"If money isn't loosened up, this sucker could go down" - George W. Bush warned in September 2008

Friday, June 18, 2010

Really great links - Fiscal policy - Carmen Reinhart - Financial repression - Twitter panic - Toward a More Efficient Labor Market

Brad DeLong - Fiscal Policy - Words of wisdom - "For a couple of years now--ever since we slammed into the zero nominal interest rate lower bound--I have been wandering around saying:
        The obvious policy is the long-term debt neutral stimulus: spending increases and tax cuts for the next three years, standby tax increases with triggers and spending caps with triggers thereafter, all calculated to guarantee that the debt is no larger ten years from now than in the baseline.
        I haven't found takers--even though those who believe in stimulus spending should think that the short-run gain outweighs the long-run pain, those who believe in confidence think that the long-run pain is good for us and worth the short-run bacchanalia, and the thing should pass unanimously."

Arnold Kling - Capital inflows - "Start with Reinhart. I find her a bit like Paul Samuelson, in that she seems to have a lot of thoughts running through her mind, and only a sample of those thoughts get processed through her vocal cords. This leaves many thoughts unexpressed.
        For example, here are three things I thought I heard her saying.
                1. Large capital inflows end badly. They are the predecessor for financial crises.
                2. Financial liberalization promotes capital inflows.
                3. Financial liberalization is a good thing.
        The opposite of financial liberalization is financial repression. Under financial repression (think China), about the only savings vehicle available is government bonds. The government then allocates capital. Private capital inflows are minimized, because who wants to invest overseas in low-yielding bonds? Domestic savers get stuck with low yields and low incomes. Reinhart thinks we will see more financial repression in debt-ridden western countries, so that governments can continue to market their debt. Have a nice day.
        I assume that some of Reinhart's unexpressed thoughts help to explain how to reconcile the benefits of financial liberalization with a desire to avoid crises caused by large capital inflows. Maybe somebody can look up what she has written and find the answer."

Michael Pettis - Financial repression - "There have periods of inflation in China in recent years, and even a brief inflationary scare in 2007 and 2008, but on average inflation has been far less than what was needed to revalue the currency sufficiently.
        So what happened? Why has inflation been muted – as it has by the way in other countries that followed the so-called Asian growth model, including most importantly Japan in the past several decades?
        Two months ago University of Chicago economist, Robert Aliber, came to speak at my central banking seminar at the Guanghua School of Peking University. In a fascinating discussion he explained that in fact there was another possible resolution of the imbalances caused by relatively rapid productivity growth in the tradable goods sector.
        He pointed out that if the nominal exchange rate is not allowed to rise, policymakers can still contain inflation by what economists call financial repression, made possible by their control over the banking system in countries where banks completely dominate the financial system. In the Chinese context, financial repression exists because the vast bulk of Chinese savings is in the form of bank deposits, and the deposit rate is set at extremely low levels.
        This has the effect of transferring large amounts of income away from net savers, which for the most part consists of Chinese households, and in favor of net users of capital. Net users, of course, consist primarily of large, capital intensive businesses, real estate developers, infrastructure investors and local and central governments, including the People’s Bank of China, the largest net borrower of renminbi in China. Net savers are forced into subsidizing net users, in other words.
        The consequence is that monetary growth is channeled not into household demand but rather into the production of more goods, and the inflationary impact of monetary expansion is muted. Financial repression is an alternative to currency appreciation or inflation."

Steven Pinker - Twitter panic - "Media critics write as if the brain takes on the qualities of whatever it consumes, the informational equivalent of "you are what you eat." As with primitive peoples who believe that eating fierce animals will make them fierce, they assume that watching quick cuts in rock videos turns your mental life into quick cuts or that reading bullet points and Twitter postings turns your thoughts into bullet points and Twitter postings."

Steve Landsburg - Toward a More Efficient Labor Market - "An anonymous math department chairman reports on his own strategy for cutting down on the workload. He believes that one of the most important determinants of a successful career is luck. So each year, he randomly rejects half the applicants without even reading their folders. That way, he eliminates the unlucky ones."

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