Month: January 2022

Cryptocurrency and its failures

PNRJ core principles, current events, ethics, financial advice, financial fraud, futurism, inequality, market failure, politics, public policy , , , , , ,

Jan 30 JDN 2459620

It started out as a neat idea, though very much a solution in search of a problem. Using encryption, could we decentralize currency and eliminate the need for a central bank?

Well, it’s been a few years now, and we have now seen how well that went. Bitcoin recently crashed, but it has always been astonishingly volatile. As a speculative asset, such volatility is often tolerable—for many, even profitable. But as a currency, it is completely unbearable. People need to know that their money will be a store of value and a medium of exchange—and something that changes price one minute to the next is neither.

Some of cryptocurrency’s failures have been hilarious, like the ill-fated island called [yes, really] “Cryptoland”, which crashed and burned when they couldn’t find any investors to help them buy the island.

Others have been darkly comic, but tragic in their human consequences. Chief among these was the failed attempt by El Salvador to make Bitcoin an official currency.

At the time, President Bukele justified it by an economically baffling argument: Total value of all Bitcoin in the world is $680 billion, therefore if even 1% gets invested in El Salvador, GDP will increase by $6.8 billion, which is 25%!

First of all, that would only happen if 1% of all Bitcoin were invested in El Salvador each year—otherwise you’re looking at a one-time injection of money, not an increase in GDP.

But more importantly, this is like saying that the total US dollar supply is $6 trillion, (that’s physically cash; the actual money supply is considerably larger) so maybe by dollarizing your economy you can get 1% of that—$60 billion, baby! No, that’s not how any of this works. Dollarizing could still be a good idea (though it didn’t go all that well in El Salvador), but it won’t give you some kind of share in the US economy. You can’t collect dividends on US GDP.

It’s actually good how El Salvador’s experiment in bitcoin failed: Nobody bought into it in the first place. They couldn’t convince people to buy government assets that were backed by Bitcoin (perhaps because the assets were a strictly worse deal than just, er, buying Bitcoin). So the human cost of this idiotic experiment should be relatively minimal: It’s not like people are losing their homes over this.

That is, unless President Bukele doubles down, which he now appears to be doing. Even people who are big fans of cryptocurrency are unimpressed with El Salvador’s approach to it.

It would be one thing if there were some stable cryptocurrency that one could try pegging one’s national currency to, but there isn’t. Even so-called stablecoins are generally pegged to… regular currencies, typically the US dollar but also sometimes the Euro or a few other currencies. (I’ve seen the Australian Dollar and the Swiss Franc, but oddly enough, not the Pound Sterling.)

Or a country could try issuing its own cryptocurrency, as an all-digital currency instead of one that is partly paper. It’s not totally clear to me what advantages this would have over the current system (in which most of the money supply is bank deposits, i.e. already digital), but it would at least preserve the key advantage of having a central bank that can regulate your money supply.

But no, President Bukele decided to take an already-existing cryptocurrency, backed by nothing but the whims of the market, and make it legal tender. Somehow he missed the fact that a currency which rises and falls by 10% in a single day is generally considered bad.

Why? Is he just an idiot? I mean, maybe, though Bukele’s approval rating is astonishingly high. (And El Salvador is… mostly democratic. Unlike, say, Putin’s, I think these approval ratings are basically real.) But that’s not the only reason. My guess is that he was gripped by the same FOMO that has gripped everyone else who evangelizes for Bitcoin. The allure of easy money is often irresistible.

Consider President Bukele’s position. You’re governing a poor, war-torn country which has had economic problems of various types since its founding. When the national currency collapsed a generation ago, the country was put on the US dollar, but that didn’t solve the problem. So you’re looking for a better solution to the monetary doldrums your country has been in for decades.

You hear about a fancy new monetary technology, “cryptocurrency”, which has all the tech people really excited and seems to be making tons of money. You don’t understand a thing about it—hardly anyone seems to, in fact—but you know that people with a lot of insider knowledge of technology and finance are really invested in it, so it seems like there must be something good here. So, you decide to launch a program that will convert your country’s currency from the US dollar to one of these new cryptocurrencies—and you pick the most famous one, which is also extremely valuable, Bitcoin.

Could cryptocurrencies be the future of money, you wonder? Could this be the way to save your country’s economy?

Despite all the evidence that had already accumulated that cryptocurrency wasn’t working, I can understand why Bukele would be tempted by that dream. Just as we’d all like to get free money without having to work, he wanted to save his country’s economy without having to implement costly and unpopular reforms.

