Monthly Archives: October 2013

The Voice of Authority

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Either Google “Charlie Rose Stanley Fischer” or try this link.

I am particularly interested in Fischer’s view that (a) the financial crisis had the potential to cause another Great Depression and (b) that the policy responses of the United States worked quite well and (c) fiscal expansion was needed, because monetary policy could not do enough. He does not offer a list of evidence on these points. Instead, he says, in effect, that experts agree on these points. Some possibilities:

1. There is a lot of evidence, but in an oral interview he could not give footnotes.

2. Fischer’s circle is an echo chamber that takes these views, without much need for evidence.

3. Fischer formulated an opinion early on in the crisis, and he has seen no need to change his views, because hypotheses about the financial crisis are untestable (we cannot undertake controlled experiments in macro).

I am particularly curious about (1), and where one could find the list of observations that supports the view that we were headed toward another Great Depression without the bank bailouts and fiscal stimulus.

Is Age the Key Variable?

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The Guardian reports,

in England, adults aged 55 to 65 perform better than 16- to 24-year-olds at foundation levels of literacy and numeracy.

Pointer from Tyler Cowen. Several of his commenters raise the issue that seemed obvious to me: how much of this reflects the higher number of immigrants in the younger cohort?

Remember that the null hypothesis is that schooling practices do not matter. That would imply that the problem of the younger generation is not that schools in England have gotten worse.

Brink Lindsey on Growth Prospects

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He writes,

In the 21st century…all growth components have fallen off simultaneously

The number of hours worked per person has been falling secularly. Years of schooling per worker has grown slowly. Capital per worker is growing slowly. And the residual, or “total factor productivity,” has also grown slowly.

On the human capital issue, Alex Tabarrok points to a NYT story, which says

In the United States, young adults in particular fare poorly compared with their international competitors of the same ages — not just in math and technology, but also in literacy.

More surprisingly, even middle-aged Americans — who, on paper, are among the best-educated people of their generation anywhere in the world — are barely better than middle of the pack in skills.

My view is that growth will depend on luck in terms of discoveries. One possibility would be discovering a cure for obesity/diabetes. Another possibility would be discovering drugs that improve the ability of young people to learn, by increasing conscientiousness, cognitive ability, or both. Another possibility would be a discovery that makes solar power really inexpensive. Another possibility would be the development of very high skill at manipulating DNA, so that we can “grow a table,” in Rodney Brooks’ phrase.

I am not counting on any of these things happening. I am just saying that you need something really big in order to affect TFP growth.

As Brink points out, public policy could be changed in order to promote growth. However, I think we are less likely to have good luck on the policy front than on the discovery front. I think that policy has a lot of inertia.

The New Keynesian Model: Who Believes It?

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John Cochrane has been going after the New Keynesian model. The other day, he linked to a paper by Bill Dupor and Rong Li. They argue that the stimulus did not increase expected inflation, which is a channel by which fiscal policy is supposed to create an expansion in the New Keynesian model.

My question is whether anyone really believes the New Keynesian model. I know that for twenty years, it’s what every graduate student was taught. I know that everyone thinks that writing down a dynamic optimization problem counts as microfoundations.

But when it comes to interpreting the stimulus, my sense is that most economists revert to the old Keynesian model. If they believed the New Keynesian model, I think they would be using the language of intertemporal substitution and expectations more frequently. Instead, what I keep reading is more along the lines of spending creates jobs and jobs create spending.

What, Me Worry?

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This year’s “edge” question is what we should be worried about. So far, my favorite is David Berreby.

out of the 9 billion people expected when the Earth’s population peaks in 2050, the World Health Organization expects 2 billion—more than one person in five—to suffer from dementia. Is any society ready for this? Is any really talking about how to be ready?

One might hope that we would have a cure by then. But in general, the demographics of the future look…strange. Rodney Brooks thinks we will need a lot of robots to

take up the slack doing the thankless and hard grunt work necessary for elder care, e.g., lifting people into and out of bed, cleaning up the messes that occur, etc., so that the younger humans can spend their time providing the social interaction and personal face time that we old people are all going to crave.

