The Brain's Permanent Income Hypothesis

The Keynesian consumption function assumes consumption is entirely based on current income, and is the basis for the multiplier, which magically translates investment in alien defense systems into greater prosperity. Milton Friedman's permanent income hypothesis is a theory of consumption whereby consumption is determined not by current income but by one's longer-term income expectations. The key conclusion of this theory is that transitory, short-term changes in income have little effect on consumer spending behavior. Federal stimulus plans, for example, are intrinsically temporary.

It seems are brains are intrinsically forward looking, more focused on anticipation of rewards than the rewards themselves. In studies with monkeys, where the monkey sees the light, pushes the button, and gets a treat, very quickly the monkey figures it out. Interestingly, the dopamine response fires not when he eats or receives the treat, but rather when he sees the light. The brain present values the stimulus, so that by the time the treat is tasted it has already been figuratively consumed. A short video on the dopamine effect is here.

It's a lot harder for the government to redistribute wealth than income, because wealth is primarily ability as opposed to cash. If you have a niche, a role where you feel valued, you are wealthy. The government can create only so many post-office jobs that grant sinecures arbitrarily, and all those temporary job incentives are seen as the transitory, ephemeral things that they are. To create real wealth, which is what really matters, you need to allow individuals to find their niches, which is best done indirectly.

Sims and Sargent

Minnesota Rules (that's where I live)! My favorite Sargent paper shows a model where even when inflation is a strictly monetary phenomenon, inflation it is really, in the long run, a fiscal phenomenon.

Chris Sims--who I've mentioned several times on this blog--is here. He basically destroyed interest in large-scale-macro-models, at least for anyone graduating subsequent to his seminal papers.

They will certainly help increase the Nobel Laureate signal/noise ratio, which currently is on par with those 'anarchists for big government' protesters. Though Sargent is, fundamentally, a macroeconomist, which means he says many silly things.