Assorted Musings

Some assorted musings:

(1) James Hamilton gives us a reality check on the U.S. debt-to-GDP ratio. He shows that we should not take comfort, as some observers do, in comparing the current value of this ratio to what is was coming out of WWII. Back then there was far more non-mandatory spending that could easily be pared down. A very sobering read. [Update: Paul Krugman replies to Hamilton]

(2) David Andolfatto meanwhile is more optimistic on the growing U.S. debt-to-GDP ratio. He cites Ricardo Caballero's argument that there is a shortage of high-quality financial assets in the world and thus the large increase in U.S. Treasuries is actually an optimal outcome. The world needs our Treasuries and the only way we can provide them is to incur more public debt.

(3) Menzie Chinn has a new paper with Jeffry Frieden where they look at the causes and consequences of the current economic crisis. Among other things, they note that the excess savings from the rest of the world was not forced on the United States. Rather, it responded to the excess U.S. demand pressures created by loose fiscal and monetary policies in the United States. They put more emphasis on fiscal policy than I would, but their key point that U.S. economic policies were the important drivers in the buildup of global economic imbalances is spot on.

(4) Tyler Cowen does a Milton Friedman smackdown of David Henderson. Tyler shows, contrary to David's claims, that Milton Friedman thought the Fed in 1929-1931 period should have (1) bought up a lot more bonds (i.e. increased the money supply) and (2) acted a lender of last resort (i.e. done more to prevent the banking system collapse). In short, Milton Friedman was for both stabilizing the money supply and bailing out the banking system. As Tyler notes, the idea of bailouts is hard for many libertarians to swallow, but the alternative may be a far worse outcome for them.

(5) Speaking of running, Justin Wolfers reminds us there is an opportunity cost to this sport. However, he does the calculations and concludes that training for a marathon is an optimal outcome for him.