A Different Housing Crisis

Here is a hint of a different dimension of the crisis -- not a main cause, but something that could be significant.

When we would drive through West Virginia back in the late 50s & early 60s, I was struck by the unemployed coal miners sitting on their porches. Their houses were quite nice, but nobody wanted to buy them because the economy was dead.

Later, my brother moved to Youngstown, Ohio after then steel mills had shut down. I remember when he called me bemoaning that a tornado missed his home by only a few hundred yards. At the time, arson was the most important industry in the town.

Theoretically, we might expect that many people would respond to unemployment by searching for better opportunities. But the steelworkers in Youngstown and the coal miners in West Virginia would take such a large capital loss in selling their homes if they chose to relocate.

Later, I read an article that seemed to validate my intuition.

Andrew Oswald's proposed that home ownership was the most reasonable explanation for differences in unemployment rates between countries. The scatter graph has a very impressive fit.

Oswald, Andrew J. 1999. "The Housing Market and Europe's Unemployment: A Non-Technical Paper."
http://www2.warwick.ac.uk/fac/soc/economics/staff/faculty/oswald/homesnt.pdf

A new census report found that the rate at which people change their residences has declined. Perhaps someone will investigate the interaction between the downturn in mobility and the effect on the pace of recovery.

http://www.census.gov/Press-Release/www/releases/archives/mobility_of_the_population/013609.html

Here is the New York Times' take on the subject.

Roberts, Sam. 2009. "Slump Creates Lack of Mobility for Americans." New York Times (23 April): p. A 1.
http://www.nytimes.com/2009/04/23/us/23census.html?_r=1

"Stranded by the nationwide slump in housing and jobs, fewer Americans are moving, the Census Bureau said Wednesday. The bureau found that the number of people who changed residences declined to 35.2 million from March 2007 to March 2008, the lowest number since 1962, when the nation had 120 million fewer people."

"Experts said the lack of mobility was of concern on two fronts. It suggests that Americans were unable or unwilling to follow any job opportunities that may have existed around the country, as they have in the past. And the lack of movement itself, they said, could have an impact on the economy, reducing the economic activity generated by moves."

"Joseph S. Tracy, research director of the Federal Reserve Bank of New York, said the lack of mobility meant less income for movers and the people they employ and less spending on renovation and on durable goods like appliances. But, Dr. Tracy said, the most troubling prospect is that people were no longer able to relocate for work. "The thing that would be of deeper concern is if job-related moves are getting suppressed and workers are not getting re-sorted to the jobs that best use their skills," he said. "As the labor market started to improve, if mobility stays low, you can worry about the allocation of workers"."

"The American Moving and Storage Association said the number of people changing residences had been dropping for four years and fell 17.7 percent from 2007 to 2008. The first quarter of 2009 is likely to be even worse, the trade group said. "We saw a standstill in new home construction, so there was no domino effect from people moving," John Bisney, a spokesman, said. "People are a little nervous about getting a mortgage. And the recession is so broad-based it's not as if you can pull up stakes and move to a part of the country that's growing." Jed Smith, a research director for the National Association of Realtors, said that on average it took a homeowner 10.5 months to sell a house in 2008 compared with 8.9 months in 2007."

"In its report Wednesday, the Census Bureau said that Americans' mobility rate, which has been declining for decades, fell to 11.9 percent in 2008, down from 13.2 percent the year before and setting a post-World War II record low. Moves between states dropped the most, to half the rate recorded at the beginning of this decade."

Cognitive Dissonance and Groupthink

No sooner do I rail against the avoidance of cognitive dissonance theory by behavioral economists than a major paper employing CD in new and powerful ways appears: "Groupthink: Collective Delusions in Organizations and Markets" by Roland Benabou. This paper places CD in a social context, where a club good is being produced, and individual effort depends on estimations of the future, but there is also utility or disutility from the state of expectation (influenced by information). Individuals “choose” to accept or reject new information (or combine the two in mixed strategy form), as in most formalizations of CD. The result is a social process that exhibits less or more CD at the individual level. Here is the abstract:

