Podcast And Goodfellows - Barokong

Here are links to this week's grumpy economist podcast, and Goodfellows discussion with Niall Ferguson and H.R.  McMaster. Grumpy on the careful reopening and debt. Goodfellows on Europe. Carnivorous Moose (?)
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Unemployment Insurance Weaning - Barokong

As the economy recovers, public policy faces an inevitable dilemma. How do we wean the economy from support? This comes to the head with federal support for unemployment insurance -- $600 per week, set to expire at the end of July. The unemployment rate will still be high in July. Congress seems to have largely given up, in public, of thinking clearly about the economic purpose of policies, and now the discussion is entirely in terms of who deserves additional "help," often in watak terms -- "people" vs "corporations," various regions, sizes of business, "communities," and so on.  How can we reduce "help" while unemployment surely ravages the land? On the other hand, for many workers right now, unemployment benefits pay more than working. Unemployment pays more than going back to their old job as it opens, and it pays more than taking one of the many new jobs that are available now -- Amazon, Wal-Mart are hiring, and there is surely going to be demand for contact tracers, temperature takers, building disinfecters, social distance monitors, and so on. So, the age old question of economic policy emerges. How do we balance help -- insurance -- with incentives -- the need to get people back to work ASAP when jobs are available? Lost in the policy discussion, let us not forget the hard fact of life. Work is not fun. People in the real world (not economics bloggers!) don't work because it's fulfilling or enjoyable. They work because they need the money and the health insurance. Work is a necessary evil for our economy to produce the things we all need and want to consume. People don't take lower paying jobs willingly, no matter how much society needs you, right now, to stop binging Netflix and go spend 8 hours wiping down carts at the local Safeway. With that, here are some clever ideas. 1) Pay anyway.  If you take a job, you can keep the unemployment benefit, at least for a period of time. Or, better, you can get a nice cash check, $1200 (two weeks of federal, another stimulus check) or even $2400 (a month). In return, you can't get unemployment again for, say, 4 or 6 months. 2) Community service. If you stay on unemployment past July 31, you have to do (say) 20 hours a week of community service. What will they do? Well, I've been reading Stephanie Kelton's book (review coming), and she has a tawaran for a federal jobs acara. Apparently, she thinks there was an immense amount of good work that governments and communities needed done before the pandemic, WPA style. There is much more now -- trace contacts, disinfect playgrounds, take temperatures in public buildings, you name it.  Workers could be rented out to monitor temperatures in front of struggling businesses. So, put Kelton and company -- Bernie Sanders, AOC --  in charge of the community service part. I offer this latter suggestion only half-jokingly. Obviously there is a political divide on what to do about unemployment. If the government is already paying people, there isn't much damage to letting the left try out its jobs acara. If like me you're a little cynical about government jobs programs, well, we'll find out, and we'll save money to boot as the prospect of working for local government might just scare a lot of people back to work. And I love an offer they can't refuse. Imagine the Trump Administration calling the left's bluff on this one -- how can they say no? (A response to a commenter: It doesn't matter for this purpose if there is any value to the work. I'm looking for a disincentive to stay on unemployment when there are jobs available, that will be politically palatable.) 3) Jobs board. Sweden has (had?) an interesting system that combined a carrot with a stick. Generous unemployment, but a national job registry and you had to take a job offer. I doubt the bureaucratic competence of the US, especially in the month or so we have to get it going, but something similar could happen. To get Federal unemployment top-up after July 31, you have to fill out a one page form with work experience that reads like a job application. Employers can search and offer you a job. If you get the job offer, you take it or  lose unemployment. 4) Just who? Obviously it's time to restrict just a little bit who gets generous unemployment. If your old company is still in business and wants to hire you back, the gig is up. If it's hiring at all, even lesser job categories, you have to apply. If there are more than X job vacancies in your county, the tambahanunemployment insurance dries up. A currently popular idea is temporarily cutting or eliminating payroll taxes. This is a nice inducement to work, but even I am a little behavioralist and I wonder just how many people who earn $20 an hour are really clear on how much tambahanthey will get by returning to their old jobs if there is a payroll tax reduction. My $2400 check seems like a more salient incentive.
