How Not to Stimulate Economy, Indeed

Harvard professor Greg "Bush advisor" Mankiw posts some first class crap in his blog:

In thinking through the fiscal policy options and their implications, it might be useful to compare a few hypothetical, fanciful scenarios. Suppose that the federal government borrows some money and then...

Case A: uses the money to give a lump-sum payment (such as a tax rebate) to Joe Average, who chooses to spend his free time sitting at home watching Mork and Mindy reruns.

Case B: uses the money to hire Joe to sit at home and watch Mork and Mindy reruns.

Case C: uses the money to hire Joe to sit at home and watch Family Feud reruns, which Joe does not enjoy quite as much as Mork and Mindy.

How about:

Case D: uses the money to hire Joe to upgrade the national railway system, or

Case E: uses the money to hire Jane to give better education for 20 children, or

Case F: uses the money to fund Jack's research on new energy sources, etc.

There is no shortage of public goods that a government can take upon when the private sector absolutely refuses to make use of the available resources, preferring instead to sit on its hands and watch those Mork and Mindy reruns, or even worse, engage in blowing bubbles.

The private sector, especially the unregulated financial one, has already proven its capacity to misallocation of resources. It is high time to do something different.

Naturally, the government should take it easy on investment at times when the economy is red hot and there is scarcity of resources, but this is definitely not one of those times. Besides, those much needed public investments are soon cheaper than ever before. The situation would be much better, if the US government had gathered some surplus in the good times, instead of letting rip with massive deficits.

It's easy to make your preferred solution look good when you only compare it to even worse propositions. Why is it that some people equate government spending to burning bills? As if being paid by the government somehow makes everything worthless.

Have a Cheerful Christmas?

Ed Halliwell writes in the Guardian under the headline "Reasons to be cheerful". He has a Buddhist view on the topic of happiness and makes the case that no reason is needed for being cheerful. He interprets the word "cheerful" as an attitude, unlike "happiness", which is a state of affairs.

The next week or so will bring most of us a higher-than-usual number of wishes for our "happiness". Whether it's "Happy Christmas" (which seems to have eclipsed the more traditional exhortation to be "merry"), "Happy New Year", or the religion-neutral American import "Happy holidays", so many hopes for contentment can have the unintended effect of seeming like a reproach, especially if we are not feeling as chipper as the season appears to demand.

[...]

However, there is another, much more useful phrase for describing the potential of the holiday period – "the season of good cheer". Whereas the word happiness implies an end state, the result of causes and conditions over which we may have little control, cheerfulness is volitional, a deliberate decision to be good-spirited. Indeed, it may be especially appropriate to rouse "good cheer" at times – such as midwinter – when outer circumstances seem wretched and we are more likely to feel downcast.

[...]

The acceptance part of the process is important – cheerfulness should not be confused with the sometimes-nauseating "everything's-going-to-be-alright" approach that positive thinking gurus often appear to advocate. The purpose of cheerfulness isn't to deny that life is sometimes shit, it's that we aren't dependent on the happiness that comes from circumstances in order to find ways to wonder at it – as one Buddhist elder once asked me: "Rather than just liking the smell of roses, or hating the smell of manure, perhaps you could start appreciating that you have a nose?" (Read the whole story)

I guess this is what is usually referred to as "Christmas spirit". I guess what Ed wants to wish for everybody is: take it easy. I couldn't agree more.

Debt as a Source of Short-Sightedness

As an addendum to the previous post, there is a reason for the increasing short-sightedness of businesses.

Shortening of the time scale of business decisions is a direct result from the overall increase in the level of gearing. When equity decreases in size compared to the overall level of debt in a company, the time scale is inevitably compressed. This is because creditors, unlike equity investors, are not willing to wait for profits. Interest must be paid on the debt at a predetermined rate, or a default is triggered. When the overall level of debt increases, time scales shorten and risk-aversion increases.

Below is a graph of the average rate of growth of credit/debt versus GDP in various industrial nations:


Here is the same thing as a graph over time:


There is no reason to assume that this statistic would not revert to a mean over time. Such relative measures can not keep developing in one direction forever. What is noteworthy, besides the huge level of the debt, is its remarkably monotonic growth. The developed world has not seen a real reduction in debt for over 30 years. Now we are finding out how painful that actually is.

Oversized Financial Sector vs. True Innovation

Micheline Maynard publishes a sharp observation by John Casesa of Casesa Shapiro Group in a New York Times article about the trouble at GM:

But G.M., despite its tradition of fostering innovation, has often been impatient for profits to emerge.

Mr. Casesa said that pattern stemmed from the fact that so many of the company’s top executives had a background in finance, not in engineering and designing cars and trucks.

This out-sized rule by financial professionals in a single company is directly related to the overall size of the financial sector in developed countries. The same short-sightedness rules today in the stock market, resulting in an oversized focus on quarterly results. A long term focus and a will to wait for profits is a requirement for successful innovation.

Hoarding - Coin "Shortage" in Buenos Aires

An amazing story about the dynamics of hoarding coins in Argentina is presented by Joe Keohane in The Slate: (hat tip to Paul Kedrosky)

Welcome to the world's strangest economic crisis. Argentina in general—and Buenos Aires in particular—is presently in the grip of a moneda, or coin, shortage. Everywhere you look, there are signs reading, "NO HAY MONEDAS." As a result, vendors here are more likely to decline to sell you something than to cough up any of their increasingly precious coins in change. I've tried to buy a 2-peso candy bar with a 5-peso note only to be refused, suggesting that the 2-peso sale is worth less to the vendor than the 1-peso coin he would be forced to give me in change. When my wife went to buy a 10-trip subway pass, which retails for 9 pesos, she offered a 20-peso note and received 12 pesos in bills as change. This is commonplace—a daily, if not hourly, occurrence. It's taken for granted that the peso coin is more valuable than the 2-peso note.

No one can say what's causing this absurd situation. The government accuses Argentines of hoarding coins, which is true, at least to some extent. When even the most insignificant purchase requires the same order of planning and precision as a long-range missile strike, you can hardly blame people for keeping a jar of monedas safe at home. The people, in turn, fault the government for not minting enough coins. In fact, the nation's central bank has produced a record number of monedas this year, and the problem has gotten even worse. (Read more)

When everybody does something in anticipation of others doing the same, things can sometimes escalate out of hands in a completely uncontrolled way. If everybody would stop the adverse behaviour all at once, things would rapidly come back to normal. But how could such a coordinated action be achieved?

Hoarding is a phenomenon that is going to be a hot topic in the coming decades of resource scarcity. It is a good research subject for economists, sociologists and anthropologists. Too bad I'm an engineer myself.

What to Do with Excess Financiers?

A hilarious outburst of frustration from Stormy at the Angry Bear blog:

I still think nationalizing the banking system is a clean solution. No more fancy derivatives or CDO's. Let's have an old-fashion banking system. Sideline the money boys. Send them off to China or Sudan. Let them watch ice melt in the Arctic. Count polar bears. Have them do something useful.

Borrowings of Depository Institutions from the Federal Reserve

The credit crisis just keeps escalating. A picture is worth a thousand words: