Sunday, February 28, 2021

r < g

r<g is an essay on the question whether r<g means the government can borrow and not worry about repaying debts. No. 


A situation that the rate of return on government bonds r is less than the economy's growth rate g seems to promise that borrowing has no fiscal cost. r<g is irrelevant for the current US fiscal problems. r<g cannot begin to finance current and projected deficits. r<g does not resolve exponentially growing debt. r<g can finance small deficits, but large deficits still need to be repaid by subsequent surpluses. The appearance of explosive present values comes by using perfect-certainty discount formulas with returns drawn from an uncertain world. Present values can be well behaved despite r<g. The r<g opportunity is like the classic strategy of writing put options, which fails in the most painful state of the world.

The essay is based on comments I gave at the spring NBER EFG meeting on Ricardo Reis' "The constraint on public debt when r<g but g<m." My discussion starts here at 4:48,  Ricardo presents the paper (very good, worth listening to, many points I didn't get to) at 4:30 

pdf for now, as translating equations to blogger is taxing. 

Saturday, February 27, 2021

Fiscal theory of the price level draft

The Fiscal Theory of the Price Level is a book I'm writing on that topic. It now has a full draft, here

Comments, typos, suggestions, complaints, parts you find too easy, part you find too hard, things you think are wrong, parts you find repetitive, parts you find need better connection, things I should add, things I should delete are all most welcome! 

I also did a 2 hour video mini-course on FTPL for the Becker-Friedman Institute last summer, with slides/notes here. 

Update: The video link is now fixed (2/1/2012)

Monday, February 22, 2021

Econtalk on virus

About a month ago, Russ Roberts and I had a great conversation about virus, vaccine, and tests for the Econ Talk podcast, and the free market approach. It's out now, here for the podcast, or the below embed  and here video on YouTube. The podcast link already has some excellent comments. 

Thursday, February 18, 2021

Lipson on basic decency

Why are people gloating over Rush Limbaugh’s death? Charles Lipson writes 

The gloating over Rush Limbaugh’s death ought to shock the conscience. That’s not a political statement. That’s a cri de coeur about how our basic sense of human decency has been warped by political differences.

To take one example, a Yale Law professor tweeted he wasn’t just happy Limbaugh had died, he was euphoric.

He’s not some drunk being carried out of a rowdy bar. He’s the Charles F. Southmayd Professor of Law and Philosophy at Yale Law School and the Director of Yale’s Center for Law and Philosophy. ...

The New York Times chose to write about Limbaugh's "Legacy of Venom:", "Weaponizing conspiracy theories and bigotry."  Could they not wait for his body to be cold? Or show less respect for the tens of millions of apparently deplorable fellow citizens who listened to him? 

This is not one more complaint about the woke left. This is a problem on both sides. 

Rush’s friends on the right are happy to claim the moral high ground when the left is degrading itself like this. But they only hold it for a moment. They act the same way when the opportunity arises. Do you think they would behave any better if a Nancy Pelosi was hit by a bus? Many would think it was the perfect time to share with the world how much they hated the Speaker, how glad they were to see her gone.

Quite a few expressed that view when invading the Capitol a month or so ago.  

Lipson's main point, and mine: 

The point here is not only that this behavior is despicable, though it is. The point is that so many people think their views are righteous and worth sharing with the world. That smugness and moral self-righteousness are signs of our political divisions and the moral decay they generate.


When prominent people celebrate Rush Limbaugh’s death they are, inadvertently, telling us something about the decay of our civic culture. They are showing that we are now behaving as if we are at war, a cultural and political civil war. In the process, we are losing our sense of respect for each other at a very basic level.

No one has the moral high ground here. Far too many take every fleeting opportunity to cry, ‘Vengeance is mine.’ That cry springs from battles that both sides now consider life-or-death. That is not how political differences should be contested in a constitutional democracy. That is not how people in tolerant, liberal societies treat each other. For those who say, ‘We are better than that,’ it’s time to show it.