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Magical Monetary Theory - Barokong

I approached this task with an open mind. What I had heard of MMT has some overlap with fiscal theory of the price level, on which I work, and I hoped to see some commonality. I was disappointed. Short version: "Ms. Kelton...starts with a few correct observations. But when the implications don’t lead to her desired conclusions, her logic, facts and language turn into pretzels." Full version in 30 days, if you can't find a way around WSJ paywall.
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Perpetuities, Debt Crises, And Inflation - Barokong

My brief exchange with Markus Brunnermeier at the end of a Covid-19 talk  attracted some attention, and merits a more detailed intervention.Gavin Davies at FT made some comments (more later) as did the Economist. My anjuran to fund the US with perpetuities comes from a paper, here. (Sorry regular readers for the repeated plug.)  The rest is standard fiscal theory of the price level, spread over too many papers to give one more plug. There are three main points.  First, inflation is not about money anymore -- the choice of money vs. bonds. Money -- reserves -- pay interest, so reserves are just very short-term government bonds. Inflation is about the the overall demand for government debt. That demand comes from the likelihood of the debt  being repaid, and the rate of return people require to hold debt. Second, if we have inflation, the mechanism will be very much like a run or debt crisis. Our government rolls over very short term debt. Roughly every two years on average, the government must find new lenders to pay off the old lenders. If new lenders sniff trouble they refuse to roll over the debt and we're suddenly in big trouble. This is what happened to Greece. It's what happened to Lehman Bros. In our case, our government can redeem debt with non-interest-paying reserves, resulting in a large inflation rather than an explicit default. 2a, a run is always unpredictable. If you knew there would be a roll-over crisis next year, you would dump your government bonds this year, and the run would be on. There is a whiff of multiple equilibrium too. Our debt is nicely sustainable at 1% interest. If interest rates go up to 5%, we suddenly have north of $1 trillion additional deficits, which are not sustainable. The government  is like a family who, buying a home, got the 0.1% adjustable rate mortgage rather than the 1% (government debt prices) fixed rate mortgage because it seemed cheaper. Then rates go up. A lot. Sure demand is high for US government debt, rates are low, and there is no inflation. But don't count on trends to continue just because they are trends. How long does high demand last? Ask Greece. Ask an airline. Third, for this reason, I argue the US should quickly move its debt to extremely long maturities. The best are perpetuities -- bonds that pay a fixed coupon forever, and have no principal payment. When the day of surpluses arrives, the government repurchases them at market prices. By replacing 300 ore more separate government bonds with three (fixed rate, floating rate, and indexed perpetuities), treasury markets would be much more liquid. Perpetuities never need to be rolled over. As you can imagine the big dealer banks hate the idea, and then wander off to reasons that make MMT sound like bells of clarity. That they would lose the opportunity to earn the bid/ask spread off the entire stock of US treasury debt as it is rolled over might just contribute. But we don't have to wait for perpetuities. 30 year bonds would be a good start. 50 year bonds better. The treasury could tomorrow swap floating for fixed payments. Then we would be like the family that got the 30 year fixed mortgage. Rates go up? We don't care. By funding long, the US could eliminate the possibility of a debt crisis, a rollover crisis, a sharp inflation for a generation. Gavin Davies shows the following graph, congratulating the Treasury for going longer after 2008. But weighted average maturity is a terrible statistic, and substantially overstates the maturity. It weights only the maturity of the principal, ignoring the coupons. If the Treasury introduced perpetuities, the weighted average maturity would instantly be infinity, which is obvious nonsense. We know how to calculate better numbers -- start with duration, which includes the maturity of the coupons. The Treasury's antiquated accounting is an obstacle to reform. Well, a rise in rates is  hardly likely, you say. Indeed in the same volume as my perpetuities anjuran, Robin Greenwood, Sam Hanson, Joshua Rudolph, and Larry Summers advocated an even shorter maturity structure. The ARM is cheaper, and they ran some situations that a rise in interest rates was unlikely given the statistical patterns of recent history. But past history does not always continue. I buy earthquake insurance in California even though there hasn't been a really big one since 1906. The same statistical approach to risk management blows up regularly. Economists working on climate change often make the insurance argument -- sure, the conditional mean is not a catastrophic impact, but we should take out insurance that it's not much worse than we think. A debt crisis is like the