The Treasury View

Eugene Fama, a very distinguished finance specialist at Chicago, has been arguing that government spending cannot stimulate output as a matter of logical necessity (see the subsection of his article "The Sad Logic of a Fiscal Stimulus")

Like the auto bailout, government infrastructure investments must be financed -- more government debt. The new government debt absorbs private and corporate savings, which means private investment goes down by the same amount [...]Stimulus" spending must be financed, which means it displaces other current uses of the same funds, and so does not help the economy today.

John Cochrane, also of Chicago, has arguably made a similar point here.
Certainly he is sceptical about traditional fiscal stimulus:

The central question is whether fiscal stimulus can do anything to raise the
level of output. The question is not whether the “multiplier” exceeds one –
whether deficit spending raises output by more than the value of that spending.
The baseline question is whether the multiplier exceeds zero.

These arguments esentially repeat what was known as the Treasury View during the Great Depression. With the help of Keynes and others, this was shown to be a fallacy. What people like Paul Krugman and Brad DeLong are scratching their heads about, is how can this fallacy still exist as a serious argument?


It is worth reading Krugman's response, as it nicely describes why this argument makes the mistake of interpreting an accounting identity as a behavioural relationship, or equally Brad DeLong discusses the Treasury View here, and gives an example to explain the fallacy here (although this may be hard to follow).

Bang for the buck on public spending

There is a large debate amongst economists at the moment about the need for and effectiveness of a fiscal stimulus package (see Jonathan's post about Barro vs Krugman).
This article by Paul Krugman about dynamic scoring and the "bang for the buck" on public spending in the US basically asks: how should we measure the cost of effective fiscal stimulus?

Large transfers from taxpayers to bankers

On bonuses in the US financial sector last year despite the crisis:

«Despite crippling losses, multibillion-dollar bailouts and the passing of some of the most prominent names in the business, employees at financial companies in New York, the now-diminished world capital of capital, collected an estimated $18.4 billion in bonuses for the year.

That was the sixth-largest haul on record, according to a report released Wednesday by the New York State comptroller.(...)

Lucian A. Bebchuk, a professor at Harvard Law School and expert on executive compensation, called the 2008 bonus figure “disconcerting.” Bonuses, he said, are meant to reward good performance and retain employees. But Wall Street disbursed billions despite staggering losses and a shrinking job market.

“This was neither the sixth-best year in terms of aggregate profits, nor was it the sixth-most-difficult year in terms of retaining employees,” Professor Bebchuk said.

Echoing Mr. DiNapoli, Professor Bebchuk said he was concerned that banks might be using taxpayer money to subsidize bonuses or dividends to stockholders. “What the government has been trying to do is shore up capital, and any diversion of capital out of banks, whether in the form of dividends or large payments to employees, really undermines what we are trying to do,” he said.(...)

Andrew M. Cuomo, the New York attorney general, has issued subpoenas to John A. Thain, Merrill’s former chief executive, and to an executive at Bank of America, which recently acquired Merrill, asking for information about Merrill’s decision to pay $4 billion to $5 billion in bonuses despite new, gaping losses that forced Bank of America to seek a second financial lifeline from Washington.(...)»

Read the full article here. For an old but very interesting article about the evolution of CEO compensation, read this.

A costly coordination failure...

No comment.

Krugman vs.Barro

Here are links for the items discussed in today's lecture. Robert Barro's piece "Government Spending Is No Free Lunch/Now the Democrats are peddling voodoo economics" in a recent Wall Street Journal arguing that the multiplier is less than one is here. Krugman's response and update (with the figure for house building and expenditure on cars before, during and after the war), basically makes the point that there was a war on. A fall in some types of expenditure is not totally surprising!

Still no answers

Still no answers for the question that was posted Question for Class Discussion. Just enter a comment. You have the option of being "anonymous" so no-one will ever know.

Terminology: convex indifference curves

From an article by A. Kozlik in the American Economic Review, Mar 1941.

I was asked about the expression used in one of the problems sheets, "convex to the origin", when asked to describe the usual way economists draw indifference curves (i.e., when they satisfy a diminishing marginal rate of substitution- = get flatter -as you move to the right). Clearly our terminology has been inconsistent for a long time. The textbook uses the expression "bowed to the origin". The above article argues that (c) is the best solution, but I am not sure his recommendations were ever taken seriously.

