Jul 30, 2012

Inflation and Racism, ctd

I was struggling with this post yesterday—must have rewritten it five or six times. The basic point is that, as far as there is any consensus in economics, there is no danger of serious of hyperinflation. Yet comparisons are routinely made to Zimbabwe to argue against further stimulus, while millions languish in poverty and misery. Like racism, this is a major moral error which should bring shame on those who hold it.

Can you think of a better way to put it?

Jul 28, 2012

Inflation Paranoia Is Like Racism

[I'm blogging at Political Animal this weekend, and I wonder what you guys think of this cross-post.]

For most of human history racially-based prejudice has been very common. It’s simple, easily understood, and based on deep psychological roots. Generalizing things based on how they look makes a lot of sense most of the time, but taken too far it can lead to monstrous results.

Inflation paranoia is like that, on a smaller scale. It’s a simple, intuitive, easily-understood sort of belief which can lead to catastrophic mass suffering. Witness this prediction from Peter Schiff, pointed out by Paul Krugman:
SCHIFF: You know, look, I know inflation is going to get worse in 2010. Whether it’s going to run out of control or it’s going to take until 2011 or 2012, but I know we’re going to have a major currency crisis coming soon. It’s going to dwarf the financial crisis and it’s going to send consumer prices absolutely ballistic, as well as interest rates and unemployment.
Though Schiff is a bit of a fruitcake this kind of mindset is common, especially in Germany. Inflation is viewed as a death threat to the economy, some kind of uncontrollable beast that will jump to a hundred million percent given half a chance, which must be avoided at all costs. Mass unemployment, on the other hand, is comparatively less worrisome.

In reality, central banks have inflation easily in hand. In the US it’s low, and has been so for years. If it were to spike up too high they could raise interest rates to tamp it down again, as Paul Volcker did back in the 80s. Not a serious worry, and certainly no reason to make hysterical comparisons to Zimbabwe, especially not in the teeth of a gigantic unemployment crisis.

But the continual failure of inflation to appear doesn’t dent the conviction of the hard money fanatics. Despite the fact that the Fed has more than tripled the monetary base, Schiff still says “Printed money merely creates inflation.” (That’s not how it works.) The European Central Bank remains obsessed with 2% inflation as the Eurozone crumbles around them.

I wouldn’t say that inflation paranoia is as morally wrong as racism. But it is morally wrong. It helps the most vulnerable—debtors and the marginal worker— when they least need it (during the boom), and punishes them when they’re already suffering (during the slump). As Krugman says, the Eurozone needs some inflation to give Spain and company even a prayer of recovery (to restore competitiveness). German paranoia is giving much of the Eurozone Depression-level unemployment and may well tear it apart.

The hard money fanatics are gripped by a cancer of the mind, but a look at the consequences hopefully will make that belief repellent for future generations.

Weekend Jams

Really digging this Madeon chap. (As it turns out, he actually just turned eighteen.) Good show:


Jul 27, 2012

Salmon River Report

The truck and the boat.
The first thing you need to know about my kind of river trip is that it's not "whitewater rafting." That boat you see on the trailer is my folks' dory, and it's rigid, made out of wood (though you can also make them out of aluminum, foam, or plastic). Those kinds of boats are more fun, more difficult to row, and especially if they're wood, extremely vulnerable to rocks. If a kayak is like a whitewater motorcycle, and a raft is your sensible Toyota Corolla, a dory would be a BMW. A bit pricey and silly, but well-built and a joy to operate.

We also took a raft, which I rowed. Rafts (that is, inflatable boats) are easier to row, a bit cheaper, can bounce over rocks where a dory would get smashed, and can roll up into a smallish size. However, they're also sluggish, often leak, and with new techniques, are approaching parity with the cost of a dory. On the trip one of our friends had built himself a wooden dory from scratch in 2.5 weeks. He said the materials cost about $1500.