Spanish Inquisition. Nobody expects it. Alan Blinder, for example, writing in WSJ echoes this conventional wisdom, First, at least for now, the Fed is buying as many debt securities as the Treasury is selling. On net, the investing public doesn’t have to buy any. Wait a minute, Alan, the public does have to hold the reserves, which are just another form of government debt! Second, the U.S. borrows in its own currency. Sovereign debt crises almost never arise in such cases. True, but inflations do. Riots, civil wars, pandemics and coups "almost" never arise either, yet we are well advised to pay some attention. And the US has had one big debt crisis in 1972, though we borrow in our own currency and under Bretton Woods the dollar was the reserve currency. Foreigners distrusted the dollar and demanded payment in gold, which we ran out of.  (Short version). The UK had several debt/currency/inflation crises. Third, if the U.S. Treasury starts to supply more bonds than the world’s investors demand, the markets will warn us with higher interest rates and a sagging dollar. No such yellow lights are flashing. Did I mention that nobody expects a run? Flashing yellow lights did not warn Greece, Lehman Bros., or the US. Here are 10 year rates and inflation through the 1970s and 1980s. 10 year rates never saw inflation ahead of time. They didn't see the decline in inflation even after it happened. Fourth, interest rates on government debt in several advanced countries—notably but not only Japan—are superlow today even though their national debts are far higher, relative to gross domestic product, than seemed prudent a decade or two ago. So AIG was in worse shape than Lehman. Fifth, the U.S. public debt topped 100% of GDP at the end of World War II with no adverse consequences. After that peak, we managed to whittle the debt down to only 22% of GDP over the next 28 years or so. To accomplish that feat, we didn’t need to run anggaran surpluses year after year. We just kept deficits small enough that the debt grew slower than GDP. Which is not that hard if the interest rate remains below the economy’s growth rate—as has been true for years. Actually, post WWII, after a quick bout of inflation that wiped out some of the real value of debt, the US ran steady primary surpluses until 1975. And had strong supply-side growth in a much less regulated economy. Let's be nice -- "keep deficits small enough" is wisdom widely overlooked around Washington. "if the if the interest rate remains below the economy’s growth rate—as has been true for years" sounds  a lot to me like "if the stock market keeps going up at 7% per year -- as has been true for years." Yes, I was worried in 2008, and the crisis hasn't happened yet. But the logic of it does not suggest  a classic near-term forecast. It could wait 10 or 20 years. We could escape with strong supply side growth, and "deficits small enough" by sensible reforms. But if it came -- doubtless in a deep recession, social unrest, perhaps war, just the sort of times that people doubt America's ability to reform itself and pay off its debt -- it would be an immense disaster. Locking in 1% interest rates for a generation seems like a no-brainer. While markets are willing to sell us insurance at this rate, take it. Updates: 1) A colleague writes, Might the short term debt issuance be a way the government is implicitly committing to not inflate the debt away. Such inflation would be much more painful than say deciding to inflate away debt with a long maturity structure? This is a good point. The short maturity structure is much harder to inflate away. The long maturity structure means in the event of inflation, default, widening credit spreads for the US, etc., the government comes out ahead, and is thus less likely to avoid the event. Seeing the US in effect take a big bet on inflation might also scare markets a bit. It's sort of like showing up at the insurance office with a can of gasoline under one arm. Like swaps, it also raises the counterparty question. If the US issues 30 year bonds, interest rates rise, the bondholders take a huge hit. Will the US really allow that to happen? If the bondholders are big banks, pension funds, and so forth? I think Merton Miller once suggested that Hong Kong defend a currency peg by writing a huge number of options against it, which would profit if the peg did not fall apart and ruin the country if it did. 2) In my memory of history, I can think of only one and a half times that debt to GDP greater than 100% has ended well for bondholders in the last 1000 years. The UK following the napoleonic wars is the first (funded by perpetuities, by the way). The US after WWII is the half - the inflation of 1945-46, the collapse of Bretton Woods and inflation of the early 1970s also contributed a bit. The UK following WWII was not a success. The UK grew out of the debt -- it started the industrial revolution. So both US and UK successes trace to a surge of supply-side growth, with sober fiscal management -- at least primary surpluses, as above.  We have neither going forward.  I asked some assembled economic historians for other examples. The US after the civil war came up. That's about it. I welcome other antecedents, especially ones with sclerotic growth and ever expanding deficits.
