New EconTalk Feature

I only recently noticed that an experimental Continuing Conversation feature on EconTalk. It is like a comments section, but with the comments guided by questions from Amy Willis.

My reading of the first two continuing conversations is that they went well. When I started my economics blog, it was called Great Questions of Economics, and I ended every post with a discussion question. I stopped doing that, more out of laziness than anything else.

It would be amusing/humbling to have Willis-style questions after I wrote a blog post. “What was Kling saying when he wrote ____?” It would be even more amusing/humbling to read the answers.

Which Errors Would You Prefer?

Nick Timiraos reports,

some economists, together with policymakers at the White House and Federal Reserve, are warning that mortgage-lending standards have become too restrictive, years after carelessness by lenders inflating the housing bubble.

… the Urban Institute, a think tank in Washington, estimated that around 200,000 fewer mortgages were made in 2012 due to credit standards that were more stringent than they were before the housing bubble.

Don’t say that like it’s a bad thing!

In mortgage lending, a type I error is making a loan that defaults. A type II error is turning down a loan that would have been repaid. Some remarks.

1. When home prices rise, it very hard to make a type I error and very easy to make a type II error. If the house price has gone up, the borrower’s equity is presumably positive, and borrowers who get in trouble will sell their homes and pay off their loans.

2. During the bubble, Congress and HUD officials were convinced that lenders were making type II errors due to racial bias and anachronistic conservative lending standards.

3. After the crash, Congress and government officials were convinced that lenders had been making type I errors due to greed, predatory lending, and lack of regulatory oversight.

My own view is that lenders make type I errors and type II errors all the time. Still, I would rather have errors made by people for whom credit risk assessment is a profession, without the amateur meddling that comes from the political sector.

SNEP: A Spectrum Solution

In Setting National Economic Priorities, the three problem areas are

1. Impediments to labor supply and demand
2. Anachronistic regulatory environment relative to technological change
3. Unsustainable fiscal path

Under (2), there is the problem of the FCC and spectrum. Many years ago, Coase argued that spectrum could be allocated using property rights, rather than command and control. The path of technology since then has made his ideas both more feasible and increasingly desirable.

I view the FCC as both structurally and culturally unable to move decisively away from command and control. Accordingly, my proposal would be to take spectrum regulation out of the hands of the FCC. Instead, I would transfer responsibility to a new agency, which might be called the Spectrum Property Rights Resolution Authority. All spectrum licenses would immediately convert to property rights. The owners of a particular band in a particular location could determine its use. The Resolution Authority would define these property rights more precisely. It also would provide mechanisms for settling conflicts among spectrum rights owners and resolving disputes between spectrum rights owners and device manufacturers.

Another problem is that some spectrum bands are reserved for government agencies, which proceed to waste spectrum by holding onto more than they need or by using obsolete equipment. I would propose privatizing this spectrum, and then having the government lease back what it needs. A Government Spectrum Leasing Corporation should be chartered for that purpose. This is similar to the Government Services Administration, which leases government buildings. The spectrum leasing corporation would be encouraged to upgrade the equipment used by government agencies, in order to economize on spectrum leasing.

Neither of these proposals is particularly original, by the way.

Spending Our Accumulated Wealth: Who Decides?

Reihan Salam writes,

in trying to avoid a doom loop of oligarchy we instead wind up with a doom loop of technocracy, in which elite research universities grow ever larger and more powerful and non-profit organizations press for the expansion of a government that operates largely through private administrative proxies. This doom loop might move at an even faster clip than the doom loop of oligarchy, as non-profit organizations are tax-exempt, a fact that has had significant consequences for jurisdictions like New York city, where non-profit medical providers have been growing robustly. Imagine “profitable non-profits” that offer their employees lavish salaries, thus drawing talented workers away from firms engaging in productivity-enhancing business-model innovation, and devoting just as much of their effort to preserving and extending their privileges as they do to their ostensible social missions.

Consider three groups that might decide how to allocate large concentrations of wealth:

1. Private individuals and money managers, seeking the highest return.

2. Government officials.

3. Non-profits.

Progressives fear (1). Conservatives fear (2). Salam is saying that at some point we should start to worry about (3). He has a point.

Reihan Salam on Low-Wage Employers

He writes,

McDonald’s and other low-wage employers…are taking on a task that many American families and schools are failing to perform. To put it bluntly, McDonald’s is a company that hires large numbers of people with limited skills, many of whom are teenagers and young adults, and it introduces them to the ways of the workplace.

…Perhaps the employers who makes a risky bet on a raw employee, and who take the time and effort to train her, should be entitled to a small portion of her lifetime earnings as she moves on to more lucrative employment. That would create a powerful incentive for employers to devote real resources to building the skills of their workers.

