Steven Koonin’s “Unsettled”

Goodreads rating: 4.39.

The book offers

  • a brief tour of the physics behind climate change and the role played by human activity;
  • a skeptical discussion of climate models;
  • some stronger, some weaker examples of distorted reports, by scientists and the media, regarding causal links between human activity, climate change, and extreme weather events, sea level change, or production (opponents claim that these examples are cherry-picked; Koonin retorts that scientific reports should be correct);
  • a plausible prediction of national adaption policies rather than international cooperation to strongly reduce emissions.

For some critical reviews (some not compelling) of the book, see Wikipedia.

Aggregation

David Baqaee in SED Newsletter, November 2021.

Hulten’s theorem:

… the elasticity of aggregate TFP to a microeconomic TFP shock is equal to the sales of the producer being shocked divided by GDP. … Furthermore, if labor supply is inelastic or if the definition of GDP is expanded to include the market value of leisure, then this irrelevance result also applies to real GDP (or under some additional assumptions to welfare).

This result, oftentimes known as Hulten’s Theorem (Hulten, 1978), is a consequence of the first welfare theorem, and therefore, is remarkably general. … As with other irrelevance results in economics, like the Modigliani-Miller Theorem or Ricardian Equivalence, much of the economics of aggregation can be understood in terms of deviations from Hulten’s theorem.

Nonlinearities:

… disaggregated details … that do not matter to a first-order, do matter for understanding the nonlinear effect of shocks.

The key conceptual breakthrough is to recognize that nonlinearities are captured by changes in sales shares. Intuitively, in response to a negative shock to oil or electricity, we expect the sales shares of oil or electricity to skyrocket. On the other hand, in response to a negative shock to Walmart, we expect the sales share of Walmart to decline (perhaps rapidly). The sign and magnitude of changes in sales shares tell us that output is very concave with respect to energy shocks and convex with respect to Walmart shocks. … we characterize in very general and abstract terms the equations that determine changes in sales shares

Changes in sales shares are determined by what we call forward and backward propagation equations. Forward propagation equations show how a shock to the marginal cost of a producer propagates through forward linkages, from suppliers to consumers, to change prices downstream. The backward equations show how a shock to the sales of a producer propagates through backward linkages, from consumers to their suppliers, to change sales upstream …

These equations not only help answer questions about the nonlinearities in output in efficient environments, but they can also be used to answer microeconomic questions including, for example, how shocks propagate from one firm to another in general equilibrium, or how the distribution of factor income shares responds to shocks … Furthermore, unlike Hulten’s theorem itself, the forward and backward propagation equations straightforwardly generalize to more complex environments where the first welfare theorem does not hold, and these generalizations will allow us to extend our analysis beyond efficient equilibria.

… nonlinearities magnify negative shocks and attenuate positive shocks, resulting in an aggregate output distribution that is asymmetric (negative skewness) and fat-tailed (excess kurtosis), with a negative mean, even when shocks are symmetric around zero and thin-tailed. Average output losses due to short-run sectoral shocks are an order of magnitude larger than the welfare cost of business cycles calculated by Lucas (1987)

Frictions:

Hulten’s theorem derives its deceptive simplicity from two facts: (i) marginal-cost pricing ensures that the expenditures by firms on every input measures the elasticity of output with respect to that input (Shephard’s lemma); (ii) marginal-cost pricing ensures production is efficient, meaning that reallocating resources from one user to another does not change real GDP to a first order. Since reallocation effects can safely be ignored to a first-order, (ii) implies that the elasticity of aggregate output to shocks can be computed by assuming that the allocation of resources stays constant and resources simply scale up or down proportionally according to initial shares. From (i) we know that this will change each firm’s output by that firm’s expenditure share on the input being scaled. This “mechanical” effect of scaling resources by initial shares when summed over all input users yields sales, which is the Hulten formula.

Inefficient economies break Hulten’s theorem in two ways. First, sales shares no longer capture the “mechanical” effect of scaling up input usage because of wedges between output elasticities and expenditures shares. Second, reallocation effects, which are first-order irrelevant in efficient equilibria, now matter to a first-order and must be solved for.

… In other words, when a producer becomes more productive, the impact on aggregate TFP can be broken down into two components.

First, given the initial distribution of resources, the producer increases its output, and this, in turn, increases the output of its direct and indirect customers; this is the mechanical effect that would be equal to sales shares in the absence of wedges. Second, there are reallocation effects that can raise or lower aggregate output holding fixed the level of technology. We show that this reallocation effect can be measured by a specific weighted average of changes in wedges and changes in factor income shares (in an economy with a single factor, say labor, this is simply the labor income share). Intuitively, if a shock reallocates resources in such a way that boosts aggregate output, then this shock will “save” on factor usage. This reallocation makes factors less scarce and causes factor prices and, ceteris paribus, factor income shares to decline on average. The fact that factor income shares decline on average therefore captures changes in aggregate TFP due to reallocation effects.

… average markups have been increasing primarily due to a between-firm composition effect, whereby firms with high markups have been getting larger, and not to a within-firm increase in markups. From a social perspective, these high-markup firms were too small to begin with, and so the reallocation of resources towards them increases aggregate TFP over time.

