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Matt Yglesias writes about experiencing a minor panic when suspecting that his favorite bar may be on a widely-publicized list of DC’s best, then bemoans the inelasticity of overall bar supply. I think he’s confused two things.

If bars as a category are crowded, then more bars will help. And, in general, allowing the market to set the relative quantity of bars in any given neighborhood, city, urban area, etc, is probably a good thing. If people want a new bar more than a new pharmacy, there’s no reason to prohibit the former. Taxes and regulations can and should be used to account for any public health and neighborhood nuisance that a successful bar can engender.

But that’s not going to help at all if your favorite bar gets on that list. That’s because there’s an intangible, unregulateable quality of bars called coolness. It goes in a cycle, something like this:

-New bar opens, preferably in emerging neighborhood or on fringes of emerged neighborhood
-A few savvy people discover said bar and start hanging out there
-Word of mouth spreads and more people start hanging out at the bar [this is when peak cool occurs]
-Someone busts the bar wide open – major newspaper or magazine article for example.
-Bar gets crowded
-The original set of people who made the bar successful stop hanging out there
-Rinse and repeat

Note that this cycle will happen regardless of the overall number of bars in your city and neighborhood. Everyone is chasing the cool. But, by definition, the cool can’t be where everyone already is, otherwise it’s not cool. Cool is inherently positional and zero-sum, and there is a precarious balance to it – if I’m literally the only person in the bar, it’s not cool, and if the bar is packed to the gills with random party people every night, it’s not "cool" – it’s that liminal moment when there is still the thrill of knowing something others don’t, sharing an open secret, being part of something special and unique and distinct with a limited and exception set of others. You can’t force it, recreate it manually, or recover it once it’s lost.

Generally speaking, positionality is a hugely important factor in economic decision-making, one that tends to throw off a lot of models which are based on individuals making decisions in an absolute sense and don’t account for the ways that people act and consume and produce in ways deliberately designed to mimic, anti-mimic, exceed, match, or even sabotage others.

Any bar can serve good booze and have nifty decor. Humans pursue status and rank. That’s what a truly cool bar is about.


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:

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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?

Felix Salmon has a great post in which he links to some great journalism from NPR, and I’d love to talk about it but I am just too distracted by this picture:

I see only three explanations for this picture:

1. John Thune is bribing an AP photographer.
2. John Thune is chosen by God to lead us to a messianic age.
3. John Thune is the Icarus II:

We report, you decide.

Apparently Jeremy Binckes at TBD has weird thoughts about more than just driving:

It was a long and contentious battle, but the D.C. Council finally passed a statistically small but symbolically significant tax hike on the richest residents. The smart thing to do after such a measure would be to not give the opposition — the design-inept D.C. GOP — any ammunition. Needless to say, a council member has done exactly the opposite.

Two days after that tax hike, $2,300 in taxpayer-funded furniture was delivered to Councilman Michael A. Brown’s office, the Post reports. The couch "smelled like and looked like it was new," but his staff insisted the furniture — four chairs, a desk, a bookshelf and two floor lamps — was used, purchased from Cort to replace "shoddy" furniture from the 1980s.

It’s not about how much it cost, really, but the appearance of spending money while taxing others. This is the practical definition of a disconnect. After all, if the existing furniture had been in use since the ’80s, why choose this exact moment to buy replacement furniture? Why not two weeks ago, or perhaps two months from now? It’s almost as if the council wants bad press.

OK, so let’s avoid the "appearance of spending money while taxing others," forgetting that this is sort of what all governments do at all times. In a parallel universe where the DC Council filled its budget gap with nothing but spending cuts should they avoid the appearance of spending money on themselves while shafting the poor and needy? Maybe! Or maybe sometimes the government has to do things that seem frivolous like "replace ratty old furniture" but are really just the good old-fashioned cost of doing business. The furniture has been there since the 1980s? Why not replace it now? Notice that even he is too embarassed to make this argument directly, simply pointing out a "disconnect" or a "bad appearance," "giv[ing] the opposition…ammunition." That’s because this is not an issue. Grow up.

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