A Partisan Nonpartisan Blog: Cutting Through Confusion Since 2012
Here is my post explaining the program Matt refers to, which I am offering to economists free of charge:
Also, at the bottom of the post below, there are links to other posts on making careers more meaningful and life better—including some that are specifically directed at economists:
I am delighted to be able to share another guest post by my friend Taryn Laakso. Her previous guest posts are “Recognizing Opportunity: The Case of the Golden Raspberries” and “Taryn Laakso: Righting Your Ship Before You Capsize.”
I was challenged in a Powered by Play program earlier this year, lead by the delightful Play & Burnout Coach, Kaitlyn Lyons that went deep into learning my unique playstyle because I was on the verge of burnout. After 6 months of breaking away from corporate and spending 55+ hours a week building my coaching business during a pandemic, I forgot all about what rest, play, and fun was. I was going into a dark place with my well-being. My battery charge was on the brink of 0%.
My inner Sage was screaming at me to take care of myself but I felt like my options for getting rest and play weren't available to me due to the pandemic restrictions. I found myself comparing or judging others who seemed to be having fun on social media. I didn't like this feeling within myself. It felt icky! I needed to do something about this quick.
Hot Tip! Feelings of envy or judgment towards others is a clear signal that something is off!
What I discovered is that my version of rest and play is not something I should compare to someone else's version. Did you know there are 8 different personalities of play according to Dr. Stuart Brown?
For me, my ideal fun is movement, exploring, and storytelling. Staying at home and not traveling was a big hit to my play power levels. Some of the elements of Mover and Explorer meant traveling, backpacking, and dancing for me. Storytelling is about enjoying books, plays, watching movies, and reading books. Screech! I wasn’t doing any of this! I wasn't traveling, dancing, seeing plays, going to a new movie, or reading for fun. I had been heavy in reading about leadership and business building books. I was sitting behind my desk working on my business. Travel was out the window.
No wonder my battery was running on empty and my saboteurs were taking over my mental well being. All those ways of playing that I took for granted weren’t available. Here’s the impact when the dark side wants to take over…
I took it out on my partner by criticizing him, judging myself, and avoiding talking about my feelings. I am so grateful for the mental muscles I was building through the Positive Intelligence® work that allowed me to notice quickly how my Sage voice within was telling me to make a change. Pronto!
This meant the 10 Saboteurs from the Positive Intelligence work were creating a band of bullies at the playground in my head during this time. Here’s the line up of the entire bully band:
The Judge, Avoider, Controller, Hyper-Achiever, Hyper-Rational, Hyper-Vigilant, Pleaser, Restless, Stickler, and Victim.
For me, it was The Judge, Avoider, Hyper-Achiever, and Hyper-Rational that were depleting my energy by all their negative chatter in my head. Some serious butt-kicking was needed to evict them out of my head. It meant taking action of giving myself permission to rest and play. I enjoyed reading a mindless novel, took days off, traveled to Pt. Townsend or Lopez Island and walked outside as much as possible. Even if this meant working fewer hours and being less 'productive'. It was critical for recharging the batteries AND I actually got more done because I was rested.
It may feel hard to give yourself permission to rest and play. Here's what I know happens when you rest and play.
You are recharged
You are nicer to yourself and others
Your creativity is ignited
Do you want to feel rested, recharged, calm, and have a better relationship with your loved ones?
Don't let your saboteurs hijack you into thinking you have to 'push through' and create the 'perfect' holidays this year.
What fun can you create with the circumstances you are in right now?
What was something you loved to do when you 5 years old around the holidays?
What is something you are tolerating about the holidays that you would love to change?
This past weekend, we created fun indoors. The kids designed an obstacle course throughout the house as part of a 6 event mini Olympics. My attempt at creating and flying a paper airplane was a mess, but I laughed the whole time. We also had a competition building gingerbread houses. The winner was the one that looked like a sailboat! And yes, without shame, I admit that we had an event that was based on Beer Pong, sans the beer. I flexed my old college memory muscles for this one and beat my eldest daughter. Check out the video here of the time-lapse non-beer pong challenge.
So give yourself permission to create fun, rest and play while building stronger relationships with your family. Need ideas? Schedule time with me and I am happy to share what we've been up to!