I develop a model of (individually rational) collective reality denial in groups, organizations and markets. Whether participants’ tendencies toward wishful thinking reinforce or dampen each other is shown to hinge on a simple and novel mechanism. When an agent can expect to benefit from other’s delusions, this makes him more of a realist; when he is more likely to suffer losses from them this pushes him toward denial, which becomes contagious. This general “Mutually Assured Delusion” principle can give rise to multiple social cognitions of reality, irrespective of any strategic payoff interactions or private signals. It also implies that in hierarchical organizations realism or denial will trickle down, causing subordinates to take their mindsets and beliefs from the leaders. Contagious “exuberance” can also seize asset markets, leading to evidence-resistant investment frenzies and subsequent deep crashes. In addition to collective illusions of control, the model accounts for the mirror case of fatalism and collective resignation. The welfare analysis differentiates valuable group morale from harmful groupthink and identifies a fundamental tension in organizations’ attitudes toward free speech and dissent.

Jewish Economists

I just finished reading Janos Kornai’s memoirs (By Force of Thought). I’ll have more to say about it later, but first I want to mention my surprise at finding out that Kornai is yet another Jewish economist. A disproportionate number of economists appear to be Jews. The precise number is undetermined, but I’ll bet if we had a complete data set, we could reject the religion-neutral null at a really low p-value.

This calls out for an explanation. I think we can ignore antisemitic stupidities about Jews and money or conspiracies to control the world’s wealth. There isn’t an obvious political angle either, since Jewish or half-Jewish economists come in all stripes, from Hayek and Friedman to at least two of the contributors to this blog and, of course, Marx himself.

My approach to this is to think about the other fields in which Jews are or have been overrepresented. This appears to include theoretical physics, mathematics and depth psychology, and, in the non-academic universe, top-level chess. On the other hand, one does not see this tilt in natural history, chemistry or experimental psychology. (I could be completely wrong about these estimates; I have no actual data, only a few scattered bits of knowledge.) A valid explanation should apply to all of these, shouldn’t it?

Here is a hypothesis: the fields in which Jews are concentrated tend to be those that look for hidden patterns, as opposed to those which are mainly concerned with describing the visible world more clearly. The reason has to do with the difference between Christian and Jewish cosmology.



The Christian perspective is that the worlds of god and man were bridged initially by Jesus and have remained in communication since then, via either the intermediation of a church or direct introspection by believers. It is enough, according to this perspective, to simply observe, study and follow the path. In particular, nature is said to be an open book, revealing god’s wisdom to all who pay attention.

The Jewish view is nearly the opposite. God issues clear instructions, but the logic that underpins them is beyond understanding. The essential problem is that there is no bridge between the infinite mind of god and the frail, context-bound mind of human beings. We are commanded to comprehend, but comprehension is beyond us. So we read and reread the sacred texts, looking for hidden clues that can bring us a little closer to a knowledge that will ever remain beyond reach. Nature, like the sacred text, is in code, an endless puzzle.

Of course, both Christians and Jews have been extensively secularized, but perhaps this is the point. A deep cultural orientation remains, even as minds turn to worldly problems. Habits of decoding linger on with Jews, who then go into the decoding professions like economics and chess. (A note to non-chessplayers: a professional in this game is someone who is hooked on the question, “What is really happening in this position?”—and has become good at answering it.)

I first glimpsed the outlines of this argument when I read Ricardo’s unpublished essay on “Absolute and Exchangeable Value”. This is a cultural text as much as an economic one, an obsessive peeling away of layers that stands worlds apart from the contented common sense of Adam Smith. And this urge to dig deeper can also be found in Kornai, especially as he documents his thought process during his crucial formative years. The goal remains to discover the true meaning of events, obscured beneath the veil of appearances.

This heightened Jewish presence in the “deep-pattern” fields is transitory. It begins only with the widespread secular assimilation of Jews into mainstream European culture in the nineteenth century, and it is gradually fading away as ancient cultural legacies dissolve, and as disciplines and professions become globalized, increasingly populated by people from countries beyond the Christian/Jewish dichotomy.

