For those not familiar with the idea of a “marriage market”, consider the following quote from Gary Becker from his paper “A Theory of Marriage, Part 1” (emphasis own),
“Two simple principles form the heart of the analysis. The first is that, since marriage is practically always voluntary … the theory of preferences can be readily applied, and persons marrying can be assumed to expect to raise their utility level above what it would be were they to remain single. The second is that, since many men and many women compete as they seek mates, a market can be presumed to exist. Each person tries to find the best mate, subject to … market conditions” (p. 814)
Some equations or relations in economics are inspired guesswork, which may or may not precisely describe the real world. There are other equations which always hold, since they are simple accounting identities. The Kalecki Profit Equation is of the latter type. It describes precisely the factors which determine corporate profits. Knowing this relation can give investors a leg up in predicting earnings.
Armies, both for violence and social change, are costly. Costly to recruit, to train, to provision. But what of mobs? Mobs are cheap, if difficult to plan. Born of the moment, more opportunism born of wildfire than carefully orchestrated arson.
When I see footage of the attack on the Capitol and threads of the angry anonymous on Twitter, I see something in between an army and a mob. At first glance they appear like mobs, phenomena emerging from countless micro-interactions, absent an organizing force. Within the chaos of recent years, however, we’re seeing increased evidence of organizing agents. Within the scores of angry teenagers on the social media warpath for a stronger welfare state and MAGA zealots pushing white ethno-nationalism, we’re finding incepting Russian trolls and coordinating Capitol intruders equipped for ghastly violent theater. These mobs offer evidence of ambition. Ambition to undermine US governance; ambition to prove true the prophecies of some guy from Jersey.
Social media has radically lowered the cost of rousing a mob. Even in the face of technological advancement, however, it remains an unmitigated truth that you get what you pay for. The rabble are filled to the brim with fools, absent leadership, pulling from the tails of distribution. Those with the lowest opportunity cost of time and risk. If democracies are ruddered by the median voter, what guides the mob? The people with the most time on their hands? The least to lose? The most rage? The most bored?
If the median voter is on social media, they’re listening to the mob and also getting what they paid for. What I’m curious about, however is more statistical in nature. One of the points in favor of the median versus the mean is it’s resilience to outliers. But what happens when the median is endogenous to the outliers? What happens when the median voter finds its information increasingly filtered through an army of fools?
Armies are expensive, but mobs have never been cheaper. Why bother with the risk and investment of raising an army, or build a social movement, when you can raise a mob without leaving your home?
It has been pointed out that the only thing funnier than “someone who never played the game” trying to improve soccer is someone who calls football “soccer”. Admittedly, the nomenclature I use is endogenous to my audience, but that is neither here nor there.
A hypothesis: not listening to American advice about the rules is what makes football (aka soccer) the most popular sport in the world https://t.co/mjhZT1BX2N
The rules of football are perfectly distilled examples of the merits of rules versus discretion in optimal policy. Historically, the “laws of the game” codified by FIFA was a relatively sparse tomb that made copious use of the phrase “in the opinion of the referee”. This reliance on referee discretion has contributed as much to the evolving game as globalization, nutrition, and greater athleticism. YouTube is a wonderful place to watch footage of older matches and stare aghast as the world’s very best players try to shatter each other’s tibias and femurs every few minutes. (Brief digression: to really appreciate this, watch this collection of George Best dribbling and note how to succeed at dribbling at any time meant the opposition would inevitably try to break his legs). As our cultural norms have shifted, away from preferences for ultraviolence on fields of play, so too have the enforcement norms amongst football referees. This is at the margin, mind you, with many inframarginal fans and participants left indignant by the cowardice imposed on the game.
I previously questioned the overreliance of the game on referee discretion, much the way I sometimes questioned discretion in monetary policy. My views on monetary policy have shifted somewhat away from pure rules commitment, in part because of what I have viewed in football, and the introduction of a massive institutional shift away from discretion in two dimensions has been nothing sort of disastrous for the experience of both watching and playing a high-level professional game. The introduction of Video Assisted Replay (VAR) and its application to the enforcement of 1) Offsides and 2) Handball infractions has changed not just how the game is optimally played, but the entire emotional arc of observing and playing the game.
