101. jayackroyd - May 26, 1999 - 4:19 PM PT
FTC--
I'll lend you the Stokey and Prescott book if you'd like. Haven't looked at it in years.
102. FreeToChoose - May 26, 1999 - 4:34 PM PT
There is another aspect of his article I find more interesting. Krugman states:
"Beyond this, many stadium and theater owners seem to believe that as an overall marketing strategy it is important that access to their most popular events be available to enthusiasts at moderate prices."
Presumably, this argument is equivalent to saying that there are some people unable to afford what the market would charge for a ticket, and owners want to give these fans a chance to see the event. I once read that there are only two ways to allocate scarce resources, higher prices or longer lines. The thinking may be that the poor college student can't afford to pay the market rate for a ticket, but can stand in a line for hours.
But then Krugman notes later something that is obvious, but I hadn't thought about before:
"It also means that everyone who has bought a ticket at the box office knows that the true cost of going to the show is not the sum he actually paid but the much larger sum he could make by reselling that ticket."
103. FreeToChoose - May 26, 1999 - 4:34 PM PT
Continued
If we accept this, it means that it is literally false that keeping prices low allows people of moderate means to attend the event. Let me give an example, and see if you can poke a hole in my argument.
Suppose there is an upcoming rock concert by a popular group. The place would sell out at $100 per ticket, but the group wants to be nice to their fans so they price the tickets at $20. Joe has a limited income, and decides he can afford to pay $20 for a ticket, but couldn't afford $100. Because of the high demand, there is a long queue for tickets, but Joe manages to get there early and buys one of the tickets for $20. After hours of waiting, he finally gets his hands on the precious pasteboards. Walking away from the ticket counter, a scalper offers him $100 for the tickets.
"No way, man" Joe says.
But wait, we assumed that Joe couldn't afford to pay $100 for the ticket. He effectively *has* paid $100 for the ticket. If he sells the ticket to the scalper, then changes his mind (ignoring the scalpers markup), he will have to take $100 out of his wallet to give to the scalper. We just concluded he couldn't afford to do that. Unless we assume that Joe's wealth is so tiny that $100 would change his preferences, we should assume that a rational Joe would (perhaps tearfully) trade his tickets in for the $100.
I can think of possible counters to this argument, but I think they fail. I do not doubt for a minute that people might make such a decision, but I think the reasons are psychological, and not economically rational.
104. FreeToChoose - May 26, 1999 - 4:40 PM PT
jayackroyd
Thanks for the offer. If you tell me that it's worthwhile, I'll order it. We have built a stochastic simulation of the capital markets, and if you think this book is relevant to that subject, I can justify it.
105. FreeToChoose - May 26, 1999 - 4:47 PM PT
Yikes
I just reread my post and it leaves an incorrect inference. Suffice it to say that when TWO people recommend a book, I usually buy it. If I bought and read every book that Slack has mentioned, I wouldn't have time to post here.
Hey....is this a plot?
106. Slackjaw - May 26, 1999 - 4:54 PM PT
Message #97 So is your implication that an economic approach cannot shed light on social, political and philosophical questions? Or that assuming a rational world is incompatible with decisions people make in these realms?
107. Slackjaw - May 26, 1999 - 4:58 PM PT
FTC:
well, it's not relevant to all things stochastic. If your simulation is based on a dynamic maximization problem, then it's relevant.
I think the reason people (like the reviewers at Amazon) are disgruntled with that book is because they might think they're making an investment in learning about the macroeconomy. I'm not so sure they're right, but it's a cool book. And the methodology is useful for all kinds of things besides Chicago-Minnesota-Rochester style macro. Namely, the (universal) microeconomics.
108. AuNaturel - May 26, 1999 - 5:05 PM PT
"I do not doubt for a minute that people might make
such a decision, but I think the reasons are psychological"
You're right on this. Most people strongly differentiate between owning a readily salable item worth $100 and having $100. Maybe it's the transaction cost or maybe it's their estimate of the recreational value of the ticket. If I buy a ticket for $20 I will not sell it for a higher price if I value the concert experience itself at more than I can get.
109. Slackjaw - May 26, 1999 - 5:14 PM PT
without doubt, the rationality postulate, like all simplifying assumptions (a redundant term, actually), has its limitations. But simplify it does: there is exactly one way to be on top of a mountain with one peak; there are many ways not to be on top, and many different reasons depending on the particular problem at hand.
The challenge for social science is to (i) use the rationality postulate with care, trying to be aware of robustness issues, and (ii) preserve modeling flexibility and rigor while incorporating violations of standard theory of choice. This is difficult but not impossible, and it is a fairly hot area of economics.
For a basic introduction to behavioral economics, check out _The Winner's Curse_ by Richard Thaler. It's a very readable book.
110. FreeToChoose - May 26, 1999 - 5:18 PM PT
Slackjaw
We do not do dynamic maximization. At least, I don't think we do. We do perform optimization of asset portfolios, using the classic mean-variance metric, but not maximization problems.
If the book is relevant to the question of maximizing the growth of the economy (a Fray question) I cannot justify it, as I ought to be spending less time here.
Frankly, I'm more interested in the other book you mentioned related to information asymmetry, and I'm trying to decide whether I should get that one.
111. Slackjaw - May 26, 1999 - 5:39 PM PT
Stokey and Lucas doesn't sound so relevant.
I would think your type would be very interested in information economics. The three major micro texts on the market all cover it, but the best treatment is Kreps. He gives it the most emphasis, as it is really a game theoretic issue and his book is strong on that. (But it is self contained--you have to approach it with some mathematical facility, not specific knowledge of game theory or microeconomics.)
Eric Rasmussen's book _Games and Information_ is also very readable and has a good treatment of information economics. It is not a tremendously math-intensive book (unlike Myerson's _Game Theory_), as it is a book on *applied* game theory. It also doesn't have the obligatory treatment of general equilibrium or consumer choice one finds in Kreps.
On the other hand, while both books deal extensively with information asymmetry, neither is specifically concerned with details in insurance. Kreps does go through a fairly detailed exposition of the standard insurance model, and Rasmussen has some specific treatment of insurance too. But, these are motivating devices in these books, rather than focal points.
If you want the insurance stuff only, probably best to get the book(s) from a library. If you want to read about theoretical models of information asymmetry, either book is highly recommended. Rasmussen's deals maybe a bit more with the general topic, because his scope is narrower to begin with.
112. stamper - May 26, 1999 - 10:24 PM PT
Fellows i have a comment to make and you tell me if it makes sense. It is not possible to understand the nature of capitalism by using the example of a sports event and a rock concert because there are in the nature of a monopoly. What i mean if there is a rock concert that you just cannot miss like the Greatful Dead when Garcia was alive and you don't have a ticket then you cannot just go down the road to see what the competition is charging 'cause there was only one Garcia and that is that.
It seems to me that capitalism only works where there can be some competition and that is why i guess it is o.k. when limits are put on what monopolies like water and electric companies can charge.
I don't mind talking about scalping by itself which is part of capitalism in this respect. Let's say that their are 10 scalpers who have tickets to sell and they are not sure their tickets will be sold. that is where the capitalism comes into effect because those boys if they fear a loss will try to cut it and you amy even end up paying less than the going rate.
I may be off the track but that's the way i see it.
113. ethiopianeunuch - May 26, 1999 - 10:53 PM PT
When the Dead were at the height of their popularity they developed a complicated mail order procedure that effectivly distributed not more than two tickets to a person.It worked. There was no scalping because only the deadheads got the tickets. If you weren't with the program you didn't get in.This was definatly not the real world though.
Ahhh-were those the good old days?
114. stamper - May 26, 1999 - 11:09 PM PT
ethiopianeunuch
I sure wish you had picked an easier name to get 'cause i got to keep looking back to make sure i got it right. You must be on the west coast too 'cause it really is past by bedtime but i just can't get off this Fray. Lucky i only need about 6 to 7 hours sleep.
I always keep in mind that today and tomorrow is the good old days, but i sure do know what you mean 'cause once something you relly dug ain't there any more it is a loss. that is just one of the mysteries of life.
115. ethiopianeunuch - May 26, 1999 - 11:40 PM PT
It really was a question stamper.
I don't think that we are in the same time zone.
116. Slackjaw - May 27, 1999 - 12:26 AM PT
Message #113 Not sure what you mean by "the height of their popularity," but in the '80s and '90s one could *always* get Dead tickets from a scalper. No more than 40% of tickets ever went by mail order, often around 20%. Local ticket outlets always had standard limits on how many tickets people could by, like 8 or so. I don't recall how, but getting enough tickets by mail order never seemed to be a problem.
Whether bands have monopolies depends on what you think they are selling. The Dead are probably a stark example on one end of the spectrum, because, to Heads at least, it was an absolutely unique event, Phish notwithstanding. But does Aerosmith, say, sell Aerosmith concerts or entertainment?
That said, stamper's point is well taken. Even if Aerosmith sells mostly just entertainment (and that is questionable, frankly), they still do not price concerts facing a competitive situation.
