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The Economics of the Affordable Car Insurance Act, by David Henderson

Tue, 17 Jan 2017 16:56:40 -0500

The Affordable Car Insurance Act (ACIA), which President-elect Donald Trump and the Republican-controlled Congress have vowed to repeal, was crafted to overcome two basic problems in the provision of car insurance in the United States. First, the costs are incredibly skewed, with just 10 percent of drivers accounting for almost two thirds of the nation's spending on cars that have been in accidents.
This is from Dean Baker, "The Economics of the Affordable Car Insurance Act," January 17, 2017.

Actually, it's not from Dean's article. I've changed a few words.

But before you go and find his article, think through whether this 10 percent of drivers accounting for 2/3 of spending is a problem with car insurance. Once you've thought through that, go and read Dean's article.

HT2 Mark Thoma.


My End-of-the-World Bet with Eliezer Yudkowsky, by Bryan Caplan

Tue, 17 Jan 2017 14:45:33 -0500

Famed futurist Eliezer Yudkowsky fears the imminent end of the world at the hands of Unfriendly Artificial Intelligence.  I find this worry fanciful.  Many people in Eliezer's position would just dismiss my head-in-the-sandedness, but he's also genuinely impressed with my perfect public betting record.  To bridge the gap and advance our knowledge, we've agreed to the following bet, written in the first person by Eliezier.  Since I've just Paypaled him the money, the bet is now officially on. Short bet: - Bryan Caplan pays Eliezer $100 now, in exchange for $200 CPI-adjusted from Eliezer if the world has not been ended by nonaligned AI before 12:00am GMT on January 1st, 2030. Details: - $100 USD is due to Eliezer Yudkowsky before February 1st, 2017 for the bet to become effective. - In the event the CPI is retired or modified or it's gone totally bogus under the Trump administration, we'll use a mutually agreeable inflation index or toss it to a mutually agreeable third party; the general notion is that you should be paid back twice what you bet now without anything making that amount ludicrously small or large. - If there are still biological humans running around on the surface of the Earth, it will not have been said to be ended. - Any circumstance under which the vast bulk of humanity's cosmic resource endowment is being diverted to events of little humane value due to AGI not under human control, and in which there are no longer biological humans running around on the surface of the Earth, shall be considered to count as the world being ended by nonaligned AGI. - If there is any ambiguity over whether the world has been ended by nonaligned AGI, considerations relating to the disposition of the bulk of humanity's potential astronomical resource endowment shall dominate a mutually agreeable third-party judgment, since the cosmic endowment is what I actually care about and its diversion is what I am attempting to avert using your bet-winning skills.  Regardless, if there are still non-uploaded humans running around the Earth's surface, you shall be said to have unambiguously won the bet (I think this is what you predict and care about). - You win the bet if the world has been ended under AGI under specific human control by some human who specifically wanted to end it in a specific way and successfully did so.  You do not win if somebody who thought it was a great idea just built an AGI and turned it loose (this will not be deemed 'aligned', and would not surprise me). - If it sure looks like we're all still running around on the surface of the Earth and nothing AGI-ish is definitely known to have happened, the world shall be deemed non-ended for bet settlement purposes, irrespective of simulation arguments or the possibility of an AGI deceiving us in this regard. - The bet is payable to whomsoever has the most credible claim to being your heirs and assigns in the event that anything unfortunate should happen to you.  Whomsoever has primary claim to being my own heir shall inherit this responsibility from me if they have inherited more than $200 of value from me. - Your announcement of the bet shall mention that Eliezer strongly prefers that the world not be destroyed and is trying to exploit Bryan's amazing bet-winning abilities to this end.  Aside from that, these details do not need to be publicly recounted in any particular regard, and just form part of the semiformal understanding between us (they may of course be recounted any time either of us wishes).Notice: The bet is structured so that Eliezer still gets a marginal benefit ($100 now) even if he's right about the end of the world.  I, similarly, get a somewhat larger marginal benefit ($200 inflation-adjusted in 2030) if he's wrong.  In my mind, this is primarily a bet that annualized real interest rates stay below 5.5%.  After all, at 5.5%, I could turn $100 today in $200 inflation-adjusted without betting.  I think it's highly unlikely real rates will get that h[...]

