January 2009 Archives

John Cochrane had the following great quote in his insightful article, "Fiscal Stimulus, Fiscal Inflation or Fiscal Fallacies?"

"Others say that we should have a fiscal stimulus to 'give people confidence,' even if we have neither theory nor evidence that it will work. This astonishingly paternalistic argument was tried once with the TARP. Nobody could say how it would work in any way that made sense, but it was supposed to be important do to something grand to give people 'confidence.' You see how that worked out. Public prayer would work better and cost a lot less."

We have commented before on John Cochrane's uncanny ability to deliver biting rebuttals when challenged.

(Thanks to Mark Showalter for sending me this.)

The Bailout Game

Greg Mankiw posted a link to The Bailout Game this morning, and I couldn't resist putting it up here and on our economic jokes page. Here are a couple of tips for the game. When you get to AIG, don't bail them out and watch what happens. Also, you might enjoy the comments on the little ticker at the bottom of the page.
The Wall Street Journal ran a story yesterday entitled, "Central Banks are Creatures of Financial Crises" in which Justin Lahart showed a graphic that has been popping up from time-to-time over the last four months. It is a picture of the DJIA today mapped on top of the DJIA from the Great Depression with the peak levels lined up and normalized to 1. The story goes that the current downturn in stock prices looks a lot like the Great Depression, therefore we are at risk of a depression in the current crisis. I thought this might be the fallacy of cum hoc ergo propter hoc in that the Dow probably drops like it has currently in all recessions (including the Great Depression). But the graph below has changed my mind.

Do you ever get tired of talking about the economic crisis? I think Jake does in this video.


Japanese corporate fertility policy

One of my former students sent me this CNN piece about Japanese corporations incentivizing fertility by making their employees go home early from work two days a week. I have a few comments and questions about this article that I'll put in writing below, and a lot more that I will leave to imagination.

Bernanke Claus

(Thanks to Kerk Phillips for sending me this. It is a month late, but still worth putting up.)

Macro links

I'm teaching intermediate macro this semester using Mankiw's intermediate text.  I try to start each day talking about the day's macroeconomic news as it relates to the subject we are talking about in class that day. 

In case anyone is interested, I post links to the new articles or blog entries here.  I'll be covering all chapters of the Mankiw text, 1-19, this semester.  To follow along, the syllabus is available here.

Last semester I taught a principles class using using an in-progress textbook by Russell Cooper and Andrew John.  While the students weren't crazy about a book that wasn't in print, I really liked how the material was presented.  Using a macro standard this semester (while a clearly written book), has only increased my appreciation for the question-driven motivation of the Cooper-John book (as opposed to the model-driven motivation of standard econ texts).
A nice piece of work by Art Carden of Rhodes College. This piece is beautifully sarcastic and can be thought of as Opposite Day for conference attendees

The abstract:
Being an academic, particularly an academic economist, is a task that requires a great deal of preparation and effort. It also requires a great deal of travel. This essay provides helpful suggestions on how to be a Great Conference Participant.

One of my favorite sentences:
"Your paper should be finished no fewer than four business days after
the deadline set by your session chair and no fewer than 20 minutes before you
are actually supposed to present."

Here are some other highlights:

Madoff's inspiration

(Thanks to Mark Showalter for sending this to me.)
Jason had a great post a week-and-a-half ago about the stimulus debate. The debate as it stands right now in the newspapers, media, and blogs centers on the questions about the effect of government intervention (spending increases and tax cuts) on the economy in the short-run and in the long-run. Jason's comments were similar to those of Robert Barro (Harvard) in today's Wall Street Journal in making the case for multipliers on government spending and taxation being much lower than is being estimated by members of the Obama economic team. Barro focused on the government spending multiplier being close to zero, and Jason argued that the tax multiplier is bigger than the government spending multiplier. However, I think that the correct answer to the optimal amount of government intervention must incorporate more dynamic effects that balance any short-run benefits of intervention with long-run costs. It is, therefore, a question about how society discounts the future.
The second post ever posted on this blog in October 2008 is entitled, "International bailout arms race." I characterized the flush of bailout commitments that we saw across almost every major developed country as a strategic optimal response in the face of the bailout plans of the United States. With this model in mind, I predicted that the bailouts would develop into a situation similar to the nuclear arms race of the 1980s in which the U.S. defeated Russia by outspending them on weapons. The same thing is happening now as predicted among developed countries with respect to bailouts. The list of countries hitting their spending capacity and "folding their hand" started with Iceland and Hungary, and now looks to include Spain, Greece, Ireland, Germany, the U.K., Belgium, and the E.U. as a whole (see Iceland/Ireland joke).

Market Timing

I was pretty inactive here from mid December-early January.  During this time I was preparing for and attending the annual ASSA meetings, where many first-round interviews for economics PhDs are held.  

The following chart highlights my amazing ability to time the market.  The shaded areas represent NBER recessions, the first vertical red line is the date I graduated from college, the second is the date that I completed graduate school. 


Before I switched from MSNBC to CNN for coverage of yesterday's historic inauguration of Barack Obama as President of the United States, one of the MSNBC commentators said something that piqued my interest. He said that the only good examples of a President entering office in a recession before Barack Obama are Ronald Reagan (1981) and Franklin Delano Roosevelt (1933). Further the commentator contrasted Reagan's promise to decrease the size of government with FDR's commitment to increase the size of government. However, the following picture shows that Reagan is not the correct counterfactual.

What is the difference between Iceland and Ireland?... One letter and about six months.

[Iceland's economy crashed in mid-October, 2008.]

(Thanks to Val Lambson for passing this one along.)