The nature of competition always seems to be a sticking point for sensitive types about capitalism. Like it is necessarily withering socially, a Darwinian struggle pitting brother against brother and diverting their attention from art. But all that is required by "competition" is this: if you raise your prices any, you don't get any customers. No firms ever have to go out of business, or be "driven out" by rivals, though in reality it will certainly happen that firms fold from time to time. It's just not a necessary feature for the thing to work right. Of course, in reality transaction costs prevent any firm from facing a *perfectly* elastic demand curve, for which the slightest price increase results in all sales lost. But if those aren't too much bigger than driving to another store, the result should be about the same.
Conversely, I sometimes get the feeling that hacks like capitalism for the same reason they like sports. And they "like" evolutionary theory for the same reason.
117. cdm1110 - May 27, 1999 - 3:19 AM PT
FTC
Re your message 103, I would say the best way to think about it is as follows. The decision to sell tickets at $20 essentially presented Joe with an employment opportunity. He stood in line for, say, two hours, and earned $40 per hour (market value of ticket minus face price, divided by 2). He's now $80 richer than he was before, and now has to make the decision about whether or not he wants to "buy" (= not sell) the ticket for $100, which as you correctly reason (or correctly agree with Krugman) is the true (opportunity) cost. Your wording is a little ambiguous, in that you state that Joe could not "afford" to buy the ticket -- he certainly *can* afford it now, precisely because he has worked for two hours.
In the absence of scalping, the tickets go to high value buyers, and the revenues accrue to the rock group. Low prices and a scalping market effectively distribute some of those revenues (surplus, in economists' jargon) to people with a relatively low value of time, since they find it worthwhile to stand in line. They then resell to people with a relatively high value of time and/or high willingness to pay for the tickets. There is still some social cost, because those who stand in line use up time that could have been spent more productively. This is a purely static argument, however, and Krugman is apparently making a more subtle dynamic argument about how support for a sports team is an experience good (the more games you go to, the more you enjoy going to games) and/or a network good (the more other fans go to the game, the more you enjoy going to a game).
118. jayackroyd - May 27, 1999 - 4:53 AM PT
Message #103
I don't know about you, but it's not uncommon for me to have a ticket in hand that is worth more than I would have been willing to pay for it. I'm willing to pay, say, $60, two trips to Yankee Stadium and a couple of hours of time to see the ALCS. I'm doing that to have the experience. The opportunity cost of scalping the ticket was almost certainly more than I would have been willing to pay in cash. Is that irrational? I dunno. I'm out of pocket $60. I saw the game. I for(e?)went the market value of the ticket. In principle, that's the same thing as spending it. In practice, it is not. And if it were, the gap between face and scalp prices would shrink, as people made their decisions at the margin. The big gap indicates that people don't view the opportunity cost in the same way as out of pocket cost. That poses a problem not for the ticketholder's rationality, but for the value of opportunity cost analysis in predicting behavior.
It's also not a question of "affording" the scalp price. I simply won't pay $500 for a ticket to a baseball game. I certainly can afford to pass up the same offer for the ticket, and I'd like to see the game. If selling the ticket for $500 were hurdle-free, that might make a difference. So it could be that the additional transaction costs involved (dealing with seedy, probably dishonest middlemen or finding a buyer who won't mistake me for a seedy, dishonest middle man; breaking the law; forming a market with little information about the ticket value etc.) play a key role.
You say Krugman's wrong, that the team owners must have some other motivation. Have you suggested one that I've missed?
119. jayackroyd - May 27, 1999 - 5:03 AM PT
Message #117
"They then resell to people with a relatively high value of time and/or high willingness to pay for the tickets. There is still some social cost, because those who stand in line use up time that could have been spent more productively"
That's not an answer to an interesting question. The interesting questions are: 1) why don't sports teams price their tickets higher, collecting the full value of the ticket? 2) Why do so many people refrain from selling tickets that are worth much more than the face value?
Krugman addresses question number 1, saying that the owners of the entertainment product believe that there is long-term value in mass popularity that will be undermined if the prices are set too high. It's my guess that in sports it's more political than economic. If the sports teams get too rapacious, they won't get their stadium deals and they'll lose their monopoly exemption.
2) is a very interesting question, because it looks like irrational behavior under standard economic analysis. This, of course, is a problem for standard economic analysts. How can this behavior be explained?
120. jayackroyd - May 27, 1999 - 5:09 AM PT
BTW, the reason I specify sports teams is that I think that entertainment events like rock concerts are economic decisions. Tours make money and promote record sales. Tours that primarily promote tend to be priced substantially less than tours that primarily make money. The Rolling Stones charge a fortune for a ticket because the tour is supposed to make a lot of money, while godsmack appears in upstate NY in a festival to promote their cd.
The Dead's marketing model was different. It was essential to the creation of the deadhead community that the tickets remain relatively inexpensive. So instead of a deadhead paying $100 for one sold-out show, he or she would pay $100 for four sold-out shows.
121. cdm1110 - May 27, 1999 - 5:46 AM PT
jayackroyd
The piece of my message you quote was simply intended to isolate what exactly is going on when there is a "perfect" scalping market -- the transfer is not from the sports team to the sports fan necessarily (as earlier posts suggested), it is from the sports team to people with a low value of time. It was also making the incidental point that introducing scalping reduces some, but not all, of the inefficiency that arises from selling at a price that doesn't clear the market. But I fully agree with you about the interesting questions. The last part of my message alluded to some of the arguments made by Krugman (I think, although I only skimmed the column when it first came out, and I haven't gone back and re-read it) as to why sports teams might behave this way.
I wasn't attempting to offer an answer to why people (irrationally?) choose not to sell tickets. I think the wealth effect may be relevant in some cases -- FTC's Joe might be willing to spend $100 for the ticket precisely because he is $80 richer. But in many cases I think the explanations are to be found in psychological theory rather than economic theory, as FTC also suggests. I don't think every decision that people make can be explained as rational economic behavior, but neither do I think that poses a fundamental problem for economic analysis. Economics (typically, though not always) *assumes* rational behavior, and then tries to see how far that will go for explaining observed phenomena. That's a useful and productive exercise, even if rationality is not truly a theory of all human behavior.
122. cdm1110 - May 27, 1999 - 5:47 AM PT
jayackroyd
The piece of my message you quote was simply intended to isolate what exactly is going on when there is a "perfect" scalping market -- the transfer is not from the sports team to the sports fan necessarily (as earlier posts suggested), it is from the sports team to people with a low value of time. It was also making the incidental point that introducing scalping reduces some, but not all, of the inefficiency that arises from selling at a price that doesn't clear the market. But I fully agree with you about the interesting questions. The last part of my message alluded to some of the arguments made by Krugman (I think, although I only skimmed the column when it first came out, and I haven't gone back and re-read it) as to why sports teams might behave this way.
I wasn't attempting to offer an answer to why people (irrationally?) choose not to sell tickets. I think the wealth effect may be relevant in some cases -- FTC's Joe might be willing to spend $100 for the ticket precisely because he is $80 richer. But in many cases I think the explanations are to be found in psychological theory rather than economic theory, as FTC also suggests. I don't think every decision that people make can be explained as rational economic behavior, but neither do I think that poses a fundamental problem for economic analysis. Economics (typically, though not always) *assumes* rational behavior, and then tries to see how far that will go for explaining observed phenomena. That's a useful and productive exercise, even if rationality is not truly a theory of all human behavior.
123. cdm1110 - May 27, 1999 - 5:48 AM PT
Sorry about that -- don't know where the double post came from.
124. jayackroyd - May 27, 1999 - 6:44 AM PT
"I don't think every decision that people make can be explained as rational economic behavior, but neither do I think that poses a fundamental problem for economic analysis. Economics (typically, though not always) *assumes* rational behavior, and then tries to see how far that will go for explaining observed phenomena. "
That's not how I was taught. I was taught that micro-economics assumes rational behavior under an assumed set of preferences and nature of the commodity space, then generates refutable hypotheses to test whether people do behave "rationally". So a consumer who behaves in conformance with "regular" preferences, is defined to be "regular-rational". Since it can be shown that these preferences are consistent with a twice differentiable utility function, we can generate refutable hypotheses. We don't assert that consumers actually evaluate purchases through these preference relations, only that they behave as if they do, empirically speaking.
The naive incorporation of opportunity costs as identical to other consumer costs inside this Arrow-Debreu framework is apparently incorrect. People don't behave as if a ticket with a $20 face with a value of $200 is the same two hundred dollar bills. To just say, "well, economics doesn't try to explain silly behavior like this" is dodging the issue. If Gary Becker can write about marriage and childbearing within this framework, we certainly should be able to incorporate the opportunity cost of scalped tickets into the framework. Alternatively, we incorporate uncertainity into this model in a straightforward way, by explicitly including a preference for against risk, and probability into the commodity space. That's a lot more complicated, psychologically, than are opportunity costs.