We can also explore things you are judging yourself for and activate your fun and playful side in my next 7-week Mental Fitness Bootcamp. Registration is open now with limited spots! Bootcamp starts next Monday, December 7th.
It’s the perfect opportunity to see how judging ourselves or others could be putting a damper on play and joy this coming holiday season. You have a choice on how to experience your life. You get to redesign your definition of rest and play.
Want to turn this holiday into your own gift of joy? I'll show you how. Click here to learn more at www.bootcamp.unlaakingyourpotential.com
All the best in this messy and imperfect world,
Taryn Laakso, ACC | CPCC
Unlaaking Your Potential, LLC
Taryn Laakso provides individualized 1-on-1 coaching, group coaching programs, and resources designed to ignite creativity, stoke the flames of inspiration, and guide clients in developing their own inner wisdom. After years of working as an HR professional, she brings a consultative approach to her coaching and is passionate about working with entrepreneurial leaders who are transitioning out of their corporate careers and toward their passion work.
She is differentiated by her focus on mindset and weaves together a variety of coaching tools in her approach to transforming the lives of her clients. Taryn views herself as a “sherpa” whose role it is to guide her clients through their journey from a life of practicality and fear to a life of passion and purpose along with profit.
Outside of coaching, Taryn loves cooking, sailing, backpacking in the Pacific Northwest, reading, and spending quality time with her blended family.
When reporting vaccine results in the news journalists often remiss fail to report which fraction of participants in a trial received the vaccine and which fraction received the placebo, which makes it harder to understand the results!
That made me wonder what fraction of participants in a randomized controlled trial should be given the treatment (with the remaining participants getting the placebo). At first, it might seem obvious that half should get the treatment and have should get the placebo to maximize power, but that is treating the number of participants as fixed rather than the budget as fixed. If the treatment costs more than the placebo, then somewhat less than half of the participants should be treated in order to maximize statistical precision per dollar spent on the trial.
The math makes for a good exercise. Let me lay out the notation first:
Instead of setting it up as a Lagrangian problem, in this case we can just maximize the variance of the treatment dummy per dollar:
This ratio is invariant to the total number of participants in the trial. So the optimal fraction of participants treated is invariant to how many participants are in the trial.
Getting the first-order condition is a little easier if we put the maximization problem in logarithmic form:
Here is the first-order condition itself:
All of the denominators are positive; after clearing fractions, this is a quadratic equation in p:
Only the positive root is relevant. Because it starts at -1 when p = 0 and always has a positive derivative when p > 0, there is only one positive root. Here is a table of solutions for different values of the cost ration c_v/c_0 :
The bottom line is that you might want to treat slightly less than half if the cost of treatment is greater than the cost of the placebo, but it takes quite a large cost ratio to drive the optimal fraction treated very far from 50%.
Note that costs of collecting the data have to be included in the cost of a participant who gets the placebo as well as the cost of a participant who gets the treatment. This drives the cost ratio closer to 1. Not also that all the efforts to make getting the placebo look indistinguishable to participants from getting the treatment also drives the cost ratio closer to 1. So often the optimal fraction treated will be quite close to 50%.
The blog title is a link to a nice Twitter thread.
For a while, I thought that monetary stimulus should wait until after pandemic restrictions were over. Now, I think that for a while it is good to have both forces at work: pandemic restrictions (such as on restaurants and bars) to reduce coronavirus danger, combined with monetary stimulus to make it as likely as possible that those disemployed from one sector can find work in another—now instead of later.
Our only alternative to getting older is to die young. When we do get old (and I am now 60), falls are a serious danger. A bad fall can easily lead to a permanently diminished quality of life, and to lower levels of activity that lead to other problems.
The review above, “Tai Chi for the Prevention of Falls Among Older Adults: A Critical Analysis of the Evidence,” by Samuel Nyman, takes some care at synthesizing the results of many studies on the effects of Tai Chi on falls, while worrying about things such as publication bias. Samuel Nyman comes to the conclusion that doing Tai Chi reasonably seriously reduces falls to about 4/5 of what they would otherwise be. (“Reasonably seriously” means at least an hour a week, and done standing up, rather than a watered-down “seated” Tai Chi.) Other forms of strength training and balance training may well have the same benefits for fall prevention as far as the evidence goes. But Tai Chi has other elements that are attractive. Samuel Nyman summarizes key elements of Tai Chi practice as follows:
Eight elements have been identified as follows: focused attention, imagery and visualization, enhanced integration of physiological systems, moving meditation, strength and flexibility training, more efficient breathing, social support from attending classes, and a vehicle for increased spirituality (Wayne & Fuerst, 2013).
