Wednesday, June 12, 2013

Keynesians, Remember: Tax Policy Is Fiscal Policy

According to an AER article by Correia, Farhi, Nicolini and Teles:
When the zero lower bound on nominal interest rates binds, monetary policy cannot provide appropriate stimulus. We show that, in the standard New Keynesian model, tax policy can deliver such stimulus at no cost and in a time-consistent manner. There is no need to use inefficient policies such as wasteful public spending or future commitments to low interest rates.
My own interpretation:
(a) Wasteful government spending? Always better to do nothing (CHECK).
(b) Forward guidance, quantitative easing? Always better to do nothing (CHECK).
(c) Reduce the tax load? Maybe (CHECK). But be prepared to pay the price later (CHECK).

Jeffrey Tucker on the Character of Edward Snowden

Jeffrey Tucker writes an interesting article in The Freeman about the important role played by people like Edward Snowden in the defense of freedom. This Orwellian statement by Snowden is particularly significant:
You can't come forward against the world's most powerful intelligence agencies and be completely free from risk because they're such powerful adversaries. No one can meaningfully oppose them. If they want to get you, they'll get you in time. But at the same time you have to make a determination about what it is that's important to you. 
And if living unfreely but comfortably is something you're willing to accept—and I think many of us are, it's the human nature—you can get up every day, you can go to work, you can collect your large paycheck for relatively little work, against the public interest, and go to sleep at night after watching your shows.

Tuesday, June 4, 2013

The Bastiat in a 7-Year-Old Boy

Conversation with my son Arnaud, age 7, last Sunday during lunch:

Me: "You know son, there's this great French economist Bastiat, he writes some cool stories, I think you'd enjoy reading his books."

Arnaud: "Oh yeah?"

Me: "Yes, kind of like Aesop fables [which he loves]. But his stories are real ones, about the economy, written 150 years ago."

Arnaud: "What did he write about?"

Me: "One story is about a child that breaks one of his home's window glass panes. His father is mad at him, but passersby say that this is good for the economy, so he shouldn't be mad."

Arnaud [startled]: "WHAT?"

Me: "What 'WHAT'?"

Arnaud: "Who are those silly people that would say something so stupid?"

Me: "Why do you think it is so stupid?"

Arnaud: "Because it's so obviously bad for the economy."

Me: "Is it? The passersby believe that if the broken window needs to be fixed then it will create work for the window repairman."

Arnaud [chuckling]: "This is so stupid... If his father spends the money fixing the window, then they won't have money for buying a new Lego set (did they have Lego sets at that time?), so it's obviously bad for the Lego factory. And the family now has the same window but no new Lego set, so the economy is worse off."

Me to my wife: "Isn't it telling that a 7-year-old boy knows more economics than most central bankers and finance ministers in this world of ours?"

Thursday, May 30, 2013

My Personal Reading of Ayn Rand's "Anthem"

I chose to free myself from Christianity, Catholicism and its catechism during my early adolescence. Reading Voltaire's God and Human Beings was important in my intellectual transformation, but I also remember how Bertrand Russell's essential essay titled "Why I Am Not a Christian" turned to be the final nail in the coffin of my Christian beliefs.

Ayn Rand's "Anthem," to my surprise, rekindled my teenager memories of intellectual struggle with religion. Less surprisingly, it also made me think of my second liberation, which took place a few years later when I rejected socialism. It didn't take me much at that time to realize that socialism was mostly a perversion of Christianity, one that was useful to me only as a temporary buffer between an impractical and obsolete code of conduct and the dangers of Rand's "uncharted forest" - the latter a perfect metaphor for my early political and economic ignorance.

Like Bertrand Russell, Ayn Rand wasn't fond of Christian values. According to a letter that she wrote in 1946:
There is a great, basic contradiction in the teachings of Jesus. Jesus was one of the first great teachers to proclaim the basic principle of individualism -- the inviolate sanctity of man's soul, and the salvation of one's soul as one's first concern and highest goal; this means -- one's ego and the integrity of one's ego. But when it came to the next question, a code of ethics to observe for the salvation of one's soul -- (this means: what must one do in actual practice in order to save one's soul?) -- Jesus (or perhaps His interpreters) gave men a code of altruism, that is, a code which told them that in order to save one's soul, one must love or help or live for others. This means, the subordination of one's soul (or ego) to the wishes, desires or needs of others, which means the subordination of one's soul to the souls of others.
This is a contradiction that cannot be resolved. This is why men have never succeeded in applying Christianity in practice, while they have preached it in theory for two thousand years. The reason of their failure was not men's natural depravity or hypocrisy, which is the superficial (and vicious) explanation usually given. The reason is that a contradiction cannot be made to work. That is why the history of Christianity has been a continuous civil war -- both literally (between sects and nations), and spiritually (within each man's soul).