125. cdm1110 - May 27, 1999 - 9:25 AM PT
The economics textbooks pay lip-service to falsification, but that's not how the science progresses. The tongue-in-cheek definition of an economist as "someone who sees something happen in practice and wonders whether or not it's possible in theory" comes much closer, in my mind, to how economists usually work. The game is thus to see how far we can go using the assumption of rationality, and it's a game I enjoy playing as much as the next economist. My point was simply that few, if any, economists literally believe that everything can be explained as rational behavior ... which is why there is interesting cross-disciplinary work in economics and psychology, for example.
To the extent that you think of empirical work in economics as "testing refutable hypotheses" (I generally don't think of it that way, but that's another epistemological story), the point is almost never to "test whether people do behave rationally". Rather, some completely different hypothesis is being tested, and implicitly the joint hypothesis of rationality is being tested at the same time.
You're right, of course, that when economists say that people behave rationally, that's not meant to be a statement about their actual cognitive processes, but is usually a shorthand for the notion that actors in an economic model maximize some well-behaved objective function subject to a set of constraints, and that in the case of utility maximization, the utility function is in turn just a convenient way of representing preferences that satisfy certain axioms.
I don't quite understand your second paragaph. I don't see why the inclusion of uncertainty seems likely to resolve the scalped ticket puzzle.
126. Raskolnikov - May 27, 1999 - 10:05 AM PT
Possible reasons for Vendors selling tickets at a lower price than scalpers can get for them...
1) They want to make sure that their fan base gets to see the events, or else the fan base will disappear (Krugman's explanation). This seems inadequate to me. A lot of sporting events deal with this problem through price discrimination - box seats for the fat cats, lower deck for the middle class, and upper deck or bleachers for the poor.
2) Difficulty in determining the true value of the ticket in advance of promotion. Are the Stones still popular even though they have entered the Depends era?
3) Hype. The mere fact that something is selling out creates an aura of exclusiveness among those who get in, which makes more people want to buy the ticket for future events. A lot of movies with Oscar in mind use this strategy by opening in limited engagements so that critics and audiences who see the film can gush about it to all the poor souls who live in areas where the film isn't showing. I think the Star Wars movie used a similar tactic, deliberately restricting the breadth of the release.
4) magnaminity. A lot of entertainers and artists are a bit more on the idealistic side, and may want to keep tickets low so that their poorer fans can get in, even if it means less money in the wallet of the band.
127. Raskolnikov - May 27, 1999 - 10:16 AM PT
Continued
5) Transaction costs. It might be a pain to recalculate the pricing scheme. I think this is partly why tickets for the Star Wars film were priced the same as tickets to The Love Letter, which opened the same weekend to 1/20th the gross. Not sure if it is the studios who insist on no price variation (I think they must, or the theaters would damn near give the tickets away in order to sell you concession food, where they make their money), or if the theaters just don't want the headache of variable prices depending on week of release and popularity of the film.
Possible reasons why fans may hold on to a ticket that they could easily sell for a huge profit...
1) They value the ticket at a higher price than they paid. Willingness to Pay and Willingness to Accept the loss of, can easily be two different figures. For one thing, there are unpriced costs entailed in getting the ticket in the first place (While I spent $20 for my first REM concert, I had to make a special trip to the outlet to get a wristband, then I had to show up and wait in line for tickets for two hours. No damned way I would have parted with that ticket at cost
2) Transaction costs: fear of being arrested for scalping, not trusting the scalper, etc..
3) Hype: The mere fact that the event is sold out increases their idea of the value of the ticket, since it can mean social status by being part of the "in" crowd.
4) guilt: a lot of people just aren't money grubbing, and they would feel guilty selling something for ten times what they paid for it.
128. FreeToChoose - May 27, 1999 - 10:22 AM PT
In Message #118 jayackroyd asks:
"You say Krugman's wrong, that the team owners must
have some other motivation. Have you suggested one that
I've missed?"
Well, I'm still having trouble understanding the concept that selling tickets to businessmen will turn off loyal fans. (Rask also mentioned this is Message #126) Why should it matter whether Joe, a businessman is buying the tickets, or Bill, a bricklayer and fan. In either case, there is someone sitting in the seat. What's the diff?
I find more persuasive your comment in Message #119, where you say,
"If the sports teams get
too rapacious, they won't get their stadium deals and they'll
lose their monopoly exemption."
In fact, this carries a lot of weight. Most sports franchises are getting some sort of public financing, whether direct payment for facilities, or tax considerations. I can easily imagine that these concessions are relatively easy to sell to the public when the public feels that it can take advantage of the facilities. This support might whither if the seats are priced beyond the level a typical taxpayer can afford.
Related to that is the desire for a perception that seats are affordable. Perhaps this translates into broader fan support of people who don't even go to the ball park, and perhaps this support is necessary, to create the water cooler buzz, for example.
129. FreeToChoose - May 27, 1999 - 10:26 AM PT
Raskolnikov
I agree with you that (1) is inadequate, but for different reasons. Why is it important to have low income fans instead of high income fans? If pricing the seats high means a low income fan can't go to a game, and loses interest, why is this worse than prices the seats low, and losing a high-income fan, who isn't about to stand in a line for four hours to get a ticket? I really don't understand this distinction, unless there is some argument that the low-income fan will spend more time talking about the game to friends and building up the hype.
130. FreeToChoose - May 27, 1999 - 10:28 AM PT
Raskolnikov
Reason (2) is weak. If the price created demand in excess of the number of tickets on occasion, this might make sense, as gauging the demand is certainly as much art as science. But the assertion is that owners deliberately and knowingly price tickets well below the price that would maximize income or fill the seats.
131. FreeToChoose - May 27, 1999 - 10:39 AM PT
In Message #127 Raskolnikov says:
"Possible reasons why fans may hold on to a ticket that
they could easily sell for a huge profit...
1) They value the ticket at a higher price than they paid.
Willingness to Pay and Willingness to Accept the loss of,
can easily be two different figures. For one thing, there are
unpriced costs entailed in getting the ticket in the first place
(While I spent $20 for my first REM concert, I had to
make a special trip to the outlet to get a wristband, then I
had to show up and wait in line for tickets for two hours.
No damned way I would have parted with that ticket at
Cost"
Well, duh.
No one has suggested that the owner sell the ticket at cost. The issue is why they don't sell the ticket at a much higher value. Specifically, why is someone unwilling to sell a ticket for a price that exceeds the amount they would pay for one?
Much of the answer is psychological.
I'm sure you are familiar with the example of the person who pays $50 for an opera ticket, and, arriving at the opera house, realizes he has lost the ticket. The place not being sold out, he could buy another, but he doesn't, rationalizing that the opera was worth $50, but not $100. This thinking is economically illiterate. If he decided that the opera was worth $50, it is still worth $50, and he should buy another ticket rather than go home. (Unless someone wishes to posit an extreme wealth effect, where the reduction in wealth of $50 materially changes his preferences)
132. FreeToChoose - May 27, 1999 - 10:42 AM PT
Raskolnikov
Hype, as an explanation of why tickets are priced too low, and why the owner wouldn't sell is much more persuasive.
133. FreeToChoose - May 27, 1999 - 10:48 AM PT
Raskolnikov
Fear of prosecution is a valid reason for not selling a ticket at inflated prices, although is begs the question of why it is illegal.
There may be some people who would use guilt as a reason for not selling a ticket at an inflated price, but this is economic illiteracy (or innumeracy). Any voluntary exchange increases the utility of *both* parties, so when someone turns down an offer for their tickets, they are not only hurting themselves, they are also hurting the potential buyer, despite their argument that they do not want to hurt the potential buyer. (A plausible counter-example: you hold a ticket to a sold-out show and someone offers big bucks for the ticket, but they are clearly influenced by the hype. You refuse to sell, knowing that the next day, they would have regretted the purchase.)
134. FreeToChoose - May 27, 1999 - 10:51 AM PT
After writing my parenthetical comment above, I recalled a scene in Casablanca that may fit. The scene where the girl considers sleeping with the police chief to get passage.
135. Raskolnikov - May 27, 1999 - 11:24 AM PT
FTC:"Why is it important to have low income fans instead of high income fans? If pricing the seats high means a low income fan can't go to a game, and loses interest, why is this worse than prices the seats low, and losing a high-income fan, who isn't about to stand in a line for four hours to get a ticket? I really don't understand this distinction, unless there is some argument that the low-income fan will spend more time talking about the game to friends and building up the hype."
Keep in mind that I was just brainstorming potential reasons. I think they are of varying merit.
Because arena ticket revenues are chump change compared to how much the franchises make off of selling broadcast rights. And to sell broadcast rights, you have to have ratings. To have ratings, you have to have a broad base of fans. Evidently, the argument goes that in order to have a broad base of fans, the fans should regard the team as "theirs", not as being the team of corporate fat cats on an expense account. I don't know if this final bit is true, but it does sound slightly plausible.
"No one has suggested that the owner sell the ticket at cost. The issue is why they don't sell the ticket at a much higher value. Specifically, why is someone unwilling to sell a ticket for a price that exceeds the amount they would pay for one?"
But every time someone mentioned price, they referred to face value. I wanted to make sure that hidden costs were understood to exist as well.