Offsides
The offsides rule is quickly defined as such: you may only pass the ball to a player who has between themselves and the goal either i) the ball or ii) two opposition players. The two player bit always confuses people until they remember that the goalkeeper counts as a player.
The rule is, historically speaking, revealing in its continued structure. First, it is on its face silly that they’ve never changed the rule to “one non-goalkeeper between the player and the goal” and make an already cognitively challenging rule to monitor that much easier to enforce. It seems like the kind of rule change easily smuggled in with little opposition, not unlike eliminating offsides for throw-ins, which happened roughly a century ago. Second, there has always been a looseness to what body parts can place a player offsides – in a sport where hands cannot be used, it seems odd that they might shift the imagined lines.
For the purposes of this discussion, what matters is that what might seem a rule with little gray area was actually rife with two forms of important discretion. First, the already alluded to application to body parts. Second, given that a linesmen 40 yards from the middle of the pitch must track the ball and players often 50 yards from it, the triangle of vision they must manage simply does not allow for fine-grained analysis. They’re not tracking limbs, they’re tracking center mass, and barely at that. All of this adds up to enforcement guided by the discretion of the referee and the norms that inform them. Those key norms over time boiled down to 1) Even is onside, 2) When in doubt, the benefit is given to the attacking player, 3) the only parts that should matter are those that can play the ball i.e. flailing arms don’t count. Defensive lines were welcome to play an offside trap i.e. a high line with a governing centerback managing the line and yelling “step!” when a key offensive player might be put in an offside position. But such a strategy came with the risk of relying on a cognitively overwhelmed linesman not leaving your hapless goalkeeper one-on-one against a marauding forward.
VAR was erroneously introduced on the false premise that the weakness of offsides enforcement was the fuzziness of observation when, in fact, the entire institution was predicated on that fuzziness. Without that fuzziness, the advantage shifts strongly to the defensive player(s) because they are facing the passer, giving them the half-second to step forward, placing the offensive player offsides. Such a strategy was too much of a gamble before – placing a player 3 inches offside was sufficiently unlikely to be acknowledged, and goals too scarce, to warrant frequent reliance. Further, as it turns out, the “even is on” norm is critical to offensive counter-attacking. Which leads to the single greatest error in the introduction of VAR: the comically thin 1-pixel lines with which positioning is assessed. Presented with the fallacy that video technology could assess position with <1inch precision, “even is on” ceased to exist because effectively no two players would ever be deemed even. Without additional explication, I will simply note that assessing when a pass was executed is sufficiently fuzzy that <1 inch precision is not on offer.
How to fix it
It’s actually fairly simple in this case – you reconstruct VAR to mimic the ideal referee of the past. You make the lines wider. If those lines overlap at all, the players are deemed even. The system should either a) assign the body parts that are relevant to the rule and make the lines 6-10 centimeters wide or, b) construct the lines at center mass and make them 15-25 centimeters wide. In this manner, we get the best of both worlds – the key elements revealed by 100 years of discretionary enforcement and the uniformity of computational augmentation.
2. Handball
There is this silly posture that players now frequently assume, with their arms hidden behind their backs, as they try to move about athletically without the balance of their arms (it’s really hard, try it some time). This posture is a product of the rule that any violation inside the your defensive penalty box results in a penalty kick which results in a goal roughly ~70% of the time. That’s a very high value event when fixtures average fewer than 3 total goals per game, and is actually even higher value when you consider that scoring opportunities are endogenous to the current score i.e. teams are more conservative with a lead.
In case you did not know, you can’t use your hands, or arms, in football. You’d be within your rights to imagine that players have always gone about pegging the ball at the other teams arms when in the penalty box, trying to draw penalty kicks. You’d have been largely wrong though, for the simple reason that referees have historically been reluctant to reward such tactics. Under the loosely codified rubric of intent of action, proximity to the strike of the ball that eventually contacted their arm, awareness of the ball, or other such language, referees repeatedly made it clear that the penalty they least desired to award was one for a nebulous handball.
VAR stepped in, along with some mind-bogglingly stupid reinterpretation of the handball rule and said “Nope, if it touches the defending player’s arm in the box, it’s a penalty, and absolute chaos ensued. professional players quickly realized that any outstretched arm was to be chipped at and any leaping defender was to be collided with, in the hopes of producing a random arm-ball contact and, in turn, seven-tenths of a goal. Everyone hated it.