Both sides of our partisan politics are acting as if this is a life or death battle, the point being to wipe the other side off the face if not of the earth, of our political life. As I have opined, if it is so, we need to change the winner take all rules of our game. 

My mother advised, if you don't have anything nice to say, don't say anything. George Shultz, who we have been remembering this week at Hoover,  would not have behaved this way, even on the death of a deep ideological opponent. "Show respect" was one of his watchwords. He did, even to the Soviets. 

Let's try to keep comments polite on this one. 

Wednesday, February 17, 2021

Institutional culture

Arnold Kling has an intriguing series of blog posts on the nature of universities and other institutions that are, as he says, cancel-bait. I removed the cancel-bait part and pass on his observation on the shift in institutional culture, visible in universities but also in corporate and nonprofit institutions and in our politics. 

1. The older culture saw differential rewards as just when based on performance. The newer culture sees differential rewards as unjust.

2. The older culture sought people who demonstrate the most competence. The newer culture seeks to nurture those who are at a disadvantage.

3. The older culture admires those who seek to stand out. The newer culture disdains such people.

4. The older culture uses proportional punishment that is predictable based on known rules. The newer culture suddenly turns against a target and permanently banishes the alleged violator, based on the latest moral fashions.

5. The older culture valued open debate. The newer culture seeks to curtail speech it regards as dangerous.

6. The older culture saw liberty as essential to a good society. The newer culture sees conformity as essential to a good society.

7. The older culture was oriented toward achievement. The newer culture is oriented toward safety. Hence, we cannot complete major construction projects, like bridges, as efficiently as we used to. 

Why? Well, he passes on a theory which I don't necessarily agree with, though I haven't read the cited book. The increasing politicization of all institutions of civil society is a different force that has a lot to do with the new culture. But the observations seem perceptive no matter what the reason. Academic economics certainly seems much more careerist than it used to be, more about who has what title and job than about who wrote what interesting new idea.  But maybe that perception is a sign of age. 

Tuesday, February 16, 2021

Vaccine math. $500 per shot?

I'm reading up on the $1.9 trillion "stimulus." This caught me eye:

 Biden's plan would set out $160 billion for a nationwide vaccine program that would help state and local governments get the vaccine into people's arms.

There are 328 million people in the US. $160 billion is just about exactly $500 per person. 

Now, I am of the view that the government should have spent a lot more on vaccines, testing, public health and so forth, given the $5 trillion and counting it has cost the government, and more in lots GDP, jobs, years of school and so forth. This is likely the least bothersome line in the bill. 

Still, has the US really gotten to the point of health care sclerosis and dysfunction that it costs $500 -- on top of money already allocated -- to give someone a shot?  

Test snafu

Wouldn't it be nice if there were a $5 test that works in minutes, and can find asymptomatic people who might transmit covid? Imagine how many schools, businesses, restaurants, weddings, churches, and so forth could safely open with such a thing. Imagine how much the reproduction rate of the virus could be crushed. 

There is! And it's sitting on shelves, one of the biggest casualties of the US federal monopoly on this simplest of all consumer goods. From detailed Wall Street Journal coverage

“Antigen testing is one of the most powerful tools we have to hasten control to normalcy,” said Richard Pescatore, associate state medical director at the Delaware Department of Health and Social Services...

The tests can quickly help determine whether someone is infectious. The tests detect cases by searching for pieces of proteins from the virus. They deliver results in minutes.

Among the first rapid antigen tests cleared by regulators was the BinaxNOW, which is made by Abbott Laboratories, costs $5 and doesn’t require any equipment.

