Relying on bank lending for stimulus is inefficient by Mike Hudack

It’s struck me for a long time that much of monetary policy that’s meant to stimulate lending actually benefits people who are already wealthy and who are also, therefore, less susceptible to stimulus intended to increase their spending.

I also think that these policies are responsible for rising inequality in the world in the past decade or so as money has become cheaper and cheaper for people who already have it, with little real change for people who don’t already have it (since their wages have been stagnant and their borrowing ability is therefore limited).

A much more efficient program would be a form of helicopter money in which the government or central bank simply gave money to people who most “need” it, and who will quickly spend it. Such an approach would be much more efficient: it would get rid of all the middlemen and make every dollar much more likely to enter circulation since the poorer people receiving the checks would get immediate benefit from spending it (and, unlike rich people, relatively little benefit from saving it).

Such a direct stimulus program, however, is difficult to implement using current money technology: the government would literally have to write everyone checks, or physically hand them cash. This is part of the reason I believe we should build a new cryptocurrency-based backend for our money system — to make policy response to the next recession better and more efficient.

Anyway, the St. Louis Fed, as part of their ongoing research into the policy response to the Great Recession, has published a new analysis showing that Fed policies designed to stimulate bank lending weren’t all that efficient at achieving the policy goal:

To help address the Great Recession, banks were provided with lower-cost capital and liquidity. One of the goals was for banks to pass these benefits through to consumers by extending extra credit, encouraging them to borrow more to stimulate the economy.

Recent research shows that these credit pass-throughs made their way to some consumers. However, they didn’t go to the consumers who were most likely to spend and boost the economy.

The Fed and other central banks should be moving much faster to transition the monetary system so that they can deploy helicopter money effectively in the future.

Filter Bubbles and the Universal Hipster by Mike Hudack

The Verge captures the homogenization of culture that’s been bothering me for a long time:

Igor Schwarzmann is the German co-founder of Third Wave, a strategy consultancy based in Berlin that works with small-scale industrial manufacturers. The company’s clients range across Europe, the United Kingdom, and the United States, so Schwarzmann often finds himself moving between poles of the global economy. While traveling, he turns to Foursquare for recommendations about where to eat and drink. “It knows what I like,” he says.

Every time Schwarzmann alights in a foreign city he checks the app, which lists food, nightlife, and entertainment recommendations with the help of a social network-augmented algorithm. Then he heads toward the nearest suggested cafe. But over the past few years, something strange has happened. “Every coffee place looks the same,” Schwarzmann says. The new cafe resembles all the other coffee shops Foursquare suggests, whether in Odessa, Beijing, Los Angeles, or Seoul: the same raw wood tables, exposed brick, and hanging Edison bulbs.

It’s not that these generic cafes are part of global chains like Starbucks or Costa Coffee, with designs that spring from the same corporate cookie cutter. Rather, they have all independently decided to adopt the same faux-artisanal aesthetic. Digital platforms like Foursquare are producing “a harmonization of tastes” across the world, Schwarzmann says. “It creates you going to the same place all over again.”

I wrote about this in a different context the other day. Filter bubbles and increasing intra-class connectedness (but not much extra-class connectedness) are making our world, at least the cosmopolitan corners of it, homogenous.

Independent coffee shops around the world are all the same. Every city has good New American food. Our intra-class connectedness means that Brooklyn and Dalston and Kreuzberg and the Mission are extremely similar. We’re losing local character and losing extra-class empathy. The Dalston hipster doesn’t have much empathy for the inhabitants of post-Industrial Britain, and the Brooklyn hipster couldn’t care less about the former West Virginian coal miner.

This has always been true to at least some extent, but it’s getting worse. Filter bubbles and cheap jet fuel make it so.

Schwarzmann’s coffee shops are all the same because of the network and its filters. The relationship between them is as circular and emergent as a ranked feed. We all have one aesthetic now. We are all one. Except for those of us who don’t get the technology and don’t live in a major cosmopolitan city. They inexplicably vote for Brexit and Trump.

This will take a while to be sorted out. There will be pain in the meantime. But at least during this process we know that we can get a good quality single origin pour over coffee almost anywhere in the world, and with some nice smashed avocado toast on the side. With chili flakes and lemon.

