by Congress and the president. Monetary policy normally (but not now) means lowering or raising short-term interest rates to either speed up growth or slow it down. That power, of course, resides in the technocratic Federal Reserve….
There are plenty of powerful weapons left in the fiscal-policy arsenal. But Congress is tied up in partisan knots that will probably get worse after the election….
But what about using monetary policy? Chairman Ben Bernanke and his Federal Reserve colleagues are not paralyzed by politics. They have not fallen victim to misleading advertising claiming that past policies have not helped. And expansionary monetary policy does not raise the budget deficit. So why the hesitation?
Monetary Policy. My view is that we need tools for macroeconomic stabilization that (a) can be applied technocratically and (b) do not add greatly to national debt when they are used to stimulate the economy. Monetary policy fills that bill, once it is unhobbled by eliminating the zero lower bound. Here is what I wrote in my column “Why Austerity Budgets Won’t Save Your Economy”:
For the US, the most important point is that using monetary policy to stimulate the economy does not add to the national debt and that even when interest rates are near zero, the full effectiveness of monetary policy can be restored if we are willing to make a legal distinction between paper currency and electronic money in bank accounts—treating electronic money as the real thing, and putting paper currency in a subordinate role….
Without the limitations on monetary policy that come from our current paper currency policy, the Fed could lower interest rates enough (even into negative territory for a few quarters if necessary) to offset the effects of even major tax increases and government spending cuts.
The Costs of National Debt. That column is also important in giving some of the best arguments I know for worrying about the national debt now that it is hard to argue that national debt slows economic growth. (On the effect of national debt on economic growth, see my two columns with Yichuan Wang “After Crunching Reinhart and Rogoff’s Data, We Found No Evidence High Debt Slows Growth” and Examining the Entrails: Is There Any Evidence for an Effect of Debt on Growth in the Reinhart and Rogoff Data? and the other work they flag.) Here is what I had to say about the costs of debt in "Why Austerity Budgets Won’t Save Your Economy“:
…lenders are showing no signs of doubting the ability of the US government to pay its debts. But there can be costs to debt even if no one ever doubts that the US government can pay it back.
To understand the other costs of debt, think of an individual going into debt. There are many appropriate reasons to take on debt, despite the burden of paying off the debt:
To deal with an emergency—such as unexpected medical expenses—when it was impossible to be prepared by saving in advance.
To invest in an education or tools needed for a better job.
To buy an affordable house or car that will provide benefits for many years.
There is one more logically coherent reason to take on debt—logically coherent but seldom seen in the real world:
To be able to say with contentment and satisfaction in one’s impoverished old age, “What fun I had when I was young!”
In theory, this could happen if when young, one had a unique opportunity for a wonderful experience—an opportunity that is very rare, worth sacrificing for later on. Another way it could happen is if one simply cared more in general about what happened in one’s youth than about what happened in one’s old age.
Tax increases and government spending cuts are painful. Running up the national debt concentrates and intensifies that pain in the future. Since our budget deficits are not giving us a uniquely wonderful experience now, to justify running up debt, that debt should be either (i) necessary to avoid great pain now, or (ii) necessary to make the future better in a big enough way to make up for the extra debt burden. The idea that running up debt is the only way to stimulate an economic recovery when interest rates are near zero is exactly what I question… If reforming the way we handle paper currency made it clear that running up the debt is not necessary to stimulate the economy, what else could justify increasing our national debt? In that case, only true investments in the future would justify more debt: things like roads, bridges, and scientific knowledge that would still be there in the future yielding benefits—benefits for which our children and we ourselves in the future will be glad to shoulder the burden of debt.
National Lines of Credit: I write about the importance of stabilization policy that can be applied technocratically, without getting tangled up in politics in the context of my other main proposal for stabilization policy: National Lines of Credit (or equivalently "Federal Lines of Credit”). The key post there is “Preventing Recession-Fighting from Becoming a Political Football.” In any case, I think National Lines of Credit would get less tangled up in politics than regular traditional fiscal policy, but it would also be possible to set them up so that they were initiated in an explicitly technocratic way. Here is the relevant passage from my working paper “Getting the Biggest Bang for the Buck in Fiscal Policy”:
The lack of legal authority for central banks to issue national lines of credit is not set in stone. Indeed, for the sake of speed in reacting to threatened recessions, it could be quite valuable to have legislation setting out many of the details of national lines of credit but then authorizing the central bank to choose the timing and (up to some limit) the magnitude of issuance. Even when the Fed funds rate or its equivalent is far from its zero lower bound at the beginning of a recession, the effects of monetary policy take place with a significant lag (partly because of the time it takes to adjust investment plans), while there is reason to think that consumption could be stimulated quickly through the issuance of national lines of credit. Reflecting the fact that national lines of credit lie between traditional monetary and traditional fiscal policy, the rest of the government would still have a role both in establishing the magnitude of this authority and perhaps in mandating the issuance of additional lines of credit over the central bank’s objection (with the overruled central bank free to use contractionary monetary policy for a countervailing effect on aggregate demand).