Saturday, May 18, 2013

The Privately Managed Library of My Childhood

The library in Brasilia, Brazil, from which I would borrow the books that I read during my childhood was privately managed. Member families paid monthly fees to support the library and also paid for literature and crafts classes. It was a wonderful place of discovery, and it didn't need authoritarian, centralized, inefficient and corrupt government to work. The library didn't survive the changes in demand and supply for its services and has been replaced some time ago by an English school for kids.

You may say that this tiny institution served the interests of an economic elite. Not at all. The only elite that it served was an intellectual one, families that cared about books, literature and arts, and that considered cultural spending to be a priority. In our case it was so highly ranked in the family's budget that membership survived two oil shocks and a debt shock, while during the same period our consumption of beef was cut down to almost zero. Families that wouldn't pay for membership clearly had other priorities in life, such as watching soap operas on expensive TV sets.

And no spending on public libraries by the Brazilian government has ever changed this simple reality.

Friday, May 17, 2013

Intrade and Financial Mischief

The Financial Times suggests that financial mischief may explain the insolvency of Intrade, company renowned among the proponents of prediction markets:
A company audit earlier this year revealed that its founder John Delaney, who died while climbing Mt Everest in May 2011, had received $2.6m in insufficiently documented payments from the company in 2010 and 2011. Mr Bernstein confirmed that the legal action the company would pursue was related to those transactions.

Saturday, April 6, 2013

7th Art: Hell on Wheels, 2nd Season (2012)

The second season of Hell on Wheels is fantastic. It escapes from the most obvious American series cliches by showing anti-heroes lacking almost any quality or decency and through a depiction of violence that is repugnant and realistic. It's not sadistic, not moralistic, and not condescendent. It's just realistic.

The jump in quality from the first to the second season follows the rejection of PC and multiculturalist formulas. I hope more American productions will follow its example.

Friday, April 5, 2013

Would You Die for Free Trade?

Since David Ricardo it's impossible to ignore the fact that free trade is good for the global economy and for humanity. Yet, even when this fact is rationally acknowledged, the most stubborn anti-traders will frequently argue that it's not fair to ask a minority of compatriots to temporarily sacrifice their standards of living in order to improve the lives of the rest of humanity.

Leaving aside the fact that it's perfectly possible to design compensation mechanisms, and that nobody should have rights to stable power rents, consider the following political paradox: in all countries that I know of, it's normally assumed by a large part of the population that it's "honorable to die and kill for the sake of their fellow countrymen and countrywomen," and that "it's your duty to serve your country through sometimes regretful but necessary violence and exposure to danger." Why is it then that these same people, most of the time, don't necessarily assume that it's much more honorable to service all countries through small and temporary personal sacrifices and joyful and necessary economic cooperation? Why is it that both the left and the right refuse to apply to free trade, global peace, international cooperation, and the good of humanity the same moral standards that they apply to military service or most other sacrificial collective duties?

I believe that the answer to this paradox is that people living in modern nation-states develop cognitive dissonance through brainwashing, and that the dissonance persists because it's an important enabler of power grab, which in its turn leads to continuous brainwashing. If you think that you have a better explanation, then I'd be curious to hear from you.

Monday, March 11, 2013

Hamilton on the Fiscal Crunch

The third post in a row about this important subject. According to James Hamilton:
A fiscal crunch would force a central bank to pursue inflationary policies, a situation that's called fiscal dominance. If the Federal Reserve does not monetize the government debt (by purchasing it or, in other words, by printing money), then interest rates will rise sharply as private lenders demand a higher rate. These higher interest rates will cause the economy to contract. Indeed, without monetization, the government could end up defaulting on its debt, which would lead to a financial crisis, producing an even more severe economic contraction. The central bank would be forced to purchase ever increasing quantities of government debt by printing money, eventually leading to a surge in inflation.  ... The grave scenarios we outline here do not have to happen. Since the debt-to-GDP ratio is likely to stabilize over the next few years, there is time to avoid the dire potential problems we have highlighted. But with the gross-debt-to-GDP ratio already well above the 80% threshold-- and likely to resume a steady climb by the end of this decade-- the clock is ticking.

