Monthly Archives: July 2017

Is Illinois the trailer for the debt movie?

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I assume you have been following the story.

Illinois is now grappling with $15 billion of unpaid bills and an unthinkable quarter-trillion dollars owed to public employees when they retire.

This would be the third year in a row that America’s fifth-largest state has failed to pass a constitutionally required budget.

The U.S. government, too, can only pay its bills with borrowed money. The U.S. government, too, has an unthinkable level of unfunded liabilities–I believe it is close to $80 trillion. The U.S. government, too, is unable to pass a real budget.

Politicians love to borrow other people’s money. They don’t know how to cope with paying it back.

If you want to see how the political process functions when confronted with unpleasant reality, watch Illinois.

Interesting sentences

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From a commenter.

People in education tend to believe two things:

1) School is America’s great driver of social mobility. School lifts up the poor. Without our education system, we would be a terribly unequal, unjust, “rich get richer and the poor stay poor” society.

2) It is not just grudgingly acceptable but good and just that the more education you have, the better you are treated.

This is an interesting dilemma for progressives. They are inclined to see income and status hierarchies as unjust. However, they are inclined to see income and status advantages that accrue from schooling as just. Or, as Orwell put it, some pigs are more equal than others.

Scott Sumner’s macroeconomics: my thoughts

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He writes,

I’ll use “(e)” to denote a (market) expected value.

NGDP(e) is the single most important variable in macro; it should be the centerpiece of modern macro.

How can we work with a central concept that is purely mental? Nominal GDP, or NGDP without the (e), is a measure derived from the market exchange of goods and services. Most concepts in macroeconomics, such as interest rates, or prices, are observable when goods or securities change hands.

NGDP(e) is not an observable result of goods or securities changing hands. It is something in people’s heads.

But it’s even more problematic than that. At least 99.9 percent of all people do not even have an NGDP(e) in their heads. Even most economists do not have one.

Even if you had a futures market in NGDP, NGDP(e) would still be a purely mental concept. In the wheat market, if you sell 1000 bushels of wheat forward, on the day that the contract expires you could deliver 1000 bushels of wheat to fulfill the contract. (Actual delivery does not take place in such markets, because buyers and sellers unwind their positions at expiration.) But nobody can deliver NGDP against an NGDP futures contract. It is a pure bet.

In any event, an NGDP futures market currently does not exist. So the most important variable in macroeconomics is something that exists in people’s minds, and yet in truth it exists in almost no one’s mind. I worry that this is like saying that in physics the most important variable is the ether, even though no one can observe it.

Sumner writes,

Low and stable NGDP growth minimizes the welfare costs of “inflation”, and also leads to approximately optimal hours worked.

NGDP is an observable variable, and Sumner argues that low and stable NGDP growth is associated with good performance of inflation and employment. So why bother with NGDP(e) at all?

At the risk of putting words in Sumner’s mouth, I think he would say that NGDP(e) is important because the Fed affects NGDP by manipulating NGDP(e). How did he get there?

Monetary theorists used to say that the Fed manipulates NGDP by manipulating the quantity of money. The problem with this is that it is impossible to find a definition of money that can satisfy two conditions at the same time: (1) that the Fed can control it; and (2) it closely correlates with NGDP. The former requires a narrow definition of money, and the latter requires a broad definition.

Old Keynesians said that the Fed manipulates NGDP by manipulating the short-term interest rate. When the short-term rate gets stuck at zero, it has to manipulate the long-term rate. Or it becomes impotent. But even when it is not stuck at zero, the Fed’s manipulations often seem ineffective. For one thing, long-term interest rates sometime do not respond, or they respond perversely.

Then there are the New Keynesian types who say that the Fed manipulates NGDP by manipulating expected inflation. But to me that is another ethereal concept. At the risk of putting words in their mouths, the New Keynesians are saying that the Fed can mysteriously change expected inflation through “quantitative easing” even if short-term interest rates and long-term interest rates are both impervious to Fed actions, or even if long-term rates react perversely.

From the New Keynesian view, it is a relatively small step to Sumner’s view. Just swap out the ethereal expected inflation for the ethereal NGDP(e).

Got it? In modern macro, we have everybody working in the GDP factory. And we have everybody forming expectations about the price of the output from this GDP factory, or about the total nominal value of that output. And booms and recessions are caused by changes in these expectations. And the Fed can manipulate these expectations through an immaculate process that cannot be measured using interest rates or the money supply.

Oy.

I know that almost nobody who reads Specialization and Trade buys into my view that movements in aggregate price indices mostly reflect habits and inertia, rather than central bank operations. But when you see the contortions that monetary theorists have gone through over the years, I think I have a fair case.

Human conflict: a Girardian view

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Dan Wang writes,

If one is a Girardian, then there is perhaps no greater catastrophe than the growing tendency of the American meritocracy to be incubated in elite colleges. Is it not worth fretting that the people running the country are coming in higher numbers from these hothouse environments at a young age, where one is inflamed to compete over everything and where tiny symbolic disputes seem like life and death struggles? How much of the governing class has fully adopted this attitude, and to what extent can we see our recent political problems to be manifestations of this tendency?

Pointer from Tyler Cowen. Read the entire essay.

Wang links to a useful summary of Girard’s ideas.

If people imitate each other’s desires, they may wind up desiring the very same things; and if they desire the same things, they may easily become rivals, as they reach for the same objects. Girard usually distinguishes ‘imitation’ from ‘mimesis’. The former is usually understood as the positive aspect of reproducing someone else’s behavior, whereas the latter usually implies the negative aspect of rivalry.

Again, there is much more at this link. Wang’s idea is that when you throw a bunch of similar people together ini college, you make it natural for them to desire the same things and to be prone to conflict.

I admit that I am still trying to fully grasp these ideas.