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This is the dumbest post I have ever written. You have been warned.


I found that last bit…intriguing. Backing our currency with cat videos would, of course, be very difficult to work (backing a currency with something whose marginal cost of replication of zero is probably not a recipe for stability)…but what if we backed our currency with actual cats?

i can haz currency stability

The biggest question to answer is ‘how many cats would the government need to hold in reserve to make the standard work?’ So I went back to look at how much gold the government had when it had a gold standard, and then, in need of a denominator, indexed it as a ratio to national income (using Piketty & Zucman’s data).

look this all made sense at the time



Rather than over-analyze the data, I just took the average value of all the individual year values, came up with 1.98%, and multiplied that by national income today (just over $14.5 trillion) to estimate that the government would need to hold in reserve $288.7 billion in cats to maintain a cat standard.

This means we have a problem. The Humane Society estimates that there are 95.6 million owned cats in America, and that there are another 30-40 million stray or feral cats. That means an outside estimate of ~135 million cats in the United States. Which means even if the government eminently domained every living cat in America, that would still imply a valuation of over $2,000 per cat, which is an order of magnitude more than the current market price. This would, among other things, be highly disruptive to the cat market. It would also be hard to sustain, since rescue cats are largely sold by non-profits at the marginal cost of vaccinations, microchipping, etc.

So what the government needs to do is breed cats. Lots of cats.


Assuming we’re not talking about a purebred standard, the kind of cats the government might be keeping in reserve would probably have a market value of around $100/each, which means we would need the government to hold, in reserve, twenty times as many cats as exists in the United States today – 2.7 billion cats. Firstly, that could take a little time – depending on how large a cat base the government started with (presumably they wouldn’t catnap every cat in America), as long as a decade. This is not the insurmountable obstacle, though.

Land is.

Cats, by nature, are kind of territorial.

all mine

One study, in fact, shows a leading cause of death for outdoor cats is…other cats. Meouch.

That same study showed that outdoor cats have quite a substantial home range – as large as 1351 acres, though the average is just 4.9 acres. Even applying that average across the board, to 2.7 billion cats that gets you to 20.7 billion square miles – over a third of all the land area on Earth.

So let’s assume substantial overlap – even if you assume 100 cats per home range, that still gets you to 200 million square miles, 5-6 times the size of the United States. To get all those cats into, say, Wyoming, you’d have a density of 27,602 cats/square mile – which is shockingly close to the human density, 27,779 people/square mile, of New York City.

Wyoming, in other words, would look like this:

everybody! everybody! everybody wants to be a cat!

And it turns out Wyoming land isn’t cheap –  if you apply  the $450/acre for ranch land quoted in this article, over $28 billion.

Of course, total land value in the United States is probably over $15 trillion at this point so we could just have a land standard. That would be a lot easier. A whole lot easier…




Than herding cats.

damn right i went there



So late last year Matt Yglesias found a simple and concise way to create a good-enough estimate of the value of all privately-held American land, using the Fed’s Z1. He did not, however, go on to take the most-obvious next step, which was to use FRED to compile all the relevant series to calculate the entire time-series.

I have taken that bold step. Behold – the real value in present dollars of all privately held American land since FY 1951:

it's good to have land

Oh, look – a housing bubble!

But because this is the Age of Piketty, why stop there? Thanks to the magic of the internet and spreadsheets, all of the data Piketty relied on in his book is freely available – and perhaps even more importantly, so is all the data Piketty and Zucman compiled in writing “Capital is Back,” which may be even more comprehensive and interesting. So using that data, I was able to calculate land as a share of national income from 1950-2012. Check it out*:

 this land is my land; it isn't your land


Oh look – a housing bubble!

And why stop there? We know from reading our Piketty that the capital-to-income ratio increased substantially during that time, so let’s calculate the land share of national capital:


image (5)

Oh look – a…two housing bubbles?

It’s hard to know what to make of this at first glance, but after two decades steadily comprising a quarter of national capital, land grew over another two decades to nearly a third of it; and after a steep drop to under a fifth of national capital in less than a decade, just about as quickly rebounded, then plummeted even faster to under a fifth again.

So the question must be asked – why didn’t we notice the first real estate bubble, just as large (though not as rapidly inflated) as the first? There are two answers.

The first answer is – we did! Read this piece from 1990 – 1990! – about the “emotional toll” of the collapse in housing prices. Or all these other amazing pieces from the amazing New York Times archive documenting the ’80s housing bubble and the collapse in prices at the turn of the ’90s.

The second answer is – to the extent we didn’t, or didn’t really remember it, it’s because it didn’t torch the global financial system. Which clarifies a very important fact about what happened to the American economy in the late aughties – what happened involved a housing bubble, but wasn’t fundamentally about or caused by a housing bubble.

For context, here’s the homeownership rate for the United States:

get off my property


The 00’s housing bubble clearly involved bringing a lot of people into homeownership in a way the 80’s bubble did not; that bubble, in fact, peaked even as homeownership rates had declined.

There are a lot of lessons to learn about the 00s bubble, about debt and leverage and fraud and inequality, but the lesson not to learn – or, perhaps, to unlearn – is that a bubble and its eventual popping, regardless of the asset under consideration, is a sufficient condition of a broader economic calamity. Now, it does seem clear that the 80s housing bubble was in key ways simply smaller in magnitude than the previous one; it represented a 50% increase as a ratio to national income rather than the doubling experienced in the aughties even though both saw land increase similarly relative to capital. But there have been – and, no matter the stance of regulatory or, shudder, monetary policy, will continue to be – bubbles in capitalist economies. The policy goal we should be interested in is not preventing bubbles but building economic structures and institutions that are resilient to that fact of life in financialized post-industrial capitalism.

*Piketty and Zucman only provide national income up through 2010, so I had to impute 2011-2012 from other data with a few relatively banal assumptions.

Ryan Avent had a fantastic post Tuesday dismantling the rationale of the Fed, and specifically Jeremy Stein, for basically casting macroeconomic improvement to the wind for the sake of ill-defined financial stability. If you read Ryan’s post you’ll see precisely why this is backwards and, indeed, as likely as not to backfire.

The relatively meager contribution I’d like to make to the discussion is simply this – if the Fed truly believes that financial instability, despite being wholly absent from their legal mandate, is sufficiently important to trade off other desirable outcomes to pursue, then they should pick a target. One of the better decisions the Fed has made in recent years is more openly and rigorously defining targets – specifically, clearly defining the thresholds in widely-available and transparent measures of unemployment and inflation that may lead the Fed, once crossed, to raise interest rates, and disclaiming any potential rate raises before then. If the Fed wants us to take their approach to financial stability seriously, they should pick a variable or index and a threshold value and announce it. Absent doing so, we’ll all have to wonder whether less rigorous impulses undergird the Fed’s eagerness to find new reasons to raise interest rates even as unemployment is high and inflation low.

Matt Yglesias wrote a fun post on how massive conservative spending on elections may be causing conservative strategist inflation. What I think this post highlights implicitly is where the broader class of inflationistas goes wrong.

Let’s imagine that the Koch brothers wizarded the $400 million they spent on elections out of thin air. That created part of the conditions for inflation.

But there is a second, much more important condition for inflation – supply side constraints. The fact is that there are only so many elective offices, so many candidates, so many strategists and video produces and email spam writers. When you plow more and more money into a supply-constrained market you get rising prices without a corresponding increase in quality or quantity. That’s inflation.

For inflation to happen on an economy-wide scale you need not only for the monetary authority to create lots of money, you also need that money to exceed any corresponding increase in total output. So to believe that the Fed is about to hyperinflationatize us all into the Dark Ages you’d have to believe that there aren’t any more resources to mobilize with all that money, which is bonkers because lots of people don’t have jobs. Here is a cool map showing unemployment rates in lots of countries. They’re high. Is there nothing productive they could be doing?

Maybe not! Maybe you think that supply and production in energy markets can’t support more employment and that’s what makes now like the 70s. I disagree! But you have to make that case too, not just that “ZOMG FED PRINTING SO MUCH DOLLARS RUN FOR THE GOLDEN BUNKERS.”

Miles Kimball and Yichuan Wang find that high government debt doesn’t cause low GDP growth, and Kimball says he finds that surprising, as does Matt Yglesias. But as I suggested in a post last month, I’m not really surprised by this at all.

Governments tax or borrow. The former is withdrawing money from the economy in exchange for nothing (or perhaps a promise not to sanction the taxed) while the latter withdraws money from the economy in exchange for a piece of paper. That’s debt! Evil, evil, debt! Oh, no!

Wait, let’s start over.

The goverment decides it wants to do something it isn’t already doing, and therefore needs to command a higher share of total social production going forward than it has been. Developed-world governments don’t directly commandeer social resources, they claim through the proxy of money, by spending it. Assuming an economy at full capacity (whatever that means), if the government commandeers resources by spending money without removing any money from the economy then you’d have inflation, unless the central bank raises interest rates substantially, which would likely have undesireable negative effects. So the government attempts to roughly balance the resources claims it makes using money by withdrawing an equivalent amount of money from society. Sometimes it does this through taxes, which has some desireable properties (no future obligations on the state, can be used Pigovianly) and some undesirable ones (unintended consequences, involuntary, discourages desireable activity). Borrowing also has some desireable properties (voluntary, compensates those who part with their money) and some undesireable properties (obligates the state).

Therefore, there are two key intertwined questions to be asked about this new government activity, which remember is centrally about taking some resources deployed previously to some private purpose and redirecting them to some other, presumably public purpose – is the new activity more valuable than the activity(s) it is supplanting, and how is it being financed? They are intertwined because the latter question informs the former.

Let’s say we all agree that this new government project – let’s say it’s a SUPERTRAIN, for fun – is widely considered to be of higher value than the marginal private activity it supplants regardless of how it is funded. The government could raise taxes to fund it, but unless it is taxing something undesireable (like carbon or booze or Kardashians) this would have the drawback of incurring some "deadweight loss," not to mention other unintended consequences. It could also borrow the money, which would have two consequences. Firstly, it would supplant something different – rather than raising the cost of work or carbon emissions, it would be more likely to supplant a capital investment of some kind somewhere in the economy. Secondly, it would obligate the government.

And to what would it obligate the government? Key to understanding this is that governments, unlike Lannisters, never pay their debts. They cleverly disguise this fact by paying their debts in full and on time. Huh? From the perspective of a borrower, you get your interest payments, and then your principal in full. But from the perspective of a government, you don’t pay the principal back out of tax revenue, you pay it by rolling over the debt and issuing new debt in the amount of the principal. This works because of NGDP growth (both the RGDP growth and inflationary components). In fact, we’re still likely rolling over all the debt we incurred from WWII, which back then was 110% of NGDP but today is less than 2% of NGDP.

So really what the government does when it issues a bond is issue itself a negative perpetuity. And the key to understanding the value of a perpetuity is knowing the interest rate, since the PV = C/r. Therefore, the obligation on the government is much more dependent on the interest rate path than on the nominal coupon value.

But that interest rate path isn’t just some made-up thing – it’s fundamentally related to NGDP growth. Don’t believe me? Here’s the fed funds rate divided by the NGDP growth rate:

Inline image 1

So when recessions happen, the ratio spikes (and whether it spikes up or down is very interesting), but otherwise it’s very steady; if you exclude just the 12 of 223 periods where the absolute value of the ratio is greater than 3, you get an average of 0.8 and a standard deviation of 0.6.

So what does that mean? As interest rates grow, so does the obligation on the government – but it also implies that the government’s ability to meet that obligation is growing in tandem. Which suggests that, while governments cannot borrow limitlessly, the pain point at which government indebtedness begins to inflict structural economic harm is vastly higher than previous assumptions.

Japan, for example, is often cited as an example of government debt creating a huge drag/time bomb/giant vengeful lizard that is harming Japan’s economy. But since 1990, Japan’s debt/GDP ratio increased from 67% to 211% and GDP-per-capita…grew! Significantly! Not awesomely, not enough to catch-up with the US (in fact, it fell behind), but grow it did. Certainly more than you might think it would if the 90% monster were real and starting smashing major cities or something.

Many people have begun to worry whether the seemingly-inevitable Japanese debt crisis is nearing as yield have crept up. But yields have crept up because NGDP-growth-expectations have crept up. As long as they increase in tandem, contra Noah Smith, Japan should always be able to pay its debts.

And I’d be willing to put money/my reputation on this point. While Noah Smith is 100% right that bets != beliefs, I am nonetheless willing to agree in principle to any reasonably-valued bet that neither Japan nor the United States will default over any arbitrary time period. Any takers?

Inline image 1
the ultimate goldbug

So I’m a little late to this whole Game of Thrones thing, but I’m making up for it, having watched every episode in the last month as well as reading A Game of Thrones and making my way through A Clash Of Kings (my goal is to catch up with the show by the end of the season and read all the books by summer’s end). And since Matt Yglesias has been econblogging from GoT I figured I might as well get on that wagon while it’s still bandy. Also, it involves ragging on the "hyperinflation in America is imminnent!" set and while that’s like shooting fish in a barrel, sometimes shooting fish in a barrel is fun!*
Something that always puzzled me re: predictions of looming hyperinflation is where the predictors think the supply constraint is. Even if you accept certain assumptions about "money printing" that I would quibble with, it’s not an increase in the money supply that leads to inflation per se it’s growth in the money supply that oustripts growth in real goods and services. Assuming "velocity" is constant (whatever that means) to assume that mo money = mo debasement means you have to assume that level of goods and services is constant. If you magic a $20 bill out of nothing and hand it to me I might decide to give it to an unemployed person or stuff it in my mattress or buy something with an extremely elastic supply schedule like a nice haircut. But I might also buy gasoline! To assume that "all this new money" will lead to hyperinflation you have to believe that the economy is producing as much as it can produce or that there is some real constraint on the economy.
Here’s a great example – in A Clash of Kings, when Tyrion Lannister is scoping out King’s Landing (which has seen an enormous influx of refugees since war erupted) he makes this observation:

"The markets were crowded with ragged men selling their household goods for any price they could get…and conspicuously empty of farmers selling food. What little produce he did see was three times as costly as it had been a year ago."

This, of course, implies annualized inflation in King’s Landing of 200%. That’s hyperinflation! But the reason for it is not an influx of money (say, the Lannisters minting more gold to pay off the Iron Throne’s sovereign debt) but severe supply shortages – the war is both reducing the productive capacity and capital wealth of the Seven Kingdoms as well as massively disrupting transportation networks. This is firstly a nice example of the principles behinf Paul Krugman’s work on economic geography but secondly goes to show that hyperinflation a) doesn’t necessarily require an increase in the money supply just as an increase in the money supply doesn’t necessarily engender inflation and b) that hyperinflation is usually a symptom of underlying dysfunction and catastrophe. Certainly there are supply contraints in the modern American economy but given that commodity prices are falling and lots of people aren’t working while putting everyone back to work through monetary expansion would cause some inflation it wouldn’t evaporate all dollar-denominated wealth and it certainly wouldn’t do that while there are vast amounts of underutilized resources in the economy.
*Actually, as of late I’ve been more in to shooting fish in mid-air with a bazooka.

Ryan Avent says some things he probably considers uncontroversial, because he says so:

That’s because there are relatively uncontroversial ways in which high levels of government debt can and do affect growth. Government borrowing can crowd out private investment, induce uncomfortably high levels of inflation, and create a need for distortionary taxation.

I’m going to go ahead and say – some of this is at least somewhat controversial! A bold stance, indeed.

Let’s say the government wants to spend some money. The government can choose to finance it in two ways:

1) It can raise taxes.
2) It can borrow.

Obviously. But what does that mean?

In the first scenario, the government identifies a place where there is some money and takes it. It’s good to be the king.

In the second scenario, the government makes an offer – anyone who wants to patriotically volunteer their money to the government will get a series of small reward payments for many years, followed by the eventual full refund of their nominal volunteered sum.

Either way, the government has withdrawn an equal amount of money from society. The primary difference, it seems to me, is two-fold:

1) The money comes from different places.

2) In the latter scenario the government has obligated itself to future payments.

Item 1) is what’s usually paraphrased as "crowding out investment" – the presumption that money borrowed would have been put to use in ways that engender long-term growth, whereas money taxes would have come from mere "consumption." Regular readers (if you exist, that is) know I am not a fan of the saving/consuming dichotomy, but I am willing to indulge the idea that resources withdrawn by the private economy by government borrowing are systematically different than those withdrawn by government taxation. Let’s come back to this.

Can government borrowing "induce uncomfortably high levels of inflation?" Not if the Fed says it can’t! And the Fed has been pretty good at keeping inflation limited since the Volcker era.

Can government borrowing "create a need for distortionary taxation?" Sure! But so does taxing the money in the first place. If the government spends money and funds it all through taxes, there will be a lot of deadweight loss. If it funds at least some of it through borrowing, there will be presumably less deadweight loss since the money was coughed up voluntarily.

But look – here’s the data

Here’s real federal debt held by the public v. real federal interest payments since 1970:

Inline image 3

So, not a terribly correlated series.If you’re the naturally loggish type:

Inline image 4

Which shows a more correlated series at least during the 70s and 80s but note that starting in 1985 while the debt begins to rise and rise the total interest payments mostly stall out.

So, given the large increase in public federal debt over the last 30 years, we have seen decreased inflation, stagnant real interest payments (which means shrinking real interest payments as a share of GDP) and…so where’s the "crowding out?"

Any discussion of these issues without talking about the financial system, the central bank, the status quo ante of the macroeconomy, etc, isn’t very useful.

Inline image 1

I have invented an amazing device! It is a tremendous healing ray that instantly and costlessly cures all chronic ailments! Huzzah! A great boon for humanity!

"But wait!" says the inner economist. "What happens to labor markets?"

Sigh. Good question.

First, assume the demand for health services is unchanged (for whatever reason, just assume it, damn it, this is economics. The health sector is it’s own damn mess).

Now – what happens?

Presumably most persons suffering from some kind of ailment or disability recieve a zapping. Obviously there are communities of interest and affiliation surrounding certain kinds of disability and for many people there are questions of identity involved, but even though we don’t presume a 100% participation rate in "being bathed in the healing light of my white magic phaser" it would probably be something close.

I think, first and foremost, that we can agree that those who have been so blasted with blessing would both be more productive and experience higher wages. They would be capable of doing certain kinds of work they were previously incapable of, capable of doing their existing work better, and capable of returning to the workforce if they had been so substantially disabled that they could no longer work.

Secondly, Social Security Disability would go from spending $183 billion annually (including Medicare payments for beneficiaries) to paying something a lot closer to $0. Some of that would now be offset by things like the EITC, Medicaid and exchange subsidies (let’s assume this happens next year because why not keep assuming?), and unemployment benefits (temporarily expanded to help smooth the income of the suddenly rapidly expanded workforce), but overall this probably is a net boon to the state’s coffers.

Here is a key question – what happens to existing workers? Clearly, overall potential productivity in the economy has gone way up – many more individuals are capable of producing more, and nobody has suffered any absolute degredation in ability or capacity. But still, many workers would be close substitues to the sudden army of the newly-able, all across the board, from the previously-parapalegic who are now would-be waiters and construction workers to the previously blind and deaf who are now would-be lawyers and consultants. So…what happens?