But there is no easy money. Not really. Some people get lucky; but they ultimately benefit from other people’s hard work.

The lesson here is deeper than cryptocurrency. Yes, clearly, it was a dumb idea to try to make Bitcoin a national currency, and it will get even dumber if Bukele really does double down on it. But more than that, we must all resist the lure of easy money. If it sounds too good to be true, it probably is.

Keynesian economics: It works, bitches

PNRJ current events, macroeconomics, public policy , , , , ,

Jan 23 JDN 2459613

(I couldn’t resist; for the uninitiated, my slightly off-color title is referencing this XKCD comic.)

When faced with a bad recession, Keynesian economics prescribes the following response: Expand the money supply. Cut interest rates. Increase government spending, but decrease taxes. The bigger the recession, the more we should do all these things—especially increasing spending, because interest rates will often get pushed to zero, creating what’s called a liquidity trap.

Take a look at these two FRED graphs, both since the 1950s.
The first is interest rates (specifically the Fed funds effective rate):

The second is the US federal deficit as a proportion of GDP:

Interest rates were pushed to zero right after the 2008 recession, and didn’t start coming back up until 2016. Then as soon as we hit the COVID recession, they were dropped back to zero.

The deficit looks even more remarkable. At the 2009 trough of the recession, the deficit was large, nearly 10% of GDP; but then it was quickly reduced back to normal, to between 2% and 4% of GDP. And that initial surge is as much explained by GDP and tax receipts falling as by spending increasing.

Yet in 2020 we saw something quite different: The deficit became huge. Literally off the chart, nearly 15% of GDP. A staggering $2.8 trillion. We’ve not had a deficit that large as a proportion of GDP since WW2. We’ve never had a deficit that large in real billions of dollars.

Deficit hawks came out of the woodwork to complain about this, and for once I was worried they might actually be right. Their most credible complaint was that it would trigger inflation, and they weren’t wrong about that: Inflation became a serious concern for the first time in decades.

But these recessions were very large, and when you actually run the numbers, this deficit was the correct magnitude for what Keynesian models tell us to do. I wouldn’t have thought our government had the will and courage to actually do it, but I am very glad to have been wrong about that, for one very simple reason:

It worked.

In 2009, we didn’t actually fix the recession. We blunted it; we stopped it from getting worse. But we never really restored GDP, we just let it get back to its normal growth rate after it had plummeted, and eventually caught back up to where we had been.

2021 went completely differently. With a much larger deficit, we fixed this recession. We didn’t just stop the fall; we reversed it. We aren’t just back to normal growth rates—we are back to the same level of GDP, as if the recession had never happened.

This contrast is quite obvious from the GDP of US GDP:

In 2008 and 2009, GDP slumps downward, and then just… resumes its previous trend. It’s like we didn’t do anything to fix the recession, and just allowed the overall strong growth of our economy to carry us through.

The pattern in 2020 is completely different. GDP plummets downward—much further, much faster than in the Great Recession. But then it immediately surges back upward. By the end of 2021, it was above its pre-recession level, and looks to be back on its growth trend. With a recession this deep, if we’d just waited like we did last time, it would have taken four or five years to reach this point—we actually did it in less than one.

I wrote earlier about how this is a weird recession, one that actually seems to fit Real Business Cycle theory. Well, it was weird in another way as well: We fixed it. We actually had the courage to do what Keynes told us to do in 1936, and it worked exactly as it was supposed to.

Indeed, to go from unemployment almost 15% in April of 2020 to under 4% in December of 2021 is fast enough I feel like I’m getting whiplash. We have never seen unemployment drop that fast. Krugman is fond of comparing this to “morning in America”, but that’s really an understatement. Pitch black one moment, shining bright the next: this isn’t a sunrise, it’s pulling open a blackout curtain.

And all of this while the pandemic is still going on! The omicron variant has brought case numbers to their highest levels ever, though fortunately death rates so far are still below last year’s peak.

I’m not sure I have the words to express what a staggering achievement of economic policy it is to so rapidly and totally repair the economic damage caused by a pandemic while that pandemic is still happening. It’s the equivalent of repairing an airplane that is not only still in flight, but still taking anti-aircraft fire.

Why, it seems that Keynes fellow may have been onto something, eh?