In addition to the (often quite long) walks I take almost every day, Tai Chi (or some close substitute), along with strength training, is something I intend to do as I get even older. I easily found videos on how to do it online. I have to admit that, currently, I am simply doing one-legged knee bends with eyes open (see “Learning to Do Deep Knee Bends Balanced on One Foot”) and standing on one foot with eyes closed. At least I have down the idea that balance is important.
For annotated links to other posts on diet and health, see:
Here is my post explaining the program Scott refers to, which I am offering to economists free of charge:
Also, at the bottom of the post below, there are links to other posts on making careers more meaningful and life better—including some that are specifically directed at economists:
Not everything in The Federalist Papers is a timeless truth. The second half of The Federalist Papers #21 is a complaint that there was nothing akin to GDP that could be used to fairly apportion taxes among the 13 states. We take GDP for granted, but it’s development was a great advance for macroeconomic policy. Similarly, I think the development of a national well-being index that has technical strengths on a par with GDP will be a great advance for macroeconomic policy in the future.
Below is the full text of Alexander Hamilton’s complaint about the lack of something like GDP in the second half of The Federalist Papers #21. He also discusses various other taxing options, complaining about the difficulty of valuing land and building as well—something we routinely do for property taxes in most states now. He argues that commodity taxes at least go up with spending—and hence are not as regressive as head taxes.
The principle of regulating the contributions of the States to the common treasury by QUOTAS is another fundamental error in the Confederation. Its repugnancy to an adequate supply of the national exigencies has been already pointed out, and has sufficiently appeared from the trial which has been made of it. I speak of it now solely with a view to equality among the States. Those who have been accustomed to contemplate the circumstances which produce and constitute national wealth, must be satisfied that there is no common standard or barometer by which the degrees of it can be ascertained. Neither the value of lands, nor the numbers of the people, which have been successively proposed as the rule of State contributions, has any pretension to being a just representative. If we compare the wealth of the United Netherlands with that of Russia or Germany, or even of France, and if we at the same time compare the total value of the lands and the aggregate population of that contracted district with the total value of the lands and the aggregate population of the immense regions of either of the three last-mentioned countries, we shall at once discover that there is no comparison between the proportion of either of these two objects and that of the relative wealth of those nations. If the like parallel were to be run between several of the American States, it would furnish a like result. Let Virginia be contrasted with North Carolina, Pennsylvania with Connecticut, or Maryland with New Jersey, and we shall be convinced that the respective abilities of those States, in relation to revenue, bear little or no analogy to their comparative stock in lands or to their comparative population. The position may be equally illustrated by a similar process between the counties of the same State. No man who is acquainted with the State of New York will doubt that the active wealth of King's County bears a much greater proportion to that of Montgomery than it would appear to be if we should take either the total value of the lands or the total number of the people as a criterion!
The wealth of nations depends upon an infinite variety of causes. Situation, soil, climate, the nature of the productions, the nature of the government, the genius of the citizens, the degree of information they possess, the state of commerce, of arts, of industry, these circumstances and many more, too complex, minute, or adventitious to admit of a particular specification, occasion differences hardly conceivable in the relative opulence and riches of different countries. The consequence clearly is that there can be no common measure of national wealth, and, of course, no general or stationary rule by which the ability of a state to pay taxes can be determined. The attempt, therefore, to regulate the contributions of the members of a confederacy by any such rule, cannot fail to be productive of glaring inequality and extreme oppression.
This inequality would of itself be sufficient in America to work the eventual destruction of the Union, if any mode of enforcing a compliance with its requisitions could be devised. The suffering States would not long consent to remain associated upon a principle which distributes the public burdens with so unequal a hand, and which was calculated to impoverish and oppress the citizens of some States, while those of others would scarcely be conscious of the small proportion of the weight they were required to sustain. This, however, is an evil inseparable from the principle of quotas and requisitions.
