Matt Nolan

Banking panics and deflation

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When looking at the European debt crisis, and even before that the Global Financial Crisis, people constantly described the risks as being shown through deflation – if we experienced deflation monetary policy must do “all it can” to turn things around and help to boost the economy.

The lack of deflation around the world in the face of these “banking panics” was seen as an indicator that we were not facing the same sort of crisis, and that as a result there is no real role for central banks.  Now, in terms of direct monetary policy is may be the case, depending on our view regarding what is going on and how institutional settings are different from the Great Depression.  However, the idea that a banking panic would lead to deflation directly holds no weight.  From Essays on the Great Depression by Bernanke we have this result:

Banking panics had no effect on wholesale prices.  This … result is important, becuase it suggest that the observed effects of panics on output and other real variables are operating largely through nonmonetary channels.

The two large crises we have faced in recent years WERE NOT failures on monetary policy, and monetary policy models were not appropriate for trying to understand them.  They provided an example of a failure of the second function of a central bank – the lender of last resort function.  A lender of last resort is supposed to be sufficient to avoid these banking panics, and it was (and in the case of Europe is) the failure to appropriately take on this role that has led to these crises.

And the fact that deflation didn’t appear, but output fell sharply, is consistent with this explanation of the crisis.  And consistent with the mainstream economist worldview regarding policy.  That is nice.

Matt Nolan

Big news from Europe

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It should not be understated how important this would be for the world, and more importantly for New Zealand 😉

The suggestion that there is now a clear consensus for a plan that will essentially make the ECB a lender of last resort for the European financial system will help to knock the “financial crisis” element of what is going at the moment on its head.

If the ECB commits to limiting bond yields on government debt in the Eurozone, and backs that commitment with a statment saying it will do “unlimited purchases of bonds” we will finally have a conclusion to the bitter uncertainty that the European debt crisis has created for the world more generally.  As a result, Europe will continue to struggle, but the rest of the world can move forward.

Another thing that will become clear is the nature of the crisis – are peripheral governments facing a crisis of liquidity, or are they insolvent?  If it is liquidity, the ECB’s commitment will be enough to solve the problem – they won’t even need to actually buy many bonds!  If these countries are insolvent then the ECB is taking on a bunch of bad debt – a cost that will have to be faced by someone eventually.

If the ECB does come out full hog, we are going to see a significant improvement in the outlook for the global and New Zealand economies – albeit from the current incredibly negative outlook that most people currently have.

jamesz

Why don’t we work fewer hours?

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Posner hilariously skewers Skidelsky:

They have collaborated on a book arguing that people in wealthy countries like Britain and the United States work too hard and by doing so miss out on the “good life” — an ethical concept of a life as “worthy of desire, not just one that is widely desired.”
…
If you ask someone to work half as long for half the pay, you should have …answers to his question: What shall I do with my new leisure?

It’s definitely worth reading the whole thing. A small quibble: I agree with the general thrust of Posner’s argument, but do we really work because we can’t think of anything to do with our leisure time?!

jamesz

Unintended consequences

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I once read a great quote that I can no longer find. The gist was that there is no such thing as an unintended consequence, only a consequence you failed to understand. Economists, with a methodology centred on individual actions in response to incentives, are pretty good at picking the consequences of policies. That’s sometimes hard to persuade people of so it’s important to savour good examples like this when they come around:

Performance assessments are an important aspect of a healthy company. In order to maintain fighting weight, an organisation must honestly assay its employees’ contributions and cull the dead wood. … But Microsoft’s implementation plunged the company into internecine fights, horse trading, and backstabbing.

…every unit was forced to declare a certain percentage of employees as top performers, then good performers, then average, then below average, then poor…For that reason, executives said, a lot of Microsoft superstars did everything they could to avoid working alongside other top-notch developers, out of fear that they would be hurt in the rankings.

Employees quickly realised that it was more important to focus on organisation politics than actual performance.

In their pursuit of effective performance measurement Microsoft clearly forgot the effect that the act of measurement has upon employees.

Matt Nolan

Incentivised employment schemes

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Via Danyl on Twitter (from Dimpost) we have been offered the job of justifying specific incentive schemes for people currently out of employment.  The brief went as follows:

Whoever comes up with a policy-based excuse for the MSD Minister to shove beneficiaries’ heads down a toilet on live TV will be a rich man

In the interests of better public policy, helping those less fortunate, and becoming rich men – TVHE is taking it upon ourselves to discuss the benefits of this obviously positive scheme, the “pro-active employment incentive scheme“.

Now on the face of it, public humiliation seems like a terrible thing to do to someone.  However, it is important not to let moral considerations get in the way of an objective analysis of the facts – which will then allow us to weigh up the costs and benefits of the scheme more appopriately.

We have to realise that, when a scheme is put in place we can’t just look at some perceived “cost” that people who are currently beneficiaries would bear!  Undeniably, people would change behaviour given the possibility of having their heads shoved down a toilet, and our modeling suggests that the change in behaviour would make people better off then they are in the situation without this credible threat.

So, in the interests of clear and transparent accounting, here are bullets of the expected benefits of this scheme:

  1. A significant increase in beneficiaries moving into work:  This increases economic output, and increases the welfare of the individual by improving their human capital – which they are currently not taking into account when looking for work.
  2. An increase in labour productivity among the current workforce:  Knowing that Kentucky unemployment comes with an additional cost, employees will spend less time on facebook and more time enjoying the process of creating output.
  3. A drop in labour force participation:  If you can’t find work, leave the labour market or get dunked in a toilet – in this situation some people will leave the labour market.  On the face of it this may seem like a bad thing, however we know that New Zealander’s work “too much” – if we have some people leaving the labour market altogether, this may well lower the average number of hours people are working!
  4. Consumption benefit to the viewing public:  Even if no-one ends up getting dunked, the idea of it will excite the public, satisfying a well know urge for public spectacles.

Of course there are costs, these are:

  1. The direct cost of being dunked and embarrased.  Our modeling suggests this is an insignificant issue.
  2. The cost of free-to-air TV:  Having to pay TV stations is a cost, however this issue is outside the scope of the study, and merely suggests setting a price somewhere.
  3. The cost of the minimum wage:  A minimum wage will ensure that some people who do not want to be dunked can’t find work!  As a result, this cost can be removed by removing the minimum wage.

As we can see, there are 4 bullet points in favour, and 3 against – two of which are pretty much irrelevant.  Compelling evidence in favour of a “pro-active employment incentive scheme” such toilet dunking and public wedgies.

Note:  None of this is serious.

Matt Nolan

Quote of the day: On dispassionate analysis

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From Tyler Cowen, comes this beaut:

A while ago a few people drew a contrast between a more dispassionate style of (blog) analysis and a more explicitly moralizing approach.  I would frame it differently.  Pluralism reigns and there are many different moral values of import.  The moralizing approach tends to leave a writer stuck in emphasizing a single value or a single comparison of values.  The so-called dispassionate approach is more likely to lead the writer to see a broader range of values and moral trade-offs.  The moralizing approach is most of all impoverished when it comes to…morality.