So what went wrong? Once again, it’s a case where the equilibrium of the game had evolved to entirely depend on discretion. The penalty box, and its single-sanction system for violations, was designed to deter teams for being overzealous in defense, and give attacking teams fair opportunity to score. That single-sanction, however, was so strong, that it only held in equilibrium through its discretionary, and therefore unpredictable, application by the referee. Sure, it’s arguably the single most powerful referee tool in major sports, but given that soccer is the most popular sport in the world, it certainly warrants respect as a stable second-best solution.
When VAR robbed the institution of its discretionary fuzziness, however, the equilibrium was shattered and the combination of a single-sanction system with a rule that cannot be perfectly complied with, well, the game was sent into minor chaos. The de factor rules had shifted so rapidly and so completely that neither players nor fans understood what was happening. Everyone was thinking more about if and when balls were in contact with arms than if and when it might go in the net. That’s not the ideal equilibrium for a sport, particularly if you’d prefer highlights that are more than penalty kicks (which make for exceedingly boring viewing).
How to fix it
There’s no getting rid of the handball rule. There’s no way to eliminate random contact with arms/hands. There’s no way to adjudicate intent well. If you can’t change the rule and you can’t change the monitoring quality, there’s only one thing left to do: change the punishment. Football should walk away from the single-sanction system.
Indirect free kicks from the spot of the handball
Why Indirect free kicks in the penalty box?
They offer lower expected value than penalties,
The expected value that does emerge reflects the ability of both teams, rather than just the shooter and goalkeeper.
They sneak in a little bit of referee discretion when they identify the spot of the foul i.e. location determines value.
Classic arguments about rules versus discretion are typically about constitutional constraints of elected and appointed officials. Maybe the most salient to our modern lives is how the Federal Reserve should go about it’s policy of increasing or decreasing the money supply i.e. what is the optimal amount of inflation? Regardless of what that number might be, or whether it should be adjusted with the assessed stage of the business cycle, the underlying argument is really about whether or not the targeted number should be chosen by people or set by a rule to which we are bound by a codified pre-commitment.
I myself was once a hard line “rules” person, or at least as hard line as one can be without being a monetary economist by field or training (for an informed opinion, ask this guy). Over time, though, I’ve come to appreciate that rules only work if we know what we are doing when we set them and if we can credibly commit to them. These are big “if’s”. The reality is that there is no such thing as a “pure rule” setting – some amount of discretion is always baked in. If you can’t identify exactly where the status quo discretion is, or, more importantly, why we arrived at the current equilibrium level of discretion, you should proceed with extreme caution. You may find that the discretion you didn’t know was there was the only thing keeping the system afloat this whole time.
When the unexpected happens, who are you going to call? One of the important social functions of religion is that it operates as social insurance. For example, someone who cannot afford groceries, rent, or some other staple like their utility payment might contact their local church leader and ask if there is possibility for assistance during this difficult time. At this point, some might be saying, “They shouldn’t have to do this. The government should provide a safety net for these people.”
There is certainly a connection between the social insurance function of the government and churches. For example, Daniel Hungerman (2004) uses the 1996 Welfare Reform Act to document that the church and state are substitutes in the provision of social services. Part of welfare reform was to restrict welfare payments made to immigrants. Therefore, churches in states with a larger share of immigrants should see a greater decline in welfare payments and, if the church and state are substitutes, a larger increase in church spending on social activities. That is exactly what Hungerman finds. For every one dollar reduction, churches increased spending by 20 – 38 cents.
It started as a simple question: can you substitute blackstrap molasses for regular molasses in a gingerbread recipe?
In order to reduce our potential exposure to Covid, we are ordering groceries online and having them delivered. Whole Foods (owned by Amazon), delivers free to Amazon Prime customers like us. In our order the other day we included molasses. We are almost out, and I wanted to make a gingerbread recipe this holiday week. The bottle that arrived yesterday along with the rest of our order says “Blackstrap Molasses”. Hmm, I wondered, what is different about blackstrap molasses and can you use it in place of the usual Grandma’s molasses that we have always had in our cupboards?
Once I get reading on a topic, it is hard to stop. It turns out there is much to know about molasses (treacle, in the U.K.). We all know it to be a sweet, flavorful ingredient in baked goods, and in savory dishes like pulled pork and baked beans. Diluted molasses is touted as a hair de-frizzer and hair mask, and there are even claims it can help combat gray hair.