There is no method of steering clear of this inconvenience, but by authorizing the national government to raise its own revenues in its own way. Imposts, excises, and, in general, all duties upon articles of consumption, may be compared to a fluid, which will, in time, find its level with the means of paying them. The amount to be contributed by each citizen will in a degree be at his own option, and can be regulated by an attention to his resources. The rich may be extravagant, the poor can be frugal; and private oppression may always be avoided by a judicious selection of objects proper for such impositions. If inequalities should arise in some States from duties on particular objects, these will, in all probability, be counterbalanced by proportional inequalities in other States, from the duties on other objects. In the course of time and things, an equilibrium, as far as it is attainable in so complicated a subject, will be established everywhere. Or, if inequalities should still exist, they would neither be so great in their degree, so uniform in their operation, nor so odious in their appearance, as those which would necessarily spring from quotas, upon any scale that can possibly be devised.
It is a signal advantage of taxes on articles of consumption, that they contain in their own nature a security against excess. They prescribe their own limit; which cannot be exceeded without defeating the end proposed, that is, an extension of the revenue. When applied to this object, the saying is as just as it is witty, that, “in political arithmetic, two and two do not always make four.”
If duties are too high, they lessen the consumption; the collection is eluded; and the product to the treasury is not so great as when they are confined within proper and moderate bounds. This forms a complete barrier against any material oppression of the citizens by taxes of this class, and is itself a natural limitation of the power of imposing them.
Impositions of this kind usually fall under the denomination of indirect taxes, and must for a long time constitute the chief part of the revenue raised in this country. Those of the direct kind, which principally relate to land and buildings, may admit of a rule of apportionment. Either the value of land, or the number of the people, may serve as a standard. The state of agriculture and the populousness of a country have been considered as nearly connected with each other. And, as a rule, for the purpose intended, numbers, in the view of simplicity and certainty, are entitled to a preference. In every country it is a herculean task to obtain a valuation of the land; in a country imperfectly settled and progressive in improvement, the difficulties are increased almost to impracticability. The expense of an accurate valuation is, in all situations, a formidable objection. In a branch of taxation where no limits to the discretion of the government are to be found in the nature of things, the establishment of a fixed rule, not incompatible with the end, may be attended with fewer inconveniences than to leave that discretion altogether at large.
PUBLIUS.
Here are links to my other posts on The Federalist Papers so far:
The Federalist Papers #1: Alexander Hamilton's Plea for Reasoned Debate
The Federalist Papers #3: United, the 13 States are Less Likely to Stumble into War
The Federalist Papers #4 B: National Defense Will Be Stronger if the States are United
The Federalist Papers #5: Unless United, the States Will Be at Each Others' Throats
The Federalist Papers #6 A: Alexander Hamilton on the Many Human Motives for War
The Federalist Papers #11 A: United, the States Can Get a Better Trade Deal—Alexander Hamilton
The Federalist Papers #12: Union Makes it Much Easier to Get Tariff Revenue—Alexander Hamilton
The Federalist Papers #13: Alexander Hamilton on Increasing Returns to Scale in National Government
The Federalist Papers #14: A Republic Can Be Geographically Large—James Madison
The Federalist Papers #21 A: Constitutions Need to be Enforced—Alexander Hamilton
Source: blog.stephenwolfram.com. Hat tip to a Tumblr post by isomorphismes.
Hat tip to Joshua Hausman. Joshua mentions that while the article says 40% humidity won’t be too hard on your house. But that depends on temperature: below about 20 degrees Fahrenheit, even 40% humidity is likely to lead to significant condensation. But the general idea still holds: figure out what level of humidity is OK for your house given the outside temperature and go up as high as that level.
The pandemic we are in offers a new perspective on many things. It is possible to be disgruntled about the limitations the pandemic puts on us. But it is also possible to be grateful for things that, in the normal course of things we took for granted, but now can notice.
If you still have a job, that is something to be grateful for, and probably something you notice more now than before the pandemic. If you have a reasonably nice living space, that is something to be grateful for. If those you live with are reasonably pleasant companions, that is definitely something to be grateful for. If you have been able to reconnect with old friends who live at a distance during this time when we can see that distance matters less than it used to, that, too is something to be grateful for.