Williamson on Rogoff's Case Against Cash, by David Henderson

Mon, 16 Jan 2017 16:22:41 -0500

St. Louis Federal Reserve Bank Vice-President and economist Stephen D. Williamson has written a critical review of Kenneth Rogoff's The Curse of Cash. I use the word "critical" in the sense we academics use it: a balanced critique that looks at pluses and minuses. I haven't read Rogoff's book yet, although I did edit an Econlib article, "In Defense of Cash," by Pierre Lemieux, who did read Rogoff's book thoroughly. While Williamson's piece is balanced, I want to focus on one area in which he too easily accepts Rogoff's thinking about crime and another area in which, if I understand him correctly, Williamson seems to make a basic error in economic reasoning. Crime Williamson writes: Why is cash a "curse?" As Rogoff explains, one of currency's advantages for the user is privacy. But people who want privacy include those who distribute illegal drugs, evade taxation, bribe government officials, and promote terrorism, among other nefarious activities. Currency - and particularly currency in large denominations - is thus an aid to criminals. Indeed, as Rogoff points out, the quantity of U.S. currency in existence is currently about $4,200 per U.S. resident. But Greene et al. (2016) find in surveys that the typical law-abiding consumer holds $207 in cash, on average. This, and the fact that about 80% of the value of U.S. currency outstanding is in $100 notes, suggest that the majority of cash in the U.S. is not used for anything we would characterize as legitimate. Rogoff makes a convincing case that eliminating large-denomination currency would significantly reduce crime, and increase tax revenues. One of the nice features of Rogoff's book is his marshalling of the available evidence to provide ballpark estimates of the effects of the policies he is recommending. The gains from reforming currency issue for the United States appear to be significant - certainly not small potatoes. Let's look at those four activities cited. Using large denomination bills to promote, or, even worse, carry out, terrorism is clearcut bad. So score one for Rogoff and Williamson. How about the other three? What you think of them will depend on how you think about these issues. Consider them in turn. Distributing Illegal Drugs One of the major costs of the drug war, which gets far too little attention, is that it raises the cost of illegal drugs to those who want them. We, including me, often write about the costs to innocent parties whose property is stolen by drug users. But we typically leave out the costs to drug users, including those who don't steal. The drug war has destroyed a huge amount of consumer surplus for drug users. In any legitimate cost/benefit analysis, those losses should count too. I supervised a thesis on this in 2002: Marvin H. McGuire and Steven M. Carroll, "The economics of the drug war : effective federal policy or missed opportunity?" How does this matter for the issue at hand? High-face-value currency, as both Rogoff and Williamson recognize, facilitates illegal drug transactions. Getting rid of that currency makes those transactions more difficult, making the cost to consumers higher. That's their point. So in their view, the consumer surplus loss doesn't count. It should. Bribing Government Officials Making it more difficult to bribe government officials could be good or could be bad. It's probably bad, as Francois Melese argues in "Corruption," in The Concise Encyclopedia of Economics. In this paragraph, Melese points out both sides of the issue: Some economists argue that paying bribes to the right officials can mitigate the harmful effects of excessive government regulation. If firms had a choice to wade through red tape or pay to circumvent it, paying bribes might actually improve efficiency and spur investment. Although this view is plausible, a pioneering study by Mauro found that corruption "is strongly negatively associated with the investment rate, regardless of the amount of red tape" (Mauro 1995, p. 695). In fact, allowing firms to pay bribes to[...]