Reversals in progress against poverty

PNRJ core principles, critique of neoclassical economics, current events, development economics, inequality , , , , ,

Jan 16 JDN 2459606

I don’t need to tell you that the COVID pandemic has been very bad for the world. Yet perhaps the worst outcome of the pandemic is one that most people don’t recognize: It has reversed years of progress against global poverty.

Estimates of the number of people who will be thrown into extreme poverty as a result of the pandemic are consistently around 100 million, though some forecasts have predicted this will rise to 150 million, or, in the most pessimistic scenarios, even as high as 500 million.

Pre-COVID projections showed the global poverty rate falling steadily from 8.4% in 2019 to 6.3% by 2030. But COVID resulted in the first upward surge in global poverty in decades, and updated models now suggest that the global poverty rate in 2030 will be as high as 7.0%. That difference is 0.7% of a forecasted population of 8.5 billion—so that’s a difference of 59 million people.

This is a terrible reversal of fortune, and a global tragedy. Ten or perhaps even hundreds of millions of people will suffer the pain of poverty because of this global pandemic and the numerous missteps by many of the world’s governments—not least the United States—in response to it.

Yet it’s important to keep in mind that this is a short-term reversal in a long-term trend toward reduced poverty. Yes, the most optimistic predictions are turning out to be wrong—but the general pattern of dramatic reductions in global poverty over the late 20th and early 21st century are still holding up.

That post-COVID estimate of a global poverty rate of 7.0% needs to be compared against the fact that as recently as 1980 the global poverty rate at the same income level (adjust for inflation and purchasing power of course) income level was a whopping 44%.

This pattern makes me feel deeply ambivalent about the effects of globalization on inequality. While it now seems clear that globalization has exacerbated inequality within First World countries—and triggered a terrible backlash of right-wing populism as a result—it also seems clear that globalization was a major reason for the dramatic reductions in global poverty in the past few decades.

I think the best answer I’ve been able to come up with is that globalization is overall a good thing, and we must continue it—but we also need to be much more mindful of its costs, and we must make policy that mitigates those costs. Expanded trade has winners and losers, and we should be taxing the winners to compensate the losers. To make good economic policy, it simply isn’t enough to increase aggregate GDP; you actually have to make life better for everyone (or at least as many people as you can).

Unfortunately, knowing what policies to make is only half the battle. We must actually implement those policies, which means winning elections, which means restoring the public’s faith in the authority of economic experts.

Some of the people voting for Donald Trump were just what Hillary Clinton correctly (if tone-deafly) referred to as “deplorables“: racists, misogynists, xenophobes. But I think that many others weren’t voting for Trump but against Clinton; they weren’t embracing far-right populism but rather rejecting center-left technocratic globalization. They were tired of being told what to do by experts who didn’t seem to care about them or their interests.

And the thing is, they were right about that. Not about voting for Trump—that’s unforgivable—but about the fact that expert elites had been ignoring their interests and needed a wake-up call. There were a hundred better ways of making that wake-up call that didn’t involve putting a narcissistic, incompetent maniac in charge of the world’s largest economy, military and nuclear arsenal, and millions of people should be ashamed of themselves for not taking those better options. Yet the fact remains: The wake-up call was necessary, and we should be responding to it.

We expert elites (I think I can officially carry that card, now that I have a PhD and a faculty position at a leading research university) need to do a much better job of two things: First, articulating the case for our policy recommendations in a way that ordinary people can understand, so that they feel justified and not simply rammed down people’s throats; and second, recognizing the costs and downsides of these policies and taking action to mitigate them whenever possible.

For instance: Yes, we need to destroy all the coal jobs. They are killing workers and the planet. Coal companies need to be transitioned to new industries or else shut down. This is not optional. It must be done. But we also need to explain to those coal miners why it’s necessary to move on from coal to solar and nuclear, and we need to be implementing various policies to help those workers move on to better, safer jobs that pay as well and don’t involve filling their lungs with soot and the atmosphere with carbon dioxide. We need to articulate, emphasize—and loudly repeat—that this isn’t about hurting coal miners to help everyone else, but about helping everyone, coal miners included, and that if anyone gets hurt it will only be a handful of psychopathic billionaires who already have more money than any human being could possibly need or deserve.

