Why I Want to Break Up the Big Banks

Matthew C. Klein writes,

Using the lowest estimates, the big banks can attribute almost a fourth of last year’s profits to taxpayer largess. Higher estimates suggest that almost all of the big banks’ earnings in 2013 were due to subsidies rather than productive activity. The IMF notes that even “these dollar values likely underestimate the true TITF subsidy values” because, among other things, the calculations are based on the assumption that shareholders in bailed-out banks would lose everything, which isn’t usually what happens.

Pointer from Patrick Brennan.

Of course, the NY Fed will tell you that there are terrific economies of scale in banking, and that explains the profits of large banks.

UPDATE: Actually, one economist at the NY Fed, Joao Santos, thinks it’s a too-big-to-fail subsidy.

Using information from bonds issued over the past twenty years, this study finds that the largest banks have a cost advantage vis-à-vis their smaller peers. This cost advantage may not be entirely due to investors’ belief that the largest banks are “too big to fail” because the study also finds that the largest nonbanks, as well as the largest nonfinancial corporations, have a cost advantage relative to their smaller peers. However, a comparison across the three groups reveals that the largest banks have a relatively larger cost advantage vis-à-vis their smaller peers. This difference is consistent with the hypothesis that investors believe the largest banks are “too big to fail.”

Pointer from David Dayen via Mark Thoma.

Folk Pickettyism

Harold Meyerson writes,

Indeed, Piketty’s book provides a valuable explanatory context for America’s economic woes. Wages constitute the lowest share of U.S. GDP, and profits the highest, since the end of World War II. And with heightened accumulations of wealth come heightened accumulations of political power — a shift toward plutocracy to which Wednesday’s Supreme Court decision, permitting the wealthy to contribute to as many electoral campaigns as they wish, adds a helpful push.

…Piketty gives us the most important work of economics since John Maynard Keynes’s “General Theory.”

1, It is interesting that Meyerson deems himself qualified to make this last statement.?

2. Suppose that the book becomes nothing but popular folk economics for “Workers are getting screwed. Tax the rich.” Will Picketty consider that a success or a failure?

3. “Wages and salaries” is mostly a return on capital, albeit human capital. Labor in its purest form (unskilled) earns a much lower share of GDP than Meyerson, Pickety, or anyone else has calculated.

4. How does the growth in equality of payments to individuals compare to the growth in inequality in payments for land? Has the ratio of rent for a square foot of office space in Manhattan to that for of a square foot of lowest-value land in the rural United States gone up as much as the ratio of CEO pay to the wages of unskilled workers? In both cases, where are looking at the ratio of improved to unimproved factors of production. Should we be appalled by the growth in land inequality?

An SNP Project?

The Brooking Institution used to put out a grandiose document called Setting National Priorities. It was sort of a “shadow” budget document. I looked for a recent version, but I did not find one.

Anyway, I am in the midst of noodling over various possible projects. One idea is to try to produce a version of SNP that would be designed with a Republican Administration in mind.

I like the idea of a pyramid model. That is, there should be a few high-level objectives, and then below that would be initiatives that feed into those objectives, and below that would be components of those initiatives, and so on. There should be between three and five high-level objectives.

For example, a high-level objective could be to revive the economy by unleashing entrepreneurship in nonfinancial business, including education and health care.

Another high-level objective could be to put fiscal policy on a sustainable path.

Another high-level objective could be to align regulatory missions and policies to 21st-century technological reality in energy and telecommunication.

One can imagine this being presented in WIKI format. Comments on the pros and cons of that for this project are welcome.

I realize that I need to do a lot more to flesh out this idea. Assuming it has some appeal (to others, but most of all to me), I will post more about it as it evolves.

Gary Burtless on the Redistribution Recession

He writes,

CBO’s newest estimates confirm the long-term trend toward greater inequality, driven mainly by turbo-charged gains in market income at the very top of the distribution. The market incomes of the top 1% are extraordinarily cyclical, however. They soar in economic expansions and plunge in recessions. Income changes since 2007 fit this pattern. What many observers miss, however, is the success of the nation’s tax and transfer systems in protecting low- and middle-income Americans against the full effects of a depressed economy. As a result of these programs, the spendable incomes of poor and middle class families have been better insulated against recession-driven losses than the incomes of Americans in the top 1%. As the CBO statistics demonstrate, incomes in the middle and at the bottom of the distribution have fared better since 2000 than incomes at the very top.

Pointer from Greg Mankiw. Burtless says that the recession caused redistribution toward the bottom. Casey Mulligan says that redistribution toward the bottom did a lot to deepen the recession.

Brad DeLong’s Hierarchy of Work

He writes,

We (1) move things with large muscles; (2) manipulate things with small muscles; (3) use our hands, mouths, brains, eyes, and ears to make sure that ongoing processes and procedures stay on track; (4) via social reciprocity and negotiation try to keep us all pulling in the same direction; and (5) think up new things for us to do. The coming of the Industrial Revolution –the steam engine to power and the metalworking to build machinery — greatly reduced the need for human muscles and fingers for (1) and (2). But it enormously increased (3), for all those machines needed to be minded and all of that paper needed to be shuffled. Each improvement in machines made each human cybernetic control element more valuable as well.

