Tyler Cowen's Blog, page 537

Two CDs in a row

Diamond Mine, by King Creosote and Jon Hopkins,

followed by

Julianna Barwick, The Magic Place.

They sound much better, one after the other, in that order.  I will file them together on my shelf, once they leave my living room, and break my usual habit of alphabetizing.

I also like to follow Mahler symphonies with a short Mozart piano piece, in a major key preferably.

Can you think of other sensible combinations of music or CD sequences?

Albuquerque and Santa Fe and Gallup food bleg

Where should we eat?  In Albuquerque I am most interested in green and red chili.  Any place between the cities would be a useful recommendation as well.

I thank you all in advance.

Assorted links

1. Confessions of a ticket scalper.

2. Tim Congdon reviews the Wapshott Hayek-Keynes book.

3. Non-limited liability for the UK banking system, a new proposal.

4. Another look at Target2, and the economics of the pill.

5. Watson will go work for Citigroup.

6. .

*The Rent is Too Damn High*

The new eBook from Matt Yglesias is out today, I will likely read (and finish!) my copy tonight.  Self-recommending, you can get one here.

The hangover from a dishonest election

That is the Russian stock index.  The decline may well be noise, but a fall of over 3 percent is nonetheless worth a ponder.

Democracy, wealth, and local stimulus spending

Paul Krugman asked a good question yesterday: "…if states and localities can borrow freely, how do you explain the drastic fall in their spending I have been documenting?"

This is maybe too literal an answer to address his macroeconomic concerns, but I view state and local government spending as falling because voters wanted it to, either directly or indirectly.  Inflation-adjusted net worth per capita is still below the level of the late 1990s, and not returning any time quickly (an important point), and so voters/spenders wanted to cut back somewhere.  Local government is the target they chose, and not just in the Red states.  My point is not that the median voter is all-wise, but rather the Austerians are the guy next door.  Voters apparently don't see marginal local government activity as having the same value as cash in their pockets.  There still may be a role for a federal fiscal bridge to ease the transition, but in democratic systems some expenditure declines are in the cards, just as the rollicking revenues of earlier years led to big boosts in state and local spending.  We are not as wealthy as we thought we were, and greater federal borrowing can blunt this reality only to some extent.  The notion of a voter ideal point ought to somewhere enter the analysis.

A few months ago I saw a tweet — I forget from whom — noting that the economy would be (would have been) booming if only not for the state and local cutbacks.  I differ from that perspective, and I would rephrase it as the (not false) claim that the economy would be booming if only we were wealthier.

I've yet to see a good analysis of how freely state and local governments can borrow at the margin, especially in response to a decline in tax revenues.  Many bloggers have attacked this piece by John Taylor (pdf), as Taylor argued that the stimulus aid led to a corresponding reduction in state and local borrowing.  We still don't know if this is true, but do we know that it is false?  The arguments against Taylor consist of little more than saying he cannot be right.  Check out the graph on Taylor's p.5, noting that inverse correlation is not the same as causality.  It's striking nonetheless, as state and local borrowing goes down as receipts from the federal government go up.  Constitutional balanced budget requirements may or may not bind, as many state and local governments can "borrow" quite readily by adjusting contributions to their pension funds, among other moves.

A related question is how voters understand the ability of their state and local governments to spend more by "borrowing" against pension funds, or changing accounting, or in other words what they saw as the opportunity cost of continuing previous levels of public spending at the state and local levels.

My view in 2009 was that federal aid to state and local governments was the one part of the stimulus bill which made sense.  It is easier to preserve old jobs than to create new ones.  Still, when it comes to analyzing the state and local cutbacks, and the effectiveness of federal aid, we don't have a lot of clear answers.

Does inequality lead to a financial crisis?

Michael Bordo and Christopher Meissner say basically no (NBER gate):

The recent global crisis has sparked interest in the relationship between income inequality, credit booms, and financial crises. Rajan (2010) and Kumhof and Rancière (2011) propose that rising inequality led to a credit boom and eventually to a financial crisis in the US in the first decade of the 21st century as it did in the 1920s. Data from 14 advanced countries between 1920 and 2000 suggest these are not general relationships. Credit booms heighten the probability of a banking crisis, but we find no evidence that a rise in top income shares leads to credit booms. Instead, low interest rates and economic expansions are the only two robust determinants of credit booms in our data set. Anecdotal evidence from US experience in the 1920s and in the years up to 2007 and from other countries does not support the inequality, credit, crisis nexus. Rather, it points back to a familiar boom-bust pattern of declines in interest rates, strong growth, rising credit, asset price booms and crises.

Here is their earlier paper (pdf, ungated) on whether crises boost inequality.

Conspiracy theory bleg

People in other countries, including the elites, often believe quite bizarre conspiracy theories about the United States and its government, even when those theories contradict each other.  Do you know of good social science research trying to explain the (general) content of what they believe, why they believe it, and how they ever — if indeed they ever — come to a more reasoned understanding?

I thank you all in advance for your suggestions.

Assorted links

1. The Cal State system, America's largest, will take significant steps into on-line education.

2. Robot prejudice.

3. A new Banerjee and Duflo paper (pdf), RCTs and governance.

4. More on the Apple job creation claims.

5. More on Iceland and Canada; they seem to want to go back to a fixed exchange rate, life as a floater isn't always so simple.

6. Scott summarizes "market monetarism."

Markets in everything

By Sunday morning, four National Football League teams were linked to a "bounty" scandal that came to light in Friday's NFL announcement that New Orleans Saints defensive players were paid for "big hits" that took opponents out of play. "Knockouts" were worth $1,500 and "cart-offs" $1,000, with payments doubled or tripled for the NFL playoffs.

Here is more detail, and for the pointer I thank Sheldon Gilbert.