Monthly Archives: March 2020

The inflation virus

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Michael Mandel writes,

In the short run, the sheer disruption of the sudden lockdown advocated by the health experts is going to send both demand and prices plunging. . .

But then, like a tsunami wave, trillions of dollars of Federal Reserve funding and Treasury payments to individuals and businesses will finally come roaring onto shore. Demand should soar for all sorts of goods and services that the global economy is too disrupted to provide in quantity. The most likely outcome: A new era of rising prices like we have not seen since the 1970s.

My thoughts:

1. Right now, we are laughing at the people hoarding toilet paper. But wait a few years. When toilet paper is $50 a roll, we’ll see who’s laughing.

2. The “stimulus” is injecting new money and money-substitutes (I’ll just say “money” from now on) in the economy amounting to 20% of GDP. Since GDP isn’t going up, that is 20 percent more money chasing the same amount of goods. So prices ought to rise by 20 percent at some point.

3, But it doesn’t stop there. Inflation is a social and psychological phenomenon. At some point, people lose the belief that money and government securities are a store of value, because their value is eroding quickly. When that psychology kicks in, what do you do? You try to get rid of financial assets as fast as you can and buy toilet paper. By which I mean all kinds of stuff.

4. When everybody tries to trade financial assets for stuff, what happens? The price of stuff goes up. In other words, the fear of inflation becomes self-fulfilling, causing more inflation. In monetary jargon, the velocity of money goes up.

5. Supposedly the Fed will know how to stop the inflation virus before it causes much damage. But viruses seem to have a way of eluding the government agencies that are supposed to stop them.

Have a nice day.

Ross Douthat talks his book

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with Richard Reinsch. Douthat says,

So I start the story in 1969, in part because that particular peak of achievement, the leap to the moon also coincided with the moment or the period when the trends that I’m describing as decadence really began in earnest. So it coincides with the slowdown of economic growth that began in the ’70s and has defined the American economy, with a few exceptional periods ever since. It coincides with the first great wave of public disillusionment with government that peaked with the Watergate scandal, but then has sort of defined the country’s relationship to its government ever since. It coincides with the beginning of the birth dearth, with the Baby Boom generation giving way to a period of the low replacement fertility that has again, extended itself across the developed world ever since.

I recommend the interview. You might get more from reading it than from reading The Decadent Society as a whole.

Near the end comes this:

There’s more discontent, there’s more ferment, I think, than there was five or seven years ago. The question is, can that escape the internet and really affect the real world? Or is the internet itself just a great machine for taking people’s creativity and perversity and making sure that neither of them have that much effect on the actual institutions of society? And the Trump presidency I think has somewhat suggested that it’s more that, and if we get a Sanders presidency, we’ll get another test of the hypothesis.

…But, a Biden presidency will just be sustainable decadence all the way. I think that’s fair to say.

My idea in the Wall Street Journal

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Far and away the best policy solution I’ve seen to the economic hardships created by our response to the Covid-19 pandemic is a proposal by economist Arnold Kling.

That is Tom Giovanetti, of the Institute for Policy Innovation. He continues with an excellent write-up of the credit-line proposal and its rationale.

UPDATE: Following a trail from Tyler Cowen, I got to this post by Miles Kimball.

Instead of mailing $1000 check to each person as is being discussed, mail each adult a government credit card with a $5000 line of credit. Mail similar government credit cards with lines of credit that are a certain percentage of previous revenue to small businesses that would be most strongly affected by the coronavirus.

He wrote that on March 19. So I think he had the idea before I did.

Road to sociology watch

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I have a hypothesis that the trend in mainstream economics is toward an increased focus on Gender, Race, Inequality, and Climate. So I went to the home page of the American Economic Review, where you can look at the table of contents for past issues of the journal and also look at the table of contents of each, without being a member. I am a member, so I can see the actual articles, but for this purpose that was not necessary.

I checked out the “papers and proceedings” issue, which lists all of the sessions at the previous year’s annual convention that were selected for publication. Prior to 2018, this was always the May issue of the AER, but starting in 2018 this is broken out as a separate publication, called AEA Papers and Proceedings. Note that the annual meeting takes place right at the beginning of the year (it used to be right at the end of the preceding year). The sessions have to be planned well in advance, so for example it was difficult to arrange many sessions about the 2008 financial crisis in the 2009 meetings.

Looking at the titles of the sessions, I attempted to classify them as Gender, Race, Inequality, Climate, or all Other. This is somewhat subjective. Looking at some more recent session titles and using my best judgment, here is what I came up with:

year G R I C O
2007 1 0 1 0 25
2008 1 0 1 0 23
2014 2 1 2 1 23
2015 1 1 4 1 25
2016 3 2 4 1 23
2017 3 0 4 1 26
2018 5 3 3 2 22
2019 5 1 6 0 21

Another approach is to do this at the level of papers, rather than sessions using the JEL classification codes as assigned by the authors. For any paper that is plausibly in the GRIC category, I looked at the paper description that includes the JEL codes. Those that include a JEL code of J16 or K38 would be in the G category, those that include a code of J15, J70, J71, J78, or J79 would be in the R category, etc.

An interesting contrast is between the papers in the May 2012 AER (meetings organized by Chris Sims) and the May 2013 AER (meetings organized by Claudia Goldin). In the table below, T stands for the total number of papers.

type 2012 2013
G 1 13
R 2 5
I 2 8
C 2 4
T 105 110

Note that I avoided double-counting. If a paper had both a J16 code (G) and a J15 code (R), I tried to pick the one that best fit the paper.