There are many, many other things to be grateful for. In particular, if one of the things I listed you don’t have, my bet is that you can identify other things that you can be grateful for. In any case, it is easy to see worst-case scenarios all around us, yet most of us are not personally dealing with a worst-case scenario. That is something to be grateful for.
Gratitude puts us in the emotional presence of all the good things in our lives that we are noticing. It is a wonderful feeling. And it tends to make us nicer to the people around us. Three cheers for gratitude!
Thanks, by the way, for reading my blog. It means a lot to me to have you and others care about what I have to say. It makes the writing worthwhile.
Happy Thanksgiving!
Don’t miss these other posts about gratitude:
For annotated links to other posts on diet and health, see:
The blog title above links to an interesting article, addressing an interesting question.
My #1 theory: superspreader individuals make a huge difference, and Japanese culture is one of the few cultures that gets close to universal compliance with advice—thus having few superspreader individuals.
Other contributors:
The advice to avoid the 3 Cs recommendations are superior to the recommendations in many countries. They 3 Cs to be avoided are:
Enclosed spaces with poor ventilation
Crowded places with many people
Close contact settings such as face-to-face conversations.
Japanese authorities were also clear about the dangers of heavy breathing in proximity to others.
The fact that restrictions were voluntary made Japanese authorities willing to activate those restrictions earlier.
In David Brin’s Uplift trilogy, “uplift” is the ancient galactic tradition of identifying species that have the potential to be transformed into intelligent species (that is, technologically sophisticated species that can, say, build spaceships), and bringing about the genetic modifications through genetic engineering and breeding needed to enable that transformation.
The Great Filter (see 1, 2) may have made us the only intelligent species in the visible universe—though if the universe is as big as standard cosmological theories suggest, the part of the universe too far away to be visible is so vast that it almost surely contains other intelligent species. But there are many species on our Earth that have the potential to be uplifted. Here are some obvious candidates:
Bonobos
Chimpanzees
Gorillas
Dolphins
Octopuses
On the relatively high intelligence of octopuses already, see Peter Godfrey-Smith’s book, Other Minds:
You also might be interested in his more recent book Metazoa. Here is a link to the Wall Street Journal review of that book.
I realize that it might offend some people’s moral sense to “play God” by tinkering with other species enough to make them as intelligent or almost as intelligent as humans are. And some may argue it is too dangerous to uplift other species, lest at some point we wind up at war with them. (The “Planet of the Apes” scenario.) Let me address these concerns.
I would frame the goal of uplift as modifying a species as little as possible subject to safety concerns and subject to getting them to a point where they can write novels and other works of art. These novels and other works of art would help us understand other beings quite different from us. To me, being able to love those who are different, as well as those who are similar to you, is the highest form of love. It is also a strength: those who can love others who are different can form broad coalitions to defend themselves against those who can only love those who are similar to themselves. Indeed, we are doing just that now in fighting the coronavirus. The coronavirus reproduces by cloning (sometimes imperfect cloning). We reproduce by mating with another, quite different human being. And we cooperate with many other human beings. Even within our bodies, there are many cells that, though genetically alike, are epigenetically different.
There is a decent argument to be made that we are not yet ready for uplift: we are still struggling to love other human beings who are different. (See, for example, my post “It Isn't OK to Be Anti-Immigrant.”) But as an optimist (see Steven Pinker’s The Better Angels of Our Nature), I have hope that at some point we will be pretty good (though never perfect) at loving all other human beings. (Here is my effort toward making economists more loving.) Allowing for the lead times needed for the science and technology of uplift, it would be great if, by the time we get pretty good at loving all other human beings, we could stretch ourselves by having other fully intelligent species to learn to love, such as uplifted bonobos, uplifted chimpanzees, uplifted gorillas, uplifted dolphins and uplifted octopuses.
I, too, am genuinely worried about conflict between humans and species we uplift. Therefore, I suggest that in addition to genetic engineering and breeding to make these other species more intelligent that we also “domesticate” them to make them nonviolent, at least toward humans. This is analogous to what humans did to transform wolves into dogs. It is also analogous to installing in robots Isaac Asimov’s First Law of Robotics: “A robot may not injure a human being or, through inaction, allow a human being to come to harm.”