However, there is a decidedly unsavory side to its past. It played a key role in fueling the triangular Atlantic slave trade in the 1700’s and early 1800s. Plantations worked by slaves in the Caribbean would ship molasses to the American colonies, where it would be converted into rum. The rum was shipped to West Africa, to pay for more people to be captured and then shipped to the Caribbean plantations to grow more sugar and make more molasses.
Not to mention the deadly “Great Molasses Flood” in Boston. On January 15, 1919, a 50-ft high storage tank of molasses ruptured, and sent a 15-ft high wall of syrup racing through the street at 35 miles an hour. It crushed and drowned anything and anyone in its path. Buildings were collapsed, and 19 people died. It has a place in the history of litigation as the birthing the modern class action lawsuit.
But I digress. Back to the difference since between types of molasses. Sugarcane is squeezed to extract cane juice. Sugar, the main desired product, starts off dissolved in the juice. The cane juice is boiled to remove water, to precipitate the solid sugar crystals. The liquid that remains after the first boiling (and the removal of the sugar from that stage) is called first or light molasses. That is what has usually been sold in U.S. grocery stores.
That first molasses is subjected to a second boiling, to extract even more sugar. The remaining liquid is called second molasses, or dark or robust molasses. From all accounts, this is pretty similar in properties to the initial light molasses, just somewhat less sweet and more flavorful. Folks say that you can substitute dark molasses for light molasses in most recipes without making a big difference.
To extract the last little bit of sugar, the second molasses is boiled even longer and hotter. After the sugar from that stage has been removed, what is left is the so-called blackstrap molasses. Obviously, this product will have less sugar and less liquid, then the light molasses, with a higher concentration of the other flavoring components. The operational question for me is: Can I take some of that blackstrap molasses and simply re-dilute it with some sugar and some water to get the equivalent of light molasses?
Internet opinion on this matter is mixed. On the one hand, there are those who answer this question in the affirmative. They say that a half cup of blackstrap molasses plus half cup of light corn syrup (or half a cup of a water plus sugar mixture) can readily be substituted for a cup of light molasses.
Blackstrap molasses is what results when regular molasses is boiled down and super-concentrated, This results in bitter, salty sludge that only has a 45 percent sugar content, as opposed to the 70 percent sugar level found in both light and dark varieties of baking molasses. Spoon University warns against using blackstrap molasses as substitute for true molasses in any recipe calling for the latter due to the fact that its bitter flavor will overpower the taste of whatever you’re making.
Do not use blackstrap molasses as a substitute for light or dark molasses. It has a strong, bitter taste and isn’t very sweet. It’s more likely to wreck your recipe than help it.
But still I (being a chemical engineer by trade) wondered if this “strong, bitter” taste is merely the lack of sugar, which could be cured by replacing the missing sugar. After all, unsweetened chocolate is unpalatably bitter, but we fix that by adding sugar.
I don’t claim the final word on this, but it seems that the severe third boiling that yields the blackstrap molasses does some chemical alterations. It is not merely a matter of removing sugar. It is all well when sugar is lightly heated to form light brown caramel, but when it gets pushed too far, some bitter, dark brown compounds can form. It is not clear that merely adding sugar can undo these flavors, considering that blackstrap still contains a lot (45%) of sugar.
Conclusion: Blackstrap molasses may be fine for your BBQ sauce and as a trendy, mineral-packed low-sugar sweetener for your yoghurt and tea. But that bottle of thick black goo on my counter is going back to Whole Foods, not into my gingerbread.
Humans are soft, slow, and (to the best of my knowledge) make for fairly nutritious meals. Brains for tool-making, and the opposable thumbs for using them, are significant evolutionary adaptations, but it is our capacity to act collectively that placed us at the top of the food chain.
By the end of a standard undergraduate economics curriculum, one couldn’t be blamed for coming to the conclusion that the failures of collective action are the greatest obstacle to mankind – Oh what we could have accomplished if only we had ever found a way to just cooperate. Alas, all those externalities, Prisoners’ Dilemmas, free riders, easy riders, market failures, government failures, they just stopped us at every turn…
I’m not doubting the pedagogical value of teaching any of these obstacles, I teach them myself, but I believe we spend insufficient time reminding students that humans have been solving collective action problems with great success for thousands of years. Every national government, book club, homeowners association, and sorority has managed to produce public goods. So has every military coup and angry mob (if only sometimes for fleeting moments), but collective action is collective action, regardless of how we may feel about the outcome.
