Worthwhile Canadian Initiative

The Fed should buy pro-cyclical assets, not bonds

Suppose you believe that the US economy needs increased Aggregate Demand, and needs looser monetary policy to accomplish that, and needs asset purchases by the Fed to accomplish that. (I believe those  things, but am not going to argue them here). What sort of assets should the Fed buy?

I want to divide all assets into two classes: "pro-cyclical" assets and "counter-cyclical" assets. I think the Fed should buy pro-cyclical assets. I'm going to define them in a minute.

Sectoral shifts and the Canadian recession

Last December, I wrote a post on the effects of the recession on various sectors of the Canadian economy. The main results were:

• The service sector was barely affected; most of the losses were in the goods sector.
• Within the goods sector, manufacturing took the brunt of the job losses.

Of course, the losses in the manufacturing sector had to be put into the context of a broader trend of a shift away from manufacturing. I concluded with this:

Given these trends, it's hard to see how the manufacturing sector will be able to make up much more than a small fraction of the 200,000 jobs it lost during the recession. Perhaps all we can hope for is that employment there stays steady until the downward trend catches up to the losses generated by the recession.

That seems to be what happened. Between July 2009 and July 2010, the manufacturing sector added 2,400 jobs. You probably wouldn't call that much of a recovery, except for the fact that this was the strongest year-over-year number in more than five years.

The story of the recovery is below the fold.

Marginal Tax Rate Structure Matters for Wage Inequality

Have you ever had a conversation that completely changed your thinking on a subject?  My thinking on inequality and taxes was radically altered about 10 years ago when my office mate and I were studying for an exam in Robin Boadway's PhD course in Public Finance, and we got to discussing tax rate structure.  During that conversation I was convinced that poorly designed marginal tax rates can increase inequality - so much so that I tend to think of progressivity in tax structure as being as a marginal issue as it is a progressive one (to the point where I forget to remember that this is an idiosyncratic view).  Strictly speaking, it isn't - as defined, progressivity is measured in terms of average tax rates.  So ECON 1000 students - don't use term progressive as I have here - you will get the question wrong.

But marginal tax rates matter in terms of inequality beyond their effects on average rates.  And I can prove it, through the use of a simple stylized example:

Taylor = Wicksell + Fisher + Friedman

Note to all genuine historians of economic thought: yes, I know. There's real history, then there's Whig history, and then there's this blog post.

Federal Taxation of Labour Income in Canada is Regressive (in Terms of Marginal Rates)

Or at least, it is for some ranges of income.  Don't believe me that marginal tax rates are regressive?  Follow me:

Some reasons not to take an undergraduate degree in economics

In a recent post, Nick Rowe speculated that the President of the Federal Reserve Bank of Minneapolis made basic macro mistakes in part because he has an undergraduate degree in math.

Yet a person wanting to make a career as an academic economist (or a president of a federal reserve bank) should not choose economics as an undergraduate major. Particularly in Canada.

The bond "bubble", and why we should be worried about it

In one important sense, there is a "bubble" in US government bonds, and we should be worried about it.

Lithium in the Water Supply and Our Preferences

Big Think on one of my favourite topics - changes in behaviour caused by mineral levels in the body:

Communities with higher than average amounts of lithium in their drinking water had significantly lower suicide rates than communities with lower levels. Regions of Texas with lower lithium concentrations had an average suicide rate of 14.2 per 100,000 people, whereas those areas with naturally higher lithium levels had a dramatically lower suicide rate of 8.7 per 100,000.

Interesting stuff.  But what does it have to do with economics?

What standard monetary theory says about the relation between nominal interest rates and inflation

This is what I understand "standard" monetary theory to say about the relation between inflation and nominal interest rates.

Why "everyone" should be forced to take Intro Economics

The reason is not what you are expecting. It's because maybe if he had been forced to take Intro Economics, the 12th President of the Federal Reserve Bank of Minneapolis, who holds a PhD in Economics from the University of Chicago, who is a specialist in money and macro, who has a CV that creams mine 100 times over, would not be making mistakes like this. (H/T Andy Harless via Scott Sumner).

Monetary policy as asset prices

As every economist knows, interest rates don't really exist. They are a mathematical construct derived from observed bond prices. Take a really simple example: suppose a bond (OK, a bill, if you want to be picky) promises to pay $100 one year from today. We observe that bond to be trading at a price of $95 today. Then with the aid of your calculator, you can derive the implied interest rate on the bond as i = ($100/$95)-1 = 0.053 = 5.3%. The calculation is a little more complicated for bonds that promise a stream of payments into the future, rather than just one lump sum, but it's just the same. We observe the bond price, we can calculate the implied interest rate, if we want to.

