Monetary Policy in an Age of Radical Uncertainty

Central bankers in all major developed economies have adopted NIRP, ZIRP, or near ZIRP policies.  The Bank of Japan and the European Central Bank now “offer” negative interest rates (NIRP) on reserves and project to do so for the foreseeable future.  The Bank of England and the Federal Reserve Bank of the United States remain committed to targeting interest rates slighted above zero (near ZIRP).  10 year government bonds offered by these countries range from -0.225% in Japan to -0.027% in Germany to 1.57% in the U.S. Such policies are not consistent with sustainable economic growth. See Professor Gerard’s previous posting on the pervasiveness of such interest rates.

In a recent book entitled The End of Alchemy, former Bank of England Governor Lord Mervyn King argues that the policies we have employed in the past (and present) to stabilize our economies – such as keeping interest rates low until economic growth returns to its long term rate or unemployment falls below some designated benchmark (full employment? natural rate of unemployment?) – are inconsistent with sustainable economic growth.  Furthermore, he suggests that central bank and regulatory policies adopted post Great Recession (December 2007 – June 2009 in the U.S.) fail to address the potential for a repeat of the financial failures witnessed during that period. Among other points, King observes the following (for more in depth comments on King’s insights go here.)

  1. In the contemporary world economy, many shocks to the economy are unpredictable; thus, one cannot use probability-based forecasting models to design policy to stabilize economies.  (King calls this radical uncertainty)
  2. Policies designed to stabilize economies in the short run, such as aggressive monetary and fiscal policies, leave a residue inconsistent with long run economic growth unless stagnation is viewed as the desired norm. For King, policymakers face the stark trade-off of short term stability for long term sustainable economic growth.  In contrast to Keynes, in the long run, we are NOT all dead.
  3. In contrast with central banks as “lenders of last resort,” King offers the innovative idea of “pawnbroker for all seasons” as a constructive substitute.  Banks would know in advance what their liquid assets will bring them in terms of central bank conversion to cash.

Each of the above points demonstrates how King views central banking and bank regulation in a world characterized by radical uncertainty.  In short, policy makers need to find viable coping strategies to reduce the downside cost of economic recessions in general and financial meltdowns in particular. With radical uncertainty, the “forward guidance” offered by central banks lacks credibility and fails to address such uncertainty.   In the words of Michael Lewis ( of Liar’s Poker, Moneyball and the Blind Side fame), “if his book gets the attention it deserves, it might just save the world.” (http://www.bloomberg.com/view/articles/2016-05-05/the-book-that-will-save-banking-from-itself)

Gladwell Claims There is No Free Lunch

In his latest Revisionist History podcast, Malcolm Gladwell gives us some food for thought about where we put our resources.  He claims that small liberal arts that develop gourmet-level dining services are doing so at the expense of bringing in  low-income students.  To develop his argument, he compares two elite schools from the northeast, characterizing the situation thusly:

They compete for the same students. Both have long traditions of academic excellence. But one of those schools is trying hard to close the gap between rich and poor in American society—and paying a high price for its effort. The other is making that problem worse—and reaping rewards as a result.

His logic is pretty straight forward: Schools have a budget constraint, and at the margin they can spend an additional dollar on financial aid or on campus amenities.  A school that invests in campus amenities will draw more students willing to pay a premium price, whereas a school that skimps (relatively speaking) on amenities in favor of financial aid will be at a relative disadvantage in two ways:  First, students generally prefer high-quality amenities to low-quality amenities. Second, it generates less revenue per student and therefore fewer resources to put into financial aid or campus amenities.

Malcolm Gladwell is an influential writer with best sellers to his credit such as Outliers and The Tipping Point, as well as about a million New Yorker articles, so this pieces is certain to make waves.  That he calls the investment in high-end dining services “a moral problem” and implores students not to go to schools with ridiculously good food pretty much ensures people will be up in arms about this.