At this point, the working title for my economic priorities project is “Setting National Economic Priorities.” “Setting National Priorities” makes a grandiose idea seem even grandioser. “Setting economic priorities,” which is another alternative, might not refer to economic policy at all.

I am currently most comfortable with the following three priority areas:

1. Improving labor supply and demand incentives for low-wage workers. Improving labor supply means making sure that the structure of means-tested benefits does not create high implicit marginal tax rates for low-wage workers. Improving labor demand means lowering the cost to employers of hiring low-wage workers, particularly health insurance mandates and payroll taxes. I think it also means removing barriers to entry in the education and health care industries. I think it also means reducing the economic friction caused by occupational licensing.

2. Reconfiguring for the 21st century the regulatory missions and mechanisms for dealing with industries that have undergone significant technological change. This includes telecommunications, medicine, the electric grid, and eventually probably should include air traffic and motor vehicles (because of drones and self-driving cars).

3. Reducing the risk of a fiscal train wreck. I suspect that bringing this risk down to what I would consider a reasonable level requires taking steps on Social Security and Medicare that are more radical than what is politically feasible. I would aim for more modest goals, such as indexing the eligibility age for both programs to longevity (hardly a modest goal from a political standpoint!) and developing budget reporting mechanisms (accrual accounting? stress testing?) that provide important information not currently used in the budget process.

Anyway, Reihan’s column fits in with (1).

Ryan Decker on Piketty

He concludes,

ultimately this is a chart book, with plenty of economic data but very little economics.

Pointer from Tyler Cowen. And lest you think that the quoted sentence is a compliment, earlier in the post Decker writes,

By referencing only charts (if even that) for many of his claims, he is feeding the sloppy and destructive “this one chart proves…!” fad that has spread in the blogosphere; a chart is never sufficient to make causal claims or demonstrate optimal policy. In this sense, Piketty does his readers a disservice. He should have asked them to think harder instead of just gazing at graphs.

Many economists, including Jamie Galbraith, Robert Solow, Brad DeLong, Matt Rognlie, and myself, automatically credit Piketty with having a neoclassical production function in the background, with some strong and and unconventional assumptions built in. Decker questions whether Piketty is using a model at all.

After reading Decker’s post, I searched Piketty’s book using Google booksearch for the phrase “production function.” It appears only 9 times, without much in the way of accompanying equations. So maybe Decker is right, although it is still possible that Piketty has some math in his back pocket that he can pull out for us.

I am a critic of the use of math in economics, and that includes a lot of macroeconomics as well as the production function. But at a deeper level, what I am against is making sweeping statements about phenomena that are too complex to be amenable to sweeping statements. Making sweeping statements that are backed up by mathematical equations is bad. Making sweeping statements that are not backed up by math is worse.

Repo and the Financial Crisis, a Follow-Up

My former student writes,

I just read the post–thanks. But I now have more questions. Am I slow, or is the repo market really hard to understand?
When you talk about the original intent of repo, I have a few questions:

1) I understood from Metrick in class that the repo market functions as a type of banking system. Dealers take “deposits” and provide securities as collateral; these deposits are returned at some point with interest. Is that different than what you say the repo system used to be, or is that the same?

2) You say that Gorton/Metrick make no distinction with what the repo market used to do, and what it now does. That investment banks used to keep inventory and sell it, but now they have trading and investment portfolios. What does this mean with regard to the repo market? I.e. how does this change what’s happening?

3) Metrick did say that the securitization of real estate was what created new “safe” securities that people with assets they didn’t want to put at risk demanded. Is this the thing you find inherently dangerous? The idea of manufacturing new, relatively “safe”, liquid assets?

Sorry if these questions are stupid–or even embed inaccuracies/misunderstandings. I think I understand the type of transactions that takes place in the repo market, but I’m not at all sure who are the counterparties on opposite sides of the deal, why they want these deals in the first place for such brief periods, and why this market is as large as it is.

Here are my answers: Continue reading

Tyler Cowen’s Best Business Aphorism

From an interview with Nick Beckstead on the topic of existential risk, meaning fundamental threats to the human race.

In his view, uploads are just an idea that some people came up with, most ideas don’t work, and most institutions are dysfunctional. Those truths seem more important for thinking about the distant future than any complicated arguments for the feasibility and importance of uploads.

Emphasis added to highlight the phrase that grabbed me.

Another aphoristic excerpt from the interview:

People in rural areas care most about things like fights with local villages over watermelon patches. And that’s how we are, but we’re living in a fog about it.

Scott Sumner on the German Jobs Miracle

He writes,

So what’s the real explanation for the German success? That’s pretty obvious; the Hartz reforms of 2003 sharply reduced the incentive to not work, and sharply increased the incentive to take low wage jobs. As a result, today Germany has lots of very low wage jobs of the type that would be illegal in France or California. (Germany has no minimum wage.)