136. Raskolnikov - May 27, 1999 - 11:35 AM PT
"There may be some people who would use guilt as a reason for not selling a ticket at an inflated price, but this is economic illiteracy (or innumeracy)."
That is as may be, but I think it is common. I have known a lot of people who would flinch at making an "excessive profit". They would refuse to make a profit on general principle, and not sell the ticket because a non-profit price isn't worth giving the ticket up. Most of these people I know have mellowed out quite a bit since college, and would probably be more open to the transaction now.
My only gripe with scalping is that it makes it difficult for entertainers to subsidize their poorer fans if they are so inclined. Scalping basically hijacks some kinds of charity.
137. FreeToChoose - May 27, 1999 - 4:27 PM PT
Raskolnikov
"Keep in mind that I was just brainstorming potential reasons. I think they are of varying merit."
I write a column called "brainstorms" and I specifically prohibit criticism during what I call the embryonic phase. Had you mentioned you were trying to brainstorm, I would have been happy to oblige. FWIW, Message #135 does provide additional arguments in favor of the broad base of fans reason.
As an extreme version of this, Brian Arthur said that he had proposed to a major movie studio that they send a coupon for a free movie ticket to every adolescent in America. Noting that the sales of action figures and posters and related material exceed ticket sales by a factor of 4 to 1, he argued that total revenues would be higher if they simply gave away the tickets.
138. ethiopianeunuch - May 27, 1999 - 11:33 PM PT
The last point freetochoose makes is also an important reason for sports franchises to have low priced tickets. If families can't come younger fans may never gain interest in that sport. I was hooked on going to baseball games at a young age and have continued with my kids.Football priced me out early and still does.
139. ranheim - May 28, 1999 - 5:10 AM PT
There seems to be much similarity of prices to sporting events in Manhattan. More of a divergence in St.Louis. But, both my boys tell me that the toughest ticket for them in both cities is hockey. It might not be the most expensive; but, is right up there with the leaders. I've asked about scalping. According to my "Manhattan son" there are always a "few" tickets for Ranger games available; but, not at a price that he can afford. He once told me "TV executives like to see full stadiums. They hate it when there is no crowd".
Can anyone speak with "inside" knowlege?
140. gwindau - May 28, 1999 - 5:56 AM PT
I am a great fan of Professor Krugman's work (check out his website) and I think that those who want to see the future of Capitalism should check out the situation in Japan. I believe that Japan's crisis is the defining economic moment in our current history (more so than Asia, Latin America or Europe). Japan is a striking example of the failure of Keynesianism (or an example of where Keynesian policies are powerless to positively effect the economy). Japan virtually has a zero short term real interest rate, is rapidly approaching government bankruptcy due to massive fiscal policy spending, and if Professor Krugman's inflationary ideas are implemented in Japan, it will also soon approach the "inflation barrier" posited by Joan Robinson (a collegue of Lord Keynes) where the workers rise up in rebellion over the loss of the purchasing power of their wages. While Japanese capitalism may ruthlessly survive the crisis, it is doubtful that Keynesian economics will intellectually survive Japan's crisis.
141. jayackroyd - May 28, 1999 - 6:23 AM PT
Message #128
"Well, I'm still having trouble understanding the concept that selling tickets to businessmen will turn off loyal fans."
I found it profoundly irritating in 1986 when it was simply impossible to buy tickets to see the Mets play the Red Sox in the World Series, here or in Boston. If you simply set it up so that the people with the most money get the tickets, you are going to turn people off. The system the Yankees used last year for the post season, with a two stage process of getting in line to draw a place in line to buy the ticket worked very well.
The football Giants could lose their waiting list, and auction off their season tickets annually. Do you think that would not affect their popularity? Do you think that fans who've been going loyally for 20 years are going to feel happy when they're shut out by some stockbroker who just moved to the City?
142. JJBiener - May 28, 1999 - 7:35 AM PT
Ranheim - As a St. Louisan I can confirm that there is a wide disparity in ticket prices between sports. For the Cardinals you can still get decent tickets for $8-10. For the Blues tickets are around $35-40. Tickets for the Rams were so completely outrageous the last time I checked I haven't even bothered to price them for the last couple of years. The good news is that we have just aquired a minor league baseball team and a semi-pro basketball team. I am looking forward to them providing good entertainment at a decent price.
143. FreeToChoose - May 28, 1999 - 8:35 AM PT
jayackroyd
"I found it profoundly irritating in 1986 when it was simply impossible to buy tickets to see the Mets play the Red Sox in the World Series, here or in Boston. If you simply set it up so that the people with the most money get the tickets, you are going to turn people off. The system the Yankees used last year for the post season, with a two stage process of getting in line to draw a place in line to buy the ticket worked very well."
I understand this point (I think). But pricing tickets low, and enforcing a no scalper law, means that high income people without the willingness to stand in a long line, much less two lines, will be turned off. Given a fixed finite number of seats, and more people interested in going than there are seats, no matter what method is used, someone will be disappointed. I am trying to understand why it is considered worse to alienate low-income fans than high-income fans.
(Although ethiopianeunuch made an interesting point, if one thinks about the discounted stream of future ticket sales.)
144. FreeToChoose - May 28, 1999 - 8:38 AM PT
gwindau
Krugman's proposal to deliberately introduce inflation into the Japanese economy is intriguing. Has Krugman responded to the Robinson concern?
145. Raskolnikov - May 28, 1999 - 8:55 AM PT
Japan's problems illustrate the failure fo Japanese economic policies, not Keynesianism (or rather, neo-Keynesisanism). I find the idea of Japanese workers rising up and rebelling over the modest inflation required to implement Krugman's (a neo-Keynesian) solution quite implausible.
146. vonKreedon - May 28, 1999 - 9:04 AM PT
I keep seeing the name of this thread in my peripheral vision as "The Furure of Canibalism", pretty much summing up my view of Capitalism.
147. gwindau - May 28, 1999 - 10:50 AM PT
No, Professor Krugman has not responded to my critiques but he has responded to others who think along the same lines as I do. I mention the "inflation barrier" and define it in the same way that Joan Robinson did for a reason. Japan has crossed several economic barriers that many economists never thought possible. I mentioned Robinson's "inflation barrier" only to indicate that this is the next economic line that will be tested if Krugman's ideas are implemented. The real point of contention is the value of the 'yen'. Should Japan risk permanent damage to their currency to attempt a stimulation of their economy? Aren't we worried about the value of the Brazilian 'real' and the Argentine 'peso'? Why is it OK to worry about these currencies but not have even a casual concern for the value of the 'yen'? After all, Prof. Krugman is the guru of 'currency crisis' economics. Shouldn't we consider a 'yen' crisis?
148. elliot803 - May 28, 1999 - 11:12 AM PT
gwindau:
"is rapidly approaching government bankruptcy due to massive fiscal policy spending,..."
I don't know what "massive fiscal policy spending" is supposed to mean, but Japan's total government spending as a percentage of GDP is one of the lowest in the OECD.
149. FreeToChoose - May 28, 1999 - 11:13 AM PT
gwindau
Well, this is out of my expertise, but I thought the comment by Rask made sense.
My impression is that Krugman's proposals for induced inflation include relatively low levels. I think we are talking about low single digit, not double digit or hyperinflation. We are talking about levels that were common in the US not that long ago, and levels that some didn't think we could easily get below. While Americans got exercised at double-digit inflation, and I wouldn't want us to get near there again, I find it implausible that Japanese citizens are going to rise up and revolt over 5% inflation, particularly if Krugman is right and it revives the economy.
150. stostosto - May 29, 1999 - 3:39 AM PT
gwindau #140
"Japan is a striking example of the failure of Keynesianism (or an example of where Keynesian policies are powerless to positively effect the economy). Japan virtually has a zero short term real interest rate..."
Funny juxtaposition. The problem Keynes sought to solve was precisely the problem of a zero interest rate - the so-called liquidity trap. Keynes' and Keynesian ideas sprang from the crisis of the 30s where deflation meant that the normal self-correcting mechanism of a free market economy was rendered ineffectual. This mechanism was a falling interest rate, induced by an increased pool of savings and a falling propensity to spend on consumption as well as - particularly - investment. A low interest rate makes business investment more profitable, thus inducing more of it, thus bringing the economy out of the slump. Now, the problem in the 30s, as well as in Japan now, is that the interest rate has fallen to zero - without inducing sufficient investment (or consumption). The reason is that consumers and businesses have no confidence in the future, so that they choose to save for rainy days rather than spend, the zero interest rate notwithstanding. This is even rational in a situation with falling prices, since your money's worth is greater the longer you wait. How to correct this? How to get the real interest rate below zero? Get prices to rise. Give the economy a boost. A fiscal boost, rather than a monetary one, since this is out of the question, the interest rate already being zero (this must be what you refer to when saying that Keynesian policies are powerless - Keynesian *monetary* policies are powerless, not fiscal policies). Start inflation. Hire people, invest in public works, get people to believe in greater job security, rising incomes, a safer future. They will spend, the price decline will end, the real interest rate will be negative, the economy will turn around. This is the classic Keynesian recipe against de
151. stostosto - May 29, 1999 - 3:40 AM PT
This is the classic Keynesian recipe against depression - and, as far as I can see, it is exactly what Krugman proposes for Japan. Japan does not prove Keynesian policies ineffectual. They haven't been tried. If it proves anything it is that neoclassical, supply-side, or monetary policies are ineffectual in a situation like the Japanese. This shouldn't be all that surprising, since - as Krugman argues - Japan in the 90s is like the U.S. in the 30s. Thus the situation is known, the remedies are known - but a new (old) orthodoxy prevents them from being implemented.