This is also relevant from our perch here at a small liberal arts school with our own financial decisions to make.  I was more amused than convinced by the thesis when I first read the abstract, but after looking at the numbers and listening to Gladwell, I am more sympathetic (scroll down the Revisionist History page for the photo of a banana chocolate chip waffles with the school logo emblazoned in the center).   Though, I guess that’s why Gladwell is such a popular figure:  he makes an interesting claim, tells a good story, and makes a good case.

As an aside,  I think I speak for most people who attended a residential campus prior to 2000 when I say that the food even at campuses that “skimp” on quality is ridiculously good compared to what we ate (though I did love the Monte Cristo sandwich on Thursdays).

You can read more about it at the always lively Inside Higher Ed website.

Addendum:   It’s probably worth adding that it’s still okay to complain about food at your school.   You probably pay a lot of money for dining services, and with that, you expect certain levels of quality, variety, and availability.

A quick peek reveals that the average U.S. household (a.k.a., consumer unit) spends about $6,800 annually on food compared with college meal plans that run $2000-$3500 per semester.

Losing Interest

When I have the occasion to make a sizable consumer item — a house or a car or even a big green egg — I often will borrow some money to finance the purchase. In the past few years, the person extending the credit invariably tells me that interest rates are historically really low and you should lock in now because rates have to go up in the future.

Really?

Yes, of course.  How much lower could interest rates go?

Well, I was reading a White House report on interest rates (from July 2015) that had a figure that shows yields on 10-year treasuries have been on a downward trajectory for a very long time, like 20+ years.  Not only that, people who forecast such things have pretty much grossly overestimated future interest rates at pretty much every turn.  In other words, for the past 20 years people have been saying that interest rates “have to go up” and for the past 20 years these people have been wrong.*

Presentation1

Yeah, sure, but how much lower can they go?  It’s not like interest rates are going to go negative now, are they?

Well, actually, the bond yields for government debt around the world are increasingly going negative, with Quartz reporting that a third of all government debt worldwide has negative rates.  People are paying governments for the privilege of having a nice, safe place to park their money.**

government_bond_yields_rate_chartbuilder

 

Right, right.  Okay.   But I’m not an investor and you aren’t a government.  You don’t expect me to pay you to borrow money from me, now, do you?  I mean, I’m already offering a discounted price and zero-percent financing for 60 months, plus this oven mitt here….

 

*In fairness, the earlier forecasts on this table just predicted interest rates to be rather flat going forward, which, incidentally, is a trick I learned from my time series professor — a pretty good estimate is whatever rates happen to be right now.   If I knew where rates were going, (1) I certainly wouldn’t be telling you; and (2) I’d be enjoying a much different standard of living.

** Here’s “Everything you need to know about negative rates.”

 

 

 

Alumni College Talk

Speaking of Professor Finkler, on Friday he will be giving a talk for the Alumni College.   Here are the particulars:

The Patient Protection and Affordable Care Care (aka Obamacare):
An Efficient and Equitable Path to Life, Liberty, and the Pursuit of Health?

Professor Marty Finkler

Warch Campus Center Cinema
2:10-3:00 p.m.
Friday, June 17

Master of Supply & Demand… and Lots of Other Stuff

In a twist on the “Life After Lawrence” meme, Professor Merton D. “Marty” Finkler officially retired yesterday, after serving on the economics faculty for more than 30 years.  Professor Finkler is the consummate economist, always interested in talking about economics and ideas whether in class or at the ball game.   He also has a remarkable versatility, from his principal field of health economics to his core (and terrifying?) macro theory course to urban economics to sports economics to environmental economics and on to China.  It certainly is not possible to replace his expertise, at least not with one person.  Fortunately, he will continue to teach and engage with our students as an emeritus professor, beginning this fall with his Investments class.

Here he is pictured in his new hood (!), along with our faculty and one of our more photogenic students.   His Honorary Degree citation is below the break.