On the Foundations of Mathematical Economics

So, here I am doing something way off the usual track here of political economy and all that. In effect, this is a followup on a post I did about a year and a half ago about the centennial of the birth of my mathematician father (1907-1989). So, I have just written a paper with the same title as this post, available at my website, http://cob.jmu.edu/rosserjb (scroll down to the bottom). It comments on a paper written by Kumaraswamy Vela Velupillai that is entitled, "Taming the Uncomputable, Reconstructing the Nonconstructive and Deciding the Undecidable in Mathematical Economics," (yeah, I know, sigh... ). In the opening section of that paper he cites work of my late father in connection with this hairy topic, and says nice things about his work, noting it as homage for his centennial (yes, the paper has been floating around for awhile).

So, there is a special issue of the journal, New Mathematics and Natural Computation coming out to honor Professor Velupillai, and he and the editor of the special issue requested of me that I write a commentary on this specific paper of his, which will be the lead article of the issue, and that I also comment on my father's work in connection with all this. I had never before in my life written professionally about either my father's life or his work, and in the end I was way overdue with this. However, I did finish it finally, and for those of you more interested in what I have to say about my somewhat controversial late father, that is largely in the section prior to the Conclusions, with most of the personal observations in the footnotes. The paper will be the final one in this forthcoming special issue.

An Infinite Loop

Barack Obama tells us we should not investigate American intelligence agents or their overlings who are responsible for torturing hundreds of suspects in their custody. We have to forget about the past, he says, to concentrate our attention on the future. That might be a convincing argument if Obama were going all out for an ambitious program to remake our economy and our relationship to the rest of the world. But the future is on hold because the number one job today is bailing out the financial system, so we can preserve the money moguls who juiced our economy in the past.

Chrysler, Solved

OK, call me a genius, but I think I’ve figured it out. Here’s the situation: there is a small, but nevertheless quite large, car company called Chrysler. Their revenues can’t possibly keep pace with their operating costs and their contractual obligations to retirees and bondholders. They face imminent bankruptcy. This would be costly for many parties, so the government has been trying to find a way to avoid it. The UAW has agreed to substantial concessions, but the bondholders are holding out. Even though Chrysler’s debt is trading at 15 cents on the dollar, the bondholders are demanding 4+ times this. Unless an agreement with them can be hammered out, Chrysler is headed for the junkyard.

So who are these bondholders? Financial institutions primarily, most of whom are recipients of direct or indirect bailout support from the taxpayer. This suggests a solution: give the bondholders all they want, 100% if need be. Then deduct that money from the bailouts in some way that roughly distributes the cost across these same firms, and give it to Chrysler. You want shell games? We can do shell games.

Yes we can.

The Paternalistic Bias of Behavioral Economics

I find I’ve been waking up each morning with the outline of an essay in my head. Each time it’s a different topic, but the routine is the same: I stare groggily at the alarm clock as one part of my mind proposes objections and the other answers them by drawing out finer distinctions. This is terrible for my sleep, and it hasn’t led to anything productive because there is no way to write a new, worked-out essay each day. I’ll use this blog as a place to file these ideas away.

Today’s subject is what behavioral economists study, what they don’t study, and what this tells us about their underlying prejudices. And, as I realized at 6 am, this all goes back to the exchange between Walter Lippman and John Dewey in the 1920s, although I may not get to that here.



The domain of behavioral economics is the failure of individuals to process information according to the dictates of rational goal achievement, the idealized maximization routines one learns in microeconomics. The list is long and includes such issues as probability bias, accounting bias, availability bias, hyperbolic discounting, loss aversion (status quo bias), etc. All of these cognitive traits have been documented beyond dispute by psychologists, and there is now a vast literature demonstrating that they have nontrivial effects on economic decision-making.

But those familiar with psychological research will know that the behavioral insights gleaned by economists are not exhaustive. In particular, it is interesting that one of the biggest research fields in psychology, cognitive dissonance, has barely made a dent in the BE agenda.

The basic idea of CD is that people experience discomfort from holding two contradictory thoughts at once. The main application has to do with the reception of information that violates an individual’s self-conception: if you have chosen to do something, and this choice plays even a modest role in how you think about yourself, you will have a tendency to ignore or reject information that goes against it. The vernacular version of this is “denial”, which we see every day in real life.