Think of (1) as working without tools. (2) is working with tools, but without machinery. (3a) is working with machinery in large organizations. (3b) is working in middle management in large organizations. (4) is managing large organizations, but without creativity and innovation (I think of accountants, m. (5) is creativity and innovation.

Brad’s point is that over historical time, you can watch machines move up the food chain. Today, the computer revolution is in the process of taking away jobs at level (3). The question is whether it is possible to find matches at level (4) and level (5) for most workers, or whether they are instead doomed to a lower-level existence.

Along similar lines, see Kevin Maney’s column, which I arrived at via Irving Wladawsky-Berger (who writes that “larger numbers of people will have to invent their own jobs”) by following a pointer from James Pethokoukis.

Matt Rognlie Proposes a Solution

In the comments on this post, he suggests a possible way to reconcile secular stagnation with a high return on capital.

One way to reconcile the two is to say that Piketty’s return on capital includes the equity premium (and other premia for privately held businesses, etc.), whereas the secular stagnation idea of a perpetual ZLB deals with only the riskfree rate.

Some remarks:

1. Fischer Black said that finance is about time and risk. The risk-free rate is the price of time. The equity premium might be a proxy for the price of risk.

2. In Keynesian terms, perhaps one can think of a low risk-free rate as reflecting the desire to hoard and a high risk premium as reflecting low animal spirits.

3. As Matt notes, this approach to reconciling secular stagnation with a high return on capital implies that those earning the high returns are being rewarded for taking risks in an economy in which such risk-taking is scarce. Picketty seems to be pretty confident that high earners will not change their behavior much in response to higher taxes. Perhaps this might be true of labor supply. But can one rule out a significant dampening effect on risk-taking?

Read Matt’s entire comment. As he points out, the secular stagnation story is difficult to reconcile with some fairly basic calculations concerning capital and investment.

Joel Mokyr on Innovation

He writes,

Many of the most important inventions of the late nineteenth and twentieth centuries are things that we would not want to do without today; yet they had little effect on the national accounts because they were so inexpensive: aspirin, lightbulbs, water chlorination, bicycles, lithium batteries, wheeled suitcases, contact lenses, digital music, and more.

Later,

All the same, I will venture a guess about one feature of the future: technology will go “small.” Twentieth-century technology was primarily about “large” things. …Energy was generated by massive power stations. Materials were produced by gigantic steel mills. Huge airplanes and tall cell towers embodied what the twentieth century could do. But the twenty-first century may be very different. …sorting cells, and sequencing and splicing genes may offer a better path to a better future than building supersonic planes.

Read the whole thing. I think that it may deserve one of David Brooks’ annual awards for magazine pieces.

Better Education?

1. Jay Mathews writes,

The dollars involved are astonishing, at least to me. Every English, math or science AP test at the three Stafford schools with a passing grade from independent College Board readers meant a $100 check for the student and another for the teacher. Checks totaling $90,800 went to students and $145,370 to teachers.

Pointer from Tyler Cowen. Mathews reports that this resulted in a big increase in AP tests taken and passed at the affected schools.

On the one hand, I find this plausible. These days, high school seniors are much less motivated about AP tests. I tell my students that when I was in high school, we were much less well behaved and less deferent to authority than today’s students. But it would never have occurred to us to slack off for an AP exam. I even remember a student who spent most of the year getting high still pulled it together for his AP tests.

I teach AP courses, and I have seen motivation trump ability in terms of scores. So if money motivates students to do well on the tests, then I can imagine a significant effect. Whether this means anything in terms of overall long-term learning is less clear, I suppose. And I am not sure why a $100 check for a student is any more motivating than the value of replacing a college credit. If it is, then parents who are paying for college tuition should offer their kids very large checks for passing AP courses.

2. John Cochrane and Russ Roberts discuss John’s Ph.D-level MOOC course on asset pricing. Cochrane says,

One thing I learned was there is a larger demand to watch the videos and take some quizzes than there is to do 15 hours a week of hard problem sets.

Later,

the MOOC experience is not just a complete substitute for taking a class. It is also a set of tools and materials that are the foundation for somebody else teaching class. Much the same way a textbook is.

Much later,

one thing this might do is to give us classes that are both more specialized in a topic and more specialized to the person. There could be–there are already 100 Introduction to Finance classes. And there is one out there that is exactly right for your interest and your level. So to some extent the MOOC is going to do that. The thing it’s not going to do, which I would do with you for a 1-on-1, is of course, I would not give a lecture. We would talk and it would be a lot more of me listening. In my other instruction life, I’m a flight instructor. Which is done one on one, and where assessing the student’s competence is really important. And where assessing the student’s misconceptions about how things work is really important. And that’s what you do when you are one-on-one and the guy needs to learn how to fly the plane. And by 1-on-1 sort of quizzing, I’ll pose a puzzle; you tell me the answer; I’ll go, is that really how it works? We really explore what you understand and what you misunderstand. That’s the way you teach 1-on-1 classes, and that’s the thing that’s hard to do on a MOOC. Would you really trust a pilot of your plane who said, I learned to fly on a MOOC and a simulator? He might be darned good. And he would certainly have run through all sorts of accident scenarios that the MOOC and the simulator did, but there might be a few remaining misconceptions about things that had gotten through the process that you might worry about.