Last Hurrah

Continue reading Master of Supply & Demand… and Lots of Other Stuff

Masters of Supply & Demand

Congratulations to our 2016 graduates, many of whom walked the stage yesterday.  We were happy to see so many of you and your families at the Saturday reception.   We trust we will hear back from you at some point (and not just because you are applying for graduate school and need a recommendation(!)).

IMG_2401 (Small)

The Economics Department distributes (?) a number of awards each year, and here are the particulars:

The Iden Charles Champion Award in Commerce and Industry (Paper Prize)

  • Mishal Ayz, Astoria, NY, “A Game Theoretic Analysis of International Justice Disputes.”
  • Perrin Tourangeuau, Denver, CO, “Why Forests Fail: Exploring the Relationship between Institutions and Forest Management Outcomes in Haiti and the Dominican Republic.”

The William A. McConagha Prize for excellence in economics (Seniors)

  • Ruby Dickson, Louisville, CO
  • Zachary Martin, Brookfield, WI
  • Perrin Tourangeuau, Denver, CO

The Philip and Rosemary Wiley Bradley Achievement Scholarship in Economics (Juniors)

  • Dylan Geary, Overland Park, KS
  • Mattias Soderqvist, Stockholm, Sweeden

 

Supply & Demand in the News

From *both* of my final exams administered today….

Illustrate each of the following using “comparative static” analysis.   That is, draw a supply and demand graph, show a shift in supply or demand consistent with the headline.

Even with lots of fish, halibut prices high,” Homer News, June 7, 2016

Salmon prices are rising due to the death of millions of fish in Chile,” Daily Mail, June 7, 2016

Lumber Prices Tumble as Demand From China Falls,” 24/7 Wall Street, January 20, 2016

And my personal fave:

Germany had so much renewable energy on Sunday that it had to pay people to use electricity,” Quartz May 10, 2016

Finally, for the environmental students, we give you:

Fish Factor: Permits plummet, halibut prices soar,” Juneau Empire, March 16, 2016

 

The New Economics of Religion

That’s the title of a June 2016 Journal of Economic Literature piece, available at a website near you.   Typically, this wouldn’t warrant a response from the Lawrence Economics Blog, but typically you don’t see accolades like this directed towards one of our own:

One of the classic papers written on the economics of religion, Azzi and Ehrenberg (1975), summarized the literature on what the empirical correlates of religiosity had discovered about the United States until then.

Wow, classic papers!  If you see Professor Azzi, be sure to ask him about the genesis of that paper.

  • Sriya Iyer. 2016. “The New Economics of Religion.” Journal of Economic Literature, 54(2): 395-441.
  • Corry Azzi and Ronald Ehrenberg. 1975. “Household Allocation of Time and Church Attendance.” Journal of Political Economy 83 (1): 27–56.

Economics / Science Hall Colloquium, Monday at 4:30, Wriston Auditorium

Professor Elizabeth J. Wilson from the Humphrey School of Public Policy at the University of Minnesota will be here Monday to talk about the (potential) future of electricity systems.

Professor Wilson is a rather extraordinary interdisciplinary scholar, with a background in environmental science and a Ph.D. in Engineering & Public Policy from Carnegie Mellon University.  She is the recipient of one of the inaugural (2016) Andrew Carnegie Fellowships for her project “Nuclear Futures in a Windy World: A Comparative Analysis Balancing Energy Security, Climate Change, and Economic Development.”  She will spend the 2016-17 academic year in Denmark working on that.

Here is a blurb of her talking about sustainability and interdisciplinary research.

We will see you there.

wilson

 

 

10 Ways to Tell If You Are Sitting Next to an Economist

keynes and friedmanYou may have heard that an economist was taken off an airplane for working on equations that employed Greek letters.  It turned out to be an Italian economist working out a differential equation.  The Buttonwood column of the Economist provides some advice for those who might not know if they are sitting next to an economist (or who the two people pictured above are.)

For starters, here’s one clue.

