## Monday, March 30, 2015

 Illustration by Andrew Rae, source New York Times

Adam Davidson has a very nice New York Times Magazine article, "Debunking the Myth of the Job-Stealing Immigrant", in favor of "radically open borders."

Here's how a top professional journalist and writer puts together the central argument, so much more cleanly than I can do it:
So why don’t we open up?

## Thursday, March 26, 2015

### A New Structure for U. S. Federal Debt

A new paper by that title, here.

I propose a new structure for U. S. Federal debt. All debt should be perpetual, paying coupons forever with no principal payment. The debt should be composed of the following:
1. Fixed-value, floating-rate debt: Short-term debt has a fixed value of $1.00, and pays a floating rate. It is electronically transferable, and sold in arbitrary denominations. Such debt looks to an investor like a money-market fund, or reserves at the Fed. 2. Nominal perpetuities: This debt pays a coupon of$1 per bond, forever.
3. Indexed perpetuities: This debt pays a coupon of $1 times the current consumer price index (CPI). 4. Tax free: Debt should be sold in a version that is free of all income, estate, capital gains, and other taxes. Ideally, all debt should be tax free. 5. Variable coupon: Some if not all long-term debt should allow the government to vary the coupon rate without triggering legal default. 6. Swaps: The Treasury should manage the maturity structure of the debt, and the interest rate and inflation exposure of the Federal budget, by transacting in simple swaps among these securities. Of these, I think the first is the most important. Think of it as Treasury Electronic Money, or reserves for all. Why? ## Tuesday, March 24, 2015 ### Jumps and diffusions I learned an interesting continuous time trick recently. The context is a note, "The fragile benefits of endowment destruction" that I wrote with John Campbell, about how to extend our habit model to jumps in consumption. The point here is more interesting than that particular context. Suppose one time series $$x$$, which follows a diffusion, drives another $$y$$. In the simplest example, $dx_t = \sigma dz_t$ $dy_t = y_t dx_t.$ In our example, the second equation describes how habits $$y$$ respond to consumption $$x$$. The same kind of structure might describe how invested wealth $$y$$ responds to asset prices $$x$$, or how option prices $$y$$ respond to stock prices $$x$$. Now, suppose we want to extend the model to handle jumps in $$x$$, $dx_t = \sigma dz_t + dJ_t.$ What do we do about the second equation? $$y_t$$ now can jump too. On the right hand side of the second equation, should we use the left limit, the right limit, or something in between? ## Monday, March 23, 2015 ### Hospital Supply In my view, health care supply restrictions are more important than the insurance or demand features that dominate public discussion. If you are spending your own money, yes, you shop for a good deal. But spending your own money in the face of restricted supply is like hailing a cab to LaGuardia at 5 o'clock on a rainy pre-Uber Friday afternoon. We need to free up innovative, disruptive health-care supply. Let the Southwest Airlines, Walmarts, Amazons and Apples in. But where are the supply restrictions? Alas it's not as simple as the NY taxi commission. Supply restrictions are spread all over Federal, state and local law and regulation, and usually hidden. So, I was interested to discover an interesting supply restriction in this editorial in the Wall Street Journal last week. Last year the Daughters of Charity Health System sought to sell its six insolvent hospitals in California to Prime for$843 million including debt and pension liabilities. State law requires the AG [California Attorney General Kamala Harris] to approve nonprofit hospital acquisitions. Ms. Harris attached several poison pills at the urging of the SEIU [Service Employees International Union], which forced Prime last week to withdraw its offer.
State law requires the AG [Attorney General] to approve nonprofit hospital acquisitions. How could this go wrong?

