Monthly Archives: May 2014

A Scientist Shunned

Posted on by

Patrick Brennan reproduces a letter from a scientist pressured to resign from a climate skeptic group.

I had not expect[ed] such an enormous world-wide pressure put at me from a community that I have been close to all my active life. Colleagues are withdrawing their support, other colleagues are withdrawing from joint authorship etc.

I see no limit and end to what will happen. It is a situation that reminds me about the time of McCarthy. I would never have expecting anything similar in such an original peaceful community as meteorology. Apparently it has been transformed in recent years.

I do not know the full background. Perhaps there is a charitable interpretation. However, unless there are particulars that justify this instance, I am inclined to think that shunning of a former colleague for joining a climate skeptic group is a sign of intellectual weakness, not strength.

The list of speakers dis-invited or withdrawn from commencement addresses because of a purge mentality is also a source of concern. I wish that there were stronger voices on the left denouncing this phenomenon.

Occupational Licensing and Anti-trust

Posted on by

Aaron Edlin and Rebecca Haw write,

Some recent additions to the list of professions requiring licensing include locksmiths, beekeepers, auctioneers, interior designers, fortune tellers, tour guides, and shampooers.

They argue that when licensing boards are made up of professionals who are currently licensed, they should be subject to antitrust laws.

Pointer from Timothy Taylor.

What to do about occupational licensing?

I think that the best idea would be to eliminate it. Instead of occupational licensing, have occupational certification. A consumer would still be free to accept services from an individual who is not certified.

Assuming that elimination of licensing is not going to fly, then I think that Congress should require states to accept licenses from other states except in cases where a fundamental difference in professional requirements exists across states. If being a dental assistant in Alabama is pretty much the same job as in Wyoming, then someone who is licensed in one state should be entitled to practice in the other. To deny the licenses from another state is a violation of the Commerce clause, which is intended to prevent states from setting up barriers to trade with one another.

Tim Geithner on Freddie and Fannie

Posted on by

Nick Timiraos extracts from the new Geithner book.

But the erosion in underwriting standards, the rush to provide credit to Americans who couldn’t have gotten it in the past, was led by consumer finance companies and other nonbank lenders that did not have to comply with the Community Reinvestment Act—which, after all, discouraged redlining for nearly three decades before the crisis. These firms took credit risks because they wanted to, not because they had to; they believed rising home prices would protect them from losses, and their investors were eager to finance their risk-taking. Fannie and Freddie lost a lot of market share to these exuberant private lenders, and while they did belatedly join the party, the overall quality of mortgages they bought and guaranteed was significantly stronger than the industry average.

That strikes me as beside the point. The comparison to make is not between risk of the mortgages Freddie and Fannie bought with some industry average. The comparison that matters is between the mortgages that they bought and their capital and loss reserves. With enough capital, they could have taken on the worst of the subprime mortgages and survived. Conversely, even relatively safe mortgages can take you under if you do not maintain the loss reserves and capital that are needed in an adverse house price scenario.

This defense of Freddie and Fannie comes across to me as purely rhetorical. I hope he is too smart to really believe it. Otherwise, I would say that if this is the way that high government officials think about finance, then anyone who thinks that such people can prevent crises is making a really unsound wager.

Having said that, much of the rest of the article makes Geithner sound a lot more sensible than the typical progressive housing policy type. He recognizes that the key to housing finance reform is bringing back a reasonable down payment. He also seems to be one of the few people who gets it that the attempts to bail out homebuyers were based on unrealistic expectations of the mortgage servicing industry.

Rubio Touches the Third Rail

Posted on by

Andrew Biggs writes,

Included in Sen. Rubio’s ideas are:

–Social Security solvency: Rubio would gradually increase the retirement age in line with life expectancies and reduce the growth of benefits for higher-earning individuals. In addition, Rubio favors strengthening the safety net for lower-income retirees.
–Delayed retirement: Rubio would eliminate the 12.4% payroll tax for retirement-age individuals to encourage them to stay in the work force. I really like this idea and wrote on it for the Wall Street Journal.
–Open the TSP: Rubio would allow workers who are not offered retirement plans by their employers to participate in the federal government’s Thrift Savings Plan, the DC pension for government employees. In a way, this builds upon the President’s myRA proposal, but allows for greater choice in investments.