He keeps telling you that “there is no such thing” as a “complimentary refreshment service.”

For the rest, check out the Buttonwood column.

Enjoy!

Five Big Truths About Trade

In a recent opinion piece in the Wall Street Journal, Princeton economist and former vice-chair of the Federal Reserve, Alan Blinder attempts to add constructive insight to the political discussion regarding international trade.  Below you will find the Five Big Truth he cited.  I encourage you to read the details.

  1. Most job losses are not due to international trade.
  2. Trade is more about efficiency – and hence wages – than about the number of jobs.
  3. Bilateral trade imbalances are inevitable and mostly uninteresting.
  4. Running an overall trade deficit does not make us “losers.”
  5. Trade agreements barely affect a nation’s trade balance.

If you can’t access the Wall Street Journal, use the entry on Greg Mankiw’s blog.

Springing Forward

It is that time of year where the days get longer, aided by a single leap and bound.  This Saturday into Sunday, much of the US will push its clocks forward by one hour.  Despite the “Daylight Savings” moniker, there is no actual daylight saved — it just shifts an hour from the morning to the evening.   The consequences of this likely will affect whether some people live through the rest of March or not, as I pointed out in the New York Times Room for Debate section a few years ago.  My contribution has to do with the changes in pedestrian fatality risks and total fatalities associated with the time change.  I also wrote a more general piece for the Appleton Post-Crescent.  Below is my semi-annual rehash of a previous post…

So, what does a time change look like?  Glad you asked:  The figure from the sunshine authority, Gaisma.com, shows daylight patterns for our own Appleton, Wisconsin.  Each day starts with midnight at the bottom and goes to the top, and the months go left to right.  The blue line is the dawn and the red the dusk.

The Appleton Day
Appleton Time

The switch to DST in March and the switch back to standard time in November are clear — they are the discontinuities (the “breaks”) in the sunrise and sunset curves.  Because we “spring ahead” one hour, the sunrise time on Sunday morning will be one hour later than it was on Saturday.  An early morning walk that was in that daylight on Saturday will be in the dark on Sunday.  To have a sunrise at the same time as Saturday’s, we will have to wait until early April.  The opposite happens in the evening.  Sunset will be one hour later starting on Sunday.  There will be less light in the morning, but more light in the evening.

Light and visibility are extremely important determinants of traffic safety, particularly for pedestrians.  Paul Fischbeck and I looked at data from 1999-2005 on fatalities and travel patterns, and determined that the morning risk increases about 30% per mile walked, while the afternoon risk falls close to 80%.

The figure below shows pedestrian fatality risks from 1999-2005.  The blue and maroon bars show fatality risks per 100 million miles walked in March and April, respectively.  Note that for the 6 a.m. time slot the risks increase about 30%, whereas for the 6 p.m. time slot the risks take a sharp nosedive.  At midday the risks stay right about the same (we found no statistically significant difference in risks for that time period).  Overall, total pedestrian fatalities decrease in the Spring both because risks fall more in the evening than they rise in the morning, and there are many more people out later in the day.

Ped Spring

These data are rather crude in the presentation, as they do not focus specifically on the days leading up to and immediately following the time shifts, which is how researchers typically isolate the effects of the time change.

Here are some references for those interested:

S A Ferguson, D F Preusser, A K Lund, P L Zador, and R G Ulmer “Daylight saving time and motor vehicle crashes: the reduction in pedestrian and vehicle occupant fatalities,” American Journal of Public Health 1995 85:1, 92-95

J M Sullivan and M J Flannagan, “The role of ambient light level in fatal crashes: inferences from daylight saving time transitions,” Accident Analysis & Prevention, 2002 34:4, 487-498

D Coate and S Markowitz, “The effects of daylight and daylight saving time on US pedestrian fatalities and motor vehicle occupant fatalities,” Accident Analysis & Prevention, 2004, 36: 3 351-357

2016-17 Draft Schedule

Click here for the Draft 2016-17 schedule.   There will be some changes to this, but that is effectively what we are looking at for next year.