## Friday, March 20, 2015

### Borio, Erdem, Filardo and Hofmann on the Costs of Deflation

Claudio Borio, Magdalena Erdem, Andrew Filardo and Boris Hofmann have a nice paper, "The costs of deflations: a historical perspective"

Deflation remains the looming zombie apocalypse of international monetary commentary.  Before we argue too much about cause and effect, it's nice to get the correlations straight. And the correlation between deflation and poor growth is much weaker than most people think:

## Thursday, March 19, 2015

### Levine on the Keynesian Illusion

David Levine has a very nice post on the Keynesian Illusion.

 David Levine's analogy for Stimulus
Some big themes: Standard Keynesian economics violates budget constraints. He explains it well, but it is sure to occasion the usual venom from with the "Say's law fallacy" brigade that has a lot of trouble understanding the difference between budget constraints and equilibrium conditions.

David does a lot without equations. That broadens the appeal, but equations can be useful. For example equations clarify that crucial difference between budget constraints and equilibrium conditions. Equations can put to rest silly controversies. We might not still be writing papers, books, and blog posts about what "Keynes really meant," 80 years after the fact, or using "Say's law" as rotten tomatoes, if Keynes had written some equations.  Cynically, maybe the lesson is that lack of equations -- or even an equations appendix or citation -- keeps debate going and your name in the papers.

## Wednesday, March 18, 2015

### Arezki, Ramey, and Sheng on news shocks

I attended the NBER EFG (economic fluctuations and growth) meeting a few weeks ago, and saw a very nice paper by Rabah Arezki, Valerie Ramey, and Liugang Sheng, "News Shocks in Open Economies: Evidence from Giant Oil Discoveries" (There were a lot of nice papers, but this one is more bloggable.)

They look at what happens to economies that discover they have a lot of oil.

An oil discovery is a well identified "news shock."

Standard productivity shocks are a bit nebulous, and alter two things at once: they give greater productivity and hence incentive to work today and also news about more income in the future.

An oil discovery is well publicized. It incentivizes a small investment in oil drilling, but mostly is pure news of an income flow in the future. It does not affect overall labor productivity or other changes to preferences or technology.
Rabah,Valerie, and Liugang then construct a straightforward macro model of such an event.

## Monday, March 16, 2015

### Duffie and Stein on Libor

Darrell Duffie and Jeremy Stein have a nice paper, "Reforming LIBOR and Other Financial-Market Benchmarks" I learned some important lessons from the paper and discussion.

Libor is the "London interbank offering rate." If you have a floating rate mortgage, it is likely based on Libor plus a percentage.
In its current form, LIBOR is determined each day (or “fixed”), not based on actual transactions between banks but rather on a poll of a group of panel banks, each of which is asked to make a judgmental estimate of the rate at which it could borrow.
As soon as money changes hands, there is an incentive to, er, shade reports in the direction that benefits the trading desk.
Revelations of widespread manipulation of LIBOR and other benchmarks, including those for foreign exchange rates and some commodity prices, have threatened the integrity of these benchmarks..
or report a rate that makes your bank look better (lower rate) than it really is:
During the financial crisis of 2007-2009...Some banks did not wish to appear to be less creditworthy than others... The rates reported by each of the panel of banks polled to produce LIBOR were quickly published, alongside the name of the reporting bank, for all to see. As a result, there arose at some banks a practice of... understating true borrowing costs when submitting to a LIBOR poll.

## Thursday, March 5, 2015

### Marginal Revolution on Kleptocracy

I don't often just post links, but sometimes a post is so good, and so complete, it just needs reading without comment.

Marginal Revolution on Kleptocracy

Ok, one comment. The mainstream media are focused on the racial element. This problem is much deeper than race.

## Wednesday, March 4, 2015

### Mankiw on dynamic scoring

Greg Mankiw has a nice op-ed on dynamic scoring

The issue: When the congressional budget office "scores" legislation, figuring out how much it will raise or lower tax revenue and spending, it has been using "static" scoring. For example, it assumes that a tax cut has no effect on GDP, even if the whole point of the tax cut is to raise GDP.

This is obviously inaccurate. But, as Greg points out, there is a lot of uncertainty in dynamic scoring.