152. gwindau - May 29, 1999 - 5:30 AM PT
Japan in the 90's is quite different than the US in the 30's. Real income (not to mention per capital income) is higher for Japan-90's than for US-30's. On the question of real interest rates, if we factor in absolute deflation in the US-30's, we see that real interest rates for US-30's were much higher than for Japan-90's. It is important to look at fiscal spending as a percentage of GDP and compare it to other nations. Japan's fiscal spending as percentage of GDP is much higher than say Brazil's fiscal spending as percentage of Brazil's GDP. This is serious. Fiscal policy, in my view, is more effective at lower levels of national income and higher levels of real interest rates. Thus if Japan-90's used identical fiscal policy as US-30's, the effect would be feeble in comparison to the effect on the US in the 1930's. It is common knowledge that when Japan cut its fiscal spending its economy went into a real recessionary dive with obscene levels of 'real' (not hidden) unemployment and a scary drop in GDP.
153. gwindau - May 29, 1999 - 5:47 AM PT
The problem with Professor Krugman's 'expectations of inflation' prescription for Japan is that, although it may be designed to be small, it may have a big consequences on Japan's fiscal policy effectiveness. After all, it is the fiscal policy which is keeping Japan's economy in a holding pattern instead of a steep dive. While the immediate effect of Krugman's ideas may 'clear' markets, the effect of a 5% inflation rate will affect business plans as well as workers' paychecks. Prices may rise due to control of market share where business in Japan will see increased pricing power beyond a mere 5% increase. Thus if the workers tighten their belts, spend their savings instead of asking for a raise, we may still see a type of "monopoly price inflation" where business keep raising prices anyway. If the 'yen' holds its value in this price spiral, Japan's relative costs in the world marketplace will rise, making it less competitive. The fact is that the 'yen' won't be able to hold its value, the 'yen' will fall.
154. cdm1110 - May 30, 1999 - 4:25 AM PT
gwindau
I'm sorry, but your posts just don't make very much sense to me.
First, let's be clear on what Krugman is proposing. He wishes the Bank of Japan to generated expected inflation, and at the same time to keep nominal rates close to zero. The goal is to generate negative real interest rates, thus encouraging consumption and so giving a boost to the economy. He is thus talking about general inflation, where prices and wages both rise, and so concern about workers rising up because of erosion of their pay packets is completely off the point. Likewise, I see no reason why this strategy should affect firms' market power, or lead to "monopoly price inflation" (whatever that means). This policy would cause the yen to depreciate, but so what? Japan has a floating exchange rate and there is no issue of a speculative attack on the currency.
As others have pointed out, Krugman's recommendation is quintessentially Keynesian, and it is very odd to suggest that Japan's experience signals the death of Keynesian economics.
Japan's government finances are in perfectly fine shape, and it is just nonsense to talk about Japan "rapidly approaching government bankruptcy". And when you claim that "fiscal policy, in [your] view, is more effective at lower levels of national income and higher levels of real interest rates", what is that based on? It's not an obvious implication of any of the macro models that I know. Finally, your last post suggests that Krugman's suggestion may have "big consequences on Japan's fiscal policy effectiveness", but you offer no explanation of why that should be the case.
155. FreeToChoose - May 30, 1999 - 6:22 AM PT
cdm1110
"As others have pointed out, Krugman's recommendation is quintessentially Keynesian, and it is very odd to suggest that Japan's experience signals the death of Keynesian economics."
I'm confused. I thought a Keynesian approach, at the risk of over-simplifying, implied fiscal stimulus. I thought Krugman's proposal to boost inflation expectations was a monetarist proposal. Am I wrong on one or both?
156. gwindau - May 30, 1999 - 7:01 AM PT
There is not enough space and time to outline everything that I am trying to say here. I am not using the same 'models' that Prof. Krugman uses. I can only interject a limited list of short ideas here in this forum. I see Japan's problem as a crisis of investment, not over-saving by 'should-be' consumers. That stands Krugman's 'liquidity trap' scenario on its head. The type of 'currency crisis' for Japan that I see is quite different than the ones we have seen in the past two years, so we are not talking about a 'peg-to-float' problem, but rather a 'float-to-peg' problem (as a possibility, but not an inevitability). In other words, to hold asset values, Japan (a possibiity) may have to start holding currency reserves, peg its 'yen' to US 'dollar', rather than the reverse scenario. This essentially means turning the 'yen' into a currency that is not in general international circulation anymore. Can anyone at least see what I am talking about (despite your strong disagreements)?
157. gwindau - May 30, 1999 - 7:19 AM PT
In my view, the critical issue is Japan's fiscal policy and how effective it can be (and has been) in helping its economy. The blanket assumption that the same fiscal policy produces the same effect under different conditions is not really scientific. It does not mean that Keynesism is always wrong, but rather than Keynesianism is not always right. It is my view (won't find it in any textbooks, so don't waste your time looking) that two important factors that determine the 'effectiveness' of a given fiscal policy are: (1) Level of National Income and (2) current 'real' interest rates. There are more factors to consider but let's just work with these factors for now. Now, if I am correct, moving to negative real interest rates (inflation) reduces the effectiveness of a given fiscal policy. Also, at higher real National Income, the same fiscal policy will have lowered positive effect. The goal is restoration of the profit rate in Japan. Krugman's ideas won't do that, I feel.
158. Raskolnikov - May 30, 1999 - 12:55 PM PT
FTC:"I'm confused. I thought a Keynesian approach, at the risk of over-simplifying, implied fiscal stimulus. I thought Krugman's proposal to boost inflation expectations was a monetarist proposal. Am I wrong on one or both?"
Keynesianism is more of an assessment of the cause of a monetary problem than it is an adherence to a specific solution. Keynesians believe that macroeconomic problems are caused by a screw up in the money supply, and that by adjusting the money supply correctly, these problems can go away. They also tend to believe that the money suppky *can* be adjusted more or less correctly.
This being the case, there is no orthodoxy, to my knowledge, about the best way to do this. Whether it is through fiscal spending, printing money, or lowering interest rates, the end result is the desired expansion in the money supply.
Monetarists believe that you can't manage the money supply adequately, so you should just maintain a specific target and let the private sector adjust its behavior to a known quantity, instead of having to guess what the government is going to do to the money supply.
I'm sure I am missing some distinctions, but this is the gist of the difference. Krugman's solution falls completely within the realm of Keynesianism. Although other Keynesians may disagree with him that it is the best solution.
159. cdm1110 - May 31, 1999 - 2:55 AM PT
gwindau
You talk about the problem being an investment crisis, not a savings crisis, as if this is completely incompatible with Krugman's analysis. But the liquidity trap argument is that high savings AND/OR low investment are leading to an equilibrium real interest rate that is negative. So talking about underinvestment rather than oversaving is close to a distinction without a difference; it certainly doesn't turn "Krugman's argument on its head". I also still don't see the currency crisis issue that you are concerned about.
There is no "blanket assumption" in macro that fiscal policy works the same way in all circumstances. But if you have a particular view of how fiscal policy works, then you need to give us some justification or model to support your view. Otherwise, why should we care? The fact that your view is (as you admit) not in the textbooks tells me that your view is almost certainly wrong. I don't believe that textbooks are right about everything, but I do know that they are distilling the combined wisdom of a very large number of very smart people (smarter than you or me) who have thought long and hard about these kinds of problems.
I make one correction to my earlier post. Having looked a little more at the numbers, I would agree that Japan's government finances probably cannot stand up to a sustained period of deficits at their current levels, so saying that govt finances were in perfectly fine shape was too sanguine on my part -- although I still would argue that neither are they rapidly approaching bankruptcy.
You've dropped discussion of the Robinson inflation barrier and of effects of inflation on monopoly power, which I take as progress.
160. gwindau - May 31, 1999 - 10:23 AM PT
cdm1110
I have not 'dropped' the 'inflation barrier' as a point of discussion here. My point was that as Japan's economy crosses other barriers that were not foreseen, now among these, we will have the 'inflation barrier' to contend with if Prof. Krugman's ideas are tested in Japan. The so-called savings over investment gap is about 7 trillion dollars (if we evaluate it in US dollars). That is about 67% of the US GDP for the year 1997. It is more like a canyon than a gap and I don't believe a "minor" expectation of inflation will reconcile this 'gap'. In other words 'major' inflation (using Krugman's models, assuming that you accept them) is called for under the size of this 'gap/canyon'. I can't really outline my models for Japan's crisis in this medium. As I said, all I can do is present short ideas here. We can discuss this in detail if you post an an e-mail address here, from the e-mail address we can exchange postal addresses and I can send documents through the snail mail.