Economic experiments

Yesterday took place the last session in the series of economic experiments that we have been running during the last few days. In terms of organisation and participation, the experiments were a success. A total of 77 students took part in them, very close to our target, many of them from Economics 1A. We would like to thank all students who took part for their interest, curiosity and ethusiasm. These experiments were part of one of our research projects aimed at studying how real people make decisions. The readers of this blog will be the first ones to be informed about the results once we process them in the form of an article. Meanwhile, thank you so much for your participation!

Who said you needed textbooks?

Interview with the head of Zimbabwe's reserve bank, aka "Mr. Inflation":
«Your critics blame your monetary policies for Zimbabwe's economic problems.
I've been condemned by traditional economists who said that printing money is responsible for inflation. Out of the necessity to exist, to ensure my people survive, I had to find myself printing money. I found myself doing extraordinary things that aren't in the textbooks. Then the IMF asked the U.S. to please print money. I began to see the whole world now in a mode of practicing what they have been saying I should not. I decided that God had been on my side and had come to vindicate me.»
More on the Newsweek website.

Recession

(Graphic from FT.com.) As of last week, it's official. We are in a recession (which everyone knew anyway). Officially you need two quarters (quarter = 3 months) of negative GDP growth, and since three quarters ago growth was precisely zero, that didn't count.  Martin Weale, director of the National Institute for Economic and Social Research, said that, based on its estimates, the recession began in May 2008 and the economy had contracted 2.7 per cent from its April peak. The FT has an interactive graphic which shows output growth in a range of countries over the last 100 years or so.

A Question for Class Discussion

This is from Greg Mankiw's blog.

The NY Times reports that the new president is concerned about how banks are using TARP funds [JT: TARP=The Troubled Asset Relief Program , a US government program to purchase assets and equity from financial institutions to help improve the situation of the financial sector]
[President Obama] criticized companies that have used federal money they received under the financial bailout for low priority or wasteful purposes and promised not to let that happen. He cited “reports that we’ve seen over the last couple of days about companies that have received taxpayer assistance, then going out and renovating bathrooms or offices, or in other ways not managing those dollars appropriately.”

A prominent economist emails me the following:

Discussion question.
Scenario 1. AmeriBank of Holland, Ohio, receives TARP funds and uses $20,000 to hire Joe the Plumber to remodel a bathroom in one of its banks.
Scenario 2. AmeriBank of Holland, Ohio, receives TARP funds and loans $20,000 to Bob the Baker to remodel a bathroom in his house.
Explain the difference in macroeconomic stimulus in these two scenarios.

Anyone want to venture an answer? (Just enter a comment below)

The way to a woman's heart

This is a link to the study I spoke about in my tutorial which suggested that the way to a woman's heart is to give her a bad gift.

Are economists hot? Apparently not.

This is from the Crooked Timber website, and is based on data from RateMyProfessors. Apparently even the highest scoring subject (languages) gets a negative score, which is a bit depressing...

At least we beat the accountants.

(Click to enlarge picture.)

The cost of fur

Here is a link to the article (from the Economist) about figuring out the preferences of captive mink, discussed in last week's lecture.

links for the graphs in today's lecture.

This was computed by Alex Tabarrok. (Click for larger picture.)
This is from Nicholas Bloom and Max Floetotto at Stanford. (Click for larger picture.)

The Endowment Effect

Here is something from Marginal Revolution related to the last lecture on the endowment effect:

Don't touch when you are shopping, or the new endowment effect

Be careful how you reach out:
A new study suggests that just fingering an item on a store shelf can create an attachment that makes you willing to pay more for it.
Previous studies have shown that many people begin to feel ownership of an item - that it "is theirs" - before they even buy it. But this study, conducted by researchers at Ohio State University, is the first to show "mine, mine, mine" feelings can begin in as little as 30 seconds after first touching an object.
Here is the full story.

What economists research

This is the picture made by Paul Kedrosky from the titles of 505 papers at January's American Economic Association meetings, using a programme called Wordle.

Welcome

Welcome to the Economics 1A blog! This blog will run alongside the course in Semester 2, and contain items of interest (hopefully) which are related, at least vaguely, to the material we are covering. It will also, from time to time, contain points of clarification arising from lectures or tutorials. Contributors to the blog will be course lecturers (mainly me), course secretary (Eirlys) and tutors. Suggestions or questions are always welcome.
Jonathan Thomas