Costs $5 to the federal government. Imagine if Abbott could send it to you via Amazon or ship it in bulk to Wal Mart. Alas, rather than simply sell the tests on the open market, the federal government is the monopoly buyer, shipped them to states, and they sit on shelves: 

The wages of stimulus


Discussing stimulus, a colleague passed along a factoid -- wages and salaries, he said,  are running $20 billion a month or $240 billion a year below where they should be. If the "stimulus" were to aim entirely to replace all lost wages due to the pandemic, that would stop at $240 billion, not $1.9 trillion. (My colleague is usually a pro-stimulus type.) I forgot to get the source, so I tried to recreate it. Here are some documented numbers, total compensation of employees, wage and salaries. 

Feb 2019 $9,228

Feb 2020 $9,659

Dec 2020 $9,675

These are billions at an annual rate. Actually, by these numbers Dec 2020 is already above Feb 2020! That doesn't account for inflation, or missing growth. If we want to entitle ourselves to the trend, wages should have gone up $430 billion. Ok, still less than $1.9 trillion. (My snarky comment: trends are earned slowly, not laws of nature. Trends in wages come from higher productivity, expanding businesses, greater labor force participation, lower unemployment.) 

One can argue for federal payments as insurance. Some people are definitely hurting, and some others are doing better. But the case for an overall "aggregate demand" shortfall seems weak. It is not always 1933. 

Inflation issues


In analyzing whether inflation is coming, Mickey Levy at Berenberg Capital passes along the above graph. These are price indices, so the upward or downward slope measures inflation. Is there inflation? That depends on whether you ask durable goods or services. 

Why are we experiencing durable good deflation, and will it last? Part of the answer is quality adjustment: 

Friday, February 5, 2021

A modest proposal for vaccine rationing

A mid-20s child of a good friend just got the vaccine. Why? He runs a micro-brewery, which his state deemed "essential," because it's "manufacturing." 

As the WSJ reports

After nursing-home residents and health-care workers, the CDC says priority should go to those over age 75 and an expansive list of “frontline essential workers.”,

...“essential workers” ... include those who “work in transportation and logistics, food service, housing construction and finance, information technology, communications, energy, law, media, public safety, and public health. 

media! Economics blogging should count, no? 

What happens when a good is rationed? It is given out politically. 

While many states have already given priority to police and firefighters, teachers’ unions are trying to cut to the front of the line and are blackmailing politicians by refusing to reopen schools. But teachers and child-care workers face less risk than other front-line workers since children are less likely to transmit the coronavirus. 

Other unions are also lobbying for priority. The SEIU lambasted California Gov. Gavin Newsom’s well-advised decision last week to remove “essential” workers such as janitors from the state’s priority guidelines and base eligibility almost solely on age. “It’s like he’s putting us out to die,” griped SEIU United Services Workers West political director Sandra Díaz. 

Industry groups including hotels, airlines and ride-share companies are also lobbying states to have their workers vaccinated first. Gov. Andrew Cuomo this week announced that restaurant, taxi and ride-share drivers would be next in line for vaccines. But why restaurant workers before retail workers or 60-year-olds?

The WSJ suggests rationing based on age. 

The modest proposal: Why not let "industry groups" decide when they want the vaccine based on...hold your breath.. paying a market price to get it?  I wouldn't dare whisper that maybe individual people could be allowed to decide when to get the vaccine -- that is what we're talking about, when, not if --  by deciding when they want to pay for it, as our political climate cannot say out loud that anything should be rationed by willingness to pay. But surely, we can agree that profit-making businesses should be allowed to pay to get their workers vaccinated sooner -- if it's really important to them to do so -- rather than just by who has more political connections to be labeled "essential." 

Fun: Rory Cooper tweets

Fairfax schools says they're going to open up 2 days a week in March for some kids. Wanna know how? They're hiring thousands of unskilled classroom monitors to watch kids watch computer screens because their fully vaccinated teachers won't return to the building. This is nuts.


Tuesday, February 2, 2021

Trading halts and game over

David Battan writing in the WSJ brings come clarity to Robin Hood's trading stop.  It raises some questions for me, however. Much of the problem seems to stem from two-day clearing and settlement, and brokers lending people money to trade. Instant settlement and at least separating the lending activity from the trading activity ought to help. The institutions are really stuck with relics of a pre-computer world, it seems. 