Friday, March 8, 2013

The Effects of a Large Government Debt on Monetary Policy

John Cochrane wrote an insightful article on the subject. It made me think of very similar problems that Brazil faced while I worked with the country's Treasury and later with its Central Bank during hyperinflation. I had the opportunity to observe similar institutional games taking place from both perspectives. Here's a sample of his article:
Monetary policy depends on fiscal policy in an era of large debts and deficits. Suppose that the Fed raises interest rates to 5% over the next few years. This is a reversion to normal, not a big tightening. Yet with $18 trillion of debt outstanding, the federal government will have to pay $900 billion more in annual interest. Will Congress and the public really agree to spend $900 billion a year for monetary tightening? Or will Congress simply command the Fed to keep down interest payments, as it did after World War II, reasoning that "Fed independence" isn't worth that huge sum of money?
This additional expenditure would double the deficit, which tempts a tipping point. Bond markets can accept fairly big temporary deficits without charging higher interest rates—buyers understand that bigger deficits for a few years can be made up by slightly larger tax revenues or spending cuts over decades to follow. But once markets sense that deficits may be unsustainable, and that bond buyers may face default, restructuring or inflation, they will demand still-higher interest rates. Higher rates mean higher deficits—leading to a fiscal death spiral.

Thursday, March 7, 2013

Le vin a civilisé l'homme

« L'homme a domestiqué la vigne, mais le vin a civilisé l'homme. ... La vie sans bonheur, sans plaisir, est un voyage interminable. » David Khayat, oncologue et œnophile.

Latin America: Social Development or Dutch Disease?

Augusto de la Torre and Julián Messina solve a Latin-American puzzle (the combination of lowering income inequality and low labor productivity growth):
Dutch disease? This hypothesis may be stated as follows. The extended boom in commodity prices induced, through the appreciation of the real exchange rate, a substantial reallocation of resources (including labour) from non-commodity tradeable sectors to non-tradeable sectors. Provided that the latter are relatively less intensive in skilled labor, this reallocation would reduce the skill premium and the returns to education, bringing down wage inequality. ... Undoubtedly, this is a luminous and welcome fact for a region historically scarred by excessive inequality. This positive news, however, seems to hide a dark side: the specialisation of the region’s economies in activities that are relatively low in skill intensity and that therefore tend to be of lower productivity.

Wednesday, March 6, 2013

Unsustainably High TIPS Prices: What's Next?

As was anticipated in this blog last October: TIPS funds have paid an annualized return rate of around 2.5% during the last six months, and more recently the return rate has been closer to zero and even negative. It now underperforms nominally-guaranteed fixed income funds such as Minnesota Life (3% in fixed dollars) and nominally-guaranteed long-term savings accounts in Europe, which pay 2.5% or above in euros or Swiss francs. To put it short, real interest rates are so low that they cannot fall further even under a future scenario of financial repression and high inflation. Much on the contrary: if inflation rises, real interest rates will have to rise, no mattering how accommodative is the central bank policy.

To make things worse, this situation is financially and fiscally unsustainable, causing nominally-guaranteed funds to become insolvent or to need massive government subsidies to private savings, the latest leading to all kinds of obvious financial and fiscal distortions. This phenomenon took place from time to time in Brazil during the years of financial repression that preceded hyperinflation and fiscal chaos.

How to Avoid the "Resource Curse"

Excellent article on how resource-rich nations can avoid the "resource curse." According to Francisco Carneiro:
Resource wealth will not be successfully used to promote wealth and shared prosperity if institutional quality is neglected. Remember that the extractive industries, due to their enclave characteristics, can be operated in weak institutional environments. This is not the case for most other industries that require an adequate investment climate to thrive. In these cases, achieving success will depend not only on human capital development, but to a greater extent, on strong enforcement of contracts, laws, and a generally strong business environment.

Wednesday, February 27, 2013

Caplan on Indian's Political Leaning in America

Another very interesting post by EconLog's Bryan Caplan:
Consider Indians.  They are now the highest-income ethnicity in the country - and their Democrat/Republican ratio is roughly 4:1.  Accusing them of voting Democratic out of crude self-interest is plainly absurd.  In terms of values and family structure, moreover, Indians make most Americans look like a bunch of hippies.  Why then do Indians vote like Hispanics?
I'm open to alternative stories, but I think my Respect Motive story fits the facts quite nicely. Indians vote Democratic because they correctly sense that Democrats respect them more.  When the typical Republican see women in saris or statues of Ganesha, or hears about arranged marriages and great Indian restaurants, they react less positively than the typical Democrat does.