… we find that in the U.S. in 2015, eliminating markups would raise aggregate TFP by about 20% (depending on the markup series). This increases the estimated cost of monopoly distortions by two orders of magnitude compared to the famous estimate of 0.1% of Harberger (1954).

… changes in aggregate demand, for example, monetary policy shocks, can naturally affect an economy’s TFP due to reallocation effects. In particular, we propose a supply-side channel for the transmission of aggregate demand shocks by showing that in an economy with heterogeneous firms and endogenous markups, demand shocks can have first-order effects on aggregate productivity.

Intuitively, if high-markup firms have lower pass-throughs than low-markup firms, as is consistent with the empirical evidence, then an aggregate demand shock, like a monetary easing, generates an endogenous positive “supply shock” that amplifies the positive “demand shock” on output. The result is akin to a flattening of the Phillips curve. We derive a tractable four-equation dynamic model, disciplined by four sufficient statistics from the distribution of firms, and use it to show that a monetary easing generates a procyclical hump-shaped response in aggregate TFP and countercyclical dispersion in firm-level TFPR.

Non-convexities:

Unlike first-best policies, which are independent of network structure and simply ensure efficiency market-by-market, the effects of second-best policies are network-dependent. In particular, for economies with increasing returns to scale, we rationalize and revise Hirschman’s influential argument that policy should encourage expansion in sectors with the most forward and backward linkages, and we give precise formal definitions for these concepts. We show that the optimal marginal intervention aims to boost the sales of sectors that have strong scale economies, but are also upstream of other sectors with strong scale economies.

Household heterogeneity:

… we provide a modified version of Hulten’s theorem that does answer welfare questions in general equilibrium economies with non-homothetic, non-aggregable, and unstable preferences. We show that calculating changes in welfare in response to a shock only requires knowledge of expenditure shares and elasticities of substitution and (given these elasticities) does not require income elasticities and taste shocks. We also characterize the gap between changes in welfare and changes in real consumption.

Interview, Riksbank RN, 2021

Riksbank Research News 2021, December 2021. PDF (pp. 2–3), HTML.

Q: You have been leader of the CEPR Research and Policy Network on FinTech and Digital Currencies since 2021 and explored issues at the heart of monetary theory and payment systems in your research. What do you think is new about digital central bank money and what makes it different from other digital means of payment?

A: Societies have been using digital means of payment for decades. Commercial banks use digital claims against the central bank, “reserves,” to pay each other. Households and firms use digital claims against commercial banks, “deposits,” as well as claims on such deposits, as money. Financial innovations typically improved the convenience for users or helped build additional layers of claims on top of each other, fostering fractional reserve banking and raising money multipliers.

Recently, new digital instruments have appeared on the fringes of the financial system. Some think of them as currencies and others as mere database entries. These instruments exploit the fact that smart ways of managing information, and even smarter approaches to providing incentives in anonymous, decentralized networks can replicate some functions of conventional monies. Monetary theorists are not surprised. They have debated for decades to what extent money is, or is not a substitute for a large societal database. The information technology revolution has made this debate much less theoretical.

Of course, the new entrants such as Bitcoin have not been very successful so far when it comes to actually creating substitute monies. But they have been quite successful in terms of creating new assets, mostly bubbles. Bubbles are also a great mechanism for their creators to extract resources from other people.

What is new about digital central bank money for the general public (central bank digital currency, CBDC) is that households and firms would no longer be restricted to cash when they wanted to pay using a central bank (i.e., government) liability. That is, banks would lose a privilege and households and firms would gain an option. CBDC, which I like to think of as “Reserves for All,” seems natural when you consider the history of central banking. It also seems natural when you consider that many governments strongly discourage the use of cash. Nevertheless, compared with the status quo, “Reserves for All” would amount to a major structural change.

Q: What do you think are the main challenges of issuing a CBDC?

A: From a macroeconomic perspective, introducing “Reserves for All” could have major implications. The balance sheets of central banks would likely expand while commercial banks would likely lose some deposits as a source of funding. Mechanically, they would reduce their asset holdings or attract other sources of funding. The question is, which assets they would shed, and subject to which terms and conditions they would attract new funding. These are important questions because banks play a key role in the transmission of monetary policy to main street.

While many central bankers are concerned about the implications of CBDC for bank assets and funding costs academic research conveys a mixed picture. To assess the consequences of “Reserves for All” it is natural to first ask what it would take to perfectly insulate banks and the real economy from the effects of CBDC issuance. As it turns out, the answer is “not much:” Under fairly general conditions the central bank holds a lot of power and can neutralize the implications of CBDC for macroeconomic outcomes.

Of course, central banks might choose to implement other than the neutral policies. In my view, this is in fact very likely, for reasons related to the political economy of banking and central banking. On the one hand, CBDC would make it even harder for central banks to defend their independence. On the other hand, CBDC would increase the transparency of the monetary system and trigger questions about the fair distribution of seignorage. On top of this, “Reserves for All” might trigger demands for the removal of other “bank privileges:” Interest groups might request LOLR-support, arguing that they are systemically important and just temporarily short of liquidity. Others might want to engage in open market operations with the central bank.

Beyond macroeconomics and political economy, CBDC could substantially change the microeconomics of banking and finance. In the current, two-tiered system there is ample room for complementarities between financing, lending, and payments. The information technology revolution strengthens these complementarities but it also generates new risks or inefficiencies. How the connections between money and information currently change is the subject of ongoing research. I don’t think we have been able to draw robust conclusions yet as to what role CBDC would play in this respect.