Refuting Picketty by Mike Hudack

A new IMF working paper refutes Picketty:

Thomas Piketty’s Capital in the Twenty-First Century puts forth a logically consistent explanation for changes in income and wealth inequality patterns. However, while rich in data, the book provides no formal empirical testing for its theoretical causal chain. In this paper, I build a set of Panel SVAR models to check if inequality and capital share in the national income move up as the r-g gap grows. Using a sample of 19 advanced economies spanning over 30 years, I find no empirical evidence that dynamics move in the way Piketty suggests. Results are robust to several alternative estimates of r-g.

From the conclusion:

On inequality, the evidence against Piketty’s predictions is even stronger: for at least 75% of the countries, the response of inequality to increases in r − g has the opposite sign to that postulated by Piketty.

This finding makes sense to me since Picketty doesn’t make sense to me. I find it much more likely that power is shifting  away from financial capital than that financial capital is accumulating unchallengable power. 

What I mean by this is that capital is no longer scarce — it’s productive applications of capital that are scarce. If this is true I think it means that Picketty is wrong. 

Rate cuts and fiscal policy by Mike Hudack

The Bank of England cut rates by 25 bps this week. Their action was a response to a torrent of terrible economic data in the aftermath of the Brexit vote.

I think that for most people the promise of a marginally cheaper mortgage probably isn’t enough to get them buying a new house when they’re unsure about their job.

Similarly there doesn’t seem much point in taking out debt to buy new factory equipment — even if the debt is really, really cheap — if profits are falling and your long-term sales outlook is emphatically cloudy.

The British economy doesn’t seem like it needs more asset bubbles spurred by cheap money. It needs customers, jobs, markets to expand into (and maintain access to), quality infrastructure and a friendly regulatory environment.

Brexit is a political problem and needs political solutions. It’s time for fiscal stimulus and clear statements of future government commercial and trade policy.

The government must speak with one voice, clearly and loudly. And best of all, money is historically cheap! There’s never been a better time than now for government to borrow to fund some new infrastructure.

One could maybe start with supporting a nationwide fiber upgrade since BT doesn’t seem to be doing it. Committing to an accelerated Crossrail 2 would be nice too. We live just down the block from the station, and such a commitment would do wonders for our post-Brexit property values. Thank you in advance, Mrs. May.

The biggest problem with Alexa by Mike Hudack

We have three Echoes in our house. The one in the kitchen gets the most use. We use it to listen to the radio in the morning, to play music, set timers and do kitchen conversions.

We don’t use it for anything complicated. We’ve tried, but gotten frustrated quickly and given up. The reason is that Echo is bad at keeping state. It can’t have a conversation. I think part of this is a simple UI problem: it’s hard to have a conversation with a black cylinder. Humans offer lots of non-verbal feedback during conversations, and Alexa offers virtually none. Even if her software were capable of maintaining state during a complicated conversation as a human does a person talking with her would likely lose track because there’s no feedback mechanism other than words. She doesn’t even have different tones of voice.

Changes in intonation, posture, raised eyebrows, glances and shifting weight all help us keep track of where we are in a conversation. Absent these cues we use conversational pauses and tone. Absent these rougher cues — in messenger platforms or e-mail — we use written history to keep track of our conversation.

Alexa offers none of these affordances, and so she’s hard to have a conversation with. It strikes me that until she offers some kind of feedback other than words spoken in a monotone we won’t find it easy to do much with her other than ask for Radio 4 or an alarm when the boiled eggs are ready.

The rise and fall of American productivity by Mike Hudack

The review (and summary) of The Rise and Fall of American Productivity in the New York Review of Books is excellent, although pessimistic.

It argues that economic progress is generally terrible and that 1870 – 1970 was wonderfully exceptional… and that the party is now over. The author’s somewhat counter-intuitive explanation is that the pace of technological advancement has slowed since 1970. 

I prefer to think that modern economics is as bad at measuring today’s progress as the author suggests it was in his 1870-1970 “special century.” 

Just as electricity wasn’t properly accounted for in records of progress over that special century, access to all the worlds information isn’t today. And so on and so forth. 

Still, the review is well worth reading.