Sunday, February 24, 2013

It's a Long Road to the Top (If You Wanna Be a Professor)

According to The Atlantic's Jordan Weissmann:
With tenure relatively rarer than it was 30 years ago, it's fair to assume that an even larger portion of tomorrow's full professors will come from the Ph.D.'s who land academic jobs off the bat. And as we've seen, that group is getting pretty small.

Thursday, February 21, 2013

Continental Europe's Silly Obsession with FTTs

Continental Europe will shoot itself in the foot thanks to its childish obsession with financial transactions taxes. The Economist explains:
"A Bank of Canada analysis of the effect of previous FTTs found that they tend to harm market quality, by increasing volatility, reducing volumes and raising the cost of capital. The early effect of a French equity FTT that was introduced last summer was to hit trading in the shares of smaller firms. Without a co-ordinated global approach, the taxes are also likely to be circumvented by savvier investors, leaving retail investors to pick up the bill. After Sweden levied an FTT in the 1980s, 60% of trading volume in the most actively traded share classes moved to London; the tax was repealed in 1991."

Wednesday, February 20, 2013

Keynesians and Other Snake Oil Peddlers

Economists that despise fiscal discipline - those that believe that the word "austerity" is pejorative - may hysterically scream as much as they want, but one real, obvious, always proven macroeconomic fact is that fiscal discipline eliminates internal and external macroeconomic imbalances, as economists with the IMF used to know, and as exemplified by Latin-American and Asian economies in the 80s and 90s and by European economies now, see these recent news:

Italy Posts First Full-Year Trade Surplus Since 1999

Exports Drive 33.6% Reduction in Spain 2012 Trade Deficit

Greece December Current Account Deficit Narrows Sharply

Monday, February 18, 2013

Another Keynesian Dogma Demystified

Confirmation bias is widespread in social sciences, and economics has plenty of it, as the dogmatic, pro-state and self-interested defense of Keynesian multipliers exemplify so well. Garett Jones gives a good example of research that demolishes prevalent misconceptions:
One problem with estimating the effect of government purchases on the short-run economy is that government spending is responding to the economy in real time: government dollars aren't dropped in randomly, like in a lab experiment. ... It could make government spending look better than it really is: maybe governments are more likely to go on a spending spree when a free-market recovery is "just around the corner" all on its own. ...
The conventional Keynesian (and New Keynesian) story has been that government spending should get more bang for the buck--a bigger multiplier effect--when the spending happens during a deep recession.  A new paper by Owyang, Ramey, Zubairy uses news about changes in future military spending as a kind of natural experiment* to test this idea: [W]e find no evidence that multipliers are greater during periods of high unemployment in the U.S.

Sunday, February 17, 2013

Why the Euro Works, in One Paragraph

Harold James at explains, and the whole text is worth reading:
Solving the question of the German current accounts in the European setting at first appeared to require some sophisticated and ingenious political mechanism that would force French politicians to do more austerity than they would have liked, and Germans less price orthodoxy than they thought they needed. A political mechanism, however, requires continual negotiation and public deliberation that would have been painful given the policy preferences in the two countries (and in those countries that lined up with each one of the Big Two). The increased attraction of monetary union was that it required no such drawn-out political process. Monetary policy followed automatically from a decision to adopt price stability as a goal. The operation of an entirely automatic device would constrain political debate, initiative, and policy choice.

Friday, February 15, 2013

McKinnon on the Fatal Mistakes of the Federal Reserve

According to Ronald McKinnon, and I fully endorse his views:
US officials point to the stagnant US economy as the reason they want to keep domestic interest rates as low as possible—even zero. They must be convinced that this common view is mistaken, and that raising short-term interest rates on dollar assets from zero to modest levels—say 2%—jointly with their peer central banks in developed countries is in America’s own best interests, as well as that of the rest of the world. The longer the Fed’s zero interest rate policy stays in place, the more difficult it becomes to get out of the resulting liquidity trap and restore a more normal flow of financial intermediation within the USA—so as to avoid the perpetual stagnation we now see in Japan, sometimes called “Japanization.”

Wednesday, February 13, 2013

7th Art: Lazy Company (2013)

Lazy Company is a silly French comedy about the invasion of Normandy narrated from the perspective of American combatants. Not exceptional until now, but silly enough to make it fun to watch.

My outsider take: another example of the lasting positive impact of the US WWII campaign in France, despite 70 years of efforts by communists and socialists to denigrate it.