The peculiar persistence of monetary policy denialism, by Scott Sumner

Mon, 16 Jan 2017 11:12:07 -0500

When I was in grad school in the late 1970s, there was increased interest in the "monetary ineffectiveness proposition", which posited that money was neutral and monetary policy did not impact real variables. There was virtually no interest (at Chicago) in the claim that monetary policy could not impact nominal variables, like inflation and NGDP. By the early 1990s, there was no interest in the nominal ineffectiveness view in any university that I'm aware of. And yet today I see lots of people denying that monetary policy can control nominal variables. They often make arguments that are completely irrelevant, such as that the monetary base is only a tiny percentage of financial assets. That would be like saying the supply of kiwi fruit can't have much impact on the price of kiwi fruit, because kiwi fruit are only a tiny percentage of all fruits. Beyond the powerful theoretical arguments against monetary policy denialism, there's also a very inconvenient fact for denialists; both market and private forecasters seem to believe that monetary policy is effective. Let's take a look at the consensus forecast of PCE inflation over the next 10 years (from 42 forecasters surveyed by the Philadelphia Fed): Notice that most of those numbers are pretty close to 2%. The Fed's official long run target is headline PCE inflation, however in the short run they are believed to target core PCE inflation, which factors out wild swings in oil prices. Core PCE inflation is expected to come in at 1.8% this year. That may reflect the strong dollar, which holds down inflation. They forecast 2.0% inflation for the 2016-2025 period. Now think about how miraculous that 2.0% figure would be if monetary policy were not determining inflation. Suppose you believed that fiscal policy determined inflation. That would mean that professional forecasters expected Trump and Congress to come together with a package to produce exactly 2% inflation. But I've never even seen a model explaining how this result could be achieved. People who like the fiscal theory of the price level, such as John Cochrane, usually talk about the history of inflation in the broadest of terms. Thus inconvenient facts such as the fall in inflation just as Reagan was dramatically boosting deficits are waved away with talk of things like the 1983 Social Security reforms, which reduced future expected deficits. But unless I'm mistaken, there's no precision in those models, no attempt to explain how fiscal policy produced exactly the actual path of inflation. (This is from memory, please correct me if I'm wrong.) Another counterargument might be that 2% inflation is "normal", and thus might have been caused by some sort of structural factors in the economy, not monetary policy. But of course it's not at all normal. Prior to 1990, the Fed almost never achieved 2% inflation; it was usually much lower (gold standard) or much higher (Great Inflation and even the Volcker years.) Since 1990, we've been pretty close to 2% inflation, and this precisely corresponds to the period when the Fed has been trying to achieve 2% inflation. Even the catastrophic banking crash of 2008-09 caused inflation to only fall about 2% below target, as compared to double digit deflation during the 1931 crisis. So private sector forecasts seem to trust the Fed to keep inflation at 2%, on average. But how can the Fed do that unless monetary policy is effective? How about market forecasts? Unfortunately we don't have a completely unbiased market forecast, but we do have the TIPS spreads: Notice the 5-year and 10-year spreads are both 2.01%. That's actually closer to 2% than usual, but a couple caveats are in order. First, the CPI is used to index TIPS, and the CPI tends to show higher inflation that the PCE, which is the variable actually targeted by the Fed. So the markets may be forecasting slightly less than 2% inflation. Notice the Philly Fed forecast calls for 2.0% PCE inflation and 2.22% CPI inf[...]

Liquidity traps and stupidity traps, by Scott Sumner

Sat, 14 Jan 2017 16:30:18 -0500

Many people are puzzled by the fact that Japan continues to fall short of its 2% inflation target. Some attribute this the Japan being in a "liquidity trap". But surely that can't be the complete explanation. If Zimbabwe can find a way to inflate, it's hard to believe that Japan would be unable to debase its fiat money. If they don't know how, I'd be glad to show them. No charge.

In macroeconomics, causation occurs on many levels. In my book on the Great Depression I pointed to real wage shocks, and then deeper causes like deflation and New Deal polices, and then deeper problems like gold hoarding, and then deeper problems like fear of bank failure, fear of currency devaluation and lack of international cooperation on monetary policy. And then deeper causes of that lack of cooperation (bitterness over WWI, Smoot Hawley, etc., etc.)