Q: Should we, and will we have CBDCs in the near future?

A: Some countries have already decided in favor. Others, like the Riksbank I believe, are still on the sidelines, thinking about the issues, watching, and preparing. Yet others have only recently taken the issue more seriously, mostly because of the Libra/Diem shock in June 2019, which made it clear to everybody that the status quo ceases to be an option.

I think the normative question is still unanswered. Not only does CBDC have many consequences, which we would like to better understand. There are also the unknown consequences that we might want to prepare ourselves for. Moreover, many of the problems that CBDC could potentially address might also allow for different solutions; the fact that CBDC could work does not mean that CBDC is the best option.

In a recent CEPR eBook* several authors share that view, which suggests a case-by-case approach. CBDC might be appropriate for one country but not for another, for instance because cash use has strongly declined in Sweden and this may favor CBDC (as Martin Flodén and Björn Segendorf discuss in their chapter) while the same does not apply in the US or elsewhere.

Regarding the positive question, I think that many more countries will decide to introduce “Reserves for All,” and quite a few of them in the next five years. One reason is that it is politically difficult to wait when others are moving ahead. Another is the fear of “dollarization,” not only in countries with less developed financial markets. The strongest factor, I believe, is the fear that central banks might lose their standing in financial markets. This is connected with the important question, which the Riksbank has been asking early on, whether in the absence of CBDC declining cash circulation could undermine trust in central bank money.

Among the eBook authors, most but far from all expect that a CBDC in a developed economy would resemble deposits in terms of user experience. Almost everyone expects that private banks and service providers rather than the central bank itself would interact with end-users. I share these views. But there is disagreement as to whether digital currencies would be interest bearing and how strictly they would protect privacy. I believe that it is also unclear how strictly central banks would enforce KYC regulation or holding restrictions on foreigners. These two factors might critically affect the threats to monetary sovereignty in other countries, and as a consequence they might shape the chain reaction of adoptions.

What seems clear to me is that the implications of CBDC go far beyond the remit of central banks. Parliaments and voters therefore should have the final say.

* Dirk Niepelt (2021), editor: “CBDC: Considerations, Projects, Outlook”, CEPR eBook. Changes in the research staff

David Graeber’s “Debt”

Goodreads rating 4.19.

Graeber’s book contains many interesting historical observations but lacks a concise argument to convince a brainwashed neoclassical economist looking for coherent arguments on money and debt. After 60 pages, 340 more seemed too much.

Chapter one:

… the central question of this book: What, precisely, does it man to say that our sense of morality and justice is reduced to the language of a business deal? What does it mean when we reduce moral obligations to debts? … debt, unlike any other form of obligation, can be precisely quantified. … to become simple, cold, and impersonal … transferable.

… money’s capacity to turn morality into a matter of impersonal arithmetic—and by doing so, to justify things that would otherwise seem outrageous or obscene. … the violence and the quantification—are intimately linked. … the threat of violence, turns human relations into mathematics.

…The United States was one of the last countries in the world to adopt a law of bankruptcy: despite the fact that in 1787, the Constitution specifically charged the new government with creating one, all attempts were rejected, or quickly reversed, on “moral grounds” until 1898.

… historically, credit money comes first [before bullion, coins]

… ages of virtual credit money almost invariably involve the creation of institutions designed to prevent everything going haywire—to stop the lenders from teaming up with bureaucrats and politicians to squeeze everybody dry … by the creation of institutions designed to protect debtors. The new age of credit money we are in seems to have started precisely backwards. It began with the creation of global institutions like the IMF designed to protect not debtors, but creditors.

… the book begins by attempting to puncture a series of myths—not only the Myth of Barter … but also rival myths about primordial debts to the gods, or to the state … Historical reality reveals [that the state and the market] have always been intertwined. … all these misconceptions … tend to reduce all human relations to exchange … [but] the very principle of exchange emerged largely as an effect of violence … the real origins of money are to be found in crime and recompense, war and slavery, honor, debt, and redemption. … an actual history of the last five thousand years of debt and credit, with its great alternations between ages of virtual and physical money …

… many of Adam Smith’s most famous arguments appear to have been cribbed from the works of free market theorists from medieval Persia …

Chapter two (“The Myth of Barter”) contains questionable claims about economics as well as interesting historical facts (or claims?):

When economists speak of the origins of money … debt is always something of an afterthought. First comes barter, then money; credit only develops later. …

Barter … was carried out between people who might otherwise be enemies …

… “truck and barter”’ [in many languages] literally meant ”to trick, bamboozle, or rip off.”

What we now call virtual money came first. Coins came much later, … never completely replacing credit systems. Barter, in turn, … has mainly been what people who are used to cash transactions do when for one reason or another they have no access to currency.

Chapter three (“Primordial Debts”) argues the the myth of barter is central to the discourse of economics, which according to Graeber downplays the state as opposed to markets, exchange, and individual choice. He tries to confront this view with Alfred Mitchell-Innes’ credit theory of money, Georg Friedrich Knapp’s state theory of money, the Wizard of Oz (i.e. “ounce”), and John Maynard Keynes (original?) claim that banks create money.