As far as “playing God” goes. In my view, there is no one else available to play god but us. I believe in gods, but I am a nonsupernaturalist. Evolution of genes and memes created us. At this point in our history, within each of us is a Sage that is a god within. When we interact with one another Sage to Sage, that is a god between. Those are the most godlike things I know of. But there are also the god ahead or gods ahead that we are building, or could be building. I talk about the gods ahead in my sermon “Teleotheism and the Purpose of Life.” As a believer in gods, I think there should be more gods in the world. Uplift is a way to foster more gods within, more gods between (including from the interactions between species) and, in all probability, more possibilities for gods ahead. (As far as gods ahead are concerned, we “see through a glass darkly.”)
I’ll discuss the technology of uplift in another post at some point. Let me say only that with the brisk rate of improvement in biotechnology, I predict that uplift will be within our capabilities with technologies we’ll have within 100 years. (Notice that, since humans are already intelligent at the level we are talking about, this is more analogous to copying something already in existence than it is to creating something wholly new.) So it is worth having the ethical debate now. I am pro-uplift. I hope you are too.
Here are some passages as teasers. I added bullets to separate passages.
Testing half the population weekly with inexpensive, rapid-turnaround COVID-19 tests would drive the virus toward elimination within weeks—even if those tests are significantly less sensitive than gold-standard clinical tests, according to a new study published today by CU Boulder and Harvard University researchers.
When it came to curbing spread … frequency and turnaround time are much more important than test sensitivity.
In the past, federal regulators and the public have been reluctant to embrace rapid tests out of concern that they may miss cases early in infection. But, in reality, an infected person can go from 5,000 particles to 1 million viral RNA copies in 18 to 24 hours …
“There is a very short window, early in infection, in which the PCR will detect the virus but something like an antigen or LAMP test won’t” …
And during that time, the person often isn’t contagious …
“These rapid tests are contagiousness tests” …
“Less than .1% of the current cost of this virus would enable frequent testing for the whole of the U.S. population for a year,” said Mina, referencing a recent economic analysis published by the National Bureau of Economic Research.
“It’s time to shift the mentality around testing from thinking of a COVID test as something you get when you think you are sick to thinking of it as a vital tool to break transmission chains and keep the economy open” …
Copyright Miles Kimball, 2020. You may freely use this diagram for any purpose as long as you include a reference and link to this blog post.
Negative rates make all the old issues in monetary policy new. Monetary economists didn’t have a consensus on the transmission mechanism for interest rate cuts when rates were in the positive region, but almost no one doubted that rate cuts were, indeed, stimulative in the positive region because there was so much experience showing that they are. Predicting what will happen in the negative region makes monetary theory important. This post lays out the relevant theory. If you disagree, please identify the particular part of the logic of the theory below that you disagree with; I’d love to have you put your critique in a comment.
The first thing to say theoretically is that the effects of interest rate cuts are likely to be continuous. Hence, a very small interest rate cut, such as the 10 basis points that the Bank of Japan went negative, would be unlikely to have a big effect.
Beyond that point, I need to set the stage. I am interested in the effects of rate cuts that are combined with other policies so that they (a) don’t hurt bank balance sheets and (b) don’t cause any massive increase in paper currency storage.
On (a), in the real world, most central banks that use negative rates use tiering of the interest-on-reserves formula or below-market-rate lending to private banks to protect the balance sheets of private banks from negative effects from negative rates. This is certainly what I recommend. (See “Responding to Negative Coverage of Negative Rates in the Financial Times” and Ruchir Agarwal’s and my paper: “Enabling Deep Negative Rates to Fight Recessions: A Guide.”)
As they acknowledge, Markus Brunnermeier and Yann Koby's "Reversal Interest Rate" comes from a model that assumes, contrary to what happens in the real world, that the central bank will do nothing to bolster bank balance sheets when rates are cut in the negative region. Central banks are smarter than that.
On (b), a large share of what I have written or coauthored about negative rate policy has been about modifying paper currency policy in a way that avoids massive paper currency storage. On that, let me refer you to my bibliographic post “How and Why to Eliminate the Zero Lower Bound: A Reader’s Guide,” and especially the papers I highlight at the top there.