Anyways, these trips are with a bunch of old-time dory river guides who all worked in for a company called Grand Canyon Dories together back in the 70s and 80s. This company was owned by Martin Litton, the famous conservationist, and one of two key men who saved Grand Canyon from dams. Working for him is where my parents met. The old-timers have been doing reunion trips, with their families, for years—this one was the twentieth anniversary.

My folks' dory, and my raft behind it. Apparently I needed to clean my
camera lens.
A view from the stern, which is flat in case you want
to strap on a motor on the transom.
The dory is called the Celilo Falls. Like all of Litton's boats, it's named after some natural feature destroyed by man. Celilo Falls was a famous waterfall on the Columbia, and a longtime fishing spot for the local Native Americans, that was drowned by the Dalles Dam.

It was a great trip. We started at Corn Creek, and left the river just above Riggins. The rapids were fun, the water was nice and cool, and the heat wasn't too bad (the western dryness helped with that, though it did make my fingers crack). This was my first time at the oars in more than three years, and I felt pretty good about how things went. No capsizes, no major mistakes, no holes in boats.

The Salmon is one of the last rivers in the United States that isn't dammed somewhere, and so it has good swimming, big beaches for camping, and a relatively undisturbed ecosystem. The Colorado through Grand Canyon, on the other hand, is freezing cold from coming out of Lake Powell upstream, and that plus the lack of sediment in the water (as it is mostly captured by the dam upstream) has largely done for the native riparian habitat, as well as what used to be enormous beaches.

When you're on a boat, storage opportunities are considerably greater than, say, a backpacking trip. We ate good meals, and had cold beer all the way down. I read something like fourteen books (though many of those were on the car ride up, and consisted of pounding one short Terry Pratchett after another).

Here's a typical lunch.
All in all, a great experience, and one I would recommend to anyone.

Jul 26, 2012

New Madeon!

Just can't get enough of this kid.

And I'll stop calling him a kid when he turns 18.

Jul 24, 2012

I'm back!

Day I Can't Remember and Wouldn't Want to
Well, it was a great trip with my folks down the Salmon. I'll give you a more detailed update in a bit, but in brief it was about a week, we took four dories (here's a picture of one of those), four rafts, and I rowed my own boat (a raft). We started from the Corn Creek put-in and did our take-out slightly above Riggins.

It's good to be back, though it was marvelous being disconnected from everything. The Great Electronic Hivemind has a way of denting one's focus that I'm going to try to avoid more in the future. As in this idea of the Slow Web--I like that a lot.

Finally, thanks very much to my guest bloggers! You guys are the best. That's the first time I've done that and it worked out rather well, I'd say.

More to come soon.

Jul 19, 2012

Americans Disapprove of Supreme Court More Post-ACA

A new New York Times poll finds that Americans' opinion of the Supreme Court fell in the aftermath of the health care decision:
The nation is now evenly divided, with 41 percent of Americans saying they approve of the job the court is doing and the same share voicing disapproval, according to a new poll conducted by The New York Times and CBS News. In a poll a few weeks before the health care decision, the court’s approval rating was 44 percent and its disapproval rating 36 percent.
More than half of Americans said the decision in the health care case was based mainly on the justices’ personal or political views. Only about 3 in 10 of them said the decision in the case was based mainly on legal analysis.
This surprise anyone else? If the Court had truly voted along it's political preferences, I would have expected a 5-4 decision to at least toss the mandate out, if not strike down the entire law. But Chief Justice John Roberts sided with the four liberal justices to uphold it.

The Chief Justice did side with his conservative colleagues on the activity/inactivity argument, but in the end, he ruled that the penalty was just another word for a tax and thus the mandate was constitutional. Now, I personally believe this was a calculated move by the Chief Justice and that he expected the Court to gain credibility for it, allowing him to rule more conservatively on future cases. Thus, I do think that his decision was politically motivated.

But does the American public follow the Court close enough to agree with me? I doubt it. So does that mean that the public believes this is actually a liberal court? I don't believe that either, at least not after Citizens United.