OK, first the facts, then speculation, and an invitation for commenters to correct me as I am not a master of these important plumbing issues. 

When clients trade, especially on margin, they use the broker’s money to play. Imagine a client buys 100 shares of GameStop for $400 a share, using $20,000 of his own money and borrowing $20,000 from Robinhood. If the stock drops from $400 to $120 (as it did on Jan. 28), the client’s position may be sold for $12,000 due to the margin violation, leaving Robinhood trying to collect an unsecured $8,000 debt from “u/Thicc_Ladies_PM_Me.” Good luck. Multiply this by hundreds or thousands of similar clients. Option trading is worse because the leverage is much greater. 

"Margin violation" means basically this: 

Friday, January 29, 2021

Long and short of bubbles -- Grumpy podcast with Owen Lamont

The long and short of bubbles. A conversation with Owen Lamont on Gamestop and other matters. See my  last post for background and great papers by Owen. A direct link in case the above embed doesn't work. 

Owen views the current situation more as a classic short squeeze than a replay of 3com/Palm and similar affairs in 1999. These are established companies with short markets, and there is little technological news about them.  We talk a bit about bubbles in general, short sales, supply responses, the puzzling lack of liquidity -- people willing and able to take the other side of crazy stuff, and the state of the market today.  

The review of "Famous First Bubbles" that Owen mentioned is here.  

Thursday, January 28, 2021

Gamestop. 1999 déjà vu all over again?

In case you haven't noticed, Gamestop and a few similar stocks are in a classic bubble. At least it was at 8 AM pacific when I read the print WSJ, possibly not at 9:30 AM as I write. What's going on?

It's not the only time. This sort of thing has happened over and over again through history, most recently in the late 1990s. It's too easy to just say "people are dumb," and move on. That can explain everything. Instead, we can and should as always look at a repeated phenomenon like this and try to understand how the rules of the game are producing a weird outcome, despite pretty smart players. 

The best and most prescient analysis I know are Owen Lamont's "Go Down Fighting: Short Sellers vs. Firms," (last working paper, ungated here) Owen's classic paper with Dick Thaler, Can the Market Add and Subtract? Mispricing in Tech Stock Carve‐outs and of course my "Stocks as money" which offered (I think) a different and more cohesive view of the Add and Subtract event, and extended it to other situations.

There are four essential characteristics of these events, along with a few corollaries spelled out in my paper:  

  1. Securities are overpriced. 
  2. Trading volume is enormous. There is a big demand for short-term trading. There is some fundamental news and a lot of talk about the stock.  
  3. There are constraints on short sales, limiting the ability to take a long-term bet on the downside.
  4. There are constraints on the supply of shares,  among them the same short sale constraints. 

The first is obvious. The second through fourth however sharply limit our view of what is going on. Simple irrationality, people get attached to a stock, can explain overpricing, but not mad turnover, why they would sell it a day later. 

Wednesday, January 27, 2021

Jay Bhattacharya on good fellows; tests vaccines and more


Link in case the above embeds don't work. 

Stanford Doctor and Professor Jay Bhattacharya joins the GoodFellows for an engaging discussion of covid, vaccines, tests and more. He starts off with a view directly contradicting the conclusion I have come to: he thinks the vaccine should be deployed first to protect old people, not to control the spread of an exponentially growing and mutating virus. I love it when very well informed people disagree with me. Was I wrong?  Then Niall goes on to challenge the Great Barrington Declaration, and maybe consider that lockdowns might not be so dumb. Then the conversation gets really interesting! 

On Tuesday, I also recorded an Econ Talk podcast with Russ Roberts on the same issues. I'll post when up. 