161. gwindau - May 31, 1999 - 10:34 AM PT
I stand in agreement with Prof. Krugman that Japan's economy is very important to the "future of capitalism." If we assume that one fine day, Japan's economy will recover and revive into a powerhouse of capitalist production, we can rightly assume that it is because certain 'policy' actions were taken by Japan. Despite some false starts from here to there, we can watch what Japan does (or will do) to revive her economy and compare notes. Will these policy actions that Prof. Krugman proposes be part of the solution or just one of the 'false starts' that are to be made? No one knows the future but it is my opinion that Japan's road to recovery will only partially be related to Keynesian prescriptions, and not significantly so. So let us observe the 'test of events' and, as scientific thinkers, adjust our theories based upon the observations of real life events. It is wise to assume that Japan will recover . . . but how will she do it?
162. FreeToChoose - May 31, 1999 - 11:19 AM PT
Raskolnikov
"Keynesians believe that macroeconomic problems are caused by a screw up in the money supply, and that by adjusting the money supply correctly, these problems can go away. They also tend to believe that the money suppky *can* be adjusted more or less correctly."
This doesn't match up well with what I have found online. I fully understand that no online source should be taken as definitive, and I have no particular knowledge of the credentials of Kit Taylor, but he does have an online economics text with a chapter on Keynesian issues
here
Relevant excepts:
"Keynes' analysis readily suggests a remedy. If a decline in investment spending -- with its corresponding multiplier effects on consumption spending -- has taken us into a deep recession, government can compensate with an increase in government spending."
"Many Keynesians are skeptical of the usefulness of monetary policy in a depression or deep recession."
While the chapter doesn't equate Keynesian remedies with fiscal stimulus (so I sit corrected) it also doesn't suggest the affinity for monetary solutions that your post would suggest.
163. FreeToChoose - May 31, 1999 - 11:27 AM PT
Raskolnikov
here is a summary of the Keynes approach. Again, emphasis on fiscal policy and no mention of monetary policy.
"Keynes won his argument against the prevailing "supply side view" that economies were fed by investment money in the hands of capitalists and owners of production facilities. More importantly, Keynes opined that money should be put in the hands of the people (the consumers) by government spending during economic downturns and, when the economy was overheated, the government should extract more money by taxing than it spends back into the economy."
Lest someone complain that I am being selective, I've quoted seriatim from articles found using "Keynesian" in a search engine. While two for two is short of statistical reliability, the burden of proof is shifting.
164. FreeToChoose - May 31, 1999 - 11:30 AM PT
Raskolnikov
here is another site:
"No administration has ever tried what I call the full-Keynesian counter-cyclical policy of making taxing and spending adjustments to prevent depression and inflation. It's not so difficult. It doesn't require a Ph.D. to understand this. It is taught in every beginning class on economics. To even out the natural bumps in the free enterprise business cycle, the government should raise taxes and reduce expenditures (sounds paradoxical doesn't it?) during the boom part of the cycle, running a surplus, something not seen for many years. During the down side of the cycle, government should lower taxes and raise expenditures, thus running a slight deficit."
165. FreeToChoose - May 31, 1999 - 11:42 AM PT
Raskolnikov
here is another:
The "Keynesian Revolution" emphasized markets for goods and services as the source of macroeconomic disturbance and de-emphasized monetary and financial sources.
Finally, here is a source suggesting that the term embraces more than fiscal policy, but I note that the way it was written seems to imply that most accept the conflation:
"In doing so, as will be seen below, we interpret Keynesian economic policies in a rather broad sense, and specifically wish to distance ourselves from treating Keynesian policies as virtually synonymous with fiscal demand management designed to fine tune the economy."
166. stostosto - May 31, 1999 - 3:31 PM PT
The gist of Keynesianism is the idea that the goverment can manage the demand side of the government in order to - as one of FTC's quotes has it - fine-tune the economy and therby even out the bumps of the free market business cycle. This can be done by fiscal policy *as well* as monetary policy. Keynesians speak of the right "policy mix". The monetarists say that this basic management idea is illusionary, since the economic agents of the economy will learn to factor in the government interventions, rendering them ineffective. An expansionary policy will only lead to inflation, possibly, if you are a forgiving kind of monetarist, after a brief rise in economic activity. The classic monetarist recommendation - as Rask points out - is therefore to balance the budget and to have a fixed, pre-announced rate of expansion in the money supply.
What has frequently puzzled me about Krugman's take on Keynesian policies, is his virtually complete dismissal of fiscal policy - as in his "Peddling Prosperity" (1994), where he writes it off because (as I remember) it is too slowly working its way from the political haggling over budgetary deals through to the real economy. When it finally arrives, the cycle may have changed, and the effect may be to exacerbate the amplitude of the cycle. By contrast, changes in the interest rate are quick to implement and the economy acts immediately. --- Is how I understand the Krugman thinking. It seems to me that this "immediate" reaction is confined to the financial markets whereas there is still some way to go from there to the "real" economy, i.e. goods and labour markets. But it can work quickly if *expectations* are formed in one given direction. On the other hand, so can fiscal policy measures; if the government announces an intervention, e.g. a lowering of income taxes, people may ease there tightfistedness that very moment, thus creating a more benign market atmosphere for shops, businesses
167. stostosto - May 31, 1999 - 3:32 PM PT
(cont'd)
and workers.
However, in his proposal for Japan, and in line with his "monetary view" on Keynesian policy, Krugman frames his argument in terms of monetary policy - a negative interest rate created by inflation(ary expectations) - but the means by which to create this situation is a fiscal boost, as far as I can see.
168. FreeToChoose - May 31, 1999 - 3:47 PM PT
stostosto
"On the other hand, so can fiscal policy measures; if the government announces an intervention, e.g. a lowering of income taxes, people may ease there tightfistedness that very moment, thus creating a more benign market atmosphere for shops, businesses"
The government cannot simply announce a "lowering of income taxes". Even if the current administration decided this evening that such a cut would make sense, they would spend weeks, if not months internally discussing how best to do it, including polls and focus groups. Then they need to get both houses of Congress to pass such a tax, and then, when the two versions don't match, a conference committee will work out the details. Even if they all agree on a reduction in rates, they have to give businesses enough lead time to change the withholding amounts.
If the idea to reduce taxes starts in the Congress, it may well take even longer.
But don't take my word for it, someone must have looked at past tax reductions and measured how long from proposal to implementation. If anyone identifies a tax reduction with a material impact occurring less than a year after proposed, it will be a rare exception.
Arguably, people can act as if the cut is in place prior to the actual implementation. But given the track record of recent administrations, I wouldn't spend a tax cut until I received it.
169. FreeToChoose - May 31, 1999 - 3:56 PM PT
In Krugman's article here he says:
"What can be done? ...A second answer is to close the savings-investment gap with government dissaving. The trouble with this solution, of course, is that it poses problems for the long-term solvency of the government; Japan has already pretty much reached the limits of this approach.
All of which leads us to the need for unconventional policy approaches, and in particular for radical monetary policies of some kind."
This doesn't sound like fiscal policy, it sounds like rejection of fiscal policy. Why do you argue that Krugman's proposal "is a fiscal boost" ?
170. stostosto - June 1, 1999 - 1:17 AM PT
Shoot, FTC. You caught me there. It's been a while since I actually read Krugman's proposal on Japan and I will have to reread to see what (if anything) made me form the opinion expressed here. And - damn - I have to do so many other things... It's certainly true that with a current budgetary deficit of around 6% of GDP, the Japanese government would seem to have a limited room of manouever.
Your remarks on the efficiency of fiscal policy made me think about the differences between the U.S. political process and the Danish one, which is the one I am more familiar with. Here, the government can and does negotiate fiscal interventions on a short term basis with the opposition. The government calls the shots and makes use of the public administration to sort out the technicalities. The announcement comes when the parliamentary majority is ensured. Then implementation with not much further ado, depending on the announced timing. Things are probably easier in a small country with a parliamentary system than in a large country with a presidential one. Especially when the president and the majority of the Congress are from opposing parties.
If we look at a country like Britain, the government always has a parliamentary majority so that anything the government can agree on internally can also be carried through. Think of Thatcher. (The British of course do discuss from time to time whether there are sufficient checks on the government between elections).
171. stostosto - June 1, 1999 - 1:24 AM PT
FTC #169
"This doesn't sound like fiscal policy, it sounds like rejection of fiscal policy."
Like I said, this is what puzzles me about Krugman's take on Keynesian policy in general, not just about Japan. He seems to be a strictly "monetary policy Keynesian".
"Why do you argue that Krugman's proposal "is a fiscal boost" ?
Like I said, I will have to come back to you on this one.
