11 Nov 2017

A Sovereign Bond Puzzle (2 of 3)

Capital & Interest, Economics 4 Comments

Don’t worry kids, I’ll give you the punchline after this one. But I can see in the comments here that you people still aren’t getting what this has to do with Krugman on Kapital.

So, not a trick question: The 5-year Treasury yield right now is about 2%. The 5-year Japanese government bond yield is about -0.1%.

So how can this be possible? Do investors really think the US government is that likely to default? Why aren’t investors all over the world dumping Japanese bonds and buying US Treasuries, until the yields are equalized?

Or is there some other factor involved that would help explain why the rate of return could be different on different assets like this?

10 Nov 2017

Tom Woods Interviews Me About My New Liberty Classroom Course

Economics, Shameless Self-Promotion, Tom Woods No Comments

Interview here.

And if you want to order the course, use this link to stick it to The Man. (The Man being Tom.)

10 Nov 2017

A Crypto Puzzle

Bitcoin, Capital & Interest, Economics 12 Comments

Developers come up with a new cryptocurrency that doesn’t involve “mining.” Instead, holders of the coins enjoy the creation of more coins, at the rate of 10% per year. (So you can use it to buy things, but if you just hold it, the number of coins you hold grows at 10% per year. The rate is instantaneous though.) They name it GrowCoin.

Inspired by the discussion at this post, their rivals enter the market and release FasterCoin, which is very similar to GrowCoin except FasterCoin reproduces at the rate of 20% per year.

Two questions:

(1) Is it “obvious” to you that nobody would ever hold GrowCoin once FasterCoin is released?

(2) Does that mean that no such cryptocurrency could ever be developed, since obviously a competitor could always just release a coin that has a slightly higher rate of reproduction?

03 Nov 2017

Two Approaches to Criticizing Krugman on Kapital

Capital & Interest, Economics 54 Comments

Nick Rowe and I have both known that something was unsettling in Krugman’s recent posts involving capital theory and the corporate income tax. (BTW this isn’t ideological: I would’ve written the same thing about Steve Landsburg’s diagram except he had too much extra stuff going on, and it would have distracted from my point.)

So Nick writes a really long post that is very polite.

In contrast, I wrote a short, snarky post that has so far gained me 3 emails, all negative. (They were all along the lines of, “I agree that Krugman can often be annoying, but no you messed this one up, Murphy.”)

So you be the judge.

P.S. I’m writing the current blog post tongue-in-cheek, but I am actually wondering what the best approach is. I worry that Nick’s post will fly under the radar, whereas my provocative claim was *so* provocative that nobody believes me–even allies.

02 Nov 2017

Saving’s For Suckers

Economics 2 Comments

I was trying to find more recent data for the items I dug up in this post, and stumbled across the following fairly ominous FRED chart. There might be something going on with capital gains that arguably distorts things (which a Chicago School person would no doubt argue), but for what it’s worth here is the chart:

02 Nov 2017

Murphy Is a Jersey Boy This Weekend

Infinite Banking Concept No Comments

I am doing an IBC Seminar (with Carlos Lara and Nelson Nash) this Saturday in Morristown, NJ. Details are here.

01 Nov 2017

In the Long Run, I Will Always Quibble With Krugman

Economics, Krugman 1 Comment

Although Steve Landsburg is trying to talk me down from the ledge, I think there’s something rotten in economics. (Maybe this is true in every field and I just notice it here because it’s my area; I’m open to the possibility that “humans are disappointing.”)

For example, DeLong and Krugman have accused Mankiw of not simply choosing poor assumptions, but also of committing a basic math mistake. When several people said “no he didn’t,” DeLong tried to get out of by saying (see his tweets down the list here) that a “static analysis” of tax considerations means you allow behavior and hence the tax base to change. (!)

But back to the main point of the present post: In this intriguing post (and I don’t say that sarcastically), Krugman makes a neat argument to end up concluding that it could take “decades” for the U.S. rate of return on capital to be restored to the world’s average rate, following a cut in the U.S. corporate income tax rate. If true, you can see why Krugman (and DeLong and Summers etc.) are flipping out at the simple models from Mankiw et al., which take the baseline assumption that the U.S. is a small open economy and that international capital mobility is perfect.

However, I think there is a huge problem in Krugman’s analysis. To point it out, I think it’s easiest for me to recapitulate his argument:

(1) The baseline is Harberger, who famously showed that if we have a closed economy with a fixed stock of capital goods, then it is the capitalists who bear 100% of capital taxes.