And yet, now Americans have a worse opinion of the Court and only 3 in 10 say the decision was decided on legal analysis. Of course, it's just one poll and there's no reason to read too much into it. Many Americans may assume that the Court voted politically on it due to the highly political nature of the law. But it is still a bit surprising.

In the end though, the poll actually excites me a bit, if for the wrong reasons. I want Americans to have faith in the highest court in the country, but if the Chief Justice's plan was to vote liberally on this case in order to restore the Court's credibility and allow him to vote more conservatively on future cases, then I'm happy to see that the plan is not working. If that means he cannot vote as conservatively as he wishes in the future, then let the public keep showing its dissatisfaction with the Court.

Jul 18, 2012

Internet-Proofing Malls

A interesting article in the New York Times today on the future of malls:
Glimcher Realty Trust, which owns and manages shopping malls, is experimenting with making them Internet-proof. The company concedes that if shoppers can buy something online, they will. So it is trying to fill one of its malls, in Scottsdale, Ariz., with businesses that do more than sell stuff. 
There are still clothing-only retailers at the mall, Scottsdale Quarter, but more than half of the stores offer dining or some other experience that cannot be easily replicated on the Web. That has Glimcher executives taking some unconventional approaches to finding suitable tenants — like testing out laser salons, getting hairstyling lessons and watching movies in a theater that serves food.
Matt Yglesias and others have been talking about the "end of retail" for a while now and I'm on board. There's just no way brick-and-mortar stores can compete with the convenience of online shopping, especially when there is no sales tax (though that may change soon). So Glimcher is certainly smart to consider filling the mall with attractions that cannot be done online.

This seems to me to be the future of where activities and shopping are going. Cities exist so that everything is clustered and that makes business, among other things, much quicker and easier. Why shouldn't activities be the same? Instead of driving from the bowling alley to the crafts store to the movie theater, it would be a lot easier if they were located in one area with an abundance of restaurant options and you could walk from. This seems to be exactly what Glimcher has in mind.

The next question I have is whether it's possible to attract enough customers to fill a mall and cover the costs of running it. I'm not so sure on that front, but it looks like we're going to find out.

Jul 16, 2012

Eminent Domain and Underwater Mortgages

Hey guys. I'm Danny and I'm interning at the Washington Monthly this summer. I'll be a senior at Duke University next year where I'm majoring in economics and public policy. I have my own blog at Across All Sports, which was mainly sports-focused but I've now expanded into political and policy blogging. Feel free to go check it out though I admit I don't update it as frequently as I would like.

And big thanks to Ryan for letting me add a few posts here while he's off crushing the rapids out West. Hopefully I can live up to the excellent posts he normally puts up. So let's jump right in:

I recently posted an article on the Monthly about the government acting on behalf of a private company using eminent domain to buy underwater mortgages at a slight discount. The company would then lower the principal on the mortgage to bring the loan back above water and allow the homeowner to refinance at a lower rate. The company would make a profit from buying at a discount, the homeowner would get to keep his home and the bank would get the defaulted mortgage of their sheets. Win-Win-Win. Except many banks have sold mortgage-backed securities to investors and those investors are not looking to get them off their balance sheet. They certainly aren’t looking to sell at a discount. I hypothesized that if the U.S. used eminent domain to take these MBS from investors, it would forever add greater risk to these investments and thus banks and investors would charge a higher interest rate to offset that risk.

You can go to the article and read it in more detail, but that’s not what I want to talk about here. I want to briefly discuss the idea that using eminent domain for mortgage-backed securities is different from using it for seizing a property for a new highway. There are slight differences, but in general, they are very similar.

First off, both a mortgage-backed security and property are investments. They can go up in value or down in value. Just because someone has a home on it, lives there and doesn’t think of their property as an investment doesn’t change that.