Of course, if someone had asked me, I would have said that I worry about fiscal imbalances.

Joel Kotkin on Average is Over

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in California

The swelling number of billionaires in the state, particularly in Silicon Valley, has enhanced power that is emerging into something like the old aristocratic French second estate. Through public advocacy and philanthropy, the oligarchs have tended to embrace California’s “green” agenda, with a very negative impact on traditional industries such as manufacturing, agriculture, energy, and construction. Like the aristocrats who saw all value in land, and dismissed other commerce as unworthy, they believe all value belongs to those who own the increasingly abstracted information revolution than has made them so fabulously rich.

… In neo-feudalist California, the biggest losers tend to be the old private sector middle class. This includes largely small business owners, professionals, and skilled workers in traditional industries most targeted by regulatory shifts and higher taxes.

If nothing else, the era of Average is Over produces a lot of intense rhetoric. Although, I have to say, Kotkin’s rhetoric is not too far removed from my jobs speech (which has an Average is Over theme to it).

Suits, Geeks, and Health-care Exchanges

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Megan McArdle writes,

I predicted in December 2012 that the exchanges would not be up and running on time with minimal knowledge of how the contracts and budgeting were being run, because the administration was being pretty closed-mouthed about those things. Was I prophetic? Hardly. I just didn’t see how the administration could make things work in the allotted time frame. The development cycle was just too aggressive, even with what my boss used to call a “Shake and Bake” system (take something out of the box, add a few of your own ingredients and roll it out). I thought about the software-implementation projects I’d worked on (not in development but on the server side) back in the days when I was an IT consultant. This seemed a lot faster than anything that any company I’d ever worked with would commit to, even if it had already designed some of the underlying architecture.

Michael Malone writes,

Anyone who has ever worked on or, worse, bought a big software application – and this is one of the biggest in history — could have told HHS that the final result would be buggy, late, unsatisfying to users, unable to live up to its billing, and most of all, resistant to upgrades, much less wholesale changes. In the real world, you can’t just order “Make it so!”

I, too, have some experience with software development. This sounds to me like a case of suits saying one thing and geeks saying another. The suits are talking about “glitches” and “too much demand.” The geeks are making it sound like the system might be FUBAR.

1. I have been reading that the process of interacting with databases in order to deal with user identity and security issues is cumbersome, and that is causing the problems, even at small scale. If so, then this cannot be solved by adding servers or by patching a few lines of code. It may be closer to “we need to rip the guts out of the segment of the system that manages data transfer and re-architect it.”

2. My instinct at this point would be to try to separate the functions involved with sign-up from the functions involved with “tire-kicking.” I would think that it would be easier to set up a “tire-kicking” site where people can find out what the plans are and approximately what they will cost given their personal situations. However, because you could not actually sign up, the system would not store personal information or access so much data. Meanwhile, you straighten out the system that lets people actually sign up. If it takes 6 more months to build a robust sign-up system, that is a PR issue that can be managed, as long as the tire-kicking” system would enable consumers to satisfy themselves about what Obamacare means to them personally.

3. There has always been a high failure rate in big software projects. This is true in the private sector as well as in government. In this case, I think a lot depends on how easy it is to take out one part of the system and fix it without affecting other parts of the system. If the internal interdependencies are too large and complex, trying to patch the system can turn out to be a bigger challenge than starting over by creating a simpler architecture.

Money, Finance, and Nominal GDP

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Scott Sumner writes, among other things,

there is utterly no reason to presume that “the financial markets will evolve ways to insulate the economy from what the Fed does.” Indeed so far as I know no economist has ever even proposed a model where this is true. And that’s because it would have to be a very strange model.

This puts me in an awkward position. Either I say that this is my own model, in which case I think I am taking more credit than I should. Or I say that it is implicit in the writings of some other economists, in which case Scott is going to argue that I am misinterpreting them. When in doubt, I will commit the first error.