Well…it depends, doesn’t it? There’s no good reason we would expect a substantial increase in per-capita productive capacity to result in tremendous unemplyoment, is there? We might expect some short term…well, let’s not call it chaos, but perhaps friction? But within a year or so, given the correct response from governing institutions (especially monetary institutions) we would expect aggregate demand would "catch up" with potential aggregate supply and find an equilibrium at a higher absolute level of production and employment. This all assumes, of course, that a USA whose absolute net labor force increased sharply and substantially wouldn’t hit some global supply constraint, like, say, a finite amount of flamable black goo that was for some reason very important. But let’s assume that too! Because, as my mother always told me, assuming makes a mensch out of you and me! That’s totally what she said.

Anyway, the short version is, assuming proper response from key institutions and a lack of economy-wide medium-term supply constraints, there is no reason to think that waving a magic wand that increased the potential productivity of the labor force would inevitably induce net harm on any specific group. This could be, not just a weak Pareto improvement, but a strong one.

Now, what if the disability wasn’t physical, but legal? What if it were, say, some sort of legal status somewhat-arbitrarily assigned to a large group of workers that rendered them less productive then they could be otherwise? And then we waved our magic wand of law and removed that restriction? Who would that hurt?

Tyler Cowen on the shrinking labor force participation rate:

(And broken down by age here, I never find that disaggregation reassuring however, since the elderly are working more and the young less.)

Well, of course it is. More and more old people are working in white collar jobs. More and more old people are healthier and fitter in mind and body. More and more old people are still waiting for their 201(k)s to become 401(k)s again. And there’s just not enough demand to get you to full employment. So the least experienced, least skilled, least institutional-knowledge-endowed laborers are shut out of the workforce.

Conclusion: moar money, moar inflation, moar aggregate demand plz.

Sorry for the snark.


Let’s model a kingdom. In this model, the kingdom is a closed economy, and (very importantly) it is “well-normed” – it has strong norms relating to governance and society that tend to be widely honored and respected.

This kingdom is governed by two individuals: the king, and the wizard. Most formal power, as well as the titles of head of state and head of government, is vested with the king. The king has formally unlimited powers to tax and spend, raise armies, and adjudicate disputes, but in practice is limited by norms, sense of duty (symbolized in a sworn oath to serve in the interest of the whole kingdom and its subjects), and the patience of subjects; therefore, the king tends to maintain inherited intuitions to which their power has been delegated, like courts and military bureaucracy. The crown is hereditary – the first-born child of the king (this is a gender-progressive kingdom) inherits the crown, and in the past, though there have been occasional hiccups, most transfers of power have been peaceful and orderly.

The king must retain a wizard, who is charged in vague terms with independently securing the safety, security, and prosperity of the kingdom. The wizard bears a hat that grants them vast yet mysterious magical powers. Unlike the crown, which is symbolic, the wizard’s hat is in fact where the magical powers are vested, and is not hereditary. When the existing wizard dies, the king selects the next wizard, who receives a lifetime appointment. Extremely strong norms dictate that the king select whomever is widely acclaimed the wisest scholar in the kingdom, regardless of their personal feelings towards that individual or inclination to select an ally as wizard. Often the wizard will survive the king.

As stated above, the wizard has vast powers, but they are mysterious and to some extent ill-defined. There is no user manual for the wizard’s hat, and often throughout history wizards have surprised themselves with the consequences of exercising their powers. Therefore, norms have developed that the wizards exhibit strong restraint in exercising their powers, even in times of emergency. Extremely strong norms have also developed against the king making formal or open requests of the wizard, as well as against the wizard interfering in the quotidian or terrestrial business of the king. In the past, there have been some violations of this norm in both direction, but for the most part it tends to persist. Consequentially, the wizard tends to be reclusive, speak carefully and opaquely, and avoid commitments to use their powers. There is much dispute among the subjects of the kingdom to exactly what the wizard is doing or could be doing, and when the wizard ought to exercise their powers.

Your assignment: model the governance and economy of this kingdom.

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