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Airlines And Information - Barokong

Airlines are in big trouble. Even after reopening, nobody wants to fly, perceiving them as dangerous. But are airline flights dangerous? As I read the super-spreading literature, I have not seen a single case of an airline flight charged with spreading the virus. (Please chime in if you have seen any documented cases of virus spread on airline flights.) That's remarkable. From January to March, people were flying all over the world. People were flying from Wuhan to all over the world. But while we have seen super spreading events in restaurants, bars, cruise ships, aircraft carriers, nursing homes, jails, beach parties, Mardi Gras, choir practice, and more, I have not seen one from an airline flight. Even though people are cooped up for hours in close quarters. One can speculate why. Airliners actually have very good ventilation systems and hospital grade HEPA filters. Except for the occasional chatty seat mate with cat videos to show, people are usually completely silent. Talking loudly seems to be a big part of spreading the virus. An airline with reasonable ekstraprecautions, such as taking temperatures, certifying no symptoms (and you get your money back if you say you have symptoms, please), masks, wipe downs, is likely safer still. The worry may be for nothing. But how will we know? Now I get to the point. In the tens, and probably eventually hundred or more billion dollars our government is spending to prop up airlines, how about 1 billion for research on the question, is an airline flight safe? For a billion dollars we ought to be able to answer this question definitively in about a week. Actually 10 million -- 1/1,000 of the money our government will shovel out to boost airlines -- ought to do the trick. If I'm right, that would do more good than an MMTers dream of stimulus. This is part of a larger issue. Yes, I'd love a vaccine. Yes, I'd love widely available cheap tests and a public health infrastructure that can do something useful with test results. Well, we have what we have. But the government can still subsidize science. And it can still promulgate useful information. Yes, the airlines could pay for it, but in our politicized age nobody trusts science on logic and data anymore, they just look for who paid for it. So that won't work. Spend 1 week and $10 million. Find out if air travel is safe or not. Tell us the answer. If as I suspect the answer is that you're about as likely to catch corona virus on an airplane as you are to die in an airline crash, then let us know. Recovery without second wave depends on up-to-date accurate information on how the virus spreads -- and how it does not spread. Update: Or maybe this is a job for the FAA. After all, they seem to have the time on their hands to regulate American Airlines hand sanitizers, and air safety is their concern. (Off topic, but I think Tyler and Gary Leff failed to see the bright side on this one. Yes, it seems a bit dumb that American Airlines has to ask the FAA to sign off on its hand sanitizers. But Tyler forgets just how bad the regulatory state can be. Yes, American does have its very own "local office of a federal agency dedicated to your business, with its own letterhead."  But that is a whole lot better than the usual -- 5 different regulatory agencies, each with 10 offices, nobody able to give a simpulan yes, but all happy to stop a project going forward. If only there were a single office for home rehab in Palo Alto, where you can get a straight answer on anything in a week! Bureaucracy can be much worse than the FAA. ) A clarification I response to a comment, suggesting that putting sick people on a plane might be hard to get through IRB review. I didn't have that in mind. But surely the kind of ex-post sleuthing that revealed the other super spreader events came from specific restaurants can be used. Take passenger lists of planes in January, and match them against Covid data, for example. On flight attendants. They, like bus drivers, bear a substantial risk. Even if an airplane is not a super spreader, where lots of people get together and all have a chance of getting it, one perorangan who contacts many others during a day is at particular risk. However, first, this is not really the central public health concern. The public health concern is to get the reproduction rate under one. Small groups, no matter how heroic, who are susceptible, don't add a lot to the reproduction rate. Second, like doctors, they are well trained professionals. It's possible to run hospitals where doctors don't get sick. As is already happening, the main key is just to reduce contact between flight attendants and passengers. They really are there only for a crash, now sit down be quiet and don't breathe hard. Third, the point of the post is how to get people on airlines, not how to get flight attendants on airlines. From a correspondent: quoting science magazine on Japan's experience Not surprisingly, they found that most clusters originated in gyms, pubs, live music venues, karaoke rooms, and similar establishments where people gather, eat and drink, chat, sing, and work out or dance, rubbing shoulders for relatively extended periods of time. But commuter train travel reflects similar realities to airplane travel and didn't spread on Japan's commuter trains: Reassuringly, they did not trace any clusters to Japan’s notoriously packed commuter trains. Oshitani says riders are usually alone and not talking to other passengers. And lately, they are all wearing masks. “An infected perorangan can infect others in such an environment, but it must be rare,” he says. He says Japan would have seen large outbreaks traced to trains if airborne transmission of the virus was possible. A note: Of course there is a worry about all travel -- that's how places are seeded that have gotten rid of the virus. Nothing special about airplanes here, and in fact whatever testing and screening airplanes do may be helpful to stop that. Also if there were, for the $5 trillion we're spending, anyone in the government doing tracing, it's a lot easier to figure out who is on a plane and where they came from and where they're going than if people go in cars and RVs.