So what is the deeper cause of Japan's "lowflation". Back in 2010, John Taylor wrote a post describing how the US used to pressure Japan to avoid depreciating the yen. Taylor does not suggest that this policy caused Japan's 1997-2012 deflation, but it certainly might have.

Is this still true today? This article caught my eye:

If United States president-elect Donald Trump's appointment of Peter Navarro to head a new Council of Trade is the prelude to strained relations between Beijing and Washington, the United States will not wish to alienate Japan at the same time.

Japanese economic policies that might ordinarily raise US eyebrows could instead pass unchallenged. The yen could fall further in value.

I don't believe that the US would actually stop Japan form depreciating the yen. In my view we are a "paper tiger". But Japan may see things differently, and be reluctant to risk a trade war.

You might wonder why Japan doesn't adopt another type of expansionary monetary policy---one that does not involve depreciating the yen. The problem here is that any effective monetary stimulus will depreciate the yen, regardless of whether it is accomplished by the BOJ buying domestic assets or foreign exchange.

That's one reason why I call this a "stupidity trap". US pressure on Japan is based on an EC101-type error. Indeed it's based on four such mistakes:

1. The idea that monetary stimulus can create inflation without depreciating a currency.

2. The idea that Japan's currency account surplus shows that its currency is "undervalued". In fact, it merely shows that Japan saves more than it invests, not surprisingly for a thrifty country with a falling population.

3. And it's based on the misconception that it's possible to prevent Japan from depreciating its real exchange rate (which is what matters for trade), by preventing it from depreciating its nominal exchange rate. Instead, if the equilibrium real exchange rate falls, and the nominal rate is held fixed, Japan's real exchange rate will fall via deflation.

4. It's based on the misconception that a current account surplus in Japan somehow steals jobs from America.

In freshman economics we try to teach students that these ideas are myths. But these views are widely held by people in places like the Treasury Department, even under previous administrations that tended to favor free trade.

Imagine what we'll get with the Trump administration.


Why Are Drug Prices So High?, by David Henderson

Sat, 14 Jan 2017 12:13:25 -0500

Economists have shown that the cost to get one drug to market successfully is now more than $2.8 billion. This cost has been growing at 7.5 percent per year, more than doubling every ten years. Most of this cost is due to FDA regulation. Some potentially helpful drugs don't ever make it to market because the cost the company must bear is too high. Drug companies regularly "kill" drugs that could be effective because the potential profits, multiplied by the probability of collecting them, are less than the anticipated costs. One of us has helped kill drugs for brain cancer, ovarian cancer, melanoma, hemophilia and other debilitating conditions. Imagine a drug for melanoma that never got on the market due to FDA regulation. In a sense, its price is infinite because it can't be purchased. Reduce FDA regulation so that it gets on the market, and the price falls from "infinite" to merely "high." If you had melanoma, which would you rather have: no drug or a high-priced drug that treats it? If we simply went back to pre-1962 law, the FDA could still require proof of safety, but would not be able to require evidence on efficacy. This one change would allow drugs to be developed faster--often as much as 10 years faster. Market success would establish efficacy. Could there be ineffective drugs? Sure. But as doctors and patients learn, such drugs would disappear over time. This is nothing new; doctors and patients regularly evaluate drugs for efficacy. Clinical trials often show that perhaps only 20 percent, 40 percent, or 60 percent of patients benefit. Even when the FDA finally approves the drug as "safe and efficacious," doctors must still evaluate the drug to find out how efficacious it is for each particular patient. In practice, an FDA certification of efficacy is just a starting point. Who would want to take a drug that has not been shown, to the FDA's satisfaction, to be effective? Almost everyone. Many drugs have off-label uses. These are uses that doctors have found effective for a particular use but that the FDA has not approved for that use. According to WebMD, "More than one in five outpatient prescriptions written in the U.S. are for off-label uses." Tabarrok cites studies showing that 80 to 90 percent of pediatric patients are prescribed drugs for off-label uses. As is well-known in the medical establishment, off-label prescribing is legal and widely practiced. Indeed, Congress, the National Institute for Health, Medicare, the Veterans Administration, and the National Cancer Institute all encourage it. Consider gastroparesis, a poorly understood upper gastrointestinal disorder in which the contents of the stomach do not move efficiently into the small intestine. Diabetics are particularly susceptible to this condition. The FDA has approved only one drug to treat it: metoclopramide. But doctors have found that, for some patients, an antibiotic called erythromycin reduces nausea, vomiting, and abdominal pain. Erythromycin is not FDA-approved to treat gastroparesis. But it works. Moreover, off-label uses in oncology account for as much as 90 percent of all cancer treatments. For some diseases, like AL amyloidosis, there are no approved medicines. Not a single one. So what do doctors do? They use medicines developed to treat related diseases, such as multiple myeloma, even though they and their patients would prefer medicines that treat AL amyloidosis directly. This is from David R. Henderson and Charles L. Hooper, "Why Are Drug Prices so High?" Goodman Institute Brief Analysis No. 117, January 10, 2017. (55 COMMENTS)[...]