More often than not the most interesting question to me isn’t can a collective action problem be solved, but rather i) how has it already been solved and ii) how is that solution going to be threatened or hijacked? When I look to the current political landscape and the only mildly-exaggerated state of political and social polarization, I see not just rival ideologies, but alternative strategies for engendering and ensuring cooperation. On the left, I observe greater recent emphasis on purity – there is a narrow band of acceptable truth and any deviation from that, be it however accidental or benign in intent, can lead to significant punishments, including purges colloquially referred to as cancellations. On the right, I see required public professing of incorrect, often seemingly absurd, beliefs. I might talk about purity tests and purges on the left another times. What I’m interested in at the moment are the public untruths of current right wing identities (broadly conceived) and how they fit into the sacrifice and stigma theory, or club theory, of religion.**
I’ve written a lot about sacrifice and stigma theory. It has become the hammer than has left me forever searching for nails. Originally put forth by Laurence Iannaccone in 1992, it is nothing short of brilliant to my mind. A tool for solving collective problems so profound that when it shows up we barely notice it, and where it shows up tends to be the most powerful clubs shaping our societies: the religious, martial, and extremist political groups that bend the arc of history.
Groups produce what we call “club goods” i.e. public goods only accessible to members of the group. What Iannaccone demonstrated was that a group could actually increase their production of club goods by burdening its members with completely unproductive costs. Why do religious groups require clothing, behavior, or language that could stigmatize their members in broader society? Why are members required to sacrifice their resources at the literal or figurative altar of the group? Because if you impair members’ private productivity, or if the fruits of that private production are skimmed away, they willinvest more of their resources into the group. If all group members face these same altered incentives, guess what, you’ve solved the collective action problem!
When I see educated women and men declaring the earth is 5,000 years old, that evolution isn’t real, that climate change is a hoax, or that Donald Trump is a brilliant human being, what I see is public profession of beliefs that might limit social or even occupational opportunities and, in turn, further commit them to a specific subset of affiliations. In the constellation of beliefs that might end up as political shibboleths, of course, there stand to be some more costly than others. In fact, there might even be beliefs that impose negative externalities on others, such antipathy towards vaccines or mask-wearing during a pandemic. Excessive burden might hurt the group, of course – remember, club membership must to be a net gain to persist. In a polarized society, however, vitriol created in rival factions by the externality-generating belief could actually intensify the commitment of group members. The liberals hate real-Americans like me so much now, they’d never accept me as anything but a dumb redneck, so the rational thing to do is double down on my commitment to the only group that will have me. Beliefs that reduce private productivity, increase group productivity, and create long-run antipathy in rival groups can serve to create something incredibly valuable to the group: a captured membership. If there is one thing that is evolutionarily hard-wired into human beings it is the knowledge that isolation is death. A member so stigmatized by past public behavior that rival groups would never accept them stands to be very committed to the group going forward.
The vulnerability of sacrifice and stigma born of public adherence to false beliefs, however, is the capacity of leaders to incept preferred false beliefs into the dogma. This is one way that minority groups can become scapegoated, the carbon costs of fossil fuels denied, quack remedies pedaled, or the reliability of electoral institutions undermined. Religious texts exist (mostly) unedited for long periods of time for a very important reason: core rules of behavior, methods of tithing, and sets of beliefs must be inoculated against opportunistic actors who would hijack the club goods they produce.
Sacrifice and stigma through club-specific false beliefs is a dangerous strategy for political parties for the simple reason that without the constraints of fact or scripture, leaders will feel the pull of their own preferences. Far more dangerous however, is the megalomaniacal conman that any political party institutionally designed to demand cognitive dissonance of its members will eventually attract. Political parties need to solve collective action problems, yes, but they also need immune systems. One might point to social norms, both within and outside the group, as key means of protection. Recent years, however, would seem to suggest that norms are not sufficiently robust in the long run. The US court system has held up well, and has in many ways served as the nations constitutional immune system. Perhaps the major political parties should consider updating and reinforcing their own constitutions, and put in place mechanisms to protect themselves from the next inevitable invasion.