(2) However, nowadays capital is very mobile internationally. In the limit, if we imagine a small open economy, then the after-tax rate of return to capital in that country must be equal to the world average. If the government of this small economy cuts its corporate income tax, that temporarily means a higher after-tax rate of return in this country, compared to the global average. But then capital from foreign investors flows in, pushing down the PRE-tax return on capital in this small economy, until the after-tax rate of return is once again equal to the world average. So this means the capitalists of this economy don’t benefit from a cut in the corporate income tax. Instead, the *workers* do, because the extra capital flowing in yields more investment, so the higher capital per worker means labor is more productive and hence wage rates are higher.

(3) Krugman says this isn’t the full story. What other people have long known is that you have to worry about monopoly rents, and the fact that the US is a huge economy and so capital flowing into it might raise “the” global rate of return. So even in the new equilibrium, when the after-tax rate of return in the U.S. is the same as for the rest of the world, it might still be that U.S. capitalists (and global investors too) are better off, while U.S. workers have not benefited as much as the analysis in (2) would have supposed.

(4) But, says Krugman, there is another element to all of this, that only Krugman has put his finger on. Specifically, you have to ask what is the mechanism by which a “temporarily” higher after-tax rate of return in the U.S. will be whittled away? Sure, you can say “an inflow of capital from abroad,” but in practice that means the USD appreciates against other currencies, in order to cause a current account deficit (flipside of a capital account surplus). Because only a small portion of GDP is in tradable goods, it means the dollar has to strengthen a LOT to get a really big movement in the trade deficit. Krugman uses some plausible numbers and a Cobb-Douglas production function to estimate “about 6 percent of the deviation from the long run eliminated each year. That’s pretty slow: it will take a dozen years to achieve even half the adjustment to the long run.”

====> OK now that I’ve summarized Krugman’s post, here’s my problem: Krugman is assuming that ALL of the growth in the U.S. capital stock (which is needed to push down U.S. pre-tax “r” such that after-tax U.S. “r” once again equals the global average) must come from an influx of foreign saving. In other words, Krugman assumes that the increased investment in the U.S. must work through a capital account surplus, which is limited (as he says) because of the sluggishness of the international flow of goods.

But that wouldn’t be the only mechanism of adjustment. Apparently Harberger’s baseline result assumed a fixed domestic stock of capital, but of course that’s not true in reality. If the U.S. government cuts the corporate income tax rate, that will increase the return to saving and so American “S” will jump up. So the rate of U.S. capital accumulation will increase, not simply because of an influx of foreign capital, but because Americans will save a higher fraction of their income as well.

Is this empirically relevant? Well I was googling around and found this from the St. Louis Fed:

So if I’m interpreting those figures correctly, it used to be the case that U.S. saving accounted for almost all of U.S. investment. But more recently (i.e. from 2000-2004), Americans provided about 78% of the saving to finance American investment, while foreigners provided the other 22%. (Gross domestic investment was 19.3% of GDP during this period, while Americans’ saving was 15.2% of GDP and net foreign capital inflows was 4.1% of GDP.)

I think Krugman is telling us that if we have to boost the U.S. capital stock *solely* through the mechanism of larger net inflows of foreign capital, that it could take decades to fully adjust to a corporate income tax cut. OK fine. But at least for the above period, American saving provided 3x the funds for domestic investment. Those figures might have moved a lot because of government deficits but surely we shouldn’t ignore the role of American saving?

31 Oct 2017

Murphy’s “History of Economic Thought Part II” Now Available on Liberty Classroom

Economics, Shameless Self-Promotion 10 Comments

Hey boys and girls, the second installment of my course on the History of Economic Thought is now available at Tom Woods’ Liberty Classroom. This second installment is a tour of 20th century thought, covering the following topics:

As the list indicates, some of these topics can get a bit technical. I’d like to think that I struck a good balance, providing the intuitive overview of important concepts (such as the “Lucas critique”) for the layperson, while also giving some of the technical details for grad students and/or other economists who may not have studied some of these areas.

My goal in these lectures is to get the student to pass a Turing test for the material in question. For example, I don’t spend much time at all criticizing Keynes; instead I try to interpret what he’s doing in the sections that I chose to highlight from his book. (I also point out that his infamous “in the long run we’re all dead” was NOT a justification for deficit finance.)

I spend a lot of time on capital and interest theory, since that is my specialty, and I hope I convince the student why the Austrian insights here are so crucial. But I also spend a lot of time on game theory, since I think there is a lot of confusion even among mainstream economists on things like a “mixed-strategy equilibrium.”

The last plug I’ll give is this: After I uploaded the last video, I was much more relaxed when considering the prospect of being hit by a bus. I thought, “I have done my part for humanity by distilling a lot of my knowledge of economics into this 2-part History of Thought course. If I die tomorrow, so be it.”

So go sign yourself up for Tom Woods’ Liberty Classroom.