To put a point on things, I totally concede that the monetary transmission mechanism might be different in the negative region if a central bank does not protect bank balance sheets or does not modify paper currency policy. This is not relevant to my proposals the more detailed proposals that Ruchir Agarwal and I have made in our papers on negative interest rate policy. But I know that what might happen if a central bank does not protect bank balance sheets or does not modify paper currency policy affects many people’s intuitions about negative interest rate policy, even where those situations are not relevant. Please try to take seriously the assumption that the bank profits problem and the paper currency problem have been neutralized as I go on to discuss the transmission mechanism for rate cuts when those issues have been taken care of.
The diagram at the top of this post gives my perspective on the transmission mechanism for rate cuts. All of the logic in that diagram holds up 100% even when rates are negative.
Like many monetary economists, I think that the transmission mechanism for monetary policy works almost entirely through the interest rate movements it engenders. There are two subtleties:
There are many interest rates, and which assets a central banks buys (say in QE) can affect different parts of the risk- and term-structure of interest rates differently.
Expectations about the entire future path of interest rates matters. This is the lever through which forward guidance can work.
I won’t deal with these two complications in this post. But in the diagram at the top of the post, I do indicate the perspective I teach my students about how most central banks move: short-term risk-free interest rates: Supply and Demand for the Monetary Base.
Once interest rates go down, there are three categories of effects: open-economy effects, wealth effects that would happen even in a closed economy, and the direct substitution effect from the interest-rate cut. Most economists will find what the diagram says about open-economy effects and the direct substitution effect routine, though it takes some care to work through all of the open-economy effects.
I only learned what is in the diagram about the direct wealth effects from rate cuts from thinking about negative rate policy. I named the key insight The Principle of Countervailing Wealth Effects. I wrote about this principle first in my rejoinder to Mark Carney, “Even Central Bankers Need Lessons on the Transmission Mechanism for Negative Interest Rates.” Two other posts followed that up: “Responding to Joseph Stiglitz on Negative Interest Rates” and “Negative Rates and the Fiscal Theory of the Price Level.”
Importantly, The Principle of Countervailing Wealth Effects—particularly the principle that the change in the present value of what the debtor owes is equal and opposite to the change in the present value of what the lender is owed—operates just as well in a fully dynamic model as in a simplified model. If there is no borrowing and lending in the initial situation, there will be no wealth effects from a small interest rate change. Note that in a dynamic model, one is in danger of misanalyzing the effects of interest rate changes if one does not recognize the change in the present value of the consumption path planned in the initial situation as well as the change in the present value of the income stream.
In a dynamic model, no borrowing and lending doesn’t have to come from everyone being identical: those of one type could be very impatient (high utility discount rate), but have income front-loaded enough that they don’t need to borrow, while those of the other type is very patient (low utility discount rate), but have income back-loaded enough that they don’t need to lend. And if the two types have different elasticities of intertemporal substitution, borrowing and lending will arise as rate changes move things away from the initial situation. (In a simple model, the rate changes might need to come from a change in a storage technology; in more complex models the rate changes can come from central bank actions.)
The key question is unaffected by how dynamic and how complex the model of borrowing and lending is:
Which is bigger, the marginal propensity to spend (domestically on C, I and G) of the borrower compared to the marginal propensity to spend of the lender?
If the marginal propensity to spend of the borrower is greater, than the net wealth effect of a rate cut when aggregating over the borrower and lender in any borrower-lender relationship is stimulative. If the marginal propensity to spend of the lender is greater, then the net wealth effect of a rate cut on the combined spending of that particular borrower-lender pair is contractionary, but other borrower-lender pairs, the substitution effect and open-economy effects could still make the rate cut stimulative overall. Thus:
It is a good exercise to try to identify borrower-lender pairs for whom the marginal propensity to spend is higher for the lender than for the borrower. This will be hard. If you think you have succeeded, definitely tell me what you found in a comment!
However, a particular type of borrower-lender pair that does have the lender’s marginal propensity to spend higher has to be numerous enough and important enough to outweigh the net wealth effects from all the other types of borrower-lender pairs, as well as the substitution effect and open-economy effects if they are on net stimulative (as they will be if the straightforward exchange-rate effect on net exports dominates).