In all Indo-European languages, words for “debt” are synonymous with those for “sin” or “guilt,” illustrating the links between religion, payment and the mediation of the sacred and profane realms by “money.” [money-Geld, sacrifice-Geild, tax-Gild, guilt]

Wikipedia article on the book:

A major argument of the book is that the imprecise, informal, community-building indebtedness of “human economies” is only replaced by mathematically precise, firmly enforced debts through the introduction of violence, usually state-sponsored violence in some form of military or police.

A second major argument of the book is that, contrary to standard accounts of the history of money, debt is probably the oldest means of trade, with cash and barter transactions being later developments.

Debt, the book argues, has typically retained its primacy, with cash and barter usually limited to situations of low trust involving strangers or those not considered credit-worthy. Graeber proposes that the second argument follows from the first; that, in his words, “markets are founded and usually maintained by systematic state violence”, though he goes on to show how “in the absence of such violence, they… can even come to be seen as the very basis of freedom and autonomy”.

Reception of the book was mixed, with praise for Graeber’s sweeping scope from earliest recorded history to the present; but others raised doubts about the accuracy of some statements in Debt, as outlined below in the section on “critical reception”.

 

Max Horkheimer and Theodor Adorno’s “Dialektik der Aufklärung”

Goodreads rating 4.09.

Enlightenment:

Schon der Mythos ist Aufklärung, und: Aufklärung schlägt in Mythologie zurück. …

Seit je hat Aufklärung im umfassendsten Sinn fortschreitenden Denkens das Ziel verfolgt, von den Menschen die Furcht zu nehmen und sie als Herren einzusetzen. Aber die vollends aufgeklärte Erde strahlt im Zeichen triumphalen Unheils. …

Als Sein und Geschehen wird von der Aufklärung nur anerkannt, was durch Einheit sich erfassen lässt; ihr Ideal ist das System, aus dem alles und jedes folgt. … Als Gebieter über Natur gleichen sich der schaffende Gott und der ordnende Geist. … Mythen wie magische Riten meinen die sich wiederholende Natur.

Odysseus, myth, enlightenment:

Der listige Einzelgänger ist schon der homo oeconomicus, dem einmal alle Vernünftigen gleichen: daher ist die Odyssee schon eine Robinsonade. Die beiden prototypischen Schiffbrüchigen machen aus ihrer Schwäche — der des Individuums selber, das von der Kollektivität sich scheidet — ihre gesellschaftliche Stärke. Dem Zufall des Wellengangs ausgeliefert, hilflos isoliert, diktiert ihnen ihre Isoliertheit die rücksichtslose Verfolgung des atomistischen Interesses.

Juliette, enlightenment, morals:

Der Bürger, der dem kantischen kategorischen Imperativ aus der Kritik der praktischen Vernunft beistimmt … folgt keiner wissenschaftlichen Vernunft, sondern einer Narretei, wenn er sich deswegen einen materiellen Gewinn entgehen lässt. …

Bei de Sade wie bei Nietzsche wird das „szientifische Prinzip ins Vernichtende“ gesteigert. … Alles bleibt sinnfrei der Willkür des verbrecherischen Lustprinzips verhaftet. … So demontiert Sades Juliette alle Konventionen und Werte – Familie, Religion, Gesetz, Moral –, nichts vermag übrig zu bleiben, was die Gesellschaft ehemals zusammenhielt, alles fällt dem Wirtschaftsbetrieb und der enthemmten Ökonomie der aufgeklärten Verbrechergangs zum Opfer.

Wikipedia on the book:

… die These, dass sich bereits zu Beginn der Menschheitsgeschichte mit der Selbstbehauptung des Subjekts gegenüber einer bedrohlichen Natur eine instrumentelle Vernunft durchgesetzt habe, die sich als Herrschaft über die äußere und innere Natur und schließlich in der institutionalisierten Herrschaft von Menschen über Menschen verfestigte. Ausgehend von diesem „Herrschaftscharakter“ der Vernunft beobachteten Horkheimer und Adorno einen Aufschwung der Mythologie, die „Rückkehr der aufgeklärten Zivilisation zur Barbarei in der Wirklichkeit“ …

… habe nicht einen Befreiungs-, sondern einen universellen Selbstzerstörungsprozess der Aufklärung in Gang gesetzt. …

Nach Horkheimer und Adorno ist die Abstraktion das Werkzeug, mit dem die Logik von der Masse der Dinge geschieden wird. Das Mannigfaltige wird quantitativ unter eine abstrakte Größe gestellt und vereinheitlicht, um es handhabbar zu machen. … Alles, was sich dem instrumentellen Denken entzieht, wird des Aberglaubens verdächtigt. Der moderne Positivismus verbannt es in die Sphäre des Unobjektiven, des Scheins.

Aber diese Logik ist eine Logik des Subjekts, die unter dem Zeichen der Herrschaft, der Naturbeherrschung, auf die Dinge wirkt. Diese Herrschaft tritt dem Einzelnen nunmehr als Vernunft gegenüber, die die objektive Weltsicht organisiert.