I am a big fan of indexing the age of eligibility for retirement benefits to average life expectancy at age 60. I would like to see that done for Medicare as well. People can still retire when they are younger and healthier, but not on someone else’s nickel.

Larry Summers on Piketty

Posted on by

Mark Thoma seems to have provided the first pointer, although others surely will follow.

Summers’ review is the most complete evisceration of Piketty’s economics that has been published to date. But Summers suggests that we sniff the rose, never mind the manure that lies underneath. He writes,

Even in terms of income ratios, the gaps that have opened up between, say, the top .1 percent and the remainder of the top 10 percent are far larger than those that have opened up between the top 10 percent and average income earners. Even if none of Piketty’s theories stands up, the establishment of this fact has transformed political discourse and is a Nobel Prize-worthy contribution.

This is reminiscent of Brad DeLong. It strikes me as intellectual charity driven by ideological sympathy. I encourage everyone reading this blog to do the opposite. Reserve your most charitable interpretations for those whose views disturb you, and adopt the most critical-thinking posture toward those whose views please you.

The bulk of Summers’ review consists of just this sort of critical thinking. Summers writes,

Piketty argues that the economic literature supports his assumption that returns diminish slowly (in technical parlance, that the elasticity of substitution is greater than 1), and so capital’s share rises with capital accumulation. But I think he misreads the literature by conflating gross and net returns to capital. It is plausible that as the capital stock grows, the increment of output produced declines slowly, but there can be no question that depreciation increases proportionally. And it is the return net of depreciation that is relevant for capital accumulation. I know of no study suggesting that measuring output in net terms, the elasticity of substitution is greater than 1, and I know of quite a few suggesting the contrary.

I have not seen this point about the confusion of gross and net return made by anyone else. By DeLong’s standards, that means we should dismiss Summers’ argument. But to my eye, it seems like a powerful criticism. [UPDATE: Oops! A commenter points out that Matt Rognlie had made the exact point about gross and net return.]

Remember the scandal over the Reinhart-Rogoff spreadsheet? This strikes me as considerably worse.

Summers also writes,

Rather than attributing the rising share of profits to the inexorable process of wealth accumulation, most economists would attribute both it and rising inequality to the working out of various forces associated with globalization and technological change.

As in the Smithian theory of inequality.

Rethinking Accreditation

Posted on by

According to Lindsey Burke of Heritage,

Under DeSantis’ proposal, which mirrors the HERO Act introduced in the Senate earlier this year by Sen. Mike Lee, R-Utah, states would be able to empower any entity—universities, businesses, non-profit institutions, etc.—to credential individual courses. South Carolina, for instance, could allow Boeing to credential aeronautical engineering courses, and Texas could enable Texas Instruments to credential mathematics courses.

I imagine that the sticking point here is eligibility for financial aid, including student loans. If you have Federal money that you only want to go toward accredited courses, then the Federal government would seem to have a legitimate claim that it needs to control accreditation.

If the Federal accreditation process is captured by rent-seekers, I am not sure I see why states would not be captured, also. So I am inclined to look for a different solution to the problem.

The public policy rationale for accreditation is that we want government education subsidies to be spent on the merit good of education. The current accreditation policy is neither necessary nor sufficient for that. Today, an accredited university that funnels student activity fees into support for drunken bacchanals is supposedly providing the merit good of education, while a non-accredited course that helps someone get a job is not.

Today, we impose a nearly impossible burden of proof on alternative forms of education. I would propose changing the system to impose the burden of proof on those who would deny that funds are going toward a merit good. In other words, let students spend their education subsidies (or flexdollars) on any form of education they deem valid. If a student chooses a low-quality course, the one who is hurt the most is the student. If the student makes a ridiculous choice (like spending the money on drunken bacchanals and calling that “education”), then the student and the supplier of the improper service can both be prosecuted and fined. Maybe even some currently accredited institutions headed by passive college administrators could be prosecuted and fined.

My Least Favorite Macroeconomic Statistic

Posted on by

John Cochrane writes,

Philadelphia Fed President Charles Plosser made this nice graph, showing how reduced views of potential GDP are closing the gap, not rises in actual GDP.

