Monthly Archives: March 2013

Personal Accounts for Down Payments

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Alex Pollock proposes,

until the age of 35, an individual should be able to choose to have 12.4 percent of his salary paid not to Social Security taxes but instead into a restricted savings account covered by deposit insurance, from which savings can be used only to make a down payment on a house. The down payment (using this and possible other savings) must be a minimum of 20 percent, the house must be bought to live in, and the related loan must be a sound credit which is a “qualified mortgage,” as now defined by regulation. The point will be to create retirement savings in the form of equity in property, as a partial alternative to earning benefits from a troubled government pension program.

A major motivation behind the idea is a desire to steer government policy away from encouraging people to buy homes with little or not money down.

Uncle Sugar

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Charlie Quidnunc spotted this one:

the Department of Agriculture is proposing to purchase 400,000 tons (with a “t”) of sugar from domestic producers

This is why we don’t need to worry about the government Budget. This sort of spending is what grows the economy, right?

Huemer Unbound

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Michael Huemer writes,

the question of political authority is not “Should we have government?” The question is: Should the government be subject to the same moral constraints as apply to private agents? The failure of theories of political authority means that we must apply to the state the same moral standards that we apply to private agents. If a private agent would not be justified in using coercion to achieve a particular goal, then the state is also not justified in using coercion to achieve that goal.

The state is an institution, not an individual. Individuals play roles within this institution, such as legislator, policeman, or citizen. These roles are defined partly by law and partly by custom. When one talks about applying moral standards to the state, what I think this means is that we are applying moral standards to its laws and customs. For that purpose, using the metaphor of the individual to characterize these laws and customs may be helpful but it is not obligatory.

Consider another institution–a business. Should we say that a business is like a family, and the owner should be subject to the same moral standards as apply to a parent? Some people might find that analogy attractive, but I do not.

I think that the term I am looking for here is “category error.” Saying that a business or “the state” belongs in the same category as an individual strikes me as such an error. Instead, I think that “the state” belongs in a category that is closer to “relationship” or “institutional arrangement.” Within that institutional arrangement, we give authority to firemen to break traffic laws in the line of duty. When they are off duty, they are subject to the same laws as the rest of us. There are many relationships and institutional arrangements in which we authorize people to do things to us that differ from what we would permit a random stranger to do.

The problem I have with government is with the scope and scale of monopoly control. I think that the laws and customs in the United States today give too much authority to government officials. I wish that everyone had much more freedom to choose laws and customs without being forced to accept the territorial monopolies that we call government. However, I would not lean on Huemer’s arguments to make that case. Instead, I focus on the knowledge-power discrepancy.

I wrote about Huemer’s book here, and we had a follow-up exchange here.

Banks and Government

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The second of my essays on the function of banks. In this one, I talk about their relationship with government.

Think of two friends who walk to a neighborhood bar every Saturday night. On a given Saturday, the first friend may be too drunk to walk without assistance, and he may have to lean on the second friend in order to make it home. The following Saturday, it could be the second friend who needs to be supported in order to get home. However, if both of them get too drunk and try to lean on one another to get home, they may collapse together.

This is how I picture the current situation in Europe. Many European banks are unsteady. They need government guarantees and capital injections in order to stay in business. At the same time, many European governments are heavily indebted and running large deficits. They need banks to continue to lend to them in order to fund their spending.

Read the whole thing. My prescription for addressing the relationship between banks and governments is to try to apply the approach of “limited guarantees, for limited purposes.”

Bank Regulation: The Fork in the Road

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Richard W. Fisher and Harvey Rosenblum write,

we would roll back the federal safety net—deposit insurance and the Federal Reserve’s discount window—to apply only to traditional commercial banks, and not to the nonbank affiliates of bank holding companies or the parent companies themselves, where the safety net was never intended to be.

This is one of several proposals that they make to try to reduce the power of big banks.

The opposite choice is the Gary Gorton approach. That is, acknowledge that the financial sector has changed, and expand the government insurance umbrella to include new instruments, such as repurchase agreements. I may not be characterizing Gorton’s views charitably. I have always disliked them.

The Dodd-Frank legislation is an awkward compromise between these two approaches. It probably satisfies no one. It certainly does not satisfy those of us who want to cut the big banks down to (a much lower) size.

Russ Roberts and Edward Leamer

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I love this video, but that is because I agree so much with Leamer.

