Assault of Thoughts - 5/25/2010

"Words ought to be a little wild, for they are the assault of thoughts on the unthinking" -JMK

- Paul Krugman has a good post up on inflation, deflation, and the impact of monetary policy. He goes over evidence from Japan. I wish he'd be more precise about the impact of the liquidity trap. His definition has centered on the zero lower bound, but a lot of people (justifiably) have a problem with that.

- James Madison, in 1815, on internal improvements:

"Among the means of advancing the public interest the occasion is a proper one for recalling the attention of Congress to the great importance of establishing throughout our country the roads and canals which can best be executed under the national authority. No objects within the circle of political economy so richly repay the expense bestowed on them; there are none the utility of which is more universally ascertained and acknowledged; none that do more honor to the governments whose wise and enlarged patriotism duly appreciates them. Nor is there any country which presents a field where nature invites more the art of man to complete her own work for his accommodation and benefit. These considerations are strengthened, moreover, by the political effect of these facilities for intercommunication in bringing and binding more closely together the various parts of our extended confederacy. Whilst the States individually, with a laudable enterprise and emulation, avail themselves of their local advantages by new roads, by navigable canals, and by improving the streams susceptible of navigation, the General Government is the more urged to similar undertakings, requiring a national jurisdiction and national means, by the prospect of thus systematically completing so inestimable a work; and it is a happy reflection that any defect of constitutional authority which may be encountered can be supplied in a mode which the Constitution itself has providently pointed out."

Don't make too much of this one statement. As he has done with just about everything, Madison has expressed different views on this issue at different times in his life. I highlight this only because unlike his famous flip flop on centralized government, people don't usually know about both sides of the Madisonian coin on internal improvements.

- The National Bureau of Economic Research has draft chapters available of a forthcoming volume on American economic policy in the 1790s. I'm not sure when it's supposed to come out, but it looks fantastic. Doug Irwin and Richard Sylla are editing. Irwin is a well known trade economist - I don't know Sylla.

- Larry Summers shares an old joke about how the questions on economics exams never change, but the answers do. This is a reference to the changing fortunes of different schools of thought, of course, but Summers points out that it's also what it feels like making fiscal policy. The "right" policy in normal times, suggests Summers, are the wrong policies now. I liked this discussion from Summers - it rings true with respect to the point I'm trying to drive home in my draft paper on the 1920-21 downturn, namely, that (1.) not all recessions are created equal, so that (2.) you can't assume that the performance of a policy in one recession is going to predict the performance of that policy in all other recessions. All downturns are different - the most important difference is perhaps the difference between an aggregate demand driven recession and an aggregate supply driven recession. Treating them like they're the same thing can be akin to pouring water on an electrical fire vs. a wood fire.