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Get Ready For The Careful Economy - Barokong

Source: Wall Street Journal Ready or not—mostly not—the reopening is at hand. The economic carnage of a continued lockdown is simply too great to sustain. But the virus is still with us, so the carefully reopened economy will be less efficient than the pre-pandemic economy..... A Wall Street Journal Oped on where we are and peering in to the muck. Much is inspired by my "dumb reopening" blog post of a week or so ago. I must say my faith in human wisdom is a bit shaken by the videos of massive crowds on Memorial Day. Spring break and Mardi Gras were super-spreader events, and being outdoors is good but not perfect. On the other hand, in many parts of the country maybe 1/1000 people are infected at most. And the media has been known on occasion to pick one or two sensational stories and let them stand in. The oped is cut to the bone, as there things are. I did not emphasize enough that isolating the vulnerable and making sure they don't get it -- testing anyone who wants to walk in to a nursing home -- is a much more effective tool than a blanket business lockdown. This disease is very concentrated Also I wanted to hammer home that parties are dangerous, business per se is not. Locking down all business will likely be seen as a huge waste. We will see if Americans are able to refrain from partying. Indeed I worry that by focusing attention on business closings as the main policy tool, people get the idea that business is dangerous, staying at home is not. Let's party. One worry on regulation is that it will provide a recipe  for a wave of lawsuits. That may have been a reason the Administration tried to hold back CDC guidance. A long, expensive, and impractical list of things you must do to reopen is catnip when someone gets sick and wants to blame a business. Show us the records that you wiped down the bathrooms every half hour. A legal system that can sue over talcum powder is not above this.
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Jones And Fernández-Villaverde Update - Barokong

Chad Jones and Jesús Fernández-Villaverde have updated their SIR model with social distancing. A part I find very intriguing is that they impute the infection rate and the reproduction rate from death rate data. The infection rate \(I_t\)  is given by \[I_t = \frac1\delta \gamma \left( \fracd_t+2-d_t+1\theta - d_t+1 \right)\] where the greek letters are parameters they estimate by fitting the path of deaths over time, and \(d_t\) is the daily death rate. Though deaths only happen a few weeks after infection, you can reverse the versi dynamics to figure out how many are infected today from how many are dying today. (Well, tomorrow and the day after). They similarly infer today's reproduction rate \(R_0\) from the next three days death rates. Now, there is clearly some inaccuracy here, and I've been pestering them to provide standard errors. There is some noise in daily deaths and once you start double and triple differencing them, the noise is larger. But as I think about behavioral and policy responses, these are the numbers we need. How many people in this state, city, zip code, grocery store, kafe, are infectious right now? 1 in 10? 1 in 100? 1 in 1000? 1 in 10,000? Is the virus spreading or slowly decaying, with reproduction rate below one? Just how careful do we need to be? Is wiping down,  surfaces or spraying luggage with disinfectant remotely cost-effective? Where are hot spots? If we had spent 1/1,000,000 of the $5 trillion the government is spending on random testing, we would know the answer to this question.  We don't. We do have death data. So a measurement with error of the thing we need the most is potentially quite valuable. Reproduction rates seem to stabilize around one, as my little behavioral model suggested. The fraction currently infectious is tiny. Still, half a percent is half a percent. If you run in to 100 people a day you're going to get it in two days. (A commenter corrects my sloppiness here -- "run into" has to have enough close interaction to transfer the virus.) Go look up your location in Table 1 (too big to include) The SF Bay Area only has 0.04% infected! That Whole Foods is pretty safe. But the reproduction rate is still above one. Their dashboard has up to date results for lots of places.
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