The Financial Cycle

Claudio Borio writes,

Financial liberalisation weakens financing constraints, supporting the full self-reinforcing interplay between perceptions of value and risk, risk attitudes and funding conditions. A monetary policy regime narrowly focused on controlling near-term inflation removes the need to tighten policy when financial booms take hold against the backdrop of low and stable inflation. And major positive supply side developments, such as those associated with the globalisation of the real side of the economy, provide plenty of fuel for financial booms: they raise growth potential and hence the scope for credit and asset price booms while at the same time putting downward pressure on inflation, thereby constraining the room for monetary policy tightening.

Pointer from Timothy Taylor.

Borio’s writing is a bit too colorful for my tastes. He uses exclamations! In a working paper!

Still, read the paper. There may be something to the idea that financial sector expansions and contractions are a phenomenon outside of the conventional macroeconomic model. I am quite sympathetic to that point of view.

Tyler Cowen on Inflation: “Probably Not”

He writes,

Everything we were taught about the monetary base is wrong in a world with interest on reserves (IOR). A large base can sit there forever. The price level is not proportional to the base, changes in the base, etc. It just isn’t. The broader aggregates, such as M2, haven’t grown so rapidly.

But consider the scenario that worries me. Our debt continues to increase. Nominal interest rates rise, so the government has to borrow more just to finance the debt. Congress wants to avoid having to cut spending elsewhere, and the Fed is asked to do its part.

Tyler points out that the Fed could increase its purchases of Treasuries without increasing the money supply. However, the mechanism for doing this is to raise the interest rate that it pays on reserves. That mechanism does not solve the problem of lowering the government’s interest costs, which is what I think is the nub of the scenario that I am talking about.

My guess is that in practice, for a variety of reasons, when the cost of government debt starts to rise, the Fed is not going to be willing/able to sterilize its funding of the debt, through IOR or any other means. We are going to see both intended and unintended monetary expansion, and that will produce inflation.

As usual, let me say that I am not blaming the Fed or saying that inflation is just around the corner. When really out-of-control inflation emerges, it is a fiscal phenomenon.

Two Essays on the Modern Political Elite

1. Megan McArdle on Mandarinization. Read the whole thing. Trying to excerpt is frustrating, but I’ll use this:

And like all elites, they believe that they not only rule because they can, but because they should. Even many quite left-wing folks do not fundamentally question the idea that the world should be run by highly verbal people who test well and turn their work in on time. They may think that machine operators should have more power and money in the workplace, and salesmen and accountants should have less. But if they think there’s anything wrong with the balance of power in the system we all live under, it is that clever mandarins do not have enough power to bend that system to their will. For the good of everyone else, of course. Not that they spend much time with everyone else, but they have excellent imaginations.

This is an issue that I have been mulling for quite some time, and my thinking is very similar to hers. I believe that our modern elite is more insulated than American elites from the past. The movie Lincoln portrays a President much more exposed to contact with ordinary people than a modern President. And I believe that Franklin Roosevelt really understood how he differed from the typical citizen, so that he could talk with people rather than talking down to them. In contrast, Barack Obama strikes me as an elite liberal bubble-person.

Like Megan, I believe that I am more familiar with the Mandarin class than I am with the rest of America. But I still think that somehow I am less insulated than the elite pundits and policy makers.

But perhaps the biggest difference that Megan and I have with the Mandarins is that we are skeptical of the wisdom of the Mandarins. I am no populist. But looking at the elites close up, I see a lot of blemishes.

Another issue is the desire to affiliate with power. If a Mandarin encounters a powerful person, the Mandarin’s instinct it to ingratiate himself or herself. My instinct is to try to knock the person down a notch. That is in fact one of my most deeply-ingrained personality characteristics, one which I had to consciously stifle when I worked in organizational settings.

2. Angelo Codevilla on the court party vs. the country party.

Thus by the turn of the twenty first century America had a bona fide ruling class that transcends government and sees itself at once as distinct from the rest of society – and as the only element thereof that may act on its behalf. It rules – to use New York Times columnist David Brooks’ characterization of Barack Obama – “as a visitor from a morally superior civilization.” The civilization of the ruling class does not concede that those who resist it have any moral or intellectual right, and only reluctantly any civil right, to do so. Resistance is illegitimate because it can come only from low motives.

Codevilla’s essay is mostly about the inability of Republican leaders to forsake the court party. Actually, I think that one should be skeptical of Codevilla’s framing. It is empty to complain that “the people” are not represented by party leaders. That is true of all parties, at all times. I do not think that those of us with strong libertarian or conservative leanings are going to be saved by a populist uprising. Instead, we fact the daunting prospect of attempting to change the dominant views among the elite.

Ezra Klein Stumbles Over the Truth

He writes,

In general, politicians are overworked and understaffed. They’re traveling constantly, buried under too many meetings and constituent requests, and working desperately to stay one step ahead of whatever they’re getting yelled at about that week. …however well or poorly the health-care reform effort turned out, the one thing that people on both sides agree about is that it didn’t go according to anyone’s plan. Almost nothing does, and that’s because there usually isn’t much of a plan, or because the plan that did exist was quickly overtaken by events and no one had the time to really update it.

Pointer from Tyler Cowen.