172. cdm1110 - June 1, 1999 - 3:12 AM PT
FTC #162 - #165
I realize that you conducted your search simply by firing up a search engine and looking at what came out of it. The problem and the beauty of the net is of course that there are no filters. Thus your five references turned up three postings with academic credentials (your first, fourth and fifth links), one by an amateur who has decided to make a hobby of looking at the Fed (the third link), and one by, IMHO, a total kook who is interspersing confused thoughts on economics with thoughts on levitation, UFOs, and so on (the second link). For the question you're asking, it seems to make sense to place little credit in the latter two links.
The terminology on Keynesianism has subtly altered over the years, which is what makes this topic a little confusing. My read is that, back in the 60s and 70s, there was a monetarist-Keynesian debate, over whether monetary or fiscal policy was more effective in influencing aggregate demand in the economy. More recently, the debate in macro has more to do with whether changes in aggregate demand affect overall GDP (or just lead to changes in prices), with Keynesians tending to the view that aggregate demand does affect real economic activity. Some critics argue, with some justification, that modern-day Keynesians often look a lot like old-fashioned monetarists. My view is that the Keynesian-monetarist distinction has pretty much outlived its usefulness -- in general, most people accept that both fiscal and monetary policy can affect aggregate demand (with different kinds of lags, as stostosto noted).
173. cdm1110 - June 1, 1999 - 3:13 AM PT
(Of course, the liquidity trap is precisely a case where monetary policy may not be effective, because the nominal rate has hit its floor of zero, and because expansionary monetary policy works by reducing interest rates. One response is thus to turn to fiscal policy. One way to think about the Krugman proposal is that it is a means to make monetary policy effective again: if you generate expected inflation, then a given nominal rate of interest corresponds to a lower real rate, and so you can reduce the real rate of interest if you continue to pursue a monetary policy that keeps nominal rates close to zero. To put it another way, an increase in expected inflation would, other things equal, be expected to raise nominal rates, so the policy has to be combined with an increase in the money supply that keeps nominal rates down.)
BTW one example of a fiscal policy stimulus enacted by executive order was George Bush's reduction in income tax withholding, announced in the 1992 State of the Union address. Such a policy would be expected to have little impact, but that's another matter.
174. stostosto - June 1, 1999 - 5:13 AM PT
cdm
Great postings. Welcome to this forum which is always happy to have insightful people participating. Even if you disagree with them. (Which until now I, for what it's worth, don't).
All: What ever has become of pseudoerasmus? Has he sunk down in preparations for his upcoming marriage, pondering what to wear, which kind of haircut to sport, which kind of food to serve, which hymns to have played at the ceremony, who should be invited (up to now, I, for one, haven't been... hrrrmpfff), and whether to have it performed in one or more of the 20+ languages in which he is lucidly fluent?
Er,.... and don't think I miss him here. Not at all. I just wondered.
175. Raskolnikov - June 1, 1999 - 8:33 AM PT
FTC: Also note that Keynesianism has evolved considerable since Keynes original writings. Krugman frequently uses the term neo-Keynesian to describe Keynesianism after it responded to the problems pointed out by the monetarist and rational expectations crowd.
176. gwindau - June 1, 1999 - 9:34 AM PT
Can we come to some loose form of concensus that Japan is in a unique economic problem and that Keynesian prescriptions have not been as effective there as one would have hoped for? While some thinkers (perhaps even Prof. Krugman too) want to compare Japan in the 1990's to the US in the 1930's, perhaps a more useful perspective might be to compare Japan today to the USA of the early 1980's. It might be a more useful template if we wanted to actually "guestimate" what Japan will do to revive her economy. Before we jump to the conclusion that Japan will move toward a form of "Reaganomics", we might want to actually discuss: "What is/was Reaganomics?" (No, I am not a simplistic Supply Sider economist and I don't think Reaganomics is purely a supply side approach either)
177. FreetoChoose - June 1, 1999 - 10:16 AM PT
stostosto
PE is on an extended trip to various intersteting places, including Kashmir, many of which have little access to the internet.
178. elliot803 - June 1, 1999 - 10:22 AM PT
Where does PE get all his money?
179. Ronski - June 1, 1999 - 1:25 PM PT
Is PE's excursion to Kashmir what India has been calling an incursion? (Pray no.)
180. FreetoChoose - June 1, 1999 - 1:36 PM PT
cdm1110
I agree with your observations about the quality of the information found using a search engine. I wanted to add the qualification, just in case someone misinterpreted my list as some attempt at authoritative sources. Frankly, I think it is pleasantly surprising that I was able to get as my academic-to-kook ratio as high as I did.
I was tempted to leave the last cite off, as it clearly wasn't of high quality, but it was the only one that supported the contention, so it seemed a bit churlish to leave it off.
181. FreetoChoose - June 1, 1999 - 1:41 PM PT
stostosto
You brought up a point I briefly considered, but did not mention, namely that the lag between fiscal proposal and implementation may well be longer in an American style form of government (particularly when the legislative branch is dominated by a party other than that of the President) and a Parliamentary system where (by definition?) the Prime Minister is of the same party as the legislative majority.
182. FreetoChoose - June 1, 1999 - 1:43 PM PT
gwindau
In what way do you see Japan as comparable to the US of the 80's?
183. Ronski - June 1, 1999 - 2:01 PM PT
It seems to this non-economist that Japan most needs to open itself to foreign investment, something it is not going to do happily nor easily. How does this relate to a posited similarity between Japan today and the U.S. in the early 80s, if at all?
184. gwindau - June 2, 1999 - 6:18 AM PT
FreetoChoose
Some of the similarities that I see between Japan-90's and USA-80's are that both Japan and the US, because of their economic declines, had to face some sort of massive restructuring of their economies. Both economies faced a dropping profit rate due to loss of foriegn markets for finished goods and capital goods. The vulnerability of capital to foriegn takeovers are also a common thread. The US did not actively resist foriegn investment takeovers, but Japan has not allowed this to happen to any great degree. In other words, Japan has not put any of its major industries up for sale (or their troubled banks). Both economies face(d) massive devalorizations of capital and assets either due to foreign competiton (US-80's) or overinvestment combined with a decline in foreign demand for finished goods and capital goods (Japan-90's). Both economies face(d) the unpleasant task of cutting off a lot of dead wood while trying to either maintain (Japan) or restore (US) the value of its currency.
185. thoughtful - June 2, 1999 - 10:30 AM PT
gwindau, you know not whereof you speak.
Some of you may remember that several months ago in an old econ thread PseuE and I had a discussion about the efficacy of fiscal policy. What works well -- often faster than even monetary policy -- are the automatic stabilizers that are built into the fiscal system including unemployment compensation and a progressive tax structure. Very often, we are in a recession before we even suspect one on the horizon, as was the case in the 90-91 recession. Forecasting turning points are one of the things economists do the worst at, including the economists at the Fed.
186. gwindau - June 3, 1999 - 9:07 AM PT
thoughtful
I don't claim to be all-knowing. I do take a particular perspective on Japan that may be different than most. From my perspective, I believe that Japan will do some cost-cutting, cutting these 'stabilizer' programs (and progressive taxes), crushing the general wage-rate to lower labor costs and crushing the social wage rate (unemployment benefits and 'job for life' programs). I feel that Japan will embrace the deflation that Prof. Krugman fears will result in a deflationary spiral (but I do not see this 'spiral' happening). In short Japan's policies will eat-up the workers' savings accounts and crush workers' wages while keeping the Japanese 'yen' strong as an international currency. Lower, deflated prices (with a high value 'yen' to pay for imports to Japan) will keep Japan competitive in the global marketplace (assuming that no huge trade barriers are lifted against Japan). I think Japan will choose this path as opposed to Prof. Krugman's path which may harm the 'yen'.
187. Raskolnikov - June 3, 1999 - 9:29 AM PT
gwindau: I really don't think you know what you are talking about. I am an amateur when it comes to matters of international finance, and I can see dozens of logical and analytical errors in your posts.
As just one example, you argue that deflation will reduce wages (which is definitionally true). But then you suddenly leap to the conclusion that this will lower the savings rate. How? During deflation, it is in your interest to defer spending into the future, as things will be cheaper then. This creates an *incentive* to save, not a disincentive.
If you are arguing that reduced wages will cause people to draw down on savings, then you are ignoring that deflation is a drop in price levels, and that while wages are dropping, prices are dropping too, so the purchasing power of the reduced wage may not be affected.
Until you show a degree of rigor in your analysis, I am afraid that your speculations of what you *think* Japan will do have zero credibility.
188. thoughtful - June 3, 1999 - 10:00 AM PT
gwin, Rasko was kind enough to point out a few of the many logical errors in your last two posts. Allow me to point out a few factual errors.
"Some of the similarities that I see between Japan-90's and
USA-80's are that both Japan and the US, because of their
economic declines..."
Japan has been in economic stagnation/recession for the last 7 years while the US in the 80s had the second longest peacetime expansion in its history.
"Both economies face(d) massive devalorizations [sic] of
capital and assets either due to foreign competiton
(US-80's)...."
Assuming devalorizations are not moral decay, but a drop in valuation, let me point out: Dow Jones 1980=891; 1989=2509.
"Both economies face(d) the unpleasant task
of cutting off a lot of dead wood..."