Secondly, eminent domain always results in the market bottoming out. Investors would be furious if eminent domain was used to seize their securities, because very soon afterwards, home prices would rise and those securities would have risen quite a bit in value. Why? Because if the government used a policy to bring millions of Americans above water, it would allow those homeowners to refinance at affordable rates and would significantly reduce foreclosures. Fewer foreclosures would spur house prices to rise even further.  Using eminent domain would cause a housing recovery.

But using eminent domain to seize property for a new highway works in a similar way. As soon as the government seizes the land, it immediately becomes more valuable because if a person were to own a piece of it, he’d be in a tremendous bargaining position. Because the government needs that land, the owner could hold out for a huge price. Thus, every piece of property immediately becomes more valuable as soon as the government seizes it precisely because the government needs it.

And this is all on purpose. This is why eminent domain exists. It would be incredibly difficult and expensive for the government to bargain with each investor individually to make sure it wasn’t grabbing his investment and wasn’t taking it right before the value skyrocketed. It’d be nearly impossible for the government to do that.

And while a highway is a much more practical use of eminent domain, bringing millions of homeowners above water is very beneficial to the public as well.

Now, there are certainly some differences. Using eminent domain to help underwater homeowners may reward those homeowners for taking out loans they can’t pay (or it could be taking out loans that they didn’t understand). Many people would argue this could create conditions for moral hazard.

With using eminent domain for a highway, none of that exists as everyone shares the benefits and no one is rewarded for screwing. There is no moral hazard.

But my main point is that the differences between using eminent domain for physical property and financial instruments are not as large as everyone makes them out to be. This doesn’t change the issue that I bring up in my Monthly piece, but it is worth pointing out.

Jul 12, 2012

Thinking real hard while watching TV

On "Morning Joe" yesterday, Joe Scarborough took a stand against President Obama's plan to raise taxes on income above $250,000, saying that if you're a small business owner making $265,000, raising taxes during these difficult economic times will burden you so much and make you so much less likely to hire more workers. (Sorry, I can't be bothered to find you the quotes showing exactly what he said.)
I guess he used $265,000 because that's only, what, five times the median household income in this country, and any number beyond that would seem to validate the point that these people who might pay higher taxes on their income above $250,000 next year are rich enough that they can afford it.
As I listened to Joe pity those poor small business owners struggling to get by with only a quarter million dollars a year, I did some basic math:
Of the $265,000, it's only $15,000  that's going to be affected by the rates reverting to pre-2001 levels. And the tax rate for that amount will rise from 35 percent to 39.6 percent. So that's a 4.6 percentage point increase.One percent of $15,000 is $150. Multiply that by 4.6 and you get $690.
So basically the struggling business owner making more than 98 percent of the country will have to forgo updating his iPad next year to be left with the same amount of money as this year.

Jul 11, 2012

Vacation Time!

I'm heading out of town for awhile, going on a trip with my parents in northern Idaho on the Salmon River. Therefore you probably won't hear from me until about July 24th. (So excited!)

I have, however, gotten a couple of guest bloggers, Minjae Park and Danny Vinik. I encourage them to post as little or as often as they like (make sure you introduce yourselves, guys).

With that, I leave you. Be back soon!

Jul 10, 2012

Power Failures in South Africa

Sorry for the light posting folks, I've been real busy trying to prepare for a river trip coming up next week. But I had a quick thought when thinking about the recent ginormous power failures here compared to my two years in the Peace Corps. (James Fallows has some good thoughts here, here, and here.)

So, the background: we had a huge storm here, and the power was out at my house for almost five days. When I was in South Africa, this never happened. My village, about 100 km away from the nearest sizable town, way out on the rim of the Kalahari, would lose power pretty frequently during the summer from lightning storms, but it would almost always be back on within 12-24 hours. These lightning storms, by the way, were by far the most intense I have ever experienced. Bolts so close together that there was more light than darkness, and a continuous cannonade of thunder. Wind that tore off part of my roof. But the longest period of outage that we had during those two years was a little over two days, when a strike actually fried a conductor in my village and the power company had to send someone from ~250 km away to fix it.