Another example: We cannot stop trading with India and China. Hundreds of millions of innocent people would suddenly be thrown out of work and into poverty if we did. We need the products they make for us, and they need the money we pay for those products. But we must also acknowledge that trading with poor countries does put downward pressure on wages back home, and take action to help First World workers who are now forced to compete with global labor markets. Maybe this takes the form of better unemployment benefits, or job-matching programs, or government-sponsored job training. But we cannot simply shrug and let people lose their jobs and their homes because the factories they worked in were moved to China.

Strange times for the labor market

PNRJ current events, inequality, macroeconomics , , , , , ,

Jan 9 JDN 2459589

Labor markets have been behaving quite strangely lately, due to COVID and its consequences. As I said in an earlier post, the COVID recession was the one recession I can think of that actually seemed to follow Real Business Cycle theory—where it was labor supply, not demand, that drove employment.

I dare say that for the first time in decades, the US government actually followed Keynesian policy. US federal government spending surged from $4.8 trillion to $6.8 trillion in a single year:

That is a staggering amount of additional spending; I don’t think any country in history has ever increased their spending by that large an amount in a single year, even inflation-adjusted. Yet in response to a recession that severe, this is exactly what Keynesian models prescribed—and for once, we listened. Instead of balking at the big numbers, we went ahead and spent the money.

And apparently it worked, because unemployment spiked to the worst levels seen since the Great Depression, then suddenly plummeted back to normal almost immediately:

Nor was this just the result of people giving up on finding work. U-6, the broader unemployment measure that includes people who are underemployed or have given up looking for work, shows the same unprecedented pattern:

The oddest part is that people are now quitting their jobs at the highest rate seen in over 20 years:

[FRED_quits.png]

This phenomenon has been dubbed the Great Resignation, and while its causes are still unclear, it is clearly the most important change in the labor market in decades.

In a previous post I hypothesized that this surge in strikes and quits was a coordination effect: The sudden, consistent shock to all labor markets at once gave people a focal point to coordinate their decision to strike.

But it’s also quite possible that it was the Keynesian stimulus that did it: The relief payments made it safe for people to leave jobs they had long hated, and they leapt at the opportunity.

When that huge surge in government spending was proposed, the usual voices came out of the woodwork to warn of terrible inflation. It’s true, inflation has been higher lately than usual, nearly 7% last year. But we still haven’t hit the double-digit inflation rates we had in the late 1970s and early 1980s:

Indeed, most of the inflation we’ve had can be explained by the shortages created by the supply chain crisis, along with a very interesting substitution effect created by the pandemic. As services shut down, people bought goods instead: Home gyms instead of gym memberships, wifi upgrades instead of restaurant meals.

As a result, the price of durable goods actually rose, when it had previously been falling for decades. That broader pattern is worth emphasizing: As technology advances, services like healthcare and education get more expensive, durable goods like phones and washing machines get cheaper, and nondurable goods like food and gasoline fluctuate but ultimately stay about the same. But in the last year or so, durable goods have gotten more expensive too, because people want to buy more while supply chains are able to deliver less.

This suggests that the inflation we are seeing is likely to go away in a few years, once the pandemic is better under control (or else reduced to a new influenza where the virus is always there but we learn to live with it).

But I don’t think the effects on the labor market will be so transitory. The strikes and quits we’ve been seeing lately really are at a historic level, and they are likely to have a long-lasting effect on how work is organized. Employers are panicking about having to raise wages and whining about how “no one wants to work” (meaning, of course, no one wants to work at the current wage and conditions on offer). The correct response is the one from Goodfellas [language warning].

For the first time in decades, there are actually more job vacancies than unemployed workers:

This means that the tables have turned. The bargaining power is suddenly in the hands of workers again, after being in the hands of employers for as long as I’ve been alive. Of course it’s impossible to know whether some other shock could yield another reversal; but for now, it looks like we are finally on the verge of major changes in how labor markets operate—and I for one think it’s about time.

Reasons for optimism in 2022

PNRJ current events, futurism, public policy , , , , , , , , ,

Jan 2 JDN 2459582

When this post goes live, we will have begun the year 2022.

That still sounds futuristic, somehow. We’ve been in the 20th century long enough that most of my students were born in it and nearly all of them are old enough to drink (to be fair, it’s the UK, so “old enough to drink” only means 18). Yet “the year 2022” still seems like it belongs in science fiction, and not on our wall calendars.

2020 and 2021 were quite bad years. Death rates and poverty rates surged around the world. Almost all of that was directly or indirectly due to COVID.

Yet there are two things we should keep in perspective.

First, those death rates and poverty rates surged to what we used to consider normal 50 years ago. These are not uniquely bad times; indeed, they are still better than most of human history.