US unemployment rate, 1980=7.1%; 1989=5.3%.
"I don't claim to be all-knowing."
No argument there.
"I do take a particular perspective on Japan that may be different than most."
Probably because it's based on fantasy, not reality.
189. cdm1110 - June 3, 1999 - 10:09 AM PT
stostosto
Thanks for the welcome. I'm pretty busy right now, so may not be able to contribute much, but I'll try and at least keep up with the conversation.
gwindau
Krugman is fond of quoting Keynes to the effect that "though no-one will believe it, economics is a difficult and technical subject". It's grounded in data and serious and rigorous theories about how economies function, not speculation and flawed analogy. The US in the early 80s suffered a severe but relatively short recession due to a contractionary monetary policy (that was designed to reduce the at that time high inflation rate). The economy recovered rapidly as a result of expansionary monetary and fiscal policies (falling oil prices also helped). I see no useful resemblances between that experience and Japan in the 90s.
I appreciate your earlier offer to send me details of your theories by snail mail, but -- without meaning to be harsh -- I haven't yet seen evidence in your postings that your ideas are grounded in serious economic thinking.
190. gwindau - June 4, 1999 - 5:38 AM PT
Raskolnikov
I may not be communicating the logic process of my 'guesstimate' for Japan. Crushing the 'general wage rate' is done by 'concessions' in the labor-management contract, busting labor unions, taking labor leaders away in chains and leg irons, non-enforcement of pro-labor laws and other extra-economic measures. In a word it is "Reaganomics" with a Japanese flavor to it. Prices will fall by way of 'deflation'. Wages will be 'crushed'. An absolute deflation, without crushing wages would increase or maintain workers' purchasing power. Is there any confusion now about what I am visualizing for Japan? Workers with 'crushed' wage rates must dip into their savings, putting their savings into corporate revenues instead of their retirement nest egg. Professor Krugman's 'expectation of inflation' would also degrade workers' savings, but it would also create a degradation of corporate profits and may harm the 'yen'.
191. gwindau - June 4, 1999 - 5:50 AM PT
cdm1110
Thank you for responding to my offer. I find it amusing that you think my ideas are not well grounded on valid economic principles. As I said, I do not use the same 'models' as Prof. Krugman, although I am well trained to understand them. At least you know that there are a few economists that respectfully disagree with Prof. Krugman. I mean no disrespect to Krugman or his mentor (Keynes). I am, however, used to being heaped upon with tons of disrespect for my views. The important thing, in my view, is not orthodoxy but results. Who will win the 'test of events'? Will it be my view or Krugman's? What will Japan do? In the answer to this question we will find the 'future of capitalism.'
192. uzmakk - June 4, 1999 - 6:41 AM PT
gwindau:
I have complemented you on your posts before and I will do so again.
Well, stated. Lucid.
193. thoughtful - June 4, 1999 - 6:42 AM PT
gwin, you may find it amusing that I, like cdm, find no valid principles upon which you base your arguments....I find it frightening that you would represent yourself as an economist -- if I've interpreted your Message #191 correctly.
Of course there are economists who disagree with Krugman, but to be taken seriously, they do so with facts and logic...not sweeping generalizations, effusive language, circular thinking, and leaky presumptions.
194. Raskolnikov - June 4, 1999 - 7:57 AM PT
gwindau: you just made another analytical error. You seem to be saying that wages will be "crushed" more than prices will drop, leading to an average decrease in buying power for Japanese workers. Keep in mind that all of the money in an economy has to end up in *someone's* pocket (unless you think that the overall size of the economy will contract as well - if so, why?). If the wages of workers take a disproportionate share of the price decrease, then those who are paying the workers end up with a bit of a windfall - their expenses (for salaries) drop more than the prices they get for the worker's products. What makes you think that employers will be any less likely to shove this extra money into savings than the workers? Even if workers are drawing down savings because of wage drops, why wouldn't this be made up for by increased savings from employers who now have cheaper salary expenses?
This is the exact opposite of Reaganomics. Reagan's idea was that if you gave tax cuts to the wealthy, they would be more likely to save, which would spur the economy. You are saying that the wealthy are actually *less* likely to save than the workers. I think you have your empirical work cut out for you.
"The important thing, in my view, is not orthodoxy but results. Who will win the 'test of events'? Will it be my view or Krugman's? What will Japan do? In the answer to this question we will find the 'future of capitalism.'"
This is naive. Imagine two Wall street analysts, making predictions about Microsoft's stock:
One says, "Microsoft's stock will go down over the next month because of fear of antitrust action, earnings that are beneath expectations, and a general malaise that we are beginning to see in technology stocks."
The other says "Microsoft's stock will go up over the next month, because my cat, who I view as lucky because she has white spots, licked my Windows 98 disk this morning while I was read
195. Raskolnikov - June 4, 1999 - 7:58 AM PT
The other says "Microsoft's stock will go up over the next month, because my cat, who I view as lucky because she has white spots, licked my Windows 98 disk this morning while I was reading the Wall Street Journal. Not only that, Bill Gates' horoscope in the Enquirer says that "good things are coming in the future" for everyone of his astrological sign."
In one month's time, one of the predicted results for Microsoft's stock will be correct, and the other will not. Now, even if person two's prediction is correct, it doesn't make his theories any less idiotic, and anyone who follows his advice deserves the eventual shellacking they will get.
196. cdm1110 - June 4, 1999 - 8:19 AM PT
gwindau
"As I said, I do not use the same 'models' as Prof. Krugman, although I am well trained to understand them."
But the problem is that you are *not* showing that you understand them. Deflation and inflation, in general economic usage (and certainly in Krugman's models) refer to changes in the overall level of wages and prices. Thus, they do not imply changes in workers' purchasing power. I and others have pointed this out repeatedly, yet you continue to misunderstand this fundamental point in your assessment of Japanese deflation and Krugman's proposed inflationary measures. There are other logical and conceptual errors in your posts, also, some -- but by no means all -- of which have been pointed out.
You don't have to use the same models as Krugman, and I'm certainly no fan of orthodoxy for orthodoxy's sake. But for your musings to be interesting, they need to be grounded in some kind of model -- that is, an internally consistent framework of analysis. If they are, you should be able to describe that framework for us. Tell us, for example, what you are taking as endogenous, and what as exogenous. Which markets are you analyzing? Who are the key economic actors, and what are they trying to achieve? What institutional (market or nonmarket) details do you regard as essential to to your theory?
197. thoughtful - June 4, 1999 - 10:39 AM PT
Rasko, you have certainly shown more patience than I in trying to untangle gwin's remarks. However, do be careful when discussing savings. The lion's share of savings is by individuals. Business savings (retained earnings) tend to be a small share. Of course, you are correct that the money does stay in the economy -- perhaps paid out in higher profits to shareowners or in higher stock prices, improved investment spending, etc.
Better to stick with why on earth in a deflationary environment wages would fall faster than prices; or why gwin seems to think there is absolutely no connection between productivity and wages and that wages are a function of the whim of those in power -- whoever *they* are; or why gwin thinks Japan *wants* to support the yen when the export sector, upon which it is so dependent, would suffer under a high yen; or how gwin has ignored the fact that, rather than strengthening, the yen has fallen from 94 in 1995 to 120; etc., etc.
198. gwindau - June 4, 1999 - 10:45 AM PT
uzmakk 192
Thanks for your encouraging words. Most appreciated. I think my main point is: "Watch Japan, watch what she does to restore her profit rate." I have my ideas of what she will do. I have my ideas of what she should do. However, there may be a wide gap between these two things.
199. NickVanston - June 4, 1999 - 11:01 AM PT
Japan has four main economic problems. Demand is low -- there is a classic recession. Government deficits and accumulated debt are high, because fiscal stimulus has not worked very well in the past. The population is ageing rapidly, meaning that public pension payments are going to rise quickly in future, putting more strain on public finances. Inflation is too low -- the Bank of Japan tries to keep inflation at 0-2%, and it is currently closer to negative 1%. The collapse of the bubble economy means that many companies and banks are barely solvent, if that, and need to restructure retrench before they can think of investing. If the only problem was a recession, then fiscal stimulus might work (although it has not seemed to work this decade). But the public finance position rules this out, and so the Keynesian solution to a recession of fiscal stimulus will not work. Krugman therefore suggests that the Bank of Japan tries to raise inflation rates to their "ideal" level. This might encourage consumers to spend, because they stop believeing that prices will keep on falling. The extra consumer spending might in turn generate extra investment.
200. thoughtful - June 4, 1999 - 11:10 AM PT
Nick, let me suggest that the reason why Japan's fiscal stimulus is so ineffective is it is a) less than purported; b) focused on increased investment, e.g., public works infrastructure; c) tax cuts issued to consumers are only temporary. They need to get consumption up, and this they could do easily by cutting the VAT. Prior to the increase in the VAT in 97:Q2, real GDP rose over 8% (annualized). After the increase in the VAT, real GDP fell 11% (annualized).
Of course, there are structural problems galore, but certainly the execution of fiscal policy has left much to be desired.