One thing I would point out about his charts is that he uses trend lines and implies that mean reversion is the norm. That is, for most of the postwar period, if you had a recession that took GDP below trend, you would then have above-trend growth. An alternative hypothesis is that real GDP follows a random walk with drift. That would mean that it always tends to grow at 3 percent, regardless of its recent behavior. The last three recession seem to follow such a model.

In the late 1980s, some folks, notably Charles Nelson and Charles Plosser, argued strenuously against mean reversion and in favor of the random walk with drift. Note that this is back when Leamer describes output and employment as mean-reverting. I wonder if what happens as data get revised over long periods of time is that random walks get turned into mean-reverting trends.

Note Tyler Cowen’s comment on the latest employment report:

we are recovering OK from the AD crisis, but the structural problems in the labor market are getting worse. It’s becoming increasingly clear those structural problems were there all along and also that they are a big part of the real story. On the AD side, mean-reversion really is taking hold, as it should and as is predicted by most of the best neo-Keynesian models.

An Interesting Abstract

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The paper is by Ross Levine and Yana Rubinstein.

We use the classification of the self-employed into incorporated and unincorporated to separate between “entrepreneurs” and other business owners. Using data from the CPS and the NLSY79, we find, in contrast to a large body of research, that entrepreneurs earn much more per hour and work many more hours than their salaried and unincorporated counterparts. Moreover, the incorporated self-employed have distinct cognitive and noncognitive traits: they are more educated, and even as teenagers, they score higher on learning aptitude tests, exhibit greater self-esteem, and engage in more aggressive, illicit, risk-taking activities. And, these traits are much more important for entrepreneurial success than they are for success in other employment activities.

The press has picked up on the part about teenage propensity for illicit, risk-taking activities. Doesn’t describe me as a teenager.

Two Interesting Interviews

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1. Marlene Zuk.

My objection is to the assumption that what we did before — say, pre-agriculture — was healthier, or even ideal, and then, somehow, we got kicked out of the Garden of Eden, and it’s all been downhill. Diamond talks about the ways in which agriculture was bad, and he is right about those costs. Of course, walking upright is bad for us too, at least in some ways, but that ship has sailed. I think a deeper understanding of evolution helps you better understand the futility of pointing to a moment in time as being the perfect one.

2. Gary Becker.

In terms of understanding the crisis, I do not think that more realistic behavioral assumptions would solve the problem. It has always been difficult in rational choice models to adequately account for the coordination of people’s expectations. To some extent, the crisis involved the coordination of irrational expectations…the theory of rational expectations always said that people make a forecast and could coordinate on a bad forecast. That has always been part of the theory, however there is more attention being paid to that phenomenon now.

He takes some swipes at Austrian economics.

Pointers to both from Jason Collins.

Fiscal Crunch Time

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John Cochrane links to a WSJ editorial and a working paper by Greenlaw, Hamilton, Hooper, and Mishkin. The authors make the point that I have been making, which is that when government has accumulated a lot of debt, an increase in interest rates can be catastrophic. This almost forces the central bank to abandon its inflation-fighting goals when the crunch hits.

On the basis of intellectual history, there is another prominent economist who one might expect to endorse and amplify these concerns. He would dismiss the current low interest rates as Wile E. Coyote market behavior. He would trot out diagrams illustrating multiple equilibria. But that economist seems to have disappeared.

Kyle Bass thinks that this scenario will appear in Japan before it strikes Europe or the United States. If you are familiar with John Mauldin, then you know what Bass is going to say.

Most of the questions that Bass gets are “What should an ordinary investor buy?” Interestingly, I get that question a lot from friends on the left. I think that all of us happen to be at an age, close to 60, where the worst case scenario is that your savings take a big hit. If you were 40, you would figure that your human capital is still your most important asset. If you were 80, you would say that you don’t have to worry about how far your savings will go.

I would say that my worries would go away if the politics in this country shifted toward the right. Presumably, that is not where my friends on the left are coming from. My guess is that they connect their fears about preserving the value of their savings with doubts about the capitalist system in general.

Bass suggests oil wells, apartments, and firms with productive assets. I have shifted in that direction the past couple of years, so anyone who has been betting on the U.S. stock market as a whole has been doing better than I have lately. And I hope they continue to do so. Because there is no hedge against a breakdown of the social fabric, which is what Bass is predicting for Japan. There, if he is correct, the worst case scenario for a 60 year old is about to become reality.