Saturday, July 31, 2010

University Websites

A great cartoon by xkcd on University websites.

What's funny is that regular corporate websites looked exactly the same ten years ago. In general, they are better now though.


Friday, July 30, 2010

Blast from the past

Back in 2007, Arnold Kling wrote:
Finally, Zimran Ahmed writes,

I think one inevitable requirement of unwinding the housing bubble market is that housing prices have to come down to fall in line with historic trends. In some areas this means very dramatic decreases -- maybe 40%+ in real terms? I'm not sure what a "deflated housing bubble" would look like if it did not bring prices back to historic norms.

I'm sorry, but unless by "some areas" you mean areas the size of a 9-digit zip code, we're not going to see 40 percent declines in house prices.
While all areas certainly have not declined by 40%, some areas considerably larger than a "9-digit zip code" have.


Saturday, July 24, 2010

Bush tax cuts and the Quantity Theory of Money

The Bush tax cuts are set to expire, and it doesn't look like the Obama administration will intervene to extend them. I think this is a mistake.

The Quantity Theory of Money states:


M is quantity of money.
V is the velocity of money in final expenditures.
Q is an index of the real value of final expenditures.
P is price

As an example, M might represent currency plus deposits in checking and savings accounts held by the public, Q real output (which equals real expenditure in macroeconomic equilibrium) with P the corresponding price level, and the nominal (money) value of output. In one empirical formulation, velocity was taken to be “the ratio of net national product in current prices to the money stock”.

Thus far, the theory is not particularly controversial, as the equation of exchange is an identity. A theory requires that assumptions be made about the causal relationships among the four variables in this one equation. There are debates about the extent to which each of these variables is dependent upon the others. Without further restrictions, the equation does not require that a change in the money supply would change the value of any or all of P, Q, or . For example, a 10% increase in M could be accompanied by a 10% decrease in V, leaving unchanged. The quantity theory postulates that the primary causal effect is an effect of M on P.
The postulation is wrong. V changes dramatically with propensity to spend, or not spend. Not spending is the same as "saving".

Those with low incomes have very little discretion in their ability to spend or not spend. They need to spend most of their income every week just to get by. Those with high incomes have more discretion in their ability to spend or not spend. Their savings rates are much higher. Moreover, if you look at after tax consumption, you'll find that inequality is much lower than pre-tax income. This is due to transfer payments, progressive taxes, and the difference in saving.

The Bush tax cuts operate at the Federal income level, and therefore can only impact those with high incomes, as Federal Income taxes are primarily paid by high income households. Therefore, an increase in the tax rate at that segment may have the largest impact on their propensity to save, and therefore V.

This recession is primarily caused by a fall in V that has not been made up by an increase in M. Fed actions have changed the composition of M, but not its quantity. The increase in quantity has come from fiscal deficits.

Sunday, July 18, 2010

Debt is not a transfer

In this post, Interfluidity talks about how the real sticky price in the world isn't labor, it's debt. This is correct, and is at the heart of Fisher's debt-deflation theory. Fisher's an interesting guy, because after losing all his money during the Great Depression, he actually changed his mind about how the economy works.

In the comments, Nick Rowe jumps in with the standard economic position on debt:
Suppose that last year, I borrowed from you, and promised to pay you $100 this year. Sure, that $100 is “sticky”. But it’s not a price. Last year it was a price (the price we negotiated when you gave me the loan), but it’s not a price this year. It’s not a price like the price of labour or the price of cars. The price of labour or the price of cars affects how much labour or cars we decide to buy or sell at that price. And if those price are sticky and get out of whack that can create excess demand or supply of labour or cars. But that $100 I owe you is a transfer payment. It’s like a welfare payment or social security check. The decision it affected has already been made, last year. It cannot any longer create excess demand or supply, though it could have done last year, if it had been sticky last year. What it does do is transfer resources from me to you. It affects the distribution of wealth. It’s not a measure of the scarcity of goods that people are currently deciding to buy or sell.
This position is incorrect. First, an outstanding loan is not a "transfer". When a bank makes a loan, money is not "transferred" from party A to party B. The loan is made ex nihilo by the bank crediting an asset and liability at the same time, expanding its balance sheet to both create the receivable and the deposit. It is only if the loan is defaulted on that it becomes a transfer, a transfer from the bank's equity holders to the loan recipient. Macroeconomics does not model debt, and therefore does not model the economy in a useful or realistic way.

Second, distribution of wealth very much impacts forward looking decisions, and it impacts the scarcity of goods that people are trying to buy or sell. For example, if a number of loans default, and wealth is distributed from bank equity holders to loan recipients, then the banks are undercapitalized and will not extend new credit. Moreover, bank investors will revise downward their estimation of a bank's skill in making good loans, and will increase the cost of capital if they do decide to make additional investments. All of this impacts the price of credit explicitly, and are entirely distributional outcomes.

Thirdly, willingness to pay decisions in micro are always subject to budget constraints. Wealth distribution impacts this directly again. Only in macro does the amount of money you have play no role in your willingness to spend.

Friday, July 09, 2010

Don't believe the NYTimes -- Los Altos edition

From the NYTimes:
The vast majority of owners in these upscale communities are still paying the mortgage, of course. But they appear to be cutting back in other ways. The once-thriving Los Altos downtown is pocked with more than a dozen empty storefronts in a six-block stretch.
The Los Altos downtown consists of about six blocks, and would never be described as "thriving". "Sleepy" is more apt.

Thursday, July 01, 2010

Lost in Translation

I can't remember if I first read Tim Park's "Italian Neighbours" when I first moved to Italy, or while I was already there. I do know that I read the depressing "Europa" years later where the happy family Park described in his earlier books had clearly vanished. Europa was depressing, indulgent, and dull. It was nominated for a Booker. I would skip it.

Anyway, I was interested to see a New York Review of Books article by Parks on the translation of foreign language books into English, or rather, the lack of it. Park notes that the translated works, instead of highlighting cultural difference, all represent the same, internationalist, progressive, literary worldview
It seems to me rather that as we tackle intriguing stories from Latvia and Lithuania, Bosnia and Macedonia, we are struck by how familiar these voices are, how reassuringly similar in outlook to one another and ourselves....

It is as if literary fiction didn't so much reflect other cultures, obliging us to immerse ourselves in the exotic, but rather brought back news of shortcomings and injustices to an international community that could be relied upon to sympathize. These writers seem more like excellent foreign correspondents than foreigners. Across the globe, the literary frame of mind is growing more homogeneous.
He is quite correct. To hear truly novel voices today (pardon the pun) you need to go back in time and read classics in other languages, ideally from the 18th Century or earlier. Certainly pre-world war 2.

It is best to read 18th century books judged classics pre-world war 2, but not after. Kipling, for example, truly seems to be from Mars.

(A brief aside: I believe Italy requires all foreign films to be translated into the Italian. This provides work for Italian (voice) actors. Kind of like Rhode Island and its petrol pump attendants.)