Was Obamacare truly evil, or just a missed opportunity?, by Scott Sumner

Fri, 13 Jan 2017 11:06:49 -0500

I was mildly opposed to Obamacare, but mostly because I thought it was a missed opportunity to reform health care. I was bemused to see very strident opposition to the program on the right, with some pretty hyperbolic language about socialized medicine and the end of freedom. (Language I don't recall with Bush's massive increase in government involvement in healthcare.) In recent weeks I've seen a number of conservatives argue that the GOP would be making a mistake to simply repeal Obamacare. But why? If it's such a horrible program, won't Americans be much better off without it? So just repeal the program, and then later try to work on sensible reforms. That's not my view, but it's the view I'd expect from the people who told us that Obamacare was horrible. One counterargument is that some people have grown to rely on Obamacare. But if that's an argument against repeal, then it's also an argument against any policy changes in any area of governance. All policy changes create winners and losers. Lots of people who made investment decisions based on the current tax code, will be hurt if the GOP lowers rates and closes loopholes. Should we not do tax reform? (See David Henderson's excellent post discussing this issue.) At most, I would think you'd want to add a three-year grace period for those who were currently insured under Obamacare, to give them time to find suitable alternatives. But if the program is horrible, then get rid of it. But those are not the arguments I'm seeing. A typical example was recently published in the National Review, a very conservative intellectual publication. The article suggests that Obamacare should be replaced with a new program . . . which sounds almost exactly like Obamacare! Now just to be clear, it's not identical, but the similarities are so strong that it makes me wonder what all the fuss was about. Why did conservatives view Obamacare as a disaster, if they wish to replace it with such a similar program? As I said, before the election I was to the left of the conservative movement, opposed to Obamacare but viewing some of the opposition as rather hysterical. Now I've shifted to a position to the right of the conservative movement, I favor radical changes in health care: 1. Elimination of all tax subsidies, such as the deductibility of health insurance costs. 2. Radical deregulation, including no barriers to market entry, no quality regulations, open borders for doctors, abolishing the FDA, no barriers on the type of insurance that can be offered. 3. Government healthcare would be provided at the lowest cost possible, even if it meant flying Medicaid patients to Thailand. (It probably would not after open borders for doctors, and no barriers to entry.) I do favor some role for the government. One idea for overcoming the free rider problem is mandatory health saving accounts and catastrophic insurance. (The alternative is letting people who choose not to be insured simply die when they are sick. Even if that's the right policy, society is not willing to adopt it---so health savings accounts seem like a good second best policy.) In addition to health savings accounts and catastrophic insurance, there could be some sort of government subsidy for the needy. That might be government run clinics and hospitals, that offer bare bones service, as in Singapore, or subsidies for the purchase of HSAs and catastrophic insurance, for low income people. Singapore's government spends only a tiny fraction of what our government spends on health care, but it has universal coverage and the world's second longest life expectancy. If people don't like catastrophic insurance, they would be free to buy ordinary insurance, instead of HSAs. But there would be no government subsidy. The GOP could do these radical changes, which but they would be highly controversial. As a result, they'll probably end up with som[...]