I first became aware of the importance of CD in my studies of occupational safety and health. Of all the psychological impediments to rational thinking about work and health, surely denial is the most significant. There was a flurry of interest among economists in this topic following the publication of “The Economic Consequences of Cognitive Dissonance” by Akerlof and Dickens in 1982; I presented a much simpler but also sharper model in my book Markets and Mortality (1996). Researchers in health behavior took note; they had long had CD on their minds and were predisposed to see it in economic dress.

But read the current literature on BE and you will be hard-pressed to find any mention of CD at all. There is no end to studies of defective information processing, but the initial acceptance of information doesn’t make the cut. We have nuanced policy advice in books like Nudge, but the much larger questions posed by CD are off the table. Am I mistaken in thinking that denial, the refusal to acknowledge information that calls into question our economic behavior, is central to the disconnect between environmental knowledge and anemic or nonexistent policy?

So how to explain this? To put it bluntly, I sense bad faith. The topics researched by BE all have this in common: they point to traits that are likely to disappear with enough exposure to decision theory. We don’t succumb to loss aversion, probability bias or these other flaws. This means we can come up with clever schemes to fix them. But CD is another kettle of fish altogether; there is no reason to suppose that the experts (us) are any less likely to be subject to denial than the lay folk (them). In other words, I think behavioral economists find the paternalistic stance of their discipline congenial; there is less interest in pursuing questions that apply equally to their own judgment.

Ah, but what has this to do with Lippman and Dewey? That will have to wait.

Cheney Turns To HooverEconomics

A couple of months ago, I suggested that Dick Cheney actually got something right – see We’re All Keynesians Now. Maybe I spoke too soon:

President Barack Obama's expansion of the federal government into the financial sector is likely to have "devastating" effects in the long term, former Vice President Dick Cheney said in his latest salvo directed at the new White House administration. In an interview on Fox News — portions of which aired Tuesday night — the former vice president said he is "very concerned" about where the Obama administration is taking the country economically. "I worry very much that we're in a situation now where there doesn't appear to be any limitation whatsoever in terms of the spending commitments that this administration wants to make," he said. "Vast expansion in terms of the deficit, but it also says a lot about what they intend for the role of government in this society."

This kind of flip-flop might land the former Vice President a position at the National Review assisting Lawrence Kudlow write copy on economic matters!

Ideological Discrimination in Economics?

Sometime ago I remember reading a study that indicated the way that publications from Chicago trained economists clustered in the Journal of Political Economy and those from Harvard, in the Quarterly Journal of Economics. (Maybe someone recalls the reference.)

I recently came upon an article about the respective hiring patterns of departments of economics, comparative literature, of mathematics. A similar type of clustering occurs in economics, but far more modestly in mathematics, where presumably ideology would not play much of a role.

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1347002

Economists commonly describe the ideological clustering is a division between freshwater and saltwater economists -- because the conservative departments tend to be in the interior and the more liberal along the East and West coasts.

The author does not attribute the clustering to ideological influences, but one might suspect a reluctance of Chicago to dilute its ideological purity with an excessive influx of people who do Harvard or MIT style economics. Admittedly, the difference between these schools is much more modest than it has been in the past.

If one can accept the possibility of mutual discrimination on account of relatively modest intellectual differences, might one be forgiven for suspecting the long-denied discrimination against radical economists?

Another Step Toward Bank Nationalization (Without the “N” Word)

There are two theories about this latest announcement from the Obama administration about bank capitalization, in which unnamed officials tell a New York Times reporter that converting government-owned shares from preferred to common will stretch public resources at no cost to taxpayers. You could take it at face value, as Paul Krugman does. In this case, the government officials (described as “top economic advisors”—is that Larry on the other end?) are amateurs, unaware that both types of share ownership constitute a capital cushion, for the reasons Krugman lays out. I have questioned team Obama’s judgment in the past, but I don’t think this is likely.