… Die wissenschaftliche Weltherrschaft wendet sich gegen die denkenden Subjekte und verdinglicht in der Industrie, der Planung, der Arbeitsteilung, der Ökonomie die Menschen zu Objekten. … an die Stelle der befreienden Aufklärung aus der Unmündigkeit tritt das wirtschaftliche und politische Interesse, das Bewusstsein der Menschen zu manipulieren. Aufklärung wird zum Massenbetrug. …

Nach Auffassung Horkheimers und Adornos raubt industriell hergestellte Kultur dem Menschen die Phantasie … Die „Kulturindustrie“ liefert die „Ware“ so, dass dem Menschen nur noch die Aufgabe des Konsumenten zukommt. … erwünscht ist es, die reale Welt so gut wie möglich nachzuahmen. Triebe werden so weit geschürt, dass eine Sublimierung nicht mehr möglich ist. …

Das Ziel der Kulturindustrie ist – wie in jedem Industriezweig – ökonomischer Art. Alles Bemühen ist auf wirtschaftliche Erfolge ausgerichtet.

Die authentische Kultur hingegen ist nicht zielgerichtet, sie ist Selbstzweck. … fördert die Phantasie des Menschen, indem sie Anregungen gibt, aber anders als die Kulturindustrie, den Freiraum für eigenständiges menschliches Denken lässt. Authentische Kultur will nicht die Wirklichkeit nachstellen, sondern weit über sie hinausgehen.

English Wikipedia article.

“Digitales Notenbankgeld – und nun? (CBDC—What Next?),” FuW, 2021

Finanz und Wirtschaft, December 8, 2021. PDF.

  • I draw some conclusions from the CEPR eBook on CBDC, namely:
  • Banks will change, whatever happens to CBDC.
  • The main risk of retail CBDC is not bank disintermediation.
  • CBDC may not be the best option even if it has net benefits.
  • It should be for parliaments and voters, not central banks, to decide about the introduction of CBDC.

“Reserves for All: Political Rather Than Macroeconomic Risks,” CEPR, 2021

Chapter 5 in the CEPR eBook, November 24, 2021. HTML.

From the conclusion:

From a macroeconomic perspective, central banks can largely neutralise the consequences of CBDC. What is highly uncertain, however, is whether they would choose to do so – the political risks of ‘Reserves for All’ are first-order. The decision for or against CBDC thus should not only reflect the assessment of economic trade-offs, but also whether societies are confident in their ability to efficiently manage conflicts of interest. If not, and if they fear that the introduction of CBDC could further politicise banking and central banking, then the introduction of CBDC might constitute a risky regime change. It will be interesting to see how different [countries] judge this risk.

“CBDC: Considerations, Projects, Outlook,” CEPR/VoxEU, 2021

CEPR eBook, November 24, 2021. HTML.

VoxEU, November 24, 2021. HTML.

Retail central bank digital currency has morphed from an obscure fascination of technophiles and monetary theorists into a major preoccupation of central bankers. Pilot projects abound and research on the topic has exploded as private sector initiatives such as Libra/Diem have focused policymakers’ minds and taken the status quo option off the table. In this eBook, academics and policymakers review what we know about the economic, legal, and political implications of CBDC, discuss current projects, and look ahead.

Jed McKenna’s “Spiritual Enlightenment: The Damnedest Thing”

Goodreads rating 4.36.

Spiritual enlightenment is not about mysticism or happiness, although the latter might follow from the former. It is not about the “true self” but about the non-self; about radical questioning and truth seeking that ditches all putative certainties; about watching the unfolding of life with joy and interest; about accepting contradictions.

Richard Bandler and John Grinder’s “The Structure of Magic”

Goodreads rating 4.06.

Human beings have their personal models of the world. These models are wrong and sometimes very wrong, leaving people with the impression that they have no choice, are being excluded, etc. The authors argue that successful psychotherapies and -therapists all use similar methods to help clients change and correct their models, opening new perspectives for them. In the book the authors systematize this argument.

They emphasize errors that humans make when mistaking models for reality—errors due to inadequate generalization, deletion, or distortion—and they use the language and tools from linguistics (transformational grammar)—distinguishing between the deep structure and the surface structure of sentences—to provide a toolkit for psychotherapists to help identify and correct these errors. Essentially, the therapist and the client are meant to identify the errors in the client’s model by insisting on well-formed sentences.

This quote is from the end of ch. 3:

This set, the set of sentences which are well formed in therapy and acceptable to us as therapists, are sentences which:
(1) Are well formed in English, and
(2) Contain no transformational deletions or unexplored deletions in the portion of the model in which the client experiences no choice.
(3) Contain no nominalization (process -> event).
(4) Contain no words or phrases lacking referential indices.
(5) Contain no verbs incompletely specified.
(6) Contain no unexplored presuppositions in the portion of the model in which the client experiences no choice.
(7) Contain no sentences which violate the semantic conditions of well-formedness.

Edwin Abbott’s “Flatland”

Goodreads rating 3.81.

For someone living in two dimensions and becoming aware of three, it might be easier to think of four than for someone living in three dimensions.

The cherished feeling of oneness might be misleading …

That Point is a Being like ourselves, but confined to the non-dimensional Gulf. He is himself his own World, his own Universe; of any other than himself he can form no conception; he knows not Length, nor Breadth, nor Height, for he has had no experience of them; he has no cognizance even of the number Two; nor has he a thought of Plurality; for he is himself his One and All, being really Nothing. Yet mark his perfect self-contentment, and hence learn this lesson, that to be self-contended is to be vile and ignorant, and that to aspire is better than to be blindly and impotently happy. (ch. 20)

Me Poor? Then We Need Less Redistribution

In the AEJ: Economic Policy, Christopher Hoy and Franziska Mager report that people are less supportive of redistribution when they learn that they are poorer than they thought.