 

Fall Term 2016 ** DRAFT **
Fall Term 2016 ECON 100 (5483) INTRODUCTORY MICROECONOMICS (Q) (L:40 R:0 W:0) ● 09:50-11:00 MWF Jonathan Lhost

Fall Term 2016 ECON 245 (5484) LAW AND ECONOMICS (L:25 R:0 W:0) ● 12:30-02:20 TR Jonathan Lhost

Fall Term 2016 ECON 300 (5485) MICROECONOMIC THEORY (Q) 08:30-09:40 MTWF Adam Galambos
Fall Term 2016 ● ECON 421 (5486) ● INVESTMENTS ● 09:00-10:50 TR ● Merton D. Finkler
Fall Term 2016 ● ECON 481 (5487) ● ADV ECONOMETRICS & MODELING ● (L:15 R:0 W:0) APR ● 01:50-03:00 MWF ● Hillary Caruthers
Winter Term 2017 ** DRAFT **
Winter Term 2017 ECON 100 (1482) INTRODUCTORY MICROECONOMICS (Q) (L:40 R:0 W:0) ● 01:50-03:00 MWF Hillary Caruthers
Winter Term 2017 ECON 205 (1483) INTRO TO INTERNATNL ECONOMICS (G) (L:25 R:0 W:0) ● 09:50-11:00 MWF Hillary Caruthers
Winter Term 2017 ECON 215 (1484) COMPARATIVE ECONOMIC SYSTEMS (G) 11:10-12:20 MWF Adam Galambos
Winter Term 2017 ECON 255 (1480) START-UP THEATRE APR ● 01:50-03:00 MWF Staff
Winter Term 2017 ECON 380 (1489) ECONOMETRICS (Q) 09:50-11:00 MTWR Jonathan Lhost
Winter Term 2017 ECON 380 (1505) ECONOMETRICS (Q) 03:10-04:20 MTWR Jonathan Lhost
Winter Term 2017 ECON 450 (1485) ECONOMICS OF THE FIRM (Q) Arranged David Gerard
Winter Term 2017 ECON 495 (1486) TOP: NEW INSTITUTNL ECONOMICS Arranged David Gerard
Winter Term 2017 ECON 601 (1487) SENIOR EXPERIENCE: READING OPT 12:30-02:20 T Adam Galambos
Winter Term 2017 ECON 602 (1488) SENIOR EXPERIENCE: PAPER APR ● Arranged Jonathan Lhost
Spring Term 2017 ** DRAFT **
Spring Term 2017 ECON 100 (3520) INTRODUCTORY MICROECONOMICS (Q) (L:40 R:0 W:0) ● 08:30-09:40 MTWR David Gerard
Spring Term 2017 ECON 225 (3521) DECISION THEORY 11:10-12:20 MWF Adam Galambos
Spring Term 2017 ECON 280 (3522) ENVIRONMENTAL ECONOMICS (L:25 R:0 W:0) ● 12:30-02:20 TR David Gerard
Spring Term 2017 ECON 320 (3525) MACROECONOMIC THEORY (Q) 09:50-11:00 MTWR Hillary Caruthers
Spring Term 2017 ECON 320 (3542) MACROECONOMIC THEORY (Q) 03:10-04:20 MTWR Hillary Caruthers
Spring Term 2017 ECON 400 (3523) INDUSTRIAL ORGANIZATION (Q) (L:15 R:0 W:0) ● 11:10-12:20 MWF Jonathan Lhost
Spring Term 2017 ECON 405 (3524) INNOVATION & ENTREPRENEURSHIP 08:30-09:40 MWF Adam Galambos
Spring Term 2017 ECON 415 INDIVIDUALITY & COMMUNITY (L:18 R:0 W:0) ● 12:30-02:20 TR Steven Wulf

Click here for course descriptions.