Monday, 16 February 2015

Let clear thinking blossom

I love Lesley Riddoch's Blossom. It contains lots of ideas that I really want to spend time thinking about on the interplay between local autonomy and productivity. Eventually I may write a proper review... However, even towards things that you really like, it's often easiest to react to aspects you don't like. And I don't like the confusion between investment in human capital, and the use of capital spending as countercyclical fiscal policy. So I'm going to react...

As Nick Rowe makes clear in "Human Capital" and "Land Capital", the term capital is used to capture a concept related to time. Spending on early years' intervention, in the sense that it produces a "return" 20 years + later in the form of a more productive and educated next generation, is capital spending. Spending on childcare, in the sense that it allows parents to improve and maintain their skills in the workplace, which will boost their income into their 40s, 50s & 60s, is capital spending. No doubt about it.

However, Riddoch says "when capital investment is under discussion, childcare is rarely mentioned. ... Scottish politicians and civil servants have backed construction projects as the best way to kick start the economy, restore optimism and provide jobs. ... in 2013, Scotland's Finance Secretary, John Swinney, published a list of preferred 'shovel-ready' projects including £34 million worth of trunk road schemes, a £5.7 million revamp of ferry ports, £308 million for NHS buildings and £65 million on college upgrades. ... 2013 could just as easily have been the Year of the Soft Hat - with £394 million invested in human capital, not road junctions."

The rationale for using "capital spending" as countercyclical fiscal policy is that it can be lumpy, not that there is something magical about capital spending relative to revenue spending in terms of boosting the economy (at the margin). If the government wants to build a public physical asset which has a lifetime of 40 years, it doesn't really matter whether it does it this year or next year, therefore it is best to do it when private demand is low to stabilise overall economic activity. However, if a programme of early years' intervention is deemed valuable, then we cannot wait for the economic cycle to implement it - it has to be done at specific ages of the children. Childcare programmes could be shut down in a booming economy - but this wouldn't be consistent with expectations of parents, and would likely be very politically unpopular. The inflexibility over time of the spending decisions on such programmes means that they are very properly regarded as revenue spending programmes - even if they do build human capital.

Lesley Riddoch is absolutely correct to argue for such spending programmes, but not to present them as alternatives to construction projects for countercyclical fiscal policy: such programmes cannot be used countercyclically.

Sunday, 1 February 2015

End January Links

# Several great posts from Chris Dillow:
   - The Diversity Paradox: "there are (at least) three distinct meanings of the term [Diversity]. One is ethnic and gender diversity - ensuring that women and minorities are fairly represented in positions of power and prominence. A second is cognitive diversity - giving space to different intellectual perspectives. And a third is ecological diversity: having a variety of strategies and business models. I would argue very strongly for diversity in the last two senses.A multiplicity of perspectives ... can be a solution to the problems of (tightly) bounded knowledge and rationality; ... And ecological diversity can protect economies from shocks... In a changing environment, mixed strategies help ensure survival." He's not arguing against the first type of diversity, but making the point that the other two are very important and are given much less attention.
   - In praise of complexity economics which has a lot of good links
   - Who bears risk? "it is workers rather than capitalists who are risk-takers"
   - Heterodox economics and The Left
   - Basic Income: Some issues

# Interesting post from Interfluidity on economics of Uber: economists' knee-jerk assumption that rationing taxi-cab space using price is the optimal mechanism is, at the very least, dodgy.

# Interesting research highlighted by RES: Inequality in big cities: Why urbanisation makes the world more unequal

# I like the whimsical way Nick Rowe thinks, and his Did inflation targeting destroy its own signal? post with apples, bananas and inflation targets is a good example (followed up with A simple model where NGDP targeting beats inflation targeting)

# Some economics in the Hari Seldon/Psychohistory mould from globalinequality: Can Black Death explain the Industrial Revolution?

# The "Carbon Bubble" is in the news: Most fossil fuels 'unburnable' under 2C climate target, & Fossil fuels: The 'untouchable reserves' - I need to get my paper published!