We test a key assumption underlying seminal theories about preferences for redistribution, which is that relatively poor people should be the most in favor of redistribution. … people who are told they are relatively poorer than they thought are less concerned about inequality and are not more supportive of redistribution. This finding is consistent with people using their own living standard as a “benchmark” for what they consider acceptable for others.

CBDC and Cross-Border Payments

The Economist reports on “The race to redefine cross-border finance:”

  • SWIFT recently launched SWIFT Go for retail payments.
  • FinTech firms often partly bypass SWIFT by aggregating payments first.
  • Ripple evades SWIFT, using a cryptocurrency for international transactions.
  • Credit card companies build infrastructure independent of SWIFT for retail (push) payments initiated by the sender.
  • JPMorgan Chase and a Singaporean bank and Temasek launched Partior for wholesale payments. This network records transfers on a permissioned blockchain.
  • CBDCs could enable banks to make overseas payments on a shared ledger.
  • SWIFT tries to collaborate with central banks.
  • Partior aims to expand, recruiting core settlement banks for both central-bank and commercial-bank digital payments in euro, renminbi and yen.

On VoxEU, Massimo Ferrari, Arnaud Mehl, Fabio Panetta, and Ine Van Robays discuss “The international dimension of central bank digital currencies: Open research questions.” They argue that research has identified three main implications of retail CBDC (with broad access):

  • ‘Dollarization’ in other countries.
  • Stronger cross-border transmission of shocks, increased exchange rate volatility and altered capital flow dynamics. “Research finds that introducing a CBDC available to non-residents ‘super charges’ uncovered interest rate parity … leads to a stronger rebalancing of global portfolios in response to shocks, and to higher exchange rate volatility.”
  • Impact on the international role of currencies.

The authors write that most models to date are unclear about what makes CBDC really different in this context. And they argue that another open question is how intensively central banks should and would cooperate. They write, somewhat optimistically, that “according to the (unwritten) code of central banking, the introduction of a CDBC in one jurisdiction must do no harm. In particular, it must not put the financial system of other jurisdictions at risk.” Let’s see.

Moving On

After 12 years of service Dirk Niepelt resigns as the director of the Study Center to take up a post as Full Professor of Macroeconomics at the University of Bern. The Governing Board and Foundation Council

thank him for the outstanding achievements of the centre under his leadership. He has played a major role in building up the Study Center Gerzensee as a place of learning and a venue for academic research and dialogue, in preparing it to meet future challenges, and in bolstering its international presence.

Dirk Niepelt will be succeeded by Martin Brown who is currently Full Professor of Banking at the University of St. Gallen.

With his academic record, management experience and extensive network in economics, Martin Brown is ideally suited to lead the Study Center in accordance with the wishes of its founder, to ensure the high quality of its activities, and to put it on the best possible footing to address the requirements of the future. The Governing Board and the Foundation Council congratulate Professor Brown on his appointment.

SNB press releases EN, DE.

World Bank Staff Boosted China and Saudi Arabia Rankings

The FT (and many other outlets) summarize a report by law firm WilmerHale which was commissioned by the World Bank:

… in the 2018 edition of Doing Business, China’s overall ranking had been artificially held at 78 — the same as in the previous year — as a result of late changes that elevated its position from 85. The report alleges that Georgieva led efforts to improve China’s ranking at a time when she was “engrossed” in a campaign to secure a capital increase for the World Bank.

… during the preparation of Doing Business 2018, high-ranking Chinese government officials “repeatedly expressed their concerns” to then World Bank president Jim Yong Kim and other senior bank managers

… attempts were made in the days before publication of Doing Business 2018 to raise China’s ranking from 85, such as incorporating data for Hong Kong into its scores. When these efforts failed … the report alleged, Georgieva “became directly involved”. … three indicators of business conditions — starting a business, legal rights-getting credit and paying taxes — were modified …

In a statement issued by the IMF, Georgieva disagrees “fundamentally with the findings and interpretations of Investigation of Data Irregularities as it relates to my role in the World Bank’s Doing Business report of 2018.”

The WilmerHale report also alleges irregularities in the Doing Business 2020 report as far as Saudi Arabia is concerned.

Doves and Hawks at the ECB

In the FAZ, Christian Siedenbiedel discusses a ZEW study on the positions of ECB board members and how they relate to national debt levels.

Es gibt klare Fraktionen von „Falken“ und „Tauben“ im Rat, und es gibt eine gewisse Korrelation zur Höhe der Staatsschulden im jeweiligen Heimatland des Ratsmitglieds. Als „Tauben“ wurden nach der Daten-Auswertung die Ratsmitglieder Ignazio Visco (Italien), Pablo Hernández de Cos (Spanien), François Villeroy de Galhau (Frankreich), Giannis Stournaras (Griechenland und Mario Centeno (Portugal) eingestuft. Auf der anderen Seite bestehe die klare „Falken“-Fraktion aus Jens Weidmann (Deutschland), Robert Holzmann (Österreich), Klaas Knot (Niederlande), Pierre Wunsch (Belgien) und Martins Kazaks (Lettland).