Obviously, it would help to go to his post and look at the graph. But potential GDP is perhaps my least favorite economic statistic. Keep in mind that potential GDP refers to real GDP, not nominal GDP.

How to define potential GDP? I think then when you come down to it, the definition is “what GDP would be if there were no shortfall of aggregate demand.” So I think that in order to buy into potential GDP, you have to be really committed to the AS-AD paradigm.

How is potential GDP arrived at? I think that the process involves taking a graph of the history of GDP and fitting trend lines in between the peaks, perhaps with some smoothing thrown in. Since we never know what the next peak of GDP will be, we pretty much never have a good idea of potential GDP in real time, only in retrospect.

When I think in terms of PSST, there is no analogue to potential GDP. Patterns of specialization and trade are always breaking and re-forming. When patterns break, unless the break is caused by war, disaster, or government policy, it is probably the economy’s way of freeing up resources that otherwise would remain misallocated. When new patterns form, it is only a good thing if the patterns are sustainable for a decent interval of time.

SNEP and the EITC

Posted on by

Reihan Salam writes,

In theory, the EITC is a simple program. But in practice — and in particular from the vantage point of recipients — it’s opaque and complex. It’s almost surprising how much recipients did know about how their behavior related to the refund.

Salam’s piece has many useful links for what I am calling the Setting National Economic Priorities project. One of the project’s ideas is to introduce a standard “fade-out” rate of 20 percent for all means-tested programs in the safety net. A next step might be to consolidate all such programs into a single “flexdollar” benefit program, which I have described in previous posts.

My priors, which I think are supported by the research cited by Salam, is that trying to use a program like the EITC for social engineering is a mug’s game. I think that the flexdollar idea is a reasonable compromise between offering a pure cash benefit and trying to do fine-grained social engineering.

Good Sentences

Posted on by

From Ashok Rao.

Is the mind-blowing wealth of 30,000 Americans absurd? Sure. But it would be difficult to say, as the video suggests, these elite are beneficiaries of any inequality other than owning the right capital at the right time. (Indeed it is capital gains in the stock market that drive the income of this group).

Pointer from Tyler Cowen.

I strongly recommend Rao’s entire post. Later, he writes.

Sure the bottom 95% are doing a little worse and the top 5% a little better today, but the changes are nothing near the drastic increase in income inequality in the same time period. This suggests policy has changed favoring high income over low income in a much clearer fashion than high wealth over low wealth. This isn’t surprising given that much of the richest 0.01% are executives and bankers, not heirs to mounds of wealth. After all, it is the group of affluent-but-not-rich people for whom we subsidize housing (indeed more than we do food for the poor!) It is for the doctors we protect the medical market. It is for the middling executives and partners at law firms nobody has heard of we decrease taxes on those earning more than $200k. It is for the top 15(- top 2)% of Americans who couldn’t afford frequent flights to Florida without Spirit or Southwest we refuse to tax carbon emissions from airplanes the way they should be!

Public Health and Conscientiousness

Posted on by

Timothy Taylor writes,

Personal habits and public policies regarding cleanliness changed so much in the 19th and into the early 20th century that historians sometimes write of a “sanitation revolution,” which led to dramatic improvements in public health. It’s time to ramp up a “chronic disease revolution,” which would include the health care system but also reach beyond it. Modern information technology, and the coming arrival of the “Internet-of-things” will open up new possibilities here. A pillbox could be wired into the Internet, and if it isn’t opened at the appropriate times during the day, the person would receive a text or email, and then a phone call, and then maybe a personal visit of reminder. It’s now possible for a home machine to take a small blood sample from a diabetic, analyze that sample, and send in the results. Information technology makes it much easier to have interactive systems that offer reminders about diet or exercise. The benefits from improved management of chronic conditions is potentially very large.

Taylor is calling for an increase in conscientiousness, with the aid of technology. The late Gary Becker was fond of saying that young people behave as if they expect that in their lifetimes medications will be able to undo the adverse impact of overeating–and they are probably right. So Becker was arguing that technology may allow people to do away with conscientiousness.