Lazy Company : le générique en HD par OCS

Monday, February 11, 2013

Brazil, Bureaucratic Empire

Brazilian party labels may change, but political attitudes are eternal: a nation captured by politicians and bureaucrats, immersed in historical statism, where "successful entrepreneur" means nothing else than "skillful rent seeker." According to this no-news report from the New York Times:
While civil servants in Europe and the United States have had their pay slashed or jobs eliminated altogether, some public employees in Brazil are pulling down salaries and benefits that put their counterparts in developed countries to shame.
One clerk at a court in Brasília, the capital, earned $226,000 in a year — more than the chief justice of the nation’s Supreme Court. Likewise, São Paulo’s highway department paid one of its engineers $263,000 a year, more than the nation’s president.

Sunday, February 10, 2013

The Coming Credit and Real Estate Twin Crises in Brazil

Lessons not learned, same old mistakes: Brazil reproduces the government missteps that led to the financial crisis of 2007 in the US. According to my friend Adolfo Sachsida in the Washington Post:
President Dilma Rousseff is using federal subsidies and state-bank loans to boost housing after economic expansion slowed for a second year in 2012 and mortgage growth declined. Home price gains are also decelerating after rising 58 percent since 2010. 
“The market is trying to correct itself” and “the government is throwing more money at it to keep it expanding,” said Adolfo Sachsida, an economist in Brasilia at the Institute for Applied Economic Research, a federal government agency that evaluates public policy. “This market employs a lot of people and they want to keep it heated so employment doesn’t drop.” 
Rousseff is pumping more money into the housing market even as interest rates remain at the lowest in Brazil’s history, and annual inflation is running above the central bank’s target for 29 months. As economic growth fell to the slowest pace among major emerging-market economies last year, she nearly doubled spending on Brazil’s plan to build 2 million low-income homes by 2014, a goal made more expensive as preparations for the World Cup being held that year, and the Olympics in 2016 contribute to higher construction costs. 
The amount of home loans outstanding grew 38.2 percent in 2012, down from a pace of 44.5 percent in 2011 and 51.1 percent in 2010, which was the fastest since 1992, according to central bank data. Total credit outstanding increased by 16.2 percent last year.
The government’s measures are helping to sustain prices, setting the stage for a fall once interest rates climb from record lows, according to Sachsida, who co-authored an IPEA report last August that said the government is fostering a real- estate bubble.

Wednesday, February 6, 2013

Anchors Aweigh!

Nominal anchors don't like floaters. The US Treasury is receiving so many A scores that it may soon be at the top of the honorary roll call of "How to create hyperinflation 101":
U.S. to Offer Floating-Rate Notes Within a Year
Hint for the next exam: time to review some ancient lessons on how to "dry the ice."

PS: Fischer & Summers (1989) is a classic on indexation (HT to Larry White).

Wednesday, January 30, 2013

WTO and Piracy as Legal Retaliation

Curious WTO dispute development involving legal piracy according to Freakonomic's Kal Raustiala and Chris Sprigman:
Back in 2007, the tiny islands prevailed in trade court against the U.S., successfully arguing that U.S. laws restricting Internet gambling violated the trade in services provisions of the WTO. But then they faced a conundrum. What could they do to punish the U.S.? Antigua’s proposed solution was to “suspend obligations” in the area of TRIPs. In other words, it would start ignoring certain copyright and patent rules.

Caplan on the Social Pressure to Lie

Ridiculing skeptics may make them shut up.  But when you do so, you're promoting not truth, but mere conformity.

Friday, January 25, 2013

The Absurdity of Rental Prohibitions in America

Having been victimized once by rental prohibitions in the US, I became since then very suspicious of rankings that put the country not at the top but ranked relatively high in respect to property rights. Sure, the wealthy are able to keep their wealth untouched - crony capitalism and corporation bailouts abound these days. Odd things have been happening  however to American economic values and the legal framework is not in place to protect small owners like it does in other polities. News like this one:
A court will consider whether homeowners have the right to rent out their property
are unimaginable in regions marked by solid cultural and legal traditions of respect to property rights as in most of Western Europe and, ironically, even in parts of Latin America - consider the example of Chile and, in the case of rental rights, even  Brazil has sounder traditions.

