Friday, May 21, 2010

Macro musings

Scott Sumner has an interesting Great Recession/Great Depression comparision:

"It’s worth thinking about where we are in the Great Recession, relative to the same time period in the Great Depression:

1.a October 1929, stocks crash on sharply falling expectations of NGDP [nominal GDP] growth.
1.b October 2008, stocks crash on sharply falling expectations of NGDP growth.

2.a Early 1931, stocks rise on signs of recovery

2.b Early 2010, stocks rise on signs of recovery

3.a May 1931, stocks fall as European banking/sovereign debt crisis begins
3.b May 2010, stocks fall, as European banking/sovereign debt crisis begins

Let’s hope the European debt crisis doesn’t get as bad as in 1931, or if it does, let’s hope the Fed
offsets the effects of the crisis as they should have done in 1931, but didn’t."

He of course has a monetary policy response in mind. I remain somewhat skeptical on unconventional monetary policies like quantitative easing. It makes me worry about asset bubbles. It makes me worry about picking winners (which if it must be done, should be done in a deliberative legislature rather than an opaque board room). It also makes me worry about the liquidity trap. Almost all of my macroeconomics comes from my own reading and thinking - I didn't take that much macro in school - but from this very casual standpoint, it seems to me that the last thing you need in a liquidity trap is more liquidity. Sumner often argues around this simply by asserting that we're not in a liquidity trap - create inflation and there's no zero lower bound problem. That's a fine and reasonable way to deal with Krugman's somewhat problematic definition of a liquidity trap as a zero-lower bound on interest rates, but that's not really what I'm worried about. I'm worried about a Hicksian liquidity trap, where money demand is relatively flat. Sumner's posts are usually extremely long and often above my head, but I still don't quite understand how expansionary monetary policy solves the Hicksian problem.

I see this is as another example of the mistake of acting like all economic downturns are created equally - a mistake I mentioned earlier with respect to wages. Sumner actually provided some good counter-arguments to David Henderson on wages, highlighting the fact that aggregate demand-driven downturns behave differently than other downturns. But he seems to think that from a monetary perspective, all downturns are still created equal.

Anyway, I cite Sumner's chronology here, but anyone that follows the economics blogosphere knows that there are a host of other reasons why I have pulled myself away from calculation and property rights issues and am musing about the macroeconomy today aside from Europe's sovereign debt problems. Deflation worries are on the rise again, and the labor market still isn't looking that chipper. Stocks have taken a dive, and while Steve Horwitz suggests it might have something to do with the financial regulation that just passed the Senate, I have my doubts. (My impression has been that debate over this bill has not been as acrimonious as the health reform bill, and the costs of the bill are considerably less substantial. Moreover, the Senate bill still needs to be reconciled with the House bill. The idea that the market has spoken on a bill that is considerably less controversial and that isn't even through the legislative process seems silly to me. I think Horwitz is reaching. Every business survey you pick up cites consumer demand as a much bigger concern than policy regime uncertainty. Add to that the troubles in Europe, and I think you've got your explanation for stock market behavior).

So my mind is more on macroeconomics lately, and I imagine that will only increase as I pick up Garrison's Time and Money.

After Garrison, I'll have more than enough to read. In fact, I don't think I'm going to be reading much history (the other subject I enjoy) for a while. Like many businesses, the Urban Institute is going through some hard times (my job is fine - we do government research, so it's not like there's any existential threat) and we're shutting down our library. That means that employees have been allowed to go through the library's stacks and take what they want before the rest gets tossed. I rescued many of the economics "Handbooks" so that we still have those resources in our research center. In addition to that, though, I've grabbed a lot of classics that I'm eager to get into:

The Microeconomic Foundations of Employment and Inflation Theory, ed. Ed Phelps
Inflation Policy and Unemployment, by Ed Phelps
Money, Interest, and Prices, by Patinkin
The Optimum Theory of Money, and Other Essays, by Friedman
A Monetary History of the United States, by Friedman
The Theory of Wages, by Hicks
A Program for Monetary Stability, by Friedman
Maintaining and Restoring Balance in International Payments, by Fellner, Machlup, and Triffin (does anyone know if this is the where he first raises the Triffin dilemma? I'm sure he mentions it in here, even if it's not where the concern is raised)
A Revision of Demand Theory, by Hicks
Economic Heresies, by Joan Robinson
A Study in the Theory of Investment, by Haavelmo
Essays in the Theory of Economic Growth, by Joan Robinson
Cost and Choice, by Buchanan

I'm most excited to get into Phelps and Patinkin, which I'll probably read after Garrison. I've read the section of Friedman's monetary history dealing with the Depression, but I should probably read that in its entirety too.


Finally, I want to call attention to a post that Evan showed me from An und für sich, a theology blog that he follows. The analysis of monetary policy in the post is kind of standard Yglesias monetary posting: "central bankers don't care about unemployment, just inflation". Insofar as this is a critique of the European Central Bank, I concur. The collective memory of the Weimar hyperinflation is understandable, but its starting to strain credulity. With respect to the Fed, see my concerns above about pursuing more expansionary monetary policy right now. I don't think it's fair to accuse the Fed of not caring about its dual mandate. There are a few things they could be doing (lowering the interest rate they pay on reserves), but not that much more that I would be comfortable with (again, see above). The value added of this post (for me at least), is its citation of Philip Goodchild's Theology of Money, which I had never heard of before. The thesis of the books seems pretty speculative, and I'm not sure what to make of it, but it looks interesting. This is the Amazon blurb:

"Goodchild examines the theory of money in a comparable manner to Adam Smith, Karl Marx and Georg Simmel. However by contrast to the conclusions of these thinkers, he proposes that money is essentially created in excess of reserves, making it a simultaneous credit and debt. Since money is a debt that must be repaid with interest in the form of money, then the creation of money imposes a social demand for an increase in profit and an increase in the creation of money in order to repay debt. This vicious circle drives the expansion of the global economy. In summary, Goodchild argues that money is a promise, a supreme value, a transcendent value and an obligation or a law. He argues that money has taken the place of God. It is the dominant global religion in practice, even if no one believes in it in principle."

I'm not sure about the purpose of looking at Marx. Simmel is an interesting figure to raise. I'm aware of him as one of the first symbolic-interactionist sociologists. I wonder if his Philosophy of Money is an interesting read (Goodchild seems to think it is). Simmel seems to raise concerns about commodification, which I've been interested in as they relate to some of Herbert Marcuse's work. Concerns about what commodificiation does to the value of a thing is an important thing for economists to think about, since our value theory and our understanding of welfare is completely contingent on the assumption of commodification. Markets and exchange optimizes welfare contingent on a good or service's identity as a commodity. But economics offers no guarantee that the commodification of that good or service optimizes welfare relative to its uncommodified state. To state it differently, we have no fundamental welfare theorems guaranteeing us that efficiency will be maximized by the commodification of things - we only know that given the commodification of things, competitive equilibrium guarantees Pareto efficiency.

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