Cluster computing in economics

As economic models become more complex and reflect more of the heterogeneity among households and firms in the economies that we try to explain, the computational burden of solving these models increases exponentially. In the profession, this is called the curse of dimensionality.

In response to the increasing computation times required by the complexity of many current economic models, cluster computing and parallel processing are becoming important skills for economists. A new resource for economists in this area has just been made available to the public thanks to a National Science Foundation funded joint project of Russell Cooper (Univ. of Texas at Austin), Kim Ruhl (NYU Stern), and the Federal Reserve Bank of Kansas City. The website is www.clustereconomics.org.

Sports and Economic Growth

Two great games on Sunday have resulted in a Cardinals-Steelers Superbowl.  Can this tell us anything about economics?  I'm not sure, but lets compare the cities who boast the two best teams to the city who has claim on the worst team (ever).

Phoenix, the home of the Cardinals, has been one of the fastest growing cities in the US.  Much of this growth is from high-tech industry, like semi-conductor manufacturers.  And its proximity to the regulatory nightmare that is California has certainly helped that growth. 

Pittsburgh, although in the "Rust Belt", has truly blossomed in the last few years.  It has experienced decent population growth and increased the number of jobs in high paying industries like medical services.  

Political Business Cycles?

Whatever you think of the PBC literature (and despite the fact that Bush has his dates wrong) you've got to love this quote from GW's last press conference on January 12, 2008:

"In terms of the economy, look, I inherited a recession, I am ending on a recession."

Thanks to Bart-man for the quote.

Today's CPI: Missed it by that much

Alright, I stuck my neck out yesterday and predicted that the core CPI numbers released today would show a decline of between -0.1 and -0.4 percent, based largely on the Fed minutes from last month. Well, the final tally is no change, although the exact amount was a decrease of -0.015 percent. That is virtually zero, but it was a decline. This just pushes the deflation watch forward another month. I still think that the core CPI is a bellwether as to whether the economy is responding to all the stimulus being poured in. And the previous three months do now rank as the biggest quarterly decline in prices since the late 1950s, and probably since the Great Depression. Stay tuned.
I'm going to go out on a limb and call Friday's core CPI for December 2008 as being potentially either the largest monthly decline in percentage terms or close to the largest decline since the Great Depression--a decline of between -0.1 and -0.4 percent. The December numbers will be reported on Friday morning, January 16, 2009 at 8:30 a.m. EST. In the last 50 years, the largest monthly decrease in the core CPI has been -0.3 percent. If my prediction is right, Friday's CPI numbers will surprise markets and kindle some fear about the ability of Congress and the Fed to stimulate the economy enough to prevent a Japan-like deflationary episode. Below is my reasoning for this forecast.

A New York Times Economix blog post from December 31, 2008 gave a link to the cartoons from the October 6, 2008 New Yorker. Below are the ones I thought were the best.

A New York Times Economix blog post from December 31, 2008 gave a link to the Nationalpost.com's Best Financial Jokes of 2008. Below are the ones I thought were the best.


With the inauguration just over a week away, the talk of Obama's "stimulus" plan is reaching a fever pitch.  Some of the coverage is funny, some mean, some thoughtful, some just plain stupid (ever heard of the broken window fallacy?).

What ever it is, I can't get enough of the debate.

Real Grad Students of Genius

I met DeForest McDuff a few years ago at an IHS conference, and besides being a nice guy and and a good economist, he and his grad school colleagues have put together a series of videos making fun of the grad school experience.  You can find all the videos here, but my favorite is this one:

Every Breath You Take

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One of the best economics music videos out there:


I know it's been a while since this first made the rounds, but it's still a great piece of work. Thanks to a reader for suggesting we archive it on the jokes page. 

For more (and some more recent) work by Columbia B-school students, go to http://www.cbsfollies.com/

Our current recession, now in its 14th month, is commonly billed as the worst U.S. downturn since the Great Depression of the 1930s. It will become the longest recession since the Great Depression (which lasted 43 months) if it lasts two more months. But it is already being billed as the worst recession in terms of severity since the Great Depression.The employment numbers released today provided further evidence that the situation will be getting worse before it gets better. The unemployment rate increased from 6.7% in November to 7.2% in December, and the establishment survey reported a loss of 524,000 jobs in December. The following table allows one to compare the current downturn, in terms of job losses, to the previous recessions since the Great Depression.


The long and short of the AIG bailout

SP_AIG_GM.pngIs AIG a fundamentally sound company that was adversely affected by the current liquidity crisis in a way that is not representative of its long run prospects?  The plot above provides one answer to this question.

Three main risks to the economy emerged from the minutes of the December 15-16, 2008 meeting of the Federal Reserve's Federal Open Market Committee (FOMC)--Decline, Deflation, Division.

It's time to yank off that Band-aid

dilbert010209.gif(Greg Mankiw posted this on Jan. 2, 2009)

AEA Economic Humor session

The most refreshing session I attended today (Sat., 1/3/08) at the Allied Social Science Association (ASSA) meetings in San Francisco was the first ever Economic Humor session. To non-economists, the mere fact that an economic humor session exists is probably funny (although we do maintain a good economic jokes page on this site). But the three presenters were all very good and also were probably a representative sample of the range of the genre. This session was recorded on video, and a Time Magazine reporter was there. So I am hoping to post a link sometime in the near future. The following is a summary, with highlights, of the three hilarious presentations.


  • Richard W. Evans is an Assistant Professor of Economics at Brigham Young University

  • Jason DeBacker is an Assistant Professor of Economics at Middle Tennessee State University

  • Kerk L. Phillips is an Associate Professor of Economics at Brigham Young University