Mr. Klein, if you were to take a job in business, you would discover the same thing. Executives are overworked and understaffed, buried under too many meetings, etc. Plans are quickly overtaken by events, etc. In fact, Mr. Klein, even technocrats and regulators are subject to human frailty and organizational dysfunction.

However, I have confidence that Mr. Klein will pick himself up and go on advocating Washington wonkery as if nothing had ever happened.* Continue reading

Dan Pink’s Latest Book

It is called To Sell is Human. I bought an e-copy, because I consider his work self-recommending. Some notes:

1. What Nick Schulz and I call the New Commanding Heights are really soaring. Pink writes,

Ed-Med–which includes everything from community college instructors to propietors of test prep companies and from genetic counselors to registered nurses–is now, by far, the largest job secton in the U.S. economy…Ed-Med has generated significantly more new jobs in the last decade than all other sectors combined.

Philanthropy and American Exceptionalism

In Why Philanthropy Matters, Zoltan J. Acs makes the case. I was sent a review copy, which I only skimmed. p. 202-203:

what differentiates American-style capitalism from all other forms of capitalism is its historical focus on both the creation of wealth (entrepreneurship) and the reconstitution of wealth (philanthropy)…

…Historically, much of the new wealth created in the United States has been given back to the community to build up the social institutions that enhance future economic growth.

He is thinking of philanthropic support for education, scientific research, and the like. He claims that little of this take place in Europe. The picture there is one in which the wealth of the rich goes toward their own spending or toward taxes, with little in the way of philanthropy.

I am not such a fan of the non-profit sector. I prefer consumer sovereignty to donor sovereignty. In the academy, donors build too many buildings and do not offer enough research prizes.

Yes, I believe that philanthropists are better than government at investing in public goods. So, the choice is between taxes/government on the one hand and philanthropy on the other, I favor philanthropy. But if we hold the size of government constant, at the margin I think we are better off with a larger for-profit sector and a smaller non-profit sector.

Long-Term Trends in Rent

Mark Gimien writes,

Crone, Nakamura and Voith estimate that this and other problems bring down the government’s measure of rent increases by about 1.4 percent a year for the whole period that runs from 1942 to 1985. Nakamura outlines these findings in a very readable paper published by the Philadelphia Fed. Over such a long period, 1.4 percent into a really big number. Add that in, and instead of falling 20 percent in real-dollar terms over six decades, rents rise 50 percent.

Pointer from Tyler Cowen.

The main problem mentioned in the article is that the government’s rent price measure ignored cases in which the rent changes when a new tenant occupies an apartment.

The article focuses a lot on New York City. I think most people believe intuitively that rents in New York have gone up a lot over the decades. By the same token, I think most people believe intuitively that rents in small and mid-sized cities, particularly in the Midwest, have gone down. So maybe we should not talk about “the” cost of rent as if the rental market were national.

Two Articles on Retirement

First, Sunday’s lead story in the Washington Post.

For the first time since the New Deal, a majority of Americans are headed toward a retirement in which they will be financially worse off than their parents, jeopardizing a long era of improved living standards for the nation’s elderly, according to a growing consensus of new research.

You know you are headed for a low-quality article when it starts that way.

1. First off, that sentence may turn out to be wrong. Living standards for those about to retire may well turn out to be fantastic.

2. To the extent that Americans are potentially outliving their saving, it has a lot to do with the “outliving” aspect. People are living longer.

3. Revealed preference suggests that people think that they are in good enough financial shape to retire. Anecdotes and exceptions aside, the average trend is toward retiring younger, not older. Even though people are much healthier at age 65 then they used to be, and many jobs are less physically demanding.

4. The article never addresses the fact that from an aggregate saving point of view, Social Security is the problem, not the solution. It creates disincentives to work and save, so that we have less output and less capital than otherwise.

Next, a story from Kiplinger’s.

Retiring abroad can offer a host of advantages over buying a condo in Florida. Living expenses can be cheaper, cultural experiences richer and the lifestyle more satisfying — even in some places in Europe.

The article proceeds to list eight inexpensive places. I do not see elderly people wanting to pull up their roots and move to faraway places. If they are willing to do so for a lower cost of living, then that would be a sign that financial issues really are pressing. On the other hand, my guess is that staying for a month in one of the recommended cities will appeal to a lot of people who are looking for relatively low-cost trip.

The Narrative of American Public Education

On p. 153 of Why Philanthropy Matters, Zoltan J. Acs writes,

Early Americans in New England and the Chesapeake region, and later throughout the West, established schools in the majority of towns and villages. There was no legal requirement to do this, nor any norm adapted from other countries. Among white Americans, the literacy rate was arguably the highest in the world by 1800.

This contrasts with the Goldin-Katz narrative of American exceptionalism in education, which is that universal public schooling was our unique contribution. This made me wonder whether universal public schooling was a sui generis innovation or a government take-over of a system that already was working well. Searching around, I found an article from The Freeman in 1983, by Robert A. Peterson.

for two hundred years in American history, from the mid-1600s to the mid-1800s, public schools as we know them to day were virtually non-existent, and the educational needs of America were met by the free market. In these two centuries, America produced several generations of highly skilled and literate men and women who laid the foundation for a nation dedicated to the principles of freedom and self-government.

…A study conducted in 1800 by DuPont de Nemours revealed that only four in a thousand Americans were unable to read and write legibly.