Yglesias Persists in Misunderstanding Drug Policy

This has little to do with economics but it popped up on Moneybox and I wanted to comment about it , so here goes. 

Yglesias bloviates a bit today about drug policy and decides that:

One plausible story is that marijuana would substitute for alcohol use, and since marijuana has fewer health risks than booze that would militate in favor of policies designed to make pot at least as easy to get as beer. Another also possible story is that legal marijuana will complement drinking, and therefore exacerbate existing alcohol-related problems. That would indicate that we should try to make pot less widely available than beer currently is (though still more available than under the status quo) along with higher taxes on alcohol.

Like much drug policy writing, this idea suffers from several fairly coarse assumptions but most importantly the failure to make a distinction between overall drug use and "problem use" that carries a significant social cost.  It's as if people were trying to reduce car accidents by making it harder to get a car. Yes, it may have some effect, but you're sort of missing the point.

Efforts to prevent the population at large from smoking pot (or really, doing any illicit drug) are doomed to be very ineffective. If you commit a burglary your chances of getting caught are something like four hundred times higher than if you consume illegal drugs (and your chances of getting caught for committing a burglary are not that high.)

There's good news there, though, because the really harmful problem use in the US is drug use by people who commit crimes. For many years it was believed that drug use actually turned people into criminals, but this was studied in the 1980's (check your university library for the excellent work of James Inciardi among others) and found to be incorrect.  

It is actually very easy to lower the drug use of convicted criminals by drug testing them several times a week and imposing a mildly painful penalty like a small amount of community service. Those who are addicted and truly cannot stop will have to be provided with treatment (or, if you prefer, stiffer penalties like incarceration), but it is known that most drug users are very responsive to the costs - both monetary and other costs - of their drug use and if those costs go up significantly and predictably, they will use less. 

This approach is known as "Coerced Abstinence" and with a google search you can read all kinds of stuff about it including a lot of scholarly research.  It has been discussed since at least the late 1990's and has been implemented many places and its effects studied.  

Long story short, it works very well, is cheap, and reduces the strain on the justice system.  It also lowers drug use among criminals, which is a population whom EVERYONE, from prohibitionists to outright legalizers, agrees should not be using mind-altering chemicals recreationally.

This is not just an approach we should be trying.  It is THE approach we should be trying.  It makes sense.  It works.  It doesn't cost billions of dollars.  What's the holdup?

Bitcoin - Currency? Bubble? Both? Neither?

Interesting post by Yves Smith over at Naked Capitalism today regarding the phenomenon of Bitcoin.  Smith's post is very long and I'm not going to take on all the points therein, but I did want to attempt a quick summary of my take on Bitcoin.

The title of Smith's post is "Bitcoin:  Bubble or New Virtual Currency?"

The first thing I notice about this headline is that it's a false dichotomy.  Of course it could be that Bitcoin is a genuine new virtual currency AND in a bubble.  I imagine this is mostly pithy headline writing as I trust Yves Smith understands this fact quite well, but I feel it's important to be clear about these things.

The second thing is that you can answer this question pretty easily.  A currency in the modern context requires two things - a monopoly issuer and a taxation authority.

Bitcoin has the first - there is a cryptography algorithm that issues Bitcoin, and that's the only source of net  Bitcoin.  So we're good there.  The problem is with the second part of the life cycle - the taxation authority.  Currently no entity exists that can levy Bitcoin-denominated taxes on real assets.

Now, according to circuitist theory this is OK, as long as you have a legally recognized banking system that trades in Bitcoin-denominated debts, Bitcoin can still have value as a currency because the banks can levy a claim on other assets if the Bitcoin-denominated liabilities are not fulfilled.

Unfortunately for Bitcoin triumphalists, that doesn't exist either.  So, long story short:  No, Bitcoin is not a currency.  It may have some intrinsic or extrinsic value that does not arise from its value as a currency, but to the degree that its owners' expectations of value are connected to its future as a currency, those expectations are not reasonable.

Which answers that first question about the bubble.  Bitcoins are in a bubble, and indeed the bubble must inevitably pop.  But remember always "inevitable" and "soon" are not synonyms.

The Myth of Expectations

Yglesias today has a post titled "
FOMC Adopts Game-Changing Conditional Inflation Targeting Rule."If you've read his site much you can probably guess the rule - as Matt puts it the Fed "has stopped screwing around and started doing real expectations-based monetary easing.".

I've had beef with Matt about this expectations business for years, and I'm glad to see that Matt is enthusiastic about this change and not saying "well, true NGDP targeting would be better."  He's recognizing that this is the idea Matt has been flogging and if it doesn't spur economic growth by easing monetary conditions, that's a bust to the idea.

The thing Matt - and many others - fail to understand about the so-called "expectations channel" is that it's something that occurs as a result of other consequences of a policy, not as something unique unto itself.  The Fed makes a policy change, the policy change makes an impact, and then there is additional impact because people's expectations about economic performance change.

The idea that economic conditions today are being impacted by expectations about Fed action in 2014 is completely unfounded.  The new Fed targeting model may well be a great idea!  It could lead to better policy!  Hooray!

What the new model doesn't do is give the Fed new policy tools.  Fed policy is the same as it was yesterday - as expansionary as possible for as far as the eye can see.  Expectations don't change conditions, conditions change expectations.  THEN expectations can theoretically have an accelerating effect.  

A Balance Sheet Recession in a Nutshell

The Financial Times is occasionally refreshingly good.  Yesterday Martin Wolf put the essential problem of a balance sheet recession very succinctly:

[T]hose who are creditworthy do not wish to borrow; those who want to borrow are not creditworthy...