Die Klassifizierung der EZB-Direktoriumsmitglieder, die ebenfalls dem Rat angehören, zeige ein gemischteres Muster, heißt es in der Studie. So vertrat beispielsweise Isabel Schnabel (Deutschland) eine gemäßigtere Position als ihr deutscher Kollege im Gremium, Bundesbankpräsident Jens Weidmann. Das umgekehrte Muster gelte für Spanien, wo der Vizepräsident Luis de Guindos gemäßigter sei als sein eher „taubenhaft“ eingestellter Kollege, der Notenbankchef Hernandez de Cos. EZB-Präsidentin Christine Lagarde wird in der Studie als „Taube“ eingestuft, da sie sich auf die Fortführung des PEPP konzentriere und alle Arten von Debatten über einen vorzeitigen Ausstieg, die von der Falkenfraktion kämen, strikt ablehne. „Obwohl für sechs Ratsmitglieder nur unzureichende Daten zur Verfügung standen, deutet unsere Kategorisierung darauf hin, dass es im EZB-Rat eine Mehrheit von Tauben gibt“, heißt es in der Studie. …

Die Taubenfraktion im Rat kommt auf eine durchschnittliche Schuldenquote in ihren Heimatländern von 133 Prozent, fast dem Doppelten der Falkenfraktion mit 71 Prozent. Den Zusammenhang haben die Wissenschaftler dann noch statistisch abgesichert. „Unser Ergebnis zeigt eine klare Korrelation zwischen heimischer Staatsverschuldung und Positionierung“, sagt Studienautor Friedrich Heinemann.

Income Tax Burdens in Switzerland

In the NZZ, Hansueli Schöchli summarizes recent evidence.

Wer in der Schweiz im Jahr 2017 wie viel Einkommenssteuer bezahlte

Anteil Steuerpflichtige (in Prozent) Anzahl Steuerpflichtige Minimales Reineinkommen in Fr. Durchschnittliche Steuerbelastung (in %) Anteil der Einkommenssteuer Bund/Kanton/Gemeinde (in %)
0,01 515 4 548 020 43,8 4,82
0,1 5 150 1 109 760 37,3 9,89
1 51 498 331 731 34,4 24,04
5 257 489 152 799 28,1 42,55
10 514 978 111 403 24,6 53,03
25 1 287 444 73 769 20,7 74,13
50 2 574 888 49 989 18 90,24
Lesebeispiel: Die obersten 0,01% der Steuerpflichtigen deklarierten ein Reineinkommen von jeweils über 4,5 Mio. Fr. Sie hatten im Mittel eine Steuerbelastung auf ihren Einkommen von 43,8%. Diese Gruppe zahlte insgesamt 4,8% aller Einkommenssteuern in der Schweiz.
Quelle: Christian Frei, Economiesuisse NZZ / hus.

… Hinzu kommen noch die Abgaben auf hohen Löhnen für AHV/IV/EO sowie für die Arbeitslosenversicherung. In der AHV sind Abgaben auf Löhnen über rund 86 000 Fr. nicht mehr rentenbildend und deshalb faktisch Steuern. Bei der Arbeitslosenversicherung gilt dies für Abgaben auf Löhnen über 148 200 Fr. Für hohe Löhne bedeutet all dies noch eine steuerliche Zusatzbelastung von total 11 bis 12%.

“Macroeconomics II,” Bern, Fall 2021

MA course at the University of Bern.

Time: Wed 10-12. Location: A-126 UniS. Course assistant: Stefano Corbellini.

The course introduces Master students to modern macroeconomic theory. Building on the analysis of the consumption-saving tradeoff and on concepts from general equilibrium theory, the course covers workhorse general equilibrium models of modern macroeconomics, including the representative agent framework, the overlapping generations model, and the Lucas tree model. Lectures follow chapters 1–4 (possibly 5) in this book.

SARS-COV 2: Until further notice the course is offered on-site. It is our joint responsibility to reduce the risk of infection in class. Only students who satisfy two criteria should attend class: (i) They should not feel ill and (ii) they should be fully vaccinated or should recently have recovered from an infection or should have very recently tested negative. Students who do not satisfy (i) and (ii) should follow the class via podcast.

“Die Nationalbank ist an vielen Fronten gefordert (Challenges for the Swiss National Bank),” NZZ, 2021

NZZ, August 10, 2021. PDF (title changed by NZZ). Related article in Ökonomenstimme. HTML.

Should the SNB follow the Fed and the ECB and rework its strategy? There is a case for rethinking the broad inflation target, the monetary policy concept, and the communication strategy. Equally important is a strategy review outside of the SNB: The SNB cannot and must not decide about the framework within which it operates.

Conclusion:

Daher ist eine Strategieüberprüfung inner- und ausserhalb der SNB sinnvoll. Geldpolitisch prüfenswert sind das Inflationszielband, die Zentralität des Zinsinstruments und die Kommunikation. Die Glaubwürdigkeit der SNB verbietet ein Auseinanderklaffen von Theorie und Praxis, aber auch allzu häufiges und detailversessenes Feilen an der Strategie, und sie verlangt Konzentration auf das Wesentliche. Gleichzeitig sollte die SNB ihre Bindung an den – gegebenenfalls sich wandelnden – Willen des Gesetzgebers betonen. Bei Fragen, die nicht allein in ihre Zuständigkeit fallen, muss sie klarstellen, dass sie Partei und nicht Schiedsrichterin ist. Damit die SNB auch in Zukunft zu den grossen Schweizer Erfolgsgeschichten zählt, muss sie von Zeit zu Zeit über die Bücher gehen. Doch alleine kann sie die Verantwortung in Geld- und Währungsfragen nicht tragen.