Second, there are many reasons to think that 2022—or perhaps a bit later than that, 2025 or 2030—will be better.

The Omicron variant is highly contagious, but so far does not appear to be as deadly as previous variants. COVID seems to be evolving to be more like influenza: Catching it will be virtually inevitable, but dying from it will be very rare.

Things are also looking quite good on the climate change front: Renewable energy production is growing at breathtaking speed and is now cheaper than almost every other form of energy. It’s awful that we panicked and locked down nuclear energy for the last 50 years, but at this point we may no longer need it: Solar and wind are just that good now.

Battery technology is also rapidly improving, giving us denser, cheaper, more stable batteries that may soon allow us to solve the intermittency problem: the wind may not always blow and the sun may not always shine, but if you have big enough batteries you don’t need them to. (You can get a really good feel for how much difference good batteries make in energy production by playing Factorio, or, more whimsically, Mewnbase.)

If we do go back to nuclear energy, it may not be fission anymore, but fusion. Now that we have nearly reached that vital milestone of break-even, investment in fusion technology has rapidly increased.


Fusion has basically all of the benefits of fission with none of the drawbacks. Unlike renewables, it can produce enormous amounts of energy in a way that can be easily scaled and controlled independently of weather conditions. Unlike fission, it requires no exotic nuclear fuels (deuterium can be readily attained from water), and produces no long-lived radioactive waste. (Indeed, development is ongoing of methods that could use fusion products to reduce the waste from fission reactors, making the effective rate of nuclear waste production for fusion negative.) Like both renewables and fission, it produces no carbon emissions other than those required to build the facility (mainly due to concrete).

Of course, technology is only half the problem: we still need substantial policy changes to get carbon emissions down. We’ve already dragged our feet for decades too long, and we will pay the price for that. But anyone saying that climate change is an inevitable catastrophe hasn’t been paying attention to recent developments in solar panels.

Technological development in general seems to be speeding up lately, after having stalled quite a bit in the early 2000s. Moore’s Law may be leveling off, but the technological frontier may simply be moving away from digital computing power and onto other things, such as biotechnology.

Star Trek told us that we’d have prototype warp drives by the 2060s but we wouldn’t have bionic implants to cure blindness until the 2300s. They seem to have gotten it backwards: We may never have warp drive, but we’ve got those bionic implants today.

Neural interfaces are allowing paralyzed people to move, speak, and now even write.

After decades of failed promises, gene therapy is finally becoming useful in treating real human diseases. CRISPR changes everything.

We are also entering a new era of space travel, thanks largely to SpaceX and their remarkable reusable rockets. The payload cost to LEO is a standard measure of the cost of space travel, which describes the cost of carrying a certain mass of cargo up to low Earth orbit. By this measure, costs have declined from nearly $20,000 per kg to only $1,500 per kg since the 1960s. Elon Musk claims that he can reduce the cost to as low as $10 per kg. I’m skeptical, to say the least—but even dropping it to $500 or $200 would be a dramatic improvement and open up many new options for space exploration and even colonization.

To put this in perspective, the cost of carrying a human being to the International Space Station (about 100 kg to LEO) has fallen from $2 million to $150,000. A further decrease to $200 per kg would lower that to $20,000, opening the possibility of space tourism; $20,000 might be something even upper-middle-class people could do as a once-in-a-lifetime vacation. If Musk is really right that he can drop it all the way to $10 per kg, the cost to carry a person to the ISS would be only $1000—something middle-class people could do regularly. (“Should we do Paris for our anniversary this year, or the ISS?”) Indeed, a cost that low would open the possibility of space-based shipping—for when you absolutely must have the product delivered from China to California in the next 2 hours.

Another way to put this in perspective is to convert these prices per mass in terms of those of commodities, such as precious metals. $20,000 per kg is nearly the price of solid platinum. $500 per kg is about the price of sterling silver. $10 per kg is roughly the price of copper.

The reasons for optimism are not purely technological. There has also been significant social progress just in the last few years, with major milestones on LGBT rights being made around the world in 2020 and 2021. Same-sex marriage is now legally recognized over nearly the entire Western Hemisphere.

None of that changes the fact that we are still in a global pandemic which seems to be increasingly out of control. I can’t tell you whether 2022 will be better than 2021, or just more of the same—or perhaps even worse.

But while these times are hard, overall the world is still making progress.