Paradox of Thrift II

You can read the first post in this series here. I think I now see Fazzari's point.

Fazzari presents an example where a family has a choice of spending 5 dollars at a restaurant or saving 5 dollars. He proposes spending the 5 dollars is better than saving--I think--because you get 5 dollars of economic activity plus the economic activity created by the bank loaning out the money, whereas when the family simply saves the 5 dollars, they are 5 dollars of economic activity behind.

So "saving" then creates a multiplier, like spending, but the savings mutiplier is weaker than the spending multiplier because the entire amount is not spent initially. Instead the bank-savings multiplier is like the tax-cut multiplier. In keynsian economics, the tax cut multiplier is smaller than the government-spending multiplier because when the government cut taxes, the person recieving the tax cut has the option of saving part of the initial amount instead spending it, reducing the multiplier effect of tax cuts. Although under my new understanding, the saved money will also be spent by the bank-loan reciepient, some small portion (the reserve portion) will in fact be saved, making the tax-cut multiplier effect smaller than the spending multiplier.

Except it turns out that the actual evidence is that the tax multiplier is greater than the spending multiplier. Mankiw gives a possible explaination here. Maybe economics is intuitive and not a paradox at all.

Climate Change as Macroeconomics

Here's a graph showing the projected unemployment rate with the stimulus (dark blue), the projected unemployment rate without the stimulus (light blue) and then the actual unemployment rate with the stimulus (red dots).

Is the stimulus working? You wouldn't think so after looking at this graph. In fact, according to the graph, not only are we worse off than we should be with the stimulus, we're also worse off than we should have been without the stimulus. The graph seems to suggests that, not only did the stimulus not help, it actually hurt the economy.

But the counter argument is simple: The predictions were wrong! The economy was much worse than thought when the Obama administration make it's unemployment projections, and unemployment actually would have been much higher without the stimulus.

Of course, with this we-underestimated-the size-of-the-problem argument always at hand, there's no real way to determine whether the stimulus is actually working. (Greg Mankiw already made this same point much better than I can, here.)

This same prove-me-wrong problem applies to climate change science, too. It could be that human activity is changing the temperature on earth, even though the earth's temperature has steadied in the last few years. But for human activity, the earth might have cooled significantly during that period. Instead, the human interference may kept the temperature of the earth artificially high. Or the affect of human activity might simply be sporactic warming such that we shouldn't expect the earth to warm consistently (although from what I've read I understand that most models predict consistent, gradual warming).

Because of these uncertainties, there is basically no way to prove or disprove anthropogenic global warming, just as there is no way to prove or disprove the effect of the stimulus. We simply don't have any scientifically rigorous way of controlling for all of the other factors that can affect the variable we are trying to measure.

That's ok. Both economics and climatology still provide useful ways of organizing and thinking about the world. But from now on, let's give climatologists the same credence we give economists.

The Professor Asks

Two piers are located next to each other. One, government run, drastically undercharges for dock spots and so has to run a lottery every year to determine who has a right to dock at the pier. The other, privately run, charges approximately 5 times as much for a spot, but always has spots available for those willing to pay.

What happens to the price of a spot at the private pier if the government owned pier raises its price?

Here's my guess, assuming that the docking at one pier is as good as docking at the other:

Generally you'd think that if the price of a substitute goes up, then the item's price would go up too. So, if frozen yogurt goes up in price, people will substitute ice cream. The increased demand for ice cream will cause the price to go up.

I don't think that's the right way to think about this problem, however. Instead, raising the price at the government pier will cause some people who currently pay for a lottery spot at the pier to lose interest. Thus, demand will be lower for spots at the government pier at the higher price. But there is clearly excess demand, so they should still fill all the slots. Furthermore, some of the people at the private pier, who are now paying 5 times as much for spots are likely to get spots over at the public pier. Thus, demand for spots at the private pier will fall. Falling demand will result in the price for private pier spots to fall.

That's my answer.