The other explanation is that this is a misdirection play, not-so-secretly concealing a significant step toward nationalization. Real nationalization means control, not just ownership, so the switch to common stock is potentially very consequential. Of course, much of the political and financial establishment is terrified at this prospect, so some other explanation was needed. Hence the (absurd) claim that this conversion is simply a technical move that economizes on scarce federal dollars. Of course, you need a compliant press to pick up the decoy and run with it, and the Times is doing its part. Since no reputable economist would make such a goofy alibi publicly, the article has to be anonymously sourced. Check, check and check.

Should proponents of nationalization be dancing in the aisles, or in the lobbies of their favorite financial institutions? While the political deftness of the latest move can be praised, from a policy point of view it continues the flawed process of piecemeal response. Real nationalization has profound impacts on existing private shareholders and creditors. If it is introduced slowly or one bank at a time, it can set off a panic throughout the system, causing financial chaos and severe political blowback. This is why the stress tests are so problematic: there is no immediate action implied if a bank fails—on the contrary, it has half a year to raise more capital after being branded a proto-zombie. No wonder the banks have been waging a preemptive battle to convince us that they shouldn’t be given a failing grade. A real stress test as part of a coherent, comprehensive policy would result immediately in seizure for those who come up short. The same can be said about the scheme to tiptoe gingerly into nationalization via step-by-step share acquisition: there is too long a gap between the banks’ awareness they being eaten and their actual ingestion. During this pause of several months many nasty things may happen.

For what it’s worth, I repeat here my criticism of nationalization as a strategy for rebooting finance. By acquiring the banks, the government acquires their liabilities. The evidence (amplified by rumored forthcoming revisions in IMF estimates of financial losses) is that the public cannot afford to make these claimants whole. This means in turn a complex round of negotiations over how much of a writedown should be imposed on which classes of claims, a politically messy business with system-level consequences. Until these questions are resolved, the banks and other institutions cannot function in a remotely normal fashion. In other words, nationalization isn’t a solution, only another framework in which to grope for one. Granted, it’s a better framework, but there is a superior option. Specifically, it makes much more sense to use scarce public funds to immediately establish public banking facilities that can finance economic recovery, and to allow existing firms to fail. There would still be an ugly season of resolving legacy claims and parceling out defaults, but at least we would have a working financial system humming in the background. I have also made the case for the long term desirability of a public banking sector modeled loosely on the German Sparkassen, so the “good new bank” idea can also be a stepping stone to a brighter future.

The Economy, or is that Moses's Shoe?

Hundreds of thousands of economists around the world pour over their subject. A good number attempt to reduce the economy to scientific laws, which can be expressed as mathematical theorems. Laws are passed and people are taxed, subsidized or even punished in order to promote the economy.

Just what is this economy? Before dismissing this question as naïve or impertinent, consider an almost unintelligible sentence from John Selden (1584-1654), a polymath, whom the poet, Milton, described as "the chief of learned men reputed in this land." Selden wrote: "We commonly are at What's the Reason of it? before we are sure of the Thing." The two short sentences that follow makes Selden's meaning clear: "sure of the Thing. Twas an excellent question of my Lady Connon, when Sir Robert Coggon was magnifying of a shoe, which was Moses's or Noah's, and wondering at the strange shape and fashion of it: But, Mr Cotton, says she, are you shure it is a shoe?"



Just what is this economic shoe? What we call the economy is just an abstraction. We just rope off part of our lives and call it an economy.

Imagine encountering a person totally unfamiliar with our way of life who is hungrily inquiring about his surroundings. Having heard a great deal about our society, our visitor asks to be directed to see the economy. We should we point him?

Is a nursing mother lavishing love on an infant part of the economy? Her child may well turn out to be a scientist whose work will increase the Gross Domestic Product by billions of dollars. But then, we know that adversity helps some people develop. Is someone tormenting a child part of the economy?

Artists squatting in a blighted part of town may be planting the seeds of the next trendy neighborhood, making some property owners fabulously wealthy, while displacing others who cannot afford the gentrified rents. Are these artists part of the economy?

Also, when disaster strikes, people put aside their thought of the economy.