Tuesday, January 22, 2013

The "Anti-Austerity" Ideal Proxy

No better representative of the "anti-austerity" fraudulent mindset:
As an ex-presidential consultant, a former adviser to the World Bank, a financial researcher for the United Nations and a professor in the US, Artur Baptista da Silva's outspoken attacks on Portugal's austerity cuts made the bespectacled 61-year-old one of the country's leading media pundits last year.
The only problem was that Mr Baptista da Silva is none of the above. He turned out to be a convicted forger with fake credentials and, following his spectacular hoodwinking of Portuguese society, he could soon face fraud charges.

Friday, January 18, 2013

The Golden Rule of Public Budgeting

Preposterous news in the mainstream press announcing that California has "balanced its budget" made me think of my experience in budget and treasury offices in Brazil and, what I came to understand, is the golden rule of public budgeting: a deficit is never as small and a surplus is never as large as they are reported to be.

Wednesday, January 16, 2013

Trustworthy-no-more Depositories

FRANKFURT, Jan 16 (Reuters) - Germany's Bundesbank plans to bring home some of its gold reserves stored in the United States' and French central banks, bowing to government pressure to unwind a Cold War-era ploy that secured the national treasure.

The Only Real Solution to Climate Change

Climate change, man-made or not, is an inevitable reality. The most important human adaptation mechanism to climate variability, the one that is simple and has always worked, is curiously the one that has been systematically neglected in a world dominated by nation states: migration. Klaus Desmet and Esteban Rossi-Hansberg explain at Vox EU:
The current emphasis on carbon taxes as a way of dealing with global warming therefore seems appropriate. But we should certainly not forget the age-old strategy of ‘movement’ as a way of adapting to climate change. Although you may not yet be planning to migrate to Greenland, the policy debate on climate change should start giving greater importance to finding ways of alleviating migratory and trade restrictions. These frictions are fundamental to our understanding of the economic costs of global warming.

Friday, January 11, 2013

Bastiat on Law & Order

"Life, liberty, and property do not exist because men have made laws. On the contrary, it was the fact that life, liberty, and property existed beforehand that caused men to make laws in the first place." Frédéric Bastiat

Wednesday, January 9, 2013

More Platinomics Nonsense

This time the nonsense comes from The Economist's Free Exchange:
But in 2008, Congress gave the Fed authority to pay interest on reserves.  Because banks should not lend reserves to each other for less than they can get from the Fed, this restores the Fed’s control over interest rates regardless of the size of its balance sheet, and thus over inflation. ... What this means is that while the platinum coin option expands the Fed’s balance sheet and, ultimately, the monetary base, it has no implications for inflation, even if the Treasury never buys back the coin.
Back to the real world: paying interests on reserves didn't save Brazil from hyperinflation, much on the contrary, it was one of the main causes of hyperinflation. It hastens hyperinflation because the supply of high-powered money becomes incredibly endogenous to increases in nominal rates of return. In other words, the monetary and price systems become utterly unstable.

It would be funny, if it weren't tragic, that many economists appear to be unable to get this simple point.

Humanity Loses One of Its Greatest Thinkers

James M. Buchanan, one of the greatest economists of all times, who enlightened us all on the immense problems of government failure, dies at 93. A good summary of his work here.

Remember Bastiat

"L'État, c'est la grande fiction à travers laquelle tout le monde s'efforce de vivre aux dépens de tout le monde."

"The State is that great fiction by which everyone tries to live at the expense of everyone else."

Monday, January 7, 2013

Platinum Delusion

The Economist, straight to the point:
The fancy of a $1 trillion platinum coin is so tantalising in part because it puts a monetary option in play. The larger attraction, though, is that it does so in a way that honours democracy by sticking to the letter of democratic legislation, yet also flirts with the heady unilateral decisiveness of fascism. This is, I'm afraid, a combination powerfully intoxicating to the pundit id. We'd be better served, however, if the commentariat would rein in its id, stop its idle chatter about exotic, coin-based, presidential monetary policy, and begin seriously to consider the more probable but less glittering eventuality of a Greek-style default.

Murphy on Expansionary Austerity

Murphy's survey of the recent economic literature on fiscal policy (HT EconLog's Henderson) is obligatory reading in the midst of the current economic cacophony and dogmatic drivel:
Contrary to the claims of some of today's proponents of both deficit spending and increases in the highest income tax rates, there is a large literature on the historical success of supply-side economics and fiscal austerity based on cuts in government spending. Although the findings of the relevant research are not unanimous, the case for Keynesian pump-priming is not as solid as some of the Keynesians claim. Indeed, in the cases of Paul Krugman and Christina Romer, their own past academic work shows why.