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    February 2011

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    Maxine's Essays

    • 21st Century Regress
      Sometimes it seems like the world is going to hell and there's absolutely nothing a girl economist can do about it.
    • What Exactly Are We Crowding Out?
      The current economic downturn isn't a random draw of a black ball from an urn containing white balls and black balls. There's no sampling distribution. Very specific policies and actions landed us here. Now we must decide not only what policies need to be put in place to prevent it happening again, but also what policies would best drive us out of the ditch faster and sustainably.
    • I Wish It Were Only Butter
      We should be giving up some butter if we must. We should not give up education or health investment (or infrastructure or the environment (hello, BP). They may be the only legacies of any value that we pass on to our children and grandchildren.
    • Rational Health Investment?
      The obvious "market solution" is to improve the long run return on investments in health among the disadvantaged through meaningful and effective publicly funded education. The obvious short run "market solution" is to reduce the costs of investment and the shadow price of health for the disadvantaged by providing health insurance cover and reduced out-of-pocket costs.
    • The Socrates Parameter
      To the extent that our limbic systems respond to such engineering by over-riding the judgment of our frontal lobe and to the extent that our frontal lobe is deprived of the information it requires to make a rationally self-interested judgment, we are not only pigs and fools, we are slaves.
    • The Economic Rewards of Virtue
      If individual virtue tempers our "piggy" desires and conditions our choices to something that is both individually and socially better, then the economic rewards of virtue as embodied in and promoted by societal norms and institutions are far greater than we have ever suspected. As economists, we would do well to recognize this when we teach U max.
    • The Market for Morals
      Markets then are places where more is exchanged than goods and services, labor and product, credit, and interest. They are places where we also develop the personal virtues of temperance and prudence and the social virtues of benevolence and justice. When they function well, they produce trust, loyalty, and sympathy among those who trade there.
    • Post-Modern Applied Economics: It’s the Error Term, Stupid
      Maxine believes it’s time to refocus attention and discussion on the error term. It is often where much of the action is in our models. It is where unexpectedly catastrophic events dwell resulting in fat tails. It is where our animal spirits manifest and cause us to do the right thing or the wrong thing or the thing everyone else is doing rather than the self-interested, fully-informed rational thing. It is where God and miracles and chance dwell.
    • Intergenerational Win-Win: Health Insurance, Education, Environment, Infrastructure
      So when we’re talking about fiscal stimulus packages and we’re borrowing from our grandchildren to finance them, we should be thinking about how to use stimulus monies to create value for those grandchildren AND stimulate our economy.
    • Short-term Private Payoffs, Long-term Social Costs
      The real health reform discussion, the one we should be having, is “What must we do to create a health system that is both efficient and fair?” The answer will almost certainly include relegating the private sector to markets where market forces or regulation are effective at aligning short-term private incentives and goals with long-term societal interests. If such markets are scarce or non-existent in health, then the private health sector will be of limited value.
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    Thirty years of unwise policy has been the consequence of short election cycles and the popular appeal of policies combining tax reductions with increased government expenditures. Reversing the policy arouses opposition from the beneficiaries of those policies, i.e. today's voters-the only voters today's officeholders need to please. The champions of tax cuts and the champions of tax dependents have been buying votes with tomorrow's money for thirty years. That tomorrow will be here soon, and it may already be here without us having faced that yet.. The public re-elects officeholders who appear to deliver something for nothing. That is what passes for wisdom with the voting public.

    “It took us at least 30 years to dig the hole we're in. Pretending that we can fill it up in two years or ten is not only silly, it's dangerous.” Don’t agree. Here’s how to fill the hole in a few years.

    Print enough money over the next two or five years to buy back the entire national debt. That would be too stimulatory and/or inflationary, so balance that with a deflationary method of buying back, i.e. raise taxes and or cut government spending. Assuming the above stimulatory and deflationary effects cancel out, there’d be no net effect. Or alternatively one could go for a bit of stimulation by having the stimulatory effect exceed the deflationary effect.

    Can anyone spot the flaw in the above?

    The above solution is also superior to Maxine’s suggestion that ALL stimulation come via the public sector (she cites infrastructure, research, and defense). That is, there is no good reason, when coming out of a recession to distort the economy towards one sector (public or private). Buying back a large chunck of the national debt over the next five years would put extra cash into the private sector’s hands which would result in raised spending on a wide range of products (public AND private sector).

    I agree absolutely. As I wrote in a post on this subject (, today total government spending on basic scientific and medical research is approximately $34 billion per year. So for the cost of the portion of the Bush tax cuts for the rich we could triple -- triple -- government spending on basic scientific and medical research. Which would do more for long term growth and for our children, that or spending the money on yachts, mansions, and $20,000 suits for the rich?

    Ralph Musgrave,
    yes there is a flaw in the above. Why - what makes you think that you COULD buy back the whole debt? Why would those parties that hold it sell? Some of them may not even be allowed to sell (due to regulatory requirements). And pushing long term yields so low, would hit some vulnerable people (pensioners for instance) very hard. You need to think hard about the distributional effects of what you are doing, if combined with tax rises, spending cuts the effect could overall just be deflationary, with the money sitting unused in bank accounts.

    Reason, It’s true that debt holders don’t HAVE to sell. On the other hand a proportion of national debt reaches maturity each year, at which point the holders have no choice but to sell. That proportion is roughly 12% a year in the U.S., and much less in the UK (about 4%). So my “two to five year” figure above is unrealistic for the U.K., but might just about work in the U.S.

    I agree there are serious distributional effects to think about, but these problems are soluable. E.g. if the national debt shinks to near zero, then a proportion of pension schemes would have to switch to being “pay as you go” rather than investment based.

    Education is a progressive discovery of our own ignorance.

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