Open smart, redux

Open smart, I and other economists argued back in March. Don't just shut lock down the whole economy willy-nilly. An auto-body paint shop (they wear masks and respirators anyway) is not likely to spread covid-19. Parks too. Test widely, randomly, to stop the spread of the disease, not just to diagnose the sick. 

At last, perhaps, we may be headed this way, reports the Wall Street Journal 

Scientists are settling on a road map that can help critical sectors of the economy safely conduct business, from meatpacking plants to financial services, despite the pandemic’s continued spread.

After nearly a year of study, the lessons include: Mask-wearing, worker pods and good air flow are much more important than surface cleaning, temperature checks and plexiglass barriers in places like offices and restaurants. And more public-health experts now advocate wide use of cheap, rapid tests to detect cases quickly, in part because many scientists now think more than 50% of infections are transmitted by people without symptoms.

We have a long way to go before vaccines stop the spread of the disease. Tests could do it now, if the FDA would get out of the way. Yet

 a year later, sufficient testing remains a critical issue.

Test detail

One of the largest studies of asymptomatic transmission to date showed that frequent testing was essential in identifying infections among a group of nearly 2,000 Marine recruits...

The study looked at cases identified with lab-based tests that search out and amplify the genetic material of the virus, but those tests aren’t as easily scaled as so-called rapid antigen tests, which search for viral proteins.

Results from lab-based tests can sometimes take days, while results from rapid tests are usually available in less than an hour...

The shift toward using frequent, inexpensive and rapid tests on the same people multiple times a week to screen entire populations—instead of one-time tests on individuals who have symptoms—will be important to efficiently break transmission chains, epidemiologists said.

“Unless we’re doing really broad, frequent screening of the people at large, we’re completely missing the vast majority” of infections, said Michael Mina, an assistant professor of epidemiology at the Harvard T.H. Chan School of Public Health. “We have to change how we’re doing this.”

I'm sure Paul Romer is saying, great, now the scientists finally get it. Well, they do. Next the FDA. 


Indoor ventilation has been on my mind. Why is outdoor dining safe and indoor not? Is it really safe to dine "outdoors" in a plastic tent, as has become the hilarious practice around where I live? If outdoors is safe, but indoors is warm, can we not make indoors as safe as outdoors with ventilation, HEPA filters, and UV light? 

Fresh air and effective filters indoors are important because they can remove virus particles before they have time to infect.

So this is a non-grumpy post. We have a long way to go with covid, and the next one after that. To see some durable wisdom breaking out is refreshing. 

Sunday, January 24, 2021

Libertarian pandemic

 "Libertarians in a pandemic" is a good essay by Jacob Grier expanding on many themes I've written about here, whether markets though imperfect might do a better job, or at least help on top of government. And if freedom might be better in a pandemic, where all the econ 101 market failures are present, just think how well markets might allocate, say toilet paper. 

There are libertarians in a pandemic, and it turns out they have some good ideas and insightful critiques.


Let's start with the testing snafu. Tests, of course, should be run by the government because there is a big externality. I want you to get tested so you don't give me the disease. How did the the government do, relative even to a free market? 

The American pandemic response was beset by government failure from the very beginning. In February of 2020, the most urgent priority in the United States was deploying COVID tests to identify cases, survey the extent of the virus’s spread, and attempt to contain it. Although the World Health Organization had already developed a working test, the Centers for Disease Control designed its own from scratch. The CDC test turned out to be unworkably flawed, reporting false positives even on distilled water.

Around the same time, Health and Human Services Secretary Alex Azar declared a public health emergency. Ironically, one effect of this declaration was to forbid clinical labs from creating their own tests without first obtaining an emergency use authorization from the Food and Drug Administration. Bureaucratic hurdles — which included pointless requirements to send files by mail and to prove that the tests would not return false positives for MERS and the original SARS virus — slowed development. The early outbreak in Washington was uncovered in part by researchers simply defying the CDC to test samples without permission.

