Handling an asymmetric information problem

Over at the Free exchange blog there is an interesting piece on actions in the current crisis – namely whether to follow the “free market” route or the “inteventionist” route.

My hefty use of speech marks in the above sentence stems from the belief that there aren’t really two distinct schools of thought telling us what to do – there is a single framework of events that forms its descriptive and prescriptive powers from value judgments. These value judgments are thereby the true differences.

This quote sums it up for me:

The problem is that we’ve reached a point of market failure and uncertainty. It’s impossible to tell who the weak banks are.

The difference between the two prescriptions stems from how significant the implied market failure is – not a difference describing what the market failure is.
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No money? No problem!

Or so says a recent spam email:

No Money? No Problem!

You’re entitled to government funding and can claim it here

Government money is readily available for many reasons including:
# Business setup / expansion
# Real estate purchase and renovation
# Rent payment assistance
# Bills
# Education
# Equipment
# And Much Much More!

All you have to do is know where and how to ask!

Get our complimentary information kit here

Now, just before I celebrate my “free money” I find that if I go to the hyperlink I end up with this.  “Sorry, we cannot service your country”.  I guess NZ isn’t as interested in taxing everyone to give me extra buyer power – a pity really ;)

Wilful ignorance or intellectual vanity

There’s been a request for a post on wilful ignorance. How much should we aim to learn about the world, and when should we stop inquiring? Should we read up about the latest violence in Gaza or should we shut it out and concentrate on what we’re doing? In particular, what trade-offs do we face between learning and doing? For every moment we spend reading about tragedies we could be doing something to mitigate or avert it.

To begin we need to ask what we really want to achieve from learning about current events. Do we want to help others in need? Do we want to impress our friends with our learned discussion? Do we simply value accrual of knowledge? All of these are no doubt a part of our decision, yet in each case we face trade-offs. If we want to help people then looking around for people to help reduces the time we can spend actually helping them. If we wish to impress then reading the news reduces the time spent on highbrow discourse. In the final case, there is a trade-off between the depth and breadth of knowledge one can amass. Read more

Broken windows and thrown towels: The issue of stimulus

Over at Economists View, Mark Thoma points out and, in my opinion, rightly criticises a piece from the Cato institute on fiscal stimulus.

Now the Cato piece seems to equate a fiscal stimulus strictly with the “broken window fallacy“.  I do not completely agree with this.  As Thoma points out government investment should be counter-cyclical, as by investing this way they get to build public goods (which will not be provided in sufficient quantities by the market) cheaply!

However, some fiscal stimulus does fit into the broken window frame – however it does so in two different ways.  First we have the case where the windows are broken and then we are wondering what to do with policy.  Then we have the case where the government could break windows.  Lets discuss.

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Some links worth reading on fiscal stimulus

There really is a pile of excellent economic discussion flooding out the the Economics blogsphere over recent months. If the collapse of Lehman brother did nothing else – it got economists arguing!

On the issue of a US “fiscal stimulus” there have been two main posts that I have found as convincing arguments against the “large stimulus” school of thought that is being sold by Paul Krugman and Mark Thoma. These posts were by Tyler Cowen at Marginal Revolution and David Henderson at Econlog (and part 2).

Ultimately, the static Keynesian analysis being sold by Krugman and Thoma misses the impact of relative prices – a factor that is important given that some of the shocks hitting the macroeconomy are structural.

Now, given the way confidence (especially business confidence) has turned south I think we can sell some scope for a stimulus. Furthermore, government CAN help improve outcomes during a structural shift in the face of asymmetric information. However, Krugman and Thoma are both ignoring any supply side shift – and treating all the decline in activity as a decline in “demand”. Such an extreme position would only lead to excessive government involvement in my mind.

The most important question in my mind is “what is potential”? I’m sorry, but we have an observable, large, permanent, negative supply side shock – but many forecasters are still assuming that “natural” growth will be unchanged. How am I supposed to trust those forecasts in these extreme circumstances?