The Ambrosini Critique

Of course, Oxycodone is legal with a prescription, but that’s a distinction without a difference, as it was illegal for my brother to buy, possess, and presumably sell from time to time. His addiction existed in a curious demimonde wherein the whole treatment and rehab and recovery cultures attempted–I emphasize, attempted–to ignore the plain fact that the disease they were treating, attempting to treat, was a crime, and although making it not a crime might lead to more use, it might also lead to more recovery; it might lead to more regular doses, less adulteration with other substances. It might have meant that my brother didn’t have to die in a cheap roadside motel room after a late-night visit to some dealer’s ramshackle house.

— IOZ

The benefits would outweigh the costs, but drugs are immoral.

UPDATE: People (rather than moral philosophers) don’t have internally consistent and complete belief systems with which they determine what is moral and what is not. Subtracting the costs from the benefits — even if you stick to the costs and benefits that are obvious to everyone, i.e. doing economic analysis, tells you what is right or wrong. Often times, disagreement about morality is just one side or the other ignoring an obvious, at least once its been pointed out, benefit or a cost. You’ll notice that pointing an obvious cost or benefit doesn’t usually end the disagreement. The next move, generally, is to criticize the size of the costs or benefits. In other words, then the argument is no longer over morals, but over empirics. This supports Bryan Caplan’s contention that you don’t need morals to have a normative debate.

I had no idea what that meant. Until now. By definition two, the comments on that post are self-recommending.

In a comment someone really, really smart (and handsome) said:

Believers in fiscal policy should be thinking of ways to fix the administration of it. Maybe an independent fiscal authority with a precisely defined policy instrument (e.g. stimulus checks and a consumption tax) and mandate (e.g. keep consumptions spending smooth)?

Eric Leeper has a new paper (pdf):

In this lecture, I argue that there are remarkable parallels between how monetary and fiscal policies operate on the macro economy and that these parallels are sufficient to lead us to think about transforming fiscal policy and fiscal institutions as many countries have transformed monetary policy and monetary institutions. Making fiscal transparency comparable to monetary transparency requires fiscal authorities to discuss future possible fiscal policies explicitly. Enhanced fiscal transparency can help anchor expectations of fiscal policy and make fiscal actions more predictable and effective. As advanced economies move into a prolonged period of heightened fiscal activity, anchoring fiscal expectations will become an increasingly important aspect of macroeconomic policy.

The paper is human friendly and is best read as a history of monetary economic thought. Leeper underscores that expectations are key to the success of fiscal policy (like they are to monetary policy). For example, if the public expects deficit spending to be followed by increased taxes in the future, GDP can contract today (i.e. negative multipliers). He suggests that, like in monetary policy, transparency and commitment would make for better fiscal policy, but he points out:

For many reasons it is not an easy task to enhance fiscal transparency by providing information that helps to anchor expectations of future fiscal choices. The two most prominent reasons offered for the difficulties are:
(1) Fiscal policy is complex;
(2) Current governments cannot commit future governments.
These reasons are true. But they also underscore why enhanced fiscal transparency is potentially so valuable.

The best line in the paper:

Further complicating the fiscal decision process is a stunning fact: a clearly defined and attainable set of objectives for fiscal policy is rarely specified. Many fiscal authorities lay out their objectives on their web pages. Sustainable fiscal policy is the most common goal. But achieving sustainable policy is equivalent to aiming to avoid government insolvency. If a company’s CEO were to announce to shareholders that the company’s overarching goal is to avoid bankruptcy, the CEO would soon be replaced. Surely people can ask for more than minimal competence from their public officials.

He has a few suggestions for increasing transparency. First, have better projections of fiscal policy and its impact. “Fiscal authorities could produce more sophisticated projections, grounded in economic
reasoning, that characterize outcomes that, as a matter of economic logic, could occur.” Second, there could be a fiscal Fed that sets deficits. Third, agree on some basic fiscal policy objectives that can be easily measured. Fourth, define some fiscal policy rules that meet those objectives. Lastly, establish credibility.

And my vote for the understatement of the year: “But fiscal decisions are only a small subset of the votes that legislators place, so fiscal votes can easily get lost in the morass of electoral politics.” I wonder, though, if it was ever thought that monetary authorities would have as much credibility, transparency and independence as they do today.

He ends on the ARRA, “I shall end with an egregious example of non-transparent fiscal policy: the recent $787 billion American fiscal stimulus plan.”