Wednesday, January 20, 2021

Grumpy economist podcast: free market tests, vaccines and more

The Grumpy Economist podcast is back, and we're going to aim for a once per two week schedule. This week we talk about vaccines, tests, masks, and how free markets would do better than the government, or at least can usefully complement the government. 

I wanted to get to the larger point, at least can we have a free market in toilet paper? Price controls in crises are one of those econ 101 questions that divide economists from everyone else. Don't transfer income by rationing toilet paper in a crisis. Let prices allocate it to who really has got to go, and give the natural disincentive against hoarding. Next time. 

 Link here if the embed above doesn't work. 

Portfolios for long-term investors

Portfolios for long-term investors is an essay that extends a keynote talk I will give Thursday Jan 21 at the NBER "New Developments in Long-Term Asset Management" zoom conference. The link takes you to my webpage with pdf of the essay and the slides for the talk. I'll blog the next draft of the essay, as I want to do it once and I'm sure I'll get lots of comments. 

The conference program is here. You can listen to the conference on YouTube here.  I'm on Thursday 12:30 ET, but many of the other papers look a lot more interesting than mine! 


How should long-term investors form portfolios in our time-varying, multifactor and friction-filled world? Two conceptual frameworks may help: looking directly at the stream of payments that a portfolio and payout policy can produce, and including a general equilibrium view of the markets’ economic purpose, and the nature of investors’ differences. These perspectives can rationalize some of investors’ behaviors, suggest substantial revisions to standard portfolio theory, and help us to apply portfolio theory in a way that is practically useful for investors. 

Sanity in CA housing?

As reported by the Sacramento Bee, its city council voted unanimously to allow four-plexes across the city overturning one-house-per lot zoning. 

It's couched somewhat in the language of diversity, 

City officials said the proposal would help the city alleviate its housing crisis, as well as achieve equity goals, by making neighborhoods with high-performing schools, pristine parks and other amenities accessible for families who cannot afford the rising price tags to buy homes there.

“Everybody should have the opportunity to not only play in Land Park but to live in Land Park,” Mayor Darrell Steinberg said. “That’s the Sacramento that we all uphold, that we love, that we value, and you better believe this drive for inclusion and equity is the driving force of our city and it is going to continue well beyond my tenure here.”

But I applaud that. Yes, the effect of highly restrictive zoning is exactly to drive "diverse" people away. Let's not be hypocrites. 

And ok, we're not waking up in property-rights nirvana either

“We’re going to insist on design quality and scale,” [Mayor] Steinberg said

 in response to comments.  And 

buildings would still have their current height restrictions. There would also be historical protections, limits on how much of a lot size a house could take up and on the amount of square footage.

Ok, baby steps.

Neighborhood association leaders in Land Park and Elmhurs... suggested the city only allow multi-unit houses in certain areas of the city, along commercial corridors and near transit stations.

“No one will have the ability to live in lower-density neighborhoods,” said Maggie Coulter, president of the Elmhurst Neighborhood Association. “The city needs to preserve existing neighborhoods in order to promote home ownership opportunities for everybody.”

Kudos to Sacramento city council for seeing through this complete incoherence, and the obvious flaws of segregating housing to undesirable parts of the city.

The lack of a whisper about "affordable housing" mandates is also refreshing. Maybe sanity can erupt in a one-party state, when discussions are not tinged with partisan derangement syndromes?

Minimum wages. People are not all the same.

The ancient argument over the minimum wage (WSJ) is heating up, another of economics' many perennial answers in search of a question. 

As in the linked article, I think it is a mistake to focus entirely on overall employment of low-skill workers. That is surely an issue. But the wage is one part of a detailed bargain between workers and employers. By putting its thumb on one part of the bargain, the government will ensure that other parts squish out. That's the larger issue. 

Does the job allow flexible hours? Does it provide other benefits -- transportation, employee parking, uniforms? How hard do you have to work? Which workers get the jobs, not how many get jobs overall?