It is a tall order to meet this standard for rate cuts to be contractionary. The most likely case for rate cuts to be contractionary is if a nation has a massive amount of foreign-currency-denominated debt. That is, I think the open-economy effects having to do with foreign debt are the one plausible reason for interest-rate cuts to be contractionary. (Of course, if interest rate cuts are contractionary locally, then interest-rate increases will be stimulative locally, so monetary policy can still stimulate.)
Except in one situation, I think it is very, very hard to maintain that in the real world borrowers overall have lower marginal marginal propensities to spend than lenders, weighting by magnitude of borrowing. As long as borrowers have a higher marginal propensity to spend than lenders, the bottom line is this: the direct wealth and substitution effects of interest rate cuts are unambiguously stimulative, so rate cuts will be unambiguosly stimulative overall if net open-economy effects from rate cuts are stimulative.
What is the one exception I can see? It is actually about rate increases being stimulative, not directly about rate cuts being contractionary. In many hyperinflationary situations, the government feels unable to cut back spending any more, so that its marginal propensity to spend less when its interest rate expenses increase is close to zero—less than the marginal propensity to spend of the bondholders out of their extra interest-rate income. Other than that, it is hard to think of a weighty exception to the the norm that borrowers have a higher marginal propensity to spend than lenders.
This bottom line based on the forces we have analyzed so far leaves two questions:
Q: What will happen to the magnitude of the effects in the diagram when rates start deep in negative territory?
A: It is hard to see why the gap between marginal propensities to spend of borrowers and lenders should narrow dramatically as interest rates go lower. And notice that there is no serious problem for monetary policy firepower if the gap narrows somewhat. As long as the sign of the gap continues to make the marginal propensity to spend higher for borrowers than lenders, there is still the direct substitution effect and the open-economy effects. And their is no plausible real-world reason for the substitution effect to become dramatically smaller as rates go lower. Indeed, negative rates are especially salient, and deep negative rates even more salient, so if one adds in some behavioral-economics effects, one would expect the substitution effect to get somewhat bigger as rates go lower. (Why would deep negative rates be even more salient than shallow negative rates? At some point, rates are negative enough that even after a risk premium is added on top of the risk-free rate, more and more borrowers can borrow at a negative rate at least for short maturities. That is salient!)
Q: What important effects are omitted that need discussion? The main additional effects I can think of are nominal-illusion effects. The key thing here is that nominal-illusion effects will affect borrowers or lenders. So it is important to think about the net effect aggregated over borrowers and lenders of nominal illusions interacting with rate cuts. To me, it seems most plausible that nominal-illusion effects are like the salience effects I discussed above: juicing up the effects of interest-rate cuts on both borrowers and lenders. And borrowers tend to be either equally or less sophisticated than lenders. So the effects of interest rate cuts should be juiced up by nominal illusions more for borrowers overall than for lenders.
Conclusion: Let me conclude by pointing out that it is very easy to make theoretical models in which the marginal propensity to spend is higher for lenders than for borrowers. It is just that those parameter values aren’t very plausible in the real world. A simple example is that in a two-period model one could have for lenders highly curved period-utility in the second period but very slightly curved period-utility in the first period (more or less a “target retirement consumption” utility function) and do the opposite for borrowers: highly curved period-utility in the first period but very slightly curved period-utility in the second period. But why assume such different functional forms for borrowers and lenders? Isn’t it more likely that they have similar functional forms but different utility discount rates (levels of impatience)?
When it comes down to it, do we really believe empirically, in the real world, that there are weighty parts of the economy where lenders have a higher marginal propensity to spend than borrowers? I think not. And if I am right about the rarity of marginal propensities to spend that are higher for lenders in a borrower-lender pair, then only open-economy effects can overturn the idea that rate cuts remain substantially stimulative however low rates go. (“Substantially stimulative” means that there is a strictly positive lower bound on how stimulative a 100-basis-point cut will be, no matter how low rates have gone already.) That yields unlimited monetary-policy firepower if one has addressed the bank profits problem and the paper currency problem so that rates can go as low as necessary.