Though not as good as monetary stimulus, National Lines of Credit are also much better than traditional fiscal policy in yielding a high ratio of stimulus to the amount ultimately added to the national debt.
National Rainy Day Accounts. There is a related mode of stabilization policy that I consider superior to National Lines of Credit. The National Rainy Day Accounts described in this passage of my working paper “Getting the Biggest Bang for the Buck in Fiscal Policy” would not add to the national debt at all:
It is also worth pointing out that, in principle, national lines of credit in times of low demand could be superseded in the long run (at least in part) by a modest level of forced saving in times of high demand, with the funds from these “national rainy day accounts” released to households in time of recession (and also perhaps in the case of one of a well-defined list of documentable personal financial emergencies).
The National Rainy Day Accounts also have household finance benefits for people who have difficulty saving for emergencies without some external discipline. The main limitations of National Rainy Day Accounts as stabilization policy is (a) that they require advance preparation and (b) the resources of National Rainy Day Accounts might sometimes be exhausted before getting enough stimulus.
8 of my top 10 columns and 2 of my top 10 posts are totally new since the last time I made a list of my biggest hits, so it is time to make a new list. You can see my explanation of the rankings and other musings after the lists.
Top 40 Posts on supplysideliberal.com:
The top 40 posts on supplysideliberal.com listed below are based on Google Analytics pageviews from June 3, 2012 through midday, October 13, 2013. The number of pageviews is shown by each post. Not counting Quartz pageviews and pageviews from some forms of subscription, Google Analytics counts 327,807 pageviews during this period but, for example, 101,669 homepage views could not be categorized by post.
I have to handle my Quartz columns separately because that pageview data is proprietary. My very most popular pieces have been Quartz columns, so I list them first. Since there are less than 40, I have listed them all, with the ones with no data (yet) listed at the bottom. (To avoid duplication, I have disqualified companion posts to Quartz columns from the top 40 blog post list, since they eventually get recombined with the Quartz columns when I repatriate the columns. For these columns, the ranking is by pageviews at a point where things have settled down. For later posts, that is standardized to pageviews during the first 30 days when Quartz has an exclusive.
I plan to update the list of columns as new columns appear, but the list of posts is locked in place until the next time I do a post like this.
You might also find other posts you like in this earlier list of top posts. This post and that one cover everything that has ever been on one of most popular lists so far.
Musings:
Someday robots will have great moral worth of their own as conscious beings. But there is another image of robots in our culture as something distinctly less than human: emotionless, stilted, doing routine things by rote. Just think of the connotations of the word “robotic,” when applied to humans. So among robots, let me distinguish between
Part of John Stuart Mill’s argument for freedom urges us to strive to elevate ourselves far above the level of these lesser robots. He never uses the word “robot,” since that word only entered the English language in 1923, in the English translation of a 1920 Czech play by Karel Capek. But John did use the word “automaton,” in exactly the sense I just defined. Here is what he has to say in On Liberty, chapter III, “Of Individuality, as One of the Elements of Well-Being,” paragraph 4:
He who lets the world, or his own portion of it, choose his plan of life for him, has no need of any other faculty than the ape-like one of imitation. He who chooses his plan for himself, employs all his faculties. He must use observation to see, reasoning and judgment to foresee, activity to gather materials for decision, discrimination to decide, and when he has decided, firmness and self-control to hold to his deliberate decision. And these qualities he requires and exercises exactly in proportion as the part of his conduct which he determines according to his own judgment and feelings is a large one. It is possible that he might be guided in some good path, and kept out of harm’s way, without any of these things. But what will be his comparative worth as a human being? It really is of importance, not only what men do, but also what manner of men they are that do it. Among the works of man, which human life is rightly employed in perfecting and beautifying, the first in importance surely is man himself. Supposing it were possible to get houses built, corn grown, battles fought, causes tried, and even churches erected and prayers said, by machinery—by automatons in human form—it would be a considerable loss to exchange for these automatons even the men and women who at present inhabit the more civilized parts of the world, and who assuredly are but starved specimens of what nature can and will produce.
There is power in large groups of human beings acting in concert. But when that concerted effort is enforced by making each one of those human beings less–a little like an automaton–then the power is greatly reduced. There is greater power in a large group of human beings acting in concert when each individual is acting with the full capacity that comes from freedom.
Though our styles are not exactly the same, I share the sentiment my daughter Diana expresses in one of her most recent Tumblr posts:
There’s no better feeling than making a difference. But because the type of difference I’m best at making comes through quiet observation and subtly shifting people’s minds, I rarely get the honor of knowing what changes happen as a result. I can feel the warm glow of a lightbulb turning on in conversation, but I don’t usually get to see down the whole corridor it illuminates.