However, I am not totally daft. Jeffrey Rogers Hummel has just posted an excellent tour of monetary theory. It serves as a very useful reference. Read the whole thing. He concludes,

As I conceded at the outset, central banks can affect interest rates somewhat. What is incorrect is the now-common but simplistic belief that the liquidity effect is so powerful that it allows the Fed to put interest rates wherever it wants, irrespective of underlying real demands and supplies in the economy. Nor do I deny that central banks have other far-reaching economic repercussions, often detrimental. But in a globalized world of open economies, the tight control of central banks over interest rates is a mirage. Central banks remain important enough players in the loan market that they can push short-term rates up or down a little. But in the final analysis, the market, not central banks, determines real interest rates.

If you take Hummel’s tour, pay attention to the McCloskey-Fama challenge. Also, pay attention to this point:

As the Fed increased bank reserves and currency in circulation by $2.5 trillion over the five years since, it also was, for the first time, paying banks interest on their reserves deposited at the Fed. Although the 0.25 percent rate it pays is quite low, it has consistently exceeded the yield on Treasury bills, one of the primary securities in the Fed’s balance sheet. Thus, at least $2 trillion of the base explosion represents interest-bearing money that, in substance, is government or private debt merely intermediated by the Fed…The Fed can have no more impact on market rates through pure intermediation—borrowing with interest-earning deposits in order to purchase other financial assets—than can Fannie Mae or Freddie Mac. The remaining $500 billion increase in non-interest-bearing money (what economists call “outside money”) represents only a slightly more rapid increase than in the decade before the crisis, and nearly all of that has been in the form of currency in the hands of the public.

In some sense, quantitative easing consists of the Fed borrowing at 0.25 percent to buy Treasury securities. It is engaged in debt management, converting the long-term obligations of the Treasury into short-term obligations of the Fed/Treasury. As other economists have pointed out, the Treasury could cut out the middle man by buying back long-term obligations and borrowing more at the short end of the market.

Hummel does not depart from the standard theoretical assumption that there is an equilibrium “real” money supply, which ultimately ties the price level to the supply of money. That means that when the Fed raises the money supply, eventually the economy must adjust with higher prices. If you take that view, then the question of whether or not the Fed can affect interest rates may not matter. If the Fed can force prices higher, then it can raise nominal GDP, and we have something.

However, I take the view that the McCloskey-Fama challenge means that in fact that the Fed cannot force prices higher, because there is little adjustment needed in the economy when the Fed does something. The Fed is dipping its little cup in and out of a sea of financial assets. Right near the cup, you can observe water move, but viewed from overhead, the sea seems to have its own tides and storms.* As Fischer Black wrote in “Noise,” this leads to the upsetting and heretical conclusion that there is no equilibrium “real” money supply that ties down the price level. Instead, prices evolve higgledy-piggledy, based on habits and expectations.

*If the Fed used a really huge pitcher, big enough to raise the sea level by several meters, then I think we would see an effect. I only think that will happen if we run into a government debt crisis and the option of sudden monetization is adopted.

Expressing Libertarian Frustration

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Clyde Wayne Crews, Jr. writes,

here we are in the 21st Century with Obamacare’s futility characterized as “glitches” and “hiccups” by the Washington Post and NPR.

Those aren’t “glitches.”

They are, as one title by the great Ludwig von Mises put it, an inevitable manifestation of the impossibility of Economic Calculation In the Socialist Commonwealth.

In modern America, this abomination should never have even been suggested, let alone enacted.

The entire essay expresses frustration. If you are in the minority in a majority-rules environment, how can you be anything but frustrated?

A Voice of Social Conservatives

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I review Robert P. George’s Conscience and Its Enemies. My conclusion:

I think that libertarians will find George’s book to be well-reasoned. He usually anticipates the sorts of arguments and concerns that libertarians would raise about his positions as a social conservative. On the whole I think that libertarians will continue to disagree with his views on some of the central issues. However, his book has made me aware that the more aggressive moves by the Left in the culture war are putting liberty of conscience at risk.