This discrepancy—two-day power outage in a tiny village hundreds of miles out in the countryside of a poorish country, compared to a five-day outage in the capital city of the richest country the world has ever seen—is nominally about trees, I think. DC is very heavily treed, apparently with fall-prone species, and not that dense, making the power infrastructure more vulnerable and expensive per user. When a big storm comes through, some of those trees fall over and crush the power lines; around my village there were only much smaller shrubs and thorn trees that were a lot tougher in any case.

Really, though, it's about government. As it turns out South Africa had rolling blackouts back in 2008 (before I arrived) from a lot of Thabo Mbeki-related irresponsible lack of maintenance and capacity-building. But when that turned into a giant political and international embarrassment, they fixed the problem. In a kinda cheap, half-assed, and corrupt way, but it got the job done.

This is what I'm talking about when I say that South Africa has the US licked when it comes to dynamic governance. Mzanzi is an extremely corrupt country, but at least they try to do big things, or seem to feel a sense of collective guilt when they make horrible mistakes. America seems apathetic by comparison. We strut around, pounding our chests and grunting about how we're the greatest country in the world, but when the power is out for nearly a week in our capital city, we can't manage much more than a collective shrug.

For shame. Where is our pride?

Jul 8, 2012

Jul 4, 2012

Book Announcement

So, I'm heading off for a vacation for the next few days, so posting will be pretty light until next week. In the meantime I'd like to announce that I'll be putting a book out, probably sometime in the next several months. It's a collection of short stories from my father and myself. Longtime readers know that I've been posting my dad's stuff here for a long time, and it will be some of that material. It's partly to just get all that collected in the same place, but there will be some new stuff as well.

It will be self-published (if you're a publisher, feel free to contact me), done as a family thing and to see how the system works. If you like good adventure stories, you'll like it. More news to follow as I finish compiling and editing.

Happy Fourth everyone, and I hope all is well out there. As always, thanks for reading and commenting.

Jul 3, 2012

Central Banks and Inflation, ctd

This is what I was talking about:
Doesn't additional easing amount to little more than pushing on a string?
It does not, in my view. The reason is that, in my opinion, a determined central bank cannot fail to raise inflation expectations. The Fed has the ability to create as much money as it wants and can use that money to purchase every scrap of federal-government debt, every scrap of outstanding mortgage-backed securities backed by federal housing agencies, and as much foreign exchange as other governments will sell it. It strains credulity to think that the Fed could use its printing press to entirely fund the government and most of the mortgage market and to devalue the dollar with reckless abandon without having an impact on inflation expectations. In practice, it seems to take nothing like that to move expectations; a bit of tweaked language or a few hundred billion in QE purchases are enough to do the trick.
If you concede that the Fed can raise inflation expectations, then you concede everything. Higher expected future inflation raises inflation in the present, and higher inflation in the present simply represents more demand: prices rise because people are deploying more money, to buy assets and goods, to spend and invest. One hears the argument that higher inflation could hurt the economy by reducing real incomes, leading to less spending. But that's not how it works; if reduced real incomes lead to reduced spending, then you don't get the price increases in the first place. Prices don't go up unless there's more money chasing the same stock of goods.

Jul 2, 2012

Programming Update

Sorry for the downtime, folks, the power has been out at my place. Above you see my backyard, featuring a victim from the DC storm. Trees fall over surprisingly easily here. In case you didn't notice, I was blogging at Political Animal over the weekend. Here are a few of the better posts:

1. A view from our dystopian future. The power was (and is!) out at my place, and I had to hunt around for a cafe that wasn't packed. Thus, a bit of a rant about climate change.

2. Drug policy and argumentative positioning. Self-proclaimed moderates should recognize the value of the wings.

3. Generational warfare. Trying to find some common ground between young and old.

4. Batman as financial regulator. The banksters are the real lawbreakers in this world.

5. Better ways to promote public health. Liberals should lay off the elitist paternalism. It's annoying.

Hope everyone made it through the storm okay. Regularly scheduled posting should resume soon.