This is the problem in a balance sheet recession.  Policymakers, who overwhelmingly have banking backgrounds, want to solve these problems through the banking system - by setting interest rates and letting banks create money by lending.

However, banks cannot create net financial assets - every time a bank makes a loan, it creates an equivalent liability for each asset it creates.  So if private sector balance sheets are strained, banks don't lend, no matter what the interest rate is and no matter how much the government might want them to.

The solution to this problem is fairly simple; unfortunately ideological orthodoxy tends to assume it away.  From a different part of the same article:

Mr Osborne repeated the orthodoxies of the government’s approach to fiscal policy (it needs to be tight), monetary policy (it needs to be loose) and debt (it needs to be reduced).

The problem is, in a balance sheet recession, if fiscal policy is tight, balance sheets stay strained because no net financial assets are being transferred to the private sector, and thus no amount of "loosening" of monetary policy (which really just means low interest rates) can actually produce an expansion of private credit.

The most crucial part of the quote, though, is that bit at the end about debt needing to be reduced.  Whose debt?  For private balance sheets to "deleverage" (that is, to pay off debt) government debt must be increased.  There is no other source for the money needed to pay private debt off - that's what it means to be a monopoly issuer of a currency.

The simplest way for the UK and US to jumpstart their economies would be to target the people whose balance sheets are in the worst shape - the unemployed.  The government could hire the unemployed to perform useful work in their communities for $8/hr until such time as the private economy was ready to hire those people again.

It really is quite simple, but orthodoxy has a way of blinding people to obvious solutions that don't fit their prejudices.

Are Liberals Ignoring Monetary Policy?

One accusation that's been flying around a lot over at Yglesias' place is that liberals are ignoring monetary policy.  Matt makes the assertion today in a post called Job Creation is the Fed's Job.  The story, basically, is that liberals know that the Fed could easily create millions of jobs by changing its policies, but we're fixated on fiscal policy.

Of course this is not the case.  The problem is that lots of us, myself included, don't believe that the Fed can do much right now.  One thing that's been suggested is that the Fed could increase its inflation target from 2% to something higher.  I favor that but don't think it will help the current situation.  Another is that the Fed should target NGDP growth instead of inflation.  I think that's an interesting idea but don't think it will help the current situation.

Yglesias keeps hammering on two ideas to justify his fixation with monetary policy - one, that Bernanke himself says that the Fed has tools that could help the economy but isn't using them for some reason.  This isn't true - Bernanke says the Fed has things it might try if conditions warrant.  That's not the same as saying there are things that would help now that he's refusing to do.

The second idea is that there are central banks around the world that are succeeding with the monetary policy ideas he's hawking.  Matt's first obsession was Sweden - he linked to an article about Sweden setting its policy rate negative.  Unfortunately Sweden never set a negative policy rate - it was an apparent misunderstanding by a reporter that had been debunked before Yglesias ever got involved.

Yglesias continues to claim that Sweden did what they did not do, and has never addressed the Economix piece to my knowledge.  And now he's got a new dead horse to flog:  Bank of Israel's alleged targeting of NGDP growth.  Evan Soltas started a rumor that Bank of Israel was NGDP targeting and that this policy had led to Israel's impressive growth path since the 2008 financial collapse.

Once again, though, Matt has simply catapulted a myth into the mainstream.  Bank of Israel is not NGDP targeting.  Sweden never had a negative policy rate.  All these little mistakes add up to a big imaginary set of data that monetarists seems to have agreed to pretend is actual data.  This is no way to discuss the finance policy of the most important nation in the world.

Proving that Bank of Israel is Using an Inflation Target

Eric, one of the more rabid market monetarist commenters at Yglesias' place, is still insisting that I prove that Bank of Israel is not using NGDP targeting.  So, here goes.

1.  Bank of Israel's published policy is a 1-3% inflation target.
2.  Bank of Israel publishes a report every quarter explaining how it arrived at its policy by targeting 1-3% inflation.
3.  Bank of Israel's policy changes are consistent with a 1-3% inflation target (their stated policy) and inconsistent with an NGDP target (their alleged secret policy that a prep student invented by writing a blog post.)  We know this because in late 2009 Bank of Israel tightened rates to curb inflation  despite the fact that NGDP growth was below the alleged target rate of 6.5%.

I really, really hope that does it.  But somehow I think that it won't.

The Bank of Israel is not using NGDP Targeting

A couple days back Scott Sumner approvingly linked to a piece by a little-known blogger named Evan Soltas in which Soltas alleged that the Bank of Israel is using NGDP targeting.

Then Matthew Yglesias approvingly linked to the Scott Sumner article, and now around the web you're seeing market monetarists in comment threads bringing up how wonderful NGDP targeting is and wouldn't it be nice if all central bankers were as smart as the ones at Bank of Israel.

Well, there's a problem.  The Bank of Israel is not using NGDP targeting.  Soltas' "evidence" that the Bank of Israel was using a 6.5% NGDP target is that Israel's NGDP growth rate has hovered around 6.5% the past few years.  Seriously, that's the evidence.  

Sumner, who despite being by all accounts a nice guy traffics in these kinds of flimsy free-associations all the time, took Soltas' post at face value, and Yglesias, who is not known for his rigor, catapulted the whole myth into what passes for the blogosphere's "mainstream."  

This is the same thing that happened with Sweden's fictional negative interest rate policy - Yglesias linked to an old article that had since been corrected and now the myth keeps popping up because Yglesias never, ever corrects anything.  

I defend Matt a lot to people who think he's a real nuisance, but this sort of thing makes it hard.  Correct the record, Matt.  Bank of Israel is not using NGDP targeting - they're using a 1-3% inflation target.  Full stop.