• Knittel on gas prices… erm… on the crappiness that is the Cash for Clunkers program
• Sheffrin’s research on budget policy across States shows, surprise, there’s much variation in States’ policies
• This guy is saying something about Prof. Clarks’ editorial in the Washington Post
• UC Davis, ranked 8ish

I liked the internet a lot more when there wasn’t 10 other people making the exact same (down to the same citations) original and insightful comments as you.

Here’s a nice graphic showing the time use data from the American Time Use Survey. In a typical day, unemployed people spend:

• 29 more minutes than employed people looking for jobs
• 54 more minutes sleeping
• 29 more minutes socializing
• 52 more minutes watching TV or movies
• 15 more minutes playing sports or on the computer
• 0 more minutes volunteering
• 47 more minutes doing housework

I like this guy. This paper suggests deficit spending is productive at the zero lower bound because by increasing the deficit it increases expectations of inflation. Its important, however, for the central bank to coordinate its policy with the fiscal authorities to make this result happen. He very nicely shows that rules-constrained central banks, while not having the inflation bias of discretionary central banks, have deflation bias at the zero lower bound.

Here’s his Palgrave definition of liquidity trap. He argues if the Fed follows a Taylor rule, the liquidity trap really is a trap. Also,

if a central bank is discretionary, that is, unable to commit to future policy, and minimizes a standard loss function that depends on inflation and the output gap, it will also be unable to increase inflationary expectations at the zero bound, because it will always have an incentive to renege on an inflation promise or extended ‘quantitative easing’ in order to achieve low ex post inflation. This deflation bias has the same implication as the previous two irrelevance propositions, namely, that the public will expect any increase in the monetary base to be reversed as soon as deflationary pressures subside.

This should make Sumner happy:

There is a large literature on the different policy rules that minimize the distortions associated with deflationary shocks… Eggertsson and Woodford (2003) and Wolman (2005)… show that, if the government follows a form of price level targeting, the optimal commitment solution can be closely or even completely replicated, depending on the sophistication of the targeting regime. Under the proposed policy rule the central bank commits to keep the interest rate at zero until a particular price level is hit, which happens well after the deflationary shocks have subsided.

This should make Sumner unhappy:

Perhaps the most straightforward way to make a reflation credible is for the government to issue debt, for example by deficit spending. It is well known in the literature that government debt creates an inflationary incentive (see, for example, Calvo, 1978). Suppose the government promises future inflation and in addition prints one dollar of debt. If the government later reneges on its promised inflation, the real value of this one dollar of debt will increase by the same amount. Then the government will need to raise taxes to compensate for the increase in the real debt. To the extent that taxation is costly, it will no longer be in the interest of the government to renege on its promises to inflate the price level, even after deflationary pressures have subsided in the example above.

In other words, the best way to fight deflation, to increase expectations of inflation, is deficit spending.

The ARRA was a fight over distribution. As an economist, I have no dog in that fight. As a libertarian, well…

I see the blogosphere has caught up to the early nineties in the macroeconomics debate. As Larry Summers argued — in 1988! — there are problems, like the Great Depression, with real business cycle theory. How can supply shocks explain such hugemongous declines in GDP?

Cole and Ohanian subsequently took up that challenge — in 1999! — finding that while real shocks explain about half of the contraction, recovery from the Great Depression was much slower than predicted by RBC. They claimed this was because New Deal policies were contractionary. This lead to responses from folks like Eggertsson.

The neo-classical view of the Great Depression is captured in a new book edited by Kehoe and Prescott. There are no macroeconomists, except perhaps Prescott, who believe real shocks are the only important shocks to the economy. Its important to point out, though, that no matter how kooky Prescott is, real shocks explain well over half of fluctuations.

Typing the phrase “no man is an island” into this doohickey produces no equilibrium and causes an infinite loop between the phrases “1 of the islands, the only” and “one of the island, the only”.

Does my worth as an individual derive from my being one of the islands or from being one of the island? Google translate doesn’t know; how can we?

“So yes, John, the Atlantic’s economics expert didn’t realize just how much the kind of regulations Democrats are now pushing had managed to screw up New York’s health insurance market.” — Megan McArdle

Here’s J. Bradford DeLong:
“No Megan we are not for health care reform because we hate freedom. We are for health care reform because our health care sector is wedged.”

What exactly, Professor, is the health care sector wedged between?

Why oh why can’t we have a better press corps professoriate?

(I fully expect this snark will have its own set of unintended consequences, but this here is what the internets are built on!)