As you might expect, normally inexpensive goods might cost a great deal in the wake of a disaster. For example, after Hurricane Hugo hit South Carolina in 1989, portable generators that normally cost a few hundred dollars sold for thousands. However, most people find the behavior of such profiteers repellant. For example, a Newsweek article of October 30, 1989 described the doubling of bottled water prices after the 1989 San Francisco earthquake as "mind-bending audacity" (p. 10; cited in Samuels and Puro 1991, p. 62).

What was mind-bending? Isn't that what business is supposed to do? Sometimes firms do hold prices steady in the wake of disasters, despite the profits that they could earn by charging what the market might bear (Samuels and Puro 1991, p. 62). For example, Safeway refrained from raising prices immediately after the Alaskan earthquake of 1964 and continued to do so through the month of April. It raised prices in May, only after management decided that the emergency period had passed (Dacy and Kunreuther 1969, p. 116). Truck rates were lowered, but only for those commodities that could not be conveniently shipped by boat -- the competitive mode of transport (Hirshleifer 1987, p. 141).

Wal-Mart burnished its image by delivering supplies in the wake of Hurricane Katrina, but why would the public applaud such actions that violate the logic of the economy? Maybe economists' attention is misdirected and it is not Moses' shoe after all.

Apologies in advance. This is a very hasty and preliminary stab. Comments will be appreciated.

Water and Energy

Finding a solution to the energy problem will not be easy. Water is an even more challenging problem. In my Hainan talk, I mentioned the tension between water and power. Here is another article on the subject, noting the tension between water and solar energy.

http://michaelperelman.files.wordpress.com/2009/04/hainan1.pdf

Beamish, Rita (AP). 2009. "Future Cloudy for Desert Solar Drive." Sacramento Bee (19 April): p. A 4.

"A westward dash to power electricity-hungry cities by cashing in on the desert's most abundant resource -- sunshine -- is clashing with efforts to protect the tiny pupfish and desert tortoise and stinginess over the region's rarest resource: water. Water is the cooling agent for what traditionally has been the most cost-efficient type of large-scale solar plants. To some solar companies answering Washington's push for renewable energy on vast government lands, it's also an environmental thorn. The unusual collision pits natural resources protections against President Barack Obama's plans to produce more environmentally friendly energy."

Animal Cracker

by the Sandwichman

"Picture a square divided into four boxes, denoting motives that are economic or noneconomic and responses that are rational or irrational."George Akerlof and Robert Schiller are doing narrative policy analysis in their book, Animal Spirits. The 'square divided into four boxes' is also known as a semiotic square and is related to an Aristotelian square of opposition.

If they were writing a dissertation...

If they were graduate students writing a dissertation, one of the requirements would be a literature review situating their own work within the established tradition of the methodology they propose to use. There is scant precedent for narrative policy analysis in the contemporary economic literature. So their literature review would have to be interdisciplinary. Authors such as Emery Roe, Hayden White, Paul Ricouer, Roland Barthes, A. J. Greimas and Kenneth Burke would be appropriate references. They might also detour into historical tidbits involving Goethe's Faust and Giambattista Vico's New Science.

The disadvantage of a literature review is that it may appear to many readers as a digression that delays chomping into the meat of the authors' analysis. The benefit is that, presumably, the authors get and demonstrate a more solid grounding in the analytical techniques they are using.

Akerlof and Schiller correctly point out that standard macroeconomics focuses on only one corner of the economic box. They claim that goal of their book is to fill in the other three boxes. The way they attempt to do this, though, is both simplistic -- 'it's the animal spirits, stupid!' -- and overly complex and convoluted: animal spirits is confidence, fairness, bad faith, money illusion and stories. This is not adding apples and oranges. It's adding coconuts, pineapples, broccoli sprouts, condensed milk and hockey pucks.

What Akerlof and Schiller are trying to do here -- propose a counter-narrative to the traditional rational actor model in economics -- is laudable and timely. However, it is also awkwardly executed. The rule is a counter narrative must be at least as parsimonious as the dominant story it seeks to displace (Occam's razor). Akerlof & Schiller's "animal spirits" is a loose and baggy monster made even looser and baggier by the catch-all category of "stories". It's also a doubtful stretch to try to pin credit for their concoction on Keynes. Sure, he referred to animal spirits somewhere but he also talked about green cheese (in reference to money illusion). So what makes money illusion an 'animal spirit' rather than a 'green cheese'? Instead of applying Occam's razor to their animal spirits, the authors have tied themselves up in a Gordian knot.