With the liberal Goldin, there were 30 GRIC papers out of 110. With Sims, who I assume is conservative, there were 7 out of 105. My guess is that we won’t see any more AEA meetings organized by conservatives.

Other notes:

–from 2005 through 2012, the number of GRIC papers ranged from a low of 7 to a high of 19; from 2013 through 2019, the number ranged from a low of 19 to a high of 41. The peak of 41 (36.9 percent of papers) was reached in 2018, meetings organized by Olivier Blanchard.

What I won’t forgive

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1. Flying blind. I have been complaining about two major unknowns.

(a) We don’t know the true prevalence of the virus. Random-sample testing could have addressed this.

(b) We don’t know the spread mechanisms. For example, we know that the virus can remain on a doorknob for a long time. But we don’t know how likely it is that one will become infected via a doorknob. We need the experiment.

I blame the CDC for continuing to fly blind.

2. Absence of masks. As Americans, we look at masks from a “what will it do for me?” perspective. Maybe if I wear a mask and I’mm around infected people who don’t wear masks, I won’t improve my chances much. But Asians look at it from more of a social perspective. If I wear a mask an I am unknowingly infected, it seems likely that I greatly reduce my chance of infecting other people. So if everybody wears a mask, my thinking is that we can mingle in public and hold the spread rate down. Not to zero, but enough so that we don’t need to cripple the economy with lockdowns.

When I see countries that are a lot closer to China with lower case loads and deaths, and I see lots of masks in use, that makes me think that masks might be sufficient. At least in some parts of the country.

Where is the CDC on this? On the one hand, they tell us that masks won’t work. On the other hand, they tell us that masks are precious and they must be reserved for front-line health care providers.

We should have had a gigantic strategic mask reserve before this crisis started. No, I never thought of that before. But it should have occurred to the CDC. As the saying goes, You Had One Job.

3. On macroeconomic policy, using the same measures that were used in the 2008 financial crisis. This ignores (a) the fact that those tools did not work very well then and (b) this is a different crisis. In particular, this is mostly a liquidity crisis in the nonfinancial sector. We could do without fiscal “stimulus.” We could do without the Fed expanding its balance sheet. We could help people get by with short-term loans. These would enable individuals and small businesses pay rent, utilities, and meet other financial obligations. And perhaps we could let people get back to work if we used the scarves and masks strategy.

I blame economists for falling back on the 2008 playbook.

Who is getting the “stimulus”?

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Do your think that your $1000 check is a big deal? Consider this:

Assuming that there are 130 million households, and each household gets $1000, that would amount to $130 billion. Yet the “stimulus” is $2 trillion, so that leaves a lot unaccounted for. Let’s assume that the bill contains $.02 trillion in funds for medical supplies along with $0.13 trillion in checks for households. That leaves $1.85 trillion for special interests.

I know that it’s too late to do anything about it. I should just shut up and move on. But I’m in a bitter mood today. Sorry.

UPDATE. It looks closer to $3000 per household. In that case, call it $0.4 trillion for households and $1.58 trillion for special interests.

Thinking fast and slow

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Tyler Cowen writes,

What many people do not realize is that “the speed premium” is vastly higher when a deadly virus is doubling in reach every five to seven days.

We needed a billion masks weeks ago.

But thinking is slow. Eons ago, on March 13, I wrote,

My working assumption is that American business and political elites are two weeks behind in their attempts to address the virus crisis. The steps they are taking now were necessary two weeks ago. And the steps that are needed now will not be taken for another two weeks.

Here are some predictions going forward:

1. The FDA and CDC were slow and often counterproductive in this crisis. But going forward, praise will be heaped on these experts.

2. If and when public health experts finally adopt something like the masks and scarves strategy, they will fill the journals will research papers showing that lockdowns were the key to beating this crisis.

3. No matter how special-interest-fueled, unhelpful, or even counterproductive the $2 trillion “stimulus” turns out to be, economists will fill the journals with research papers showing how it saved the economy.

My point is that it does not pay to be right about the crisis. That is playing Game 1. What pays is to be on the side of the powerful elites. That is playing Game 2. And nothing makes me feel more bitter and betrayed than seeing all the Game 2ers out there, patting each other on the back and gaining in status.

Whose status should be going up? Probably Razib Khan, who on Twitter now styles himself “Self-quarantine if you Khan.”

On March 18, Razib Khan wrote,

To be frank, most of the skeptics of the impact of coronavirus are not very smart.

How about me? On March 12, I wrote,

Even though we have no symptoms and no reason to believe we have been infected, my wife and I are going to try to do everything reasonable to reduce outside contact for a while. Call it “social distancing” or self-quarantining.

How about the former Mencius Moldbug?

On February 1–February first!–Curtis Yarvin wrote,

there is no good reason for anyone to be flying across the Pacific. The same may soon be true of the Atlantic. And certainly, no one should be flying in or out of mainland China—except via a quarantine facility. . . And Western public health authorities, though their epidemiology remains first-rate, cannot say this, or even think it, because of their internationalist intellectual doctrine, just one aspect of the great American progressive tradition of government.

If I can guarantee one thing, it is that his status will not go up. I am not saying we should drop all our existing beliefs and adopt his, but we ought to take into consideration that his view of the world made him quicker to spot the threat.