The census, evidence-based policy analysis and a reversal of roles

One of the least edifying aspects of the census debacle is the government's spin to the effect that that the only people who oppose its decision to make the long form voluntary are 'left-wingers', so their concerns can therefore be dismissed out of hand. One version of this meme takes the form of the argument that sabotaging the census is part of a broader strategy to diminish the importance of government in the lives of Canadians. If there are no data to guide would-be social engineers, so the reasoning goes, then they will be prevented from expanding the reach of the State into new spheres.

This is a puzzling argument, and not only because it is based on a non sequitur. It betrays a fundamental misreading of the history of the Canadian welfare state and of how evidence-based policy analysis has evolved over the past two generations. Before the census became an issue, the Left, not the Right, was the more determined opponent of evidence-based policy analysis.

Free Policy Research Journals for Laypeople (and Economists)

Given our conversations this weekend, this could not have come at a better time.  I just received this from Facebook friend and all around good guy Bruce Bartlett - Free Economic Journals.   Contains journal articles and policy papers from U.S. government departments such as the BLS, academic journals such as the Journal of Economic Perspectives and journals from think tanks such as Cato.  Enjoy!

Liquidity and the housing market Phillips Curve

I think it is a stylised fact of the housing market that, on average, houses sell quickly when house prices are rising, and sell slowly when house prices are falling. (I am talking about house prices rising or falling relative to trend). There is a negative correlation between the rate of change of house prices (relative to trend) and the length of time houses stay on the market before selling. Why should this be so?

This stylised fact is very much like a housing market Phillips Curve. When prices are rising unemployment is low (houses sell quickly). When prices are falling unemployment is high (houses sell slowly). Thinking of this stylised fact as a Phillips Curve leads immediately to the following two theories:

Why Does the General Public Have Such a Flawed View of What Economists Do?

The comments on the post Neo-classical economics is dead. Sort of. and Why economics textbooks are (sometimes) ideological show there is a fundamental disconnect between what economists do and what the general public thinks we do.  There's also a fundamental disconnect on what economists believe and what the general public thinks we believe.  And it's mostly our fault.  Why?

The Bank of Canada's balance sheet reverts to its pre-crisis state

Last Friday's Weekly Financial Statistics release marks the end of the Bank of Canada's policy of providing liquidity to financial markets by means of securities purchased under resale agreements (SPRA). In the first three months following the introduction of these measures in September 2008, the Bank's balance sheet increased by 56%, and almost half of its assets - some $38b - took the form of SPRA (see also this post).

Why economics textbooks are (sometimes) ideological

In a recent comment on Worthwhile Canadian Initiative Tom Slee shared this experience:

...{W]hen my son comes back from an Economics 101 course at an Ontario university and shows me bald statements like these from his textbook (Parkin and Bade) then I have no problem with using a broad brush to criticize the profession:... "Arguments that protection is necessary for infant industries and to prevent dumping are weak." (yes, that is the entire bullet point) and "Arguments that protection saves jobs... are flawed".

He told me that in the multiple choice section of the exam it was easy to get the right answer - just look for the most right-wing, free-market one of the options.

You can test Tom Slee's son's theory yourself:  http://www.econ100.com/ has on-line quizzes matching the Parkin and Bade text, along with solutions.

I have no opinion on the Parkin and Bade text one way or the other.

The point of this post is to give two reasons why one would expect textbooks to be ideological.

Time Spent on the Long Form Census

This is a fairly obvious point, but I don't recall seeing it discussed anywhere.  When we examine the costs of a public policy, we not only need to consider the financial costs, but other opportunity costs as well.  Take, for instance, the costs of an election.  We not only need to consider the financial costs of the election, but we need to consider the fact that it takes time for people to get to the polling station and vote - time they could have spent doing something else.

Now what does this have to do with the long form census?

Neo-classical economics is dead. Sort of.

Ten years ago, David Colander wrote an obituary describing "the death of neo-classical economics." Sort of. Strictly speaking, he was calling for economist-assisted terminasia:

Liquidity and used cars; liquidity as the slope of the round-trip curve

Conclusion: liquidity should not be measured by the cost of a round-trip from money into the asset and back to money. Instead, liquidity should be measured by the slope of the curve relating the cost of a round-trip against the time taken to make that round-trip.

Liquidity has puzzled me for a long time. It's clearly important, but what exactly does "liquidity" mean? It's tempting to say that we first need to define "liquidity" precisely before we can talk about why it matters and what determines it. But I think that's got it the wrong way round.