Was USAID Behind Indian Government's War on Cash?, by David Henderson

Thu, 12 Jan 2017 18:38:18 -0500

On November 8, Indian prime minster Narendra Modi announced that the two largest denominations of banknotes could not be used for payments any more with almost immediate effect. Owners could only recoup their value by putting them into a bank account before the short grace period expired at year end, which many people and businesses did not manage to do, due to long lines in front of banks. The amount of cash that banks were allowed to pay out to individual customers was severely restricted. Almost half of Indians have no bank account and many do not even have a bank nearby. The economy is largely cash based. Thus, a severe shortage of cash ensued. Those who suffered the most were the poorest and most vulnerable. They had additional difficulty earning their meager living in the informal sector or paying for essential goods and services like food, medicine or hospitals. Chaos and fraud reigned well into December.
This is from Norbert Haring, "A well-kept open secret: Washington is behind India's brutal experiment of abolishing most cash," January 1, 2017.

I posted about the Indian government's action in "India's Assault on Money," November 11, 2016. It hadn't even occurred to me that other international groups might have been instigators.

Another excerpt:

Not even four weeks before this assault on Indians, USAID had announced the establishment of „Catalyst: Inclusive Cashless Payment Partnership", with the goal of effecting a quantum leap in cashless payment in India. The press statement of October 14 says that Catalyst "marks the next phase of partnership between USAID and Ministry of Finance to facilitate universal financial inclusion". The statement does not show up in the list of press statements on the website of USAID (anymore?). Not even filtering statements with the word "India" would bring it up. To find it, you seem to have to know it exists, or stumble upon it in a web search. Indeed, this and other statements, which seemed rather boring before, have become a lot more interesting and revealing after November 8.

In his post, Haring does not make a slam-dunk argument that USAID was an instigator of this extreme measure. He does point to a number of coincidences. But there's no smoking gun.

In my earlier post, I wrote:

Here's what I wonder. If Kenneth Rogoff, the U.S. economist who would like to get rid of cash and, indeed, thinks it's a curse, could push a button affirming this particular Indian government move, would he push it?

The good news is that it looks as if he wouldn't.

On November 17, Rogoff wrote:

Is India following the playbook in The Curse of Cash? On motivation, yes, absolutely. A central theme of the book is that whereas advanced country citizens still use cash extensively (amounting to about 10% of the value of all transactions in the United States), the vast bulk of physical currency is held in the underground economy, fueling tax evasion and crime of all sorts.

But he continued:
On implementation, however, India's approach is radically different, in two fundamental ways. First, I argue for a very gradual phase-out, in which citizens would have up to seven years to exchange their currency, but with the exchange made less convenient over time. This is the standard approach in currency exchanges.