Once in a blue moon, though, I catch a glimpse of the bend in the hallway. Those are the very best days.
October 18, 2013 Update: Given his 780,386 Twitter followers, a tweet from Ezra Klein is worth reporting. I like his modification to my tweet:
No, she’s a human being RT @mileskimball: Don’t miss my column “Janet Yellen is hardly a dove” http://blog.supplysideliberal.com/post/63725670856/janet-yellen-efficiency-wages-and-monetary-policy
Notes:
Andy Harless’s Question: Where Does the Curvature Come From? Andy Harless asks why there is an asymmetry–in this case a curvature–that makes things different when unemployment goes up than when it goes down. The technical answer is in Carl Shapiro and Joseph Stiglitz’ paper “Unemployment as a Worker Discipline Device.” It is not easy to make this result fully intuitive. A key point is that unemployed folks find jobs again at a certain rate. This and the rate at which diligent workers leave their jobs for exogenous reasons dilute the motivation from trying to reduce one’s chances of leaving a job. The discount rate r also dilutes any threats that get realized in the future. So the key equation is
dollar cost of effort per unit time
= (wage - unemployment benefit)
· detection rate
÷ [detection rate + rate at which diligent workers leave their jobs + rate at which the unemployed find jobs + r]
That is, the extra pay people get from work only helps deter dereliction of duty according to the fraction of the sum of all the rates that comes from the detection probability. And the job finding rate depends on the reciprocal of the unemployment rate. So as unemployment gets low, the job finding rate seriously dilutes the effect of the detection probability times the extra that workers get paid.
(The derivation of the equation above uses the rules for dealing with fractions quite heavily, backing up the idea in the WSJ article I tweeted as follows.
The Dividing Line: Why Are Fractions Key to Future Math Success? http://on.wsj.com/15rlupS
Deeper intuition for the equation above would require developing a deeper and more solid intuition about fractions in general than I currently have.)
Solving for the extra pay needed to motivate workers yields this equation:
(wage - unemployment benefit)
= dollar cost of effort per unit time
· [detection rate + rate at which diligent workers leave their jobs + rate at which the unemployed find jobs + r] ÷
detection rate
In labor market dynamics the rates are high, so a flow-in-flow-out steady state is reached fairly quickly, and we can find the rate at which the unemployed find jobs by the equation flow in = flow out, or since in equilibrium the firms keep all their workers motivated,
rate at which diligent workers lose jobs * number employed
= rate at which the unemployed find jobs * number unemployed.
Solving for the rate of job finding:
rate at which the unemployed find jobs
= rate at which diligent workers leave their jobs
· number employed ÷ number unemployed
Finally, it is worth noting that
rate at which diligent workers leave their jobs
+ rate at which the unemployed find jobs
= rate at which diligent workers leave their jobs
· [number unemployed + number employed]/[number unemployed]
= rate at which diligent workers leave their jobs
÷ unemployment rate
Morgan Warstler’s Reply: The original link in the column about Morgan Warstler’s plan was to a Modeled Behavior discussion of his plan. Here is a link to Morgan Warstler’s own post about his plan. Morgan’s reply in the comment thread is important enough I will copy it out here so you don’t miss it:
1. The plan is not Dickensian. It allows the poor to earn $280 per week for ANY job they can find someone to pay them $40 per week to do. And it gives them the online tools to market themselves.
Work with wood? Those custom made rabbit hatches you wish you could get the business of the ground on? Here ya go.
Painter, musician, rabbit farmer, mechanic - dream job time.
My plan is built to be politically WORKABLE. The Congressional Black Caucus, the Tea Party and the OWS crowd. They are beneficiaries here.
2. No one in economics notices the other key benefit - the cost of goods and services in poor zip codes goes down ;:So the $280 minimum GI check buys 30% more! (conservative by my napkin math) So real consumption goes up A LOT.
This is key, bc the effect is a steep drop in income inequality, and mobility.
That $20 gourmet hamburger in the ghetto costs $5, and it’s kicking McDonalds ass. And lots of hipsters are noticing that the best deals, on things OTHER THAN HOUSING are where the poor live.
Anyway, I wish amongst the better economists there was more mechanistic thinking about how thigns really work.
Here is a link to my 1st Pieria exclusive: “Going off the Paper Standard."
I like the website Pieria because of its focus on serious economic issues. Pieria counts me as one of its "experts,” and I keep good company in that role. In the past Pieria has mirrored many of my posts in accordance with my general permission to mirror my posts on other sites, under certain conditions. For the first time, I have engaged in an arrangement to post something on Pieria first. In about two weeks, I will repatriate it to supplysideliberal.com.
Unlike my Quartz articles, in this case, I have written exactly what I would have written if the post had appeared first on supplysideliberal.com. Pieria added the picture and a section heading, but otherwise didn’t change one word, and the title is mine. This post is at a higher level of economic sophistication than would be appropriate for Quartz.