Climate Change and Cheap Clean Energy

John Cochrane on the role of cheap clean energy which by itself will not reduce CO2 in the long run:

The standard vision in policy discussions assumes infinite substitutability. As soon as the cost of clean energy is lower than the cost of carbon-emitting energy, everyone substitutes completely to the latter and the oil and coal stay in the ground. … But as long as the elasticity of substitution is finite … then the carbon comes out of the ground. As you use less and less, the remaining uses become more and more valuable, so it’s worth it, privately and to society, to keep using it although at lower scale.

So I learn from this that a key focus for R&D is not so much on lowering the cost of alternatives, but increasing their substitutability for fossil fuels. Just because the cost of solar cells is plummeting does us little good. We need to increase their substitutability.

Climate Change and Financial Stability

John Cochrane on climate change and financial stability:

Climate change and financial stability are pressing problems. They require coherent, intelligent, scientifically valid policy responses, and promptly. But climate financial regulation will not help the climate, will further politicize central banks, and will destroy their precious independence, while forcing financial companies to devise absurdly fictitious climate-risk assessments will ruin financial regulation. The next crisis will come from some other source. And our climate-obsessed regulators will once again fail utterly to anticipate it—just as a decade’s worth of stress testers never considered the possibility of a pandemic.

How China Lends

In a CEPR discussion paper, Anna Gelpern, Sebastian Horn, Scott Morris, Brad Parks, and Christoph Trebesch document “How China Lends: A Rare Look into 100 Debt Contracts with Foreign Governments:”

China is the world’s largest official creditor, but we lack basic facts about the terms and conditions of its lending. … We collect and analyze 100 contracts between Chinese state-owned entities and government borrowers in 24 developing countries … First, the Chinese contracts contain unusual confidentiality clauses that bar borrowers from revealing the terms or even the existence of the debt. Second, Chinese lenders seek advantage over other creditors, using collateral arrangements such as lender-controlled revenue accounts and promises to keep the debt out of collective restructuring (“no Paris Club” clauses). Third, cancellation, acceleration, and stabilization clauses in Chinese contracts potentially allow the lenders to influence debtors’ domestic and foreign policies. Even if these terms were unenforceable in court, the mix of confidentiality, seniority, and policy influence could limit the sovereign debtor’s crisis management options and complicate debt renegotiation. Overall, the contracts use creative design to manage credit risks and overcome enforcement hurdles, presenting China as a muscular and commercially-savvy lender to the developing world.

Chinese commentary on the paper in the Global Times.

CBDC with Collateralized Pass-Through Funding: The Swiss Case

In his University of St. Gallen MA thesis entitled “CBDC with Collateralized Pass-Through Funding,” Bastian Wetzel assesses how strongly banks would be affected by deposit outflows into retail CBDC:

The results of the study show that 92.7 percent of all sight deposits in the aggregate Swiss banking sector are covered by excess liquidity and eligible assets, whereas sight deposits held in CHF are covered by over 100 percent. Therefore, the collateral constraint seems to be a problem only in the unlikely event where almost all sight deposits converted to CBDC. As expected, refinancing costs decline when disintermediation is low due to negative interest rates on deposits at the SNB. As disintermediation increases, funding costs rise. Thus, if disintermediation is high, the net result from interest operations could decrease by over 4 percent. To compensate for this loss, banks would have to increase their lending rate on their credits outstanding. Yet, if the central bank lends on the same terms as the customer deposits withdrawn, as also proposed by Brunnermeier and Niepelt (2019), instead of the 0.5 percent as assumed in this paper, the impact on funding costs and bank lending could potentially be mitigated. With regard to the emergence of narrow banks, it can be said that the money multiplier is already close to 1. Thus, the concern about full-reserve banking seems to be irrelevant for the time being. The results of the quantification of bank run risk show that while the aggregate banking sector is able to cover the majority of sight deposits, the coverage ratios for individual banking groups is very heterogeneous. While the big banks are covered by more than 100 percent, Cantonal banks are covered by about three quarters and Raiffeisen banks by only half. In addition, compared to big banks, Cantonal banks and especially Raiffeisen banks hold almost no eligible assets. Thus, when considering individual banking groups, a system-wider run could potentially lead to a consolidation in the banking sector. It should be noted that the study conducted is a snapshot at a time when CBDC was not yet implemented.

Liquidity Premia on Treasuries?

In an NBER working paper, Matthias Fleckenstein and Francis Longstaff argue that Treasuries do not trade at a premium:

It is widely believed that Treasuries trade at premium prices because of their safety and money-like properties. In reality, this is only true on a relative basis when compared to other bonds, but is often not true on an absolute basis. Many Treasuries have repeatedly traded at substantial discounts to their intrinsic fair values for extended periods during the past 25 years. Since 2015, Treasuries have consistently been priced at an aggregate discount of $100 to $300 billion below their fair values. Treasuries often actually become cheaper following crises. These results provide new perspectives on safe-asset theories.