The Orange Path

Three cheers for short-sellers

Felix Salmon, Reuters, Aug 7th 2009

Is there any downside to short-selling? Not really: the authors say that “there is no evidence that short selling exacerbates a downward price spiral when the misconduct is publicly revealed”.

Yes, the market is efficient

Chris Dillow, Stumbling and Mumbling, August 6th 2009

Figures from Trustnet show that, over the last five years, only a minority of unit trusts in the UK all companies sector (91 of 254) have out-performed an index-tracker fund.
This means that the key prediction of the EMH is correct - it is incredibly hard to beat the market.

John Authers: Why sitting tight is sometimes right

Financial Times, Feb 15th 2008

Further, there are good arguments based on “churning”. It costs money every time you make a trade. That eats away at your investment. Leaving things as is can be very cheap. So a bias towards inactivity makes economic sense.

Behavioural finance provides a more profound reason. Humans suffer from an activity bias. Inactivity embarrasses us. When there are problems, our instinct is not just to stand there but to do something.

3. The fiscal stimulus is going to do wonders [?]

michele boldrin, 24 Febbraio 2009

First: it is a fantasy that the economic profession at large finds the "stimulus" and the "bank bailout" plans sensible and adequate. Most economists I know oppose them: fiscal stimuli either do not work or work too slowly, and bailing out bad managers is never a good idea.

Fiscal stimuli

Anthony J. Evans, The Filter^, Feb 2009
A roundup of contemporary crtiicismts of Obama's $700bn spending plans

According to the Chicago Tribune:John Cochrane, a professor at the University of Chicago Booth School of Business, says that among academics over the last 30 years, the idea of fiscal stimulus has been discredited and in graduate courses, it is "taught only for its fallacies."

New York University economist Thomas Sargent agrees: "The calculations that I have seen supporting the stimulus package are back-of-the-envelope ones that ignore what we have learned in the last 60 years of macroeconomic research."

Greg Mankiw provides a list of more economists that are skeptical of a spending stimulus:

Alberto Alesina, Robert Barro, Gary Becker, John Cochrane, Eugene Fama, Robert Lucas, Greg Mankiw, Kevin Murphy, Thomas Sargent, Harald Uhlig, and Luigi Zingales

Mike Moffatt has some excellent posts on this topic. In "Why is so little known about modern fiscal stimulus" he cites Mark Thoma:

Monetary policy could be implemented faster, with less distortions, it could be reversed quickly, it was in the hands of independent, public minded shepherds, there wasn't any dimension, or so it was thought, upon which fiscal policy would be better than monetary policy, and vast amounts of research were devoted to getting the monetary policy component of stabilization policy correct. In the process, fiscal policy was dismissed as irrelevant, at least as a stabilization tool, and largely ignored by researchers (fiscal policy was still used to try to promote growth - that's the whole supply-side argument about cutting taxes, but not as a stabilization tool). That's not to say government spending and taxes weren't included in models and analyzed theoretically, or even empirically, but to the extent that happened, the questions were not focused on how fiscal policy could be used as a stabilization tool -- the models were not constructed to answer this question.

Also see "What are the key ingredients of fiscal stimulus" and "Fiscal stimulus - unlikely to work in the real world"

Here are some more links to take a look at:

• Political affiliations of modern macroeconomists
• Keynes as Public Works Skeptic
• A 40-Year Wish List:You won't believe what's in that stimulus bill

Update (19/2/09): Mario Rizzo tries to explain "Why Obama’s Stimulus Won’t Work and What Might" - you can view a video of his remarks here.

Will The Real Christina Romer Please Stand Up?

David Henderson, Forbes.com 7th Jan 2009

The Romers write, "[C]ountercyclical fiscal policy is not achieving its intended purpose." Why? "[I]t is difficult for fiscal policy to respond quickly to economic developments"...The best thing the federal government could do now is avoid the phony Obama tax cut and not increase spending at all. It's time for the Senate Republicans to step up.

Dangers of the Stimulus Bill

HumanEvents.com, Gary Wolfram 02/09/2009

Frederic Hayek, in his Nobel address stated that he regarded the Keynesian theory of the relationship between employment and aggregate demand “as fundamentally false.” Milton Friedman, who famously attacked the Keynesian theory in his long and distinguished career, said n one of his last interviews:  “Now Keynes, in the General Theory of Employment, Interest and Money, set forth a hypothesis which was a beautiful one, and it really altered the shape of economics.  But it turned out it was a wrong hypothesis.” 

Money for nothing won't grow the economy

Jeff Jacoby, Boston Globe, February 1, 2009

Keynes died in 1946, but the Keynesian fallacy - that money for nothing (government spending without increased productivity) can boost the economy - lives on, impervious to the evidence disproving it.

Six years into FDR's presidency, his Treasury secretary (and close friend) Henry Morgenthau Jr. ruefully acknowledged that the New Deal had proved an economic disaster.

"We have tried spending money; we are spending more than we have ever spent before and it does not work," he told two senior congressional Democrats. "I want to see this country prosperous. I want to see people get a job. I want to see people get enough to eat. We have never made good on our promises. . . After eight years of this administration, we have just as much unemployment as when we started . . . and an enormous debt to boot!"

FDR Was a Great Leader, But His Economic Plan Isn't One to Follow

The Washington Post, Amity Shlaes , Sunday, February 1, 2009

But many of the jobs that the early New Deal produced were not merely temporary but also limited in economic value. It was in these years that the political term "boondoggle," to describe costly make-work, was coined. It came from "boondoggling," the word for leather craft projects subsidized by New Deal work-relief programs. As was the case for the Troeller brothers, work-relief earnings were usually not sufficient to offset other Depression losses.

"We have tried spending money," Treasury Secretary Henry Morgenthau said to the House Ways and Means Committee in the late 1930s. "We are spending more than we have ever spent before and it does not work. . . . I say, after eight years of this administration, we have just as much unemployment as when we started . . . and an enormous debt to boot." 

Government Spending Is No Free Lunch

By Robert Barro, Wall Street Journal (JANUARY 22, 2009)

I have estimated that World War II raised U.S. defense expenditures by $540 billion (1996 dollars) per year at the peak in 1943-44, amounting to 44% of real GDP. I also estimated that the war raised real GDP by $430 billion per year in 1943-44. Thus, the multiplier was 0.8 (430/540). The other way to put this is that the war lowered components of GDP aside from military purchases. The main declines were in private investment, nonmilitary parts of government purchases, and net exports -- personal consumer expenditure changed little. Wartime production siphoned off resources from other economic uses -- there was a dampener, rather than a multiplier.