American political parties need to update and upgrade their immune systems.
Inspiring research:
Iannaccone, Laurence R. “Sacrifice and stigma: Reducing free-riding in cults, communes, and other collectives.” Journal of political economy 100.2 (1992): 271-291.
Aimone, Jason A., Laurence R. Iannaccone, Michael D. Makowsky, and Jared Rubin. “Endogenous group formation via unproductive costs.” Review of Economic Studies 80, no. 4 (2013): 1215-1236.
**Note: this is not to suggest that left-wing identity affiliations don’t utilize sacrifice and stigma mechanisms. There is no shortage of what I suspect are completely ineffective, but highly visible, ostensibly pro-environment behaviors that are demanded. But the “headline” mechanisms of herding left-of-center identities under the progressive banner look more like threats of exile than sacrifice and stigma.
Money can be simplistically defined as “A medium that can be exchanged for goods and services and is used as a measure of their values on the market, and/or a liquifiable asset which can readily be converted to the medium of exchange”. Earlier we described the amounts of various classes of “money” in the U.S. Here is a chart showing the amount of currency in circulation (coins and bills; lowest line on the chart) for 2005-2020, and also M1 (green), M2 (upper curve, purple) and “monetary base” (currency plus reserves at the Fed; red line).
To recap what M1 and M2 are:
M1: Physical currency circulating outside of the Fed and private banking system, plus the amount of demand deposits, travelers’ checks and other checkable deposits. This is highly “liquid” money, i.e. accepted and used for transactions in the private economy.
M2: M1 + most savings accounts, money market accounts, retail money market mutual funds, and small denomination time deposits (certificates of deposit of under $100,000).
The funds in these additional savings and money market accounts can in general be easily transferred to checkable accounts, and thus could go towards making purchases if desired.
Physical currency is made and put into circulation by the government or quasi-governmental agencies (the Treasury mints coins, and the Federal Reserve prints bills). But what about all the other money (M1, M2, etc.), which dwarfs the physical currency? How does it grow?
Without getting into all the weeds, it turns out that the major driver of money creation in modern economies is the process of bank loans. The vast majority of money in countries like the U.S. is not created directly by government or central bank operations, but is created in the private sector when commercial banks make loans. When individuals or companies decide to take out more loans (including loans for cars, houses, or business investment), the effective money supply in the nation increases. This is true for other modern economies. For instance, the Bank of England states:
There are three types of money in the UK economy:
3% Notes and coins
18% Reserves
79% Bank deposits
A typical scenario of how bank lending increases money might go something like this: Fred would like to add an enclosed back porch to his house, but doesn’t have the money in hand to pay a carpenter to build it for him. So the base case is no payment to the carpenter and no porch for Fred. However, Fred realizes he can go the bank and get a loan to pay for the porch. So he obtains a $20,000 loan from the bank, which first shows up as a $20,000 credit to Fred’s checking account. The bank credits Fred’s account, and in exchange obtains a contract from Fred promising that Fred will pay it back, with interest.
Fred writes a check for $20,000 to the carpenter, who in turn pays $10,000 to a lumberyard for materials and keeps the other $10,000 as his fee. The lumberyard is able to pay its workers for that day, and order replacement lumber from a mill. The workers spent their pay on various items. The carpenter puts $5000 of his $10,000 fee in a savings account, and pays the rest to a car dealer for a used car.
The initial loan to Fred set off a chain of spending and economic activity, which would not have otherwise occurred. Fred has his porch, the lumberyard workers continue to be employed and supporting their local merchants, the carpenter gets a second car, and this money keeps ricocheting around until it gets drained away into stagnant savings, or is used to pay down prior debt. Although they are not aware of it, part of the lumberyard workers’ pay for that day came out of the debt incurred by Fred.
The granting of that loan created $20,000 of spending capability, i.e. money. As far as the economy is concerned, that $20,000 did not exist as effective money prior to the loan. Thus, the money came into existence simultaneously with the debt associated with the loan. Fred received the capacity to spend $20,000 today, but in turn accepted the obligation to pay back this money, with interest. It is assumed that Fred had a stable income, such that he would in fact be able to pay back the loan in the future.