Border tax bleg, by Scott Sumner

Thu, 12 Jan 2017 14:36:26 -0500

Martin Feldstein had a recent piece in the WSJ that defended the idea of a border tax adjustment, which would be a part of the proposed corporate tax reform. He points out that if imports were no longer deductible, and exports received a subsidy, then the border adjustment would not distort trade. Rather the effect would be exactly offset by a 25% appreciation of the dollar. I certainly understand that this would be true of a perfect across-the-board border tax system. But is that what we will have? 1. Will the subsidy apply to service exports? (Recall that services are a huge strength of the US trade sector.) Let's take Disney World, which makes lots of money exporting services to European, Canadian, Asian and Latin American tourists visiting Orlando. Exactly how will Disney determine the amount of export subsidy it gets? Do they ask each tourist what country they are from, every time they buy a Coke? That seems far fetched---what am I missing? If Disney doesn't get the export subsidy, then the 25% dollar appreciation would hammer them, and indeed the entire US service export sector. 2. What about all those corporate earnings that are supposed to be repatriated? (And future earnings as well.) If the dollar appreciates by 25%, then doesn't this hurt multinationals? Or am I missing something? Update: It just occurred to me that corporate cash stuffed overseas is probably held in dollars. But future overseas earnings may still be in local currency. Keep in mind that the prediction of 25% dollar appreciation is from the supporters of the plan, like Martin Feldstein. If you did this sort of adjustment without any dollar appreciation, the impact would be devastating on companies like Walmart. Given the Fed's 2% inflation target, how could they pass along a (effective) 25% tariff on almost everything they sell? It's clear to me that I am missing something here. Can someone who knows more about the nuts and bolts of border adjustment taxes please explain exactly how this is supposed to work? I'm not saying the border tax is a bad idea--I'm agnostic so far. But unless I get good answers here, I'd recommend they not do it, or perhaps phase it in extremely gradually (like 1%/year for 25 years), and see what sort of side effects occur before going all the way to a 25% dollar appreciation. Not to mention this violates WTO rules, which the US has previously argued must be adhered to. (Insert Trump sarcasm here.) PS. Feldstein makes the following claim: Since a border tax adjustment wouldn't change U.S. national saving or investment, it cannot change the size of the trade deficit. To preserve that original trade balance, the exchange rate of the dollar must adjust to bring the prices of U.S. imports and exports back to the values that would prevail without the border tax adjustment. With a 20% corporate tax rate, that means that the value of the dollar must rise by 25%. With a 25% rise in the value of the dollar relative to foreign currencies, the $80 net price of U.S. exports would rise in the foreign currency to the equivalent of 1.25 times $80, or $100, and therefore back to the initial price. Similarly, the 25% rise in the value of the dollar would reduce the real import price to the U.S. retail customer back to $125/1.25, or $100, as it is without the border tax adjustment. Although the combination of the border tax adjustment and the stronger dollar leaves exports and imports unchanged, it has the important advantage of raising substantial tax revenue. Because U.S. imports are about 15% of GDP and exports only about 12%, the border tax adjustment gains revenue equal to 20% of the 3% trade imbalance or 0.6% of GDP, currently about $120 billion a year. At that rate, the border tax adjustment would reduce the national debt by more than $1 trillion over 10 years. That makes no sense [...]

Recession, Stagnation, and Monetary Policy , by Amy Willis

Thu, 12 Jan 2017 10:30:49 -0500

(image) What made the "Great Recession" great? How did its effects, and the policy responses prompted by it, differ from those seen with earlier recessions? This week's EconTalk episode, with Stanford economist and Chairman of the NBER's Business Cycle Dating division Robert Hall, explores why we haven't seen a significant recovery in the wake of this most recent recession.

There's been much discussion about the role of the Federal Reserve in the Great Recession, and Roberts and Hall begin there, exploring the question of whether the Fed acted too aggressively- or not aggressively enough- in response. Hall argues that the Obama administration's stimulus package wasn't effective, but for very different reasons than you might expect. Very little of the money went to the sort of "shovel-ready" projects touted, but instead went toward the debt obligations of state and local governments. For Hall, this suggests the federal government doesn't have sufficient tools to induce local governments to spend, which is needed for any stimulus package to work.

Roberts and Hall have an extended discussion on the nature of interest rates and the influence of the Fed on them. (I'm reminded of this 2013 Feature Article by Jeffrey Rogers Hummel.) The conversation naturally turns to the influence of interest rates on reserves and real interest rates in the larger economy. What is the purpose of the excess reserves being held? Hall predicts the Fed will be phasing out these "old-fashioned" reserves in favor of the newer RRP reserves.

There's a lot of macro to digest in this week's episode, some rather technical. For those interested in more general topics, the conversation includes interesting take-aways as well. Roberts and Hall discuss the changing character of macroeconomics. (Hall coined the Saltwater/Freshwater distinction.) Hall argues that the idea of differing "schools" of macroeconomic thought has disappeared. Hall also shares (as much as he's able!) how he and the rest of the NBER Business Cycle Dating committee work to determine the start and end of each recession. While today it's more complicated than that, it turns out that looking for two consecutive quarters of declining GDP is still a good generalization, just like we all learned in class.