1 Dec 2009

Just playing with us

In response to this article, which mentions Ricardian Equivalence, I wrote this letter to The Economist:
A new economic theory

SIR – So those who argue against an economic stimulus have raised “the doctrine of Ricardian equivalence”. Governments around the world are borrowing from the future and debasing their money as they attempt to thwart the business cycle. Given that this strategy requires a rather myopic population of taxpayers and investors, perhaps the more appropriate description for the trade-off between fiscal and monetary tools would be “Retardian equivalence.”

David Zetland
Berkeley, California
My point, with tongue buried in cheek, is that bureaucrats and politicians have got to think we are fools if their "stimulate me with my own money" policy is to work.

So far, we do not appear to be fools. Hence the failure of the stimulus. Such a pity. For us.

Hattip to DL


  1. May I suggest you read an Econ 101 textbook, or maybe your colleague Mr Delong's blog. Then maybe you will understand why your statement does not make sense.

  2. Of course I respectfully disagree with you here. If borrowing weren't a way to stimulate economic activity, then why would it be an engine for the creation of business? On a micro. level, borrowing and lending are vital economic enterprises, because the future return far more often provides production well beyond the initial investment. Why would this not apply to government borrowing?

    Also, businesses make suboptimal borrowing decisions all the time, and yet survive (not consistently per business, but you get my idea).

    I would not want to force businesses to lend and borrow during such an economic downturn if they feel it would be a bad business decision. This I would expect to be a government role, because out pooled resources can weather the downturn more effectively than individual businesses.

    I would much more happily use wages and benefits as the economic engine, rather than borrowing, by the way, esp. in a 70% consumer-based economy.

  3. http://www.debtorsprisonblog.org/journal/2009/11/28/a-visual-history-of-how-us-treasuries-became-worthless.html

  4. @Morten -- if you substitute "retardian UN-equivalence," does it make sense? As I said, tongue in cheek...

  5. @Josh -- Can I borrow some of YOUR money to make brilliant investments? If you refuse, then you realize the trouble with gov't stimulus. If you agree, I am going on holiday :)

  6. David, again respecfully, micro isn't the same as macro. I wouldn't expect private companies or folks to invest in economic endeavours where they wouldn't expect returns beyond their investment+risk. However, I would expect for us to invest in things, through government, that do not get us merely financial return, but provide for a climate that would then improve markets. For examples, the military and policing and courts and roadways.

    Just as I wouldn't want a company to have to front our entire road infrastructure, so I wouldn't want a company to have to front lending/borrowing during uncertain/downward flowing economic times. But I do expect the government to provide for those things outlined in the Preamble to the Constitution, and I firmly believe that shoring up a horrible economy falls squarely in the "promote the general welfare" category.

  7. @Josh -- this deserves a longer discussion, but I will continue to disagree with you.

    1) Macro is NOT the same as public goods, which includes security but neither roads not water.

    2) The government can do many things to shore up the economy, but blocking the business cycle will not accomplish that goal. As you may agree, I am more interested in protecting workers, not jobs, and commerce, not businesses.

    3) For an example of government-run business, look to Amtrak, USPS or the Soviet Union (and Russia's Gazprom today...)

    It's not the ends we disagree on, but the means.

  8. Some of the borrowing/stimulus goes to shore up state budgets. Is it your view that the level of services offered by the states should follow the business cycle?

    Also, protecting commerce means 'stimulating' the banks, and protect workers means 'stimulating' unemployment benefits.

    Other awfully(?) run government businesses includes UC Berkely, no?

  9. David, this is why I enjoy your blog so much. Our goals are mutual, and not hidden.

    First, macro is commerce, and any move by the government, due to its size, is going to affect commerce. Second, I totally disagree that roads are not public goods. I refer you to an Onion article titled, "Libertarian reluctantly calls fire department."


    I do this only to point out that they needed a road to get there, and if they didn't have one, then neighboring homes can burn, too.

    In the economic sense, roads are de facto public goods in that making them excludable would seriously dampen a number of very vital services we have come to depend on (with the exception of some freeways, for example), and arguing congestion as rival has always felt flimsy to me because going slower is not the same thing as removing from the ability to use. The case for roads as rival is the same as the case for clean air as rival, and I don't buy that, either.

    The fact that water is not defined as a "public good" (which I understand) begs for a different term for the economic concept, because it withers in the face of common language (yet another reason why the majority of people hate/don't try to understand economic concepts).

    In all honesty, I think the USPS is a fine organization that still runs services competitive with its private counterparts and without additional government largesse (so far as I know). The beauty of the USPS is that it provided the masses with a reasonably priced way to communicate long ago, and also instilled a sense of trust by being a government institution (oh, the good ol' days), when private institutions were both inaccessible on such a scale, or were untrustworthy.

    As for other government run organizations, I worked for one for seven years, CDFA/USDA Shipping Point Inspection, and it ran w/out general funds, and competed alright.

    By definition, anything the government does to shore up this economy is "blocking the business cycle". If the government were to help out in any way, it would necessarily impact the cycle's ability to either continue to shed jobs, or to begin creating them.

    In fact, I hope it blocks the business cycle. The business cycle is not a law of nature, it is the cumulative effect of human interactions. But, even if it were a law of nature, like gravity, we could still mitigate its effects. We do so for gravity all the time.

    To make an analogy of gravity, our government is so large that it is equivalent to the moon's affect on Earth (Earth being markets). Take the moon away now, and something will surely happen. Move it closer, and something else will happen.

    As for what you are interested in protecting, I also believe you are into protecting the unemployed, too, yes? And children and the elderly? These are neither workers nor commerce. I just wanted to point out that there are more things we are looking to protect when we make these decisions (or not). I do not for an instant believe you want to do anything less than provide for them, too, thus your strong ethical/philosophical bent and the passion with which you write about them.

  10. What appalls me the most is that for the past 70 years our "economic theory progress" had been the same Keynes, throwing money on the pile in hopes of reviving animal spirits.

    Not a word how to fix psychological tendency of averting short-term speculation fix to sound long-term value creation.

  11. @Josh --

    1) We have different definitions of macro (there are micro and macro versions of commerce, and policies surely affect micro incentives...)

    2) Roads are clearly NOT public good. They are rival (congestion does happen) and clearly excludable. Government provision of such a private good is possible, but not necessary.

    The first private road provider to block firetruck access (esp. since that would be pre-specificed in a contract) would be the first provider to be out of business. Try again.

    3) Water is either a private good (e.g., well water) or a public good (environmental water) or a common pool good (aquifer) or a club good (pool at UC Berkeley). That's why it's confusing.

    4) USPS lost $5 billion in 2007. Good idea in 1792, not today. [this stupid form doesn't allow past, but search USPS on this blog]

    5) To make an analogy with gravity, the government can remove it or make it 4x stronger. The government can RUIN markets with the stroke of a pen (e.g., prohibition) -- immiserating many.

    6) Yes, I love kids and old people.

  12. Ok, I changed the layout.

    Read this: http://aguanomics.com/2009/01/economics-of-usps.html

  13. I think roads as goods can be compared to the police. Clearly excludable and rival. They both have private and public providers.

    However, I still think it is useful to consider them as mainly public goods. Adding an extra user has normally a very low marginal cost, although sometimes there are congestions.

  14. They are not public, but open access (common pool) goods, meaning that everyone can use them, but that they are rival. That's why we have private cops/roads and unsolved crimes/congestion.


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