In general, increasing debt increases the money supply, and paying down debt extinguishes money. For simplicity, suppose Fred repays the $20,000 loan (with $2000 interest added) in one big lump, two years later. In that year, he will presumably spend into the economy something like $22,000 less than he would have otherwise. Thus, his paying down of his debt will act as a decrease in the circulating money.
In normal times, as one person is paying down his loan (and thereby shrinking the money supply), someone else is taking out a new and even larger loan, so total debt and the amount of money in circulation stays about the same, or grows somewhat. A feature of the 2008-2009 recession, however, was a big drop in consumer demand for credit; folks decided to pay down debts and not borrow so much money to buy stuff. The effect was a big drop in spending and thus in overall economic activity (GDP) and in employment.
Where was that $20,000 before Fred borrowed it? We might think that it was sitting unused in the bank vaults, just waiting to be borrowed. That turns out to be an incorrect picture of the lending process.
Bank loans differ in key ways from, say, an interpersonal loan. If I lend you money, I might draw down my checking deposit and give you a check which you would deposit in your bank account. No new money is created. You may hand me an I.O.U. slip stating when you will pay me back and with what interest, but that would still be just the same funds being traded back and forth between the two of us. I would have to have the money in my account to start with before I could loan it to you.
Bank lending is different. A bank can lend money and hence create a new deposit, which amounts to brand-new money, even if the bank does not have that money to start with. This is counterintuitive. In a later post we may flesh out this seemingly magical aspect of bank lending. See Overview of the U. S. Monetary System for a more complete discussion.
One of the many things I meant to do and did not have time for this Fall was a photo study of the political signs in my neighborhood. I did snap a few pictures, such as this one of a conservative house:
The next one is not a Biden/Harris sign, but they are supporting the Democrat senator Doug Jones.
The Biden signs far outnumbered the Trump signs. It’s a safe assumption that most Trump voters did not put out signs.
Tonight, you cannot tell which households supported which candidate. I think my election photo journalism failure might actually turn into a different story. Observe this street
Something CUTE that my Alabama neighbors do is put up an outdoor Christmas tree with white lights, like so:
When you drive down a street past dozens of these in a row, the effect is wonderful (and hard to capture adequately with my phone camera). It’s neither a political statement nor an anti-political statement. It’s a community that thrives despite their differences. This is something beautiful they do to enjoy together.
Like many neighborhoods, we also have “that house”:
If you haven’t read Jeremy’s earlier post on vaccine allocation take a few minutes, it’s worth the read. We have fewer vaccines than people who want vaccines. Also, who actually gets vaccines is being decided through a priority system established by the federal government.
People do not seem outraged about the priority system. Probably this is because the priority queue has some grounding in our moral intuitions. In the absence of market allocation, you are forced into some allocation criteria other than price. What would the “right” allocation be? People seem to gravitate towards principles of merit, need, and equality (see my earlier post here) and one could view the allocation to healthcare workers as meeting the criteria of merit. These individuals are currently on the frontlines of exposure to the virus and have endured significant stress the last nine months.
At the same time, it is worth asking whether a switch to the allocation of vaccines through a market mechanism is better. Markets are appealing because there is so much information to take into account (e.g. should an X-Ray tech get the vaccine before a teacher). The presence of externalities complicates the story and implies that non-market allocation could do better. Though there appear to be substantial coordination problems with our current central planning approach.
Like other economists, I see the power of markets to coordinate plans and that makes me lean towards an auction format. I am not confident the government can centrally plan towards a more efficient allocation. However, I admit the ethics of distribution according to willingness to pay makes me reluctant to use auctions. I would favor randomization of who gets the vaccine (all have an equal chance which is morally appealing) with opportunities for side-payments where people can take advantage of their local information. Jeremy suggested a lump sum transfer for the poor but it seems this would introduce new complications like who counts as poor (what percent of FPL) and the correct size of the lump sum transfer.
This approach of randomization likely has the added benefit that it randomizes potentially adverse shocks. Because the vaccines were expedited in clinical trials, there could be unique and unknown long term consequences due to the nature of our current situation and how studies are conducted. If something bad does happen, shocks will be less concentrated within industries and medical distrust will be less concentrated within a subgroup. That seems like a valuable outcome that I haven’t seen people discuss (though I have been busy this week submitting grades and preparing for a new semester).
Economist Writing Every Day 