# Simon Wren-Lewis discusses When central bank losses matter: "the effectiveness of QE is highly uncertain compared to the effectiveness of direct transfers to citizens or public works [as a means of stimulating the economy in the short run]. We seem to be stuck with an ineffective form of stimulus, because something more effective is taboo, or goes by a different name. To repeat it in a simple but more provocative way: a central bank giving money to people or governments is out of the question, but a central bank giving money to parts of the financial sector is just fine. That is a very convenient taboo for some."

Bitcoin revealed: a Ponzi scheme for redistributing wealth from one libertarian to another: "The key here is that the math problems the miners have to solve get harder the more of them there are. If there's a big influx of miners, say, because of a big bubble that pushes prices into quadruple digits, then there's even more pressure on everybody to upgrade to the latest supercomputers to stay competitive. The thing about the latest supercomputers, though, is that they're expensive to buy and expensive to run. .... So miners had to borrow lots of money to try to keep up in the Bitcoin arms race. But all that borrowing hasn't paid off now that Bitcoin prices are free falling. In fact, it's part of the reason that they're doing so. Bitcoin prices are so low, you see, that miners are spending more money running their supercomputers than they're making from new coins. So why are they still going? Well, they have dollar debts that they need to pay back, and where else are they going to get the money? They're stuck, in other words, in a catch-22: they can't afford to keep mining, but they can't afford to stop mining, either. (This, coincidentally, is the same dilemma that oil drillers who borrowed a lot during the boom face now during the bust). This has already forced one big mining group into default. And it's forced the rest to sell the only assets they have—Bitcoins—to pay back their dollar debts. That, of course, only pushes the price of Bitcoin down even further, which makes even more miners sell their Bitcoins to pay back they owe as mining becomes more unprofitable. And so on, and so on."

# Two opposing views of impact of inflation on real wages: MR asks Why is deflation continuing in Europe and Japan? and notes that "Most countries have labor market incumbents with sweet real wage deals, deals which could not be renegotiated anew today because the world has seen a repricing of labor downwards for the wealthy countries. Higher rates of price inflation would cut into those deals and thus high rates of price inflation are unpopular.", whereas Chris Dillow notes that "in the longer-run, real wages aren't affected by inflation. If they were, we could achieve higher wages by (credibly) reducing the inflation target - but nobody believes this". To the extent that expansionary policy would benefit real GDP in a demand-constrained world (without impacting upon the labour share), it has to be the case that average real wages would be boosted by inflation. But I think MR is right and there is a large cohort of incumbants who would be worse off. Rather, expansionary policy is likely to benefit the young, new hires, and the newly promoted.

It’s Scotland, Wales and Northern Ireland that can deliver the New Deal we need "the government [should] capitalise investment in the economy by buying bonds issued by regionally controlled investment banks in Scotland, Wales, Northern Ireland and the English regions. Those investment banks would then work with regional governments, local authorities, housing associations, NHS trusts and others to deliver the infrastructure this country needs. Part of that would be green green energy driven, I am sure. Part would be straight need: much of that would be housing. All would be local. And without exception it would create jobs in every constituency in the UK. This could be the economic stimulus Scotland needs on top of its new borrowing powers."

# Harry Burns say Social failure, not lifestyle, has made Scots sick "widening health inequality in Glasgow is due to the recent emergence of socially determined causes of early death. What happened to cause this? During most of the 20th century traditional industries, such as shipbuilding and steel, provided secure, meaningful employment for Glasgow. These industries declined in the 1970s as companies shifted production abroad. Skilled people left and those who remained struggled to find jobs. At the same time, communities changed as inner-city tenements were replaced by peripheral housing estates which lacked the same social cohesion. From this emerged a society with a deep sense of alienation. ... what we are seeing in Scotland is the consequence of austerity in the 1970s and 80s, when social change and joblessness led to a breakdown in family life and a cycle of alienation."

# A fantastic principle through which to think about the Greek situation: Debt restructuring: a proposed principle "there should be no significant increase in unemployment above its natural rate ... as a direct result of having to pay interest on any government debt. Unemployment above the natural rate when there is no excess core inflation is a waste of resources as well as being damaging to most of those unemployed, so any deal that creates such unemployment, or allows it to persist, should be regarded as the result of creditors acting against the social good. ... it involves creditors acting against their own self-interest, because the more of an economy’s resources you waste, the less is available to pay its debts."