Previously I have proposed an appropriately parsimonious alternative to the rational actor model. I call it Persona parsimoniae. Instead of rational calculation, Pp's behaviors are guided by habit and custom. Pp has two distinct kinds of needs, absolute or relative, material or symbolic, subsistence or status, necessary or superfluous. And instead of maximizing individual utility through market transactions, physical and social limits to production necessitate non-market social co-ordination of consumption to avoid excessive waste and deprivation. See how simple that is? Three elements, not five, each of them keyed to a characteristic of the dominant model.

Getting back to Akerlof and Schiller's square divided into four boxes, there is a way to label the elements more substantively. They opt for 'noneconomic motives' and 'irrational responses' as the alternatives to 'economic motives' and 'rational responses'. Their alternatives are too vague as a consequence of an over-reach by the standard set. My alternative suggestions would be positional vs. material motives and habitual vs. calculated responses.

There is, in my view, a third element that needs to be incorporated into the semiotic square analysis: outcomes. Makes sense? 1. motives; 2. responses; 3. outcomes. The semiotic square thus becomes a semiotic cube with eight nodes instead of four but potentially six faces instead of only one. Akerlof and Schiller's more limited square is convenient for arguing that there really is only one alternative to the prevailing conventional wisdom of the last 30 or 40 years. They advocate exchanging one set of blinkers for another that perhaps enables a bit more peripheral vision but still blocks out depth perception. I would draw a picture of the semiotic cube but I have a headache. Maybe some other time.

Mankiw: This Has to Be a Joke, Right?

Nominal interests rates have a zero bound, because it is preferable to hold money rather than lend it if rates go negative. But Mankiw and his clever grad student have a solution: let the Fed randomly pick an integer from 0 to 9 once a year and invalidate all currency whose serial number ends with it. Then people would gladly accept negative interest rates to unload their disintegrating cash.



Um, no. I don’t know what they teach at Harvard, but where I work we don’t postpone past grad school the following rather elementary observation: most money is not currency. The most recent Fed data put the monetary base at just under $1.6T, of which about half is in the form of reserves held by member banks at the Fed. M2, which includes the deposit accounts you and I have at our banks and represents a more relevant measure of the money supply, is a bit over 8.3T (not seasonally adjusted). In other words, about 90% of the money supply under a reasonably conservative definition is not cash and bears no serial numbers.

Imagine that.

And even if we could force everyone to trade in the coin of the realm and abjure those newfangled bank accounts, there would still be the international dimension to consider. About half of our dollars circulate abroad; whole countries are even dollarized. Now here’s something for Mankiw to consider: Panama, to take one example, pegs its currency to the dollar but prints the stuff itself to put a local face on legal tender. Can you foresee a spike in demand if they decide to not play the self-destructing digit game?

All of this is bonkers, of course. The more serious proposal in Mankiw’s column is for the Fed to target a particular rate of inflation, but effectively, by publicly opposing deflation, they are already doing that. Money growth has been ample so far (for instance, a 9.4% growth in M2 over the past year); there has been no repetition of the monetary contraction that accompanied the early stages of the Great Depression, just like Bernanke promised. The Fed’s toxic asset buying spree has been a form of open market operations, and monetary expansion has been one of the main sources of its bailout finance. There is general agreement, however, that this particular spigot cannot be opened much further. Enough money creation can always crank out high rates of inflation, but this would set off a run on the dollar, and the willingness of portfolios to accept ungodly amounts of dollars, and dollar-denominated T-bills, is the underpinning for the entire bailout strategy. Surely Mankiw must know this too.

So what’s the point?

Finance Question

What happened what happened with the debate about whether speculation or market manipulation could affect oil prices? I'm wondering because of the recent discussion about the urgency of preventing shortselling. Why would shortselling in stocks have an effect, but not speculation in oil?