There is no problem…

… unless there’s a REALLY BIG problem. Or so says Brad Delong (see MR for the pertinent excerpt).

Granted I’ve been a little distracted lately tussling in my little corner of the library, but I don’t see a problem with the usual econ 101 indicators of recession. Unemployment looks ok. Employment decreased in January for the first time since the last recession, but employment changes were negative several times in the nineties after that decade’s recession had already past. Consumer confidence is at a 5 year low, but we weren’t in a recession 5 years ago. Personal income and consumption is up. Industrial production is up, capacity is increasing and capital utilization is about at its historic average. Sales are flat the last couple of months but there’s growth over last year at this time.

So what’s the REALLY BIG problem? Well, if banks start seeing risk where there ain’t (e.g. credit lines businesses use to make payroll), then we might to see a problem. Seeing risk everywhere, they won’t make loans that should be made.

The Fed’s actions (including lower rates) can be see in this light. They want to calm the finance guys down so they don’t cause a real problem. If you ask me, the Fed is basically doing something because something must be done. Lowering rates and taking “unprecedented” actions over the weekend are somethings.

Having no insight into the psychology of bankers, I’m not sure if there is or there will be a REALLY BIG problem. To the extent psychology isn’t a fundamental, the fundamentals look good… or at least ok.

PS – This is a neat site. It shows what the recession timing committee looks at when deciding when recessions start.

PSS (or is it PPS) – The Fed may also be inflating to reduce the real size of mortgages. If it can be proven that Ben is explicitly doing this, I’ll petition to have him canonized.

If human life is priceless…

… does human life have infinite value? Should we spend any amount of money to save someones life?

Clearly the answer is no. But here’s a harder one: If someone has a disease and we have the means to cure it with very expensive treatment, should we cure him no matter the circumstances? Even if the diseased man is sure to die soon? Even if the money could be spent to cure 10 other people?

Are people that have to make these sorts of decisions every day, evil? What if those people have a profit motive? What if they work in a non-profit but non-governmental agency?

The end of mercantilism in England

Over a hundred years before the Wealth of Nations, Sam Pepys:

To another question of mine he made me fully understand that the old law of prohibiting bullion to be exported, is, and ever was a folly and an injury, rather than good. Arguing thus, that if the exportations exceed importations, then the balance must be brought home in money, which, when our merchants know cannot be carried out again, they will forbear to bring home in money, but let it lie abroad for trade, or keepe in foreign banks: or if our importations exceed our exportations, then, to keepe credit, the merchants will and must find ways of carrying out money by stealth, which is a most easy thing to do, and is every where done; and therefore the law against it signifies nothing in the world. Besides, that it is seen, that where money is free, there is great plenty; where it is restrained, as here, there is a great want, as in Spayne.

Nominee for MR post of the decade

Alex is the quiet half of the MR blog, but he usually makes up for his low quantity with high quality. His most recent post, The Law of Unintended Consequences, is in response to this post at the Freakonomics. Alex comes up with this definition for the Law:

The law of unintended consequences is what happens when a simple system tries to regulate a complex system. The political system is simple, it operates with limited information (rational ignorance), short time horizons, low feedback, and poor and misaligned incentives. Society in contrast is a complex, evolving, high-feedback, incentive-driven system. When a simple system tries to regulate a complex system you often get unintended consequences.

The Law should make us hesitate to invoke the so-called Precautionary Principle that I wrote about a couple years ago. The Principle would have us do “something” about climate change because even though there’s great uncertainty about the science of climate change, there’s a substantial chance of great harm if we do nothing. The Law, though, pushes back on the idea of doing “something” by suggesting that “something” will have unintended side effects.

The NYT piece also got this reaction from Andrew Gelman and someone over at his place has this great take on the Law:

I usually think of the law as a normative one: if you propose a policy to do X and use only the direct consequences of X to motivate your decision, you will have overestimated the effect of X by ignoring indirect effects. The reason the expected effect is always counter to the direct effect is that the economic incentives must work in the other direction — otherwise you wouldn’t have needed to impose X in the first place. Thus, the ingenuity of people attempting to follow the economic incentives underlying the problem will always frustrate, to some extent, the direct effect of what you’re trying to do.

The Law suggests anything we do can have significant negative side effects. For whatever reason, incentives are aligned in the economy towards emitting lots of green house gases. Unless we address all of those incentives directly, Andrew’s commenter suggests we expose ourselves to the potential for negative unintended side effects.

How to address incentives directly? Balance policy towards pricing green house gas emissions (e.g. CO2 tax) and away from regulations (e.g. CAFE standards).

Ideas not Institutions, part 2

[T]he Malthusian epoch is governed by economic forces that will inevitably generate industrialisation and a transition to sustained economic growth. The rapidity of this process may be influenced by different factors including institutions. But institutions, by themselves, do not trigger a take-off from stagnation to sustained economic growth. They simply affect the speed of this transition. Institutions can be viewed as the oil that lubricates the wheels of a train that is already in motion. The presence or absence of oil may affect the speed of the train, but it does not trigger its initial motion.

— Oded Galor in a great interview on Unified Growth Theory (pdf)

(h/t MR)


Apparently, we’re talking about the UN Human Development Index this week… the god’s demand it.

So, on the theme of “gawd-damn-it-quit-comparing-Iceland (pop. 300k)-to-the-U.S. (pop. 300m)”, here’s the HDI by states:

Connecticut would be third on the list, Delaware and Massachusetts seventh and Minnesota tenth. The lowest ranking state is Mississippi and it still ranks higher than European (so it must be better) Romania and Health Care Paradise Cuba.

Here’s the data (xls).

Reducing CO2 emissions by 75% will be painful, right?


BTW, I don’t think Quiggin is clear on this point: he’s not saying that “we” ((You like those quotes Gabriel?)) have to pressure airlines to upgrade their fleets or “we” have to start planning fewer but longer vacations. He’s saying that more expensive fuels will make airplane trips more expensive. Period. Full stop. Now, because prices happen to be powerful motivators, this *could* induce fleet upgrades or changes in vacation frequency/durations. His point in the end, though, is that these changes in behavior don’t have to be that drastic and they won’t be nearly as drastic as you might expect with the scary sounding “75% decrease in CO2 emissions”.

So fuel price changes induce not-so-painful behavior changes. What causes the fuel prices to go up?

“We” ((Isn’t this the same “we” as the one above?)) institute carbon taxes in one form or other.

Speaking of not being a fascist

Something’s very wrong with the world when Dani Rodrik is accused of being a conservative:

I was at a conference yesterday on “Global Commerce and the National Interest” convened by Robert Kuttner and the Sloan Foundation, which brought together many of the luminaries on the left-wing of the Democratic party. I was asked to make some comments, and I organized them under the heading “What Would A Progressive Trade Agenda Look Like?” Here is a 6-point summary of my comments:

Actually his points are better summarized at MR: “My whirlwind summary is pro-trade, pro-safety net, multilateral not bilateral, better procedures, pro-immigration, progressive toward poor countries, letting poor countries determine their own economic policies, and giving democracies more trade rights than non-democracies.”

Here’s Rodrik explaining the reaction to his ideas: “At some point during the day, Jeff Madrick walked over to me and whispered “how does it feel to be a conservative?” It’s true: Richard Freeman and I both came across as rabid right-wingers.”