Monthly Archives: June 2015

Anil Kashyap on Greece

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Probably the best analysis so far. Mostly, it is a recap of the past. But in talking about the pending referendum, he writes,

if the public sides with Tsipras government, then there will be a very sharp recession over the next few months. Tax collection is likely to collapse. The Tsipras government is unlikely to survive the economic collapse.

He also writes,

Greece should have defaulted in 2010. Its debt burden then was unsustainable and nothing since then has changed this. It is true that financial markets were much more jittery at that time, but the money that was raised to pay off the creditors in that bailout could have been diverted to support Greece and other weak countries. Once the bad rescue of 2010 was undertaken, it was inevitable that some form of debt relief was going to be necessary.

Imagine how different the political dynamics in Europe would have been if the German and French banks had been explicitly bailed out.

Pointer from John Cochrane (and from Greg Mankiw and James Hamilton). Of course, I think that explicit bailouts are exactly what the political system will not allow. Even going forward, I still think that “opaque bailout” is the most likely outcome. But I also think that there are some lessons for us.

1. At some point, you do run out of other people’s money (that is actually more true for us than for Greece, because we are bigger and therefore harder to bail out).

2. When you run out of other people’s money, political tensions rise considerably. See my essay Lenders and Spenders.

Sustainable Capitalism

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Jesse Ausubel writes,

Agriculture has always been the greatest raper of nature, stripping and simplifying and regimenting it, and reducing acreage left. Then, in America, in about 1940 acreage and yield decoupled. Since about 1940 American farmers have quintupled corn while using the same or even less land. Corn matters because it towers over other crops, totaling more tons than wheat, soy, rice, and potatoes together

The title of this post contains a redundancy. Capitalism is inherently sustainable, relentlessly producing more human satisfaction using fewer resources. What environmentalists call “sustainability” ought to be called primitivism, producing less human satisfaction using more resources. Read Ausubel’s entire piece.

State Nullification of the Federal Income Tax?

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Ryan H. Murphy writes,

In principle, the state could effectively end the federal income tax by using two surprisingly simple and straightforward legislative maneuvers—neither of which involves secession. Texas could choose to send its federal taxpayers a check in the form of a state tax credit equal to their federal income tax liability. It could then pay for the credit by increasing the state sales tax in a revenue-neutral way. effectively, that would mean the end of all income taxes in the state while significantly raising sales taxes. This isn’t about cutting taxes per se; rather, this is the tax swap to end all tax swaps.

This is an interesting and original proposal, but surely he has not thought through all of the consequences. For example, if this were enacted, then residents would have no incentive to minimize their tax liability. Go ahead and realize all of your capital gains, because when you pay more Federal taxes, your state sends you a credit. So it seems to me that one consequence would be a huge windfall increase in Federal revenue, financed by higher state sales taxes.

When Economists Were Right, Allegedly

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Richard Baldwin writes,

Barry Eichengreen added specificity to this in January 2009 with his insightful column “Was the euro a mistake?”, noting: “What started as the Subprime Crisis in 2007 and morphed in the Global Credit Crisis in 2008 has become the Euro Crisis in 2009. Sober people are now contemplating whether a Eurozone member such as Greece might default on its debt.” He wrote that the alternative to default was “fiscal retrenchment, wage reductions, and assistance from the EU and the IMF for the cash-strapped government.”

He predicted – again dead on – that “[t]here will be demonstrations against the fiscal cuts and wage reductions. Politicians will lose support and governments will fall. The EU will resist providing financial assistance for its more troublesome members. But, ultimately, everyone will swallow hard and proceed … In the end, the EU will overcome its bailout aversion.” The farsightedness is astounding. In January 2009, few knew the Greeks had a problem serious enough to require debt restructuring.

Pointer from Brad DeLong, via Mark Thoma.

That sounds impressive. He also cites other economists. But a couple of cautionary notes.

1. The best way to develop a reputation as far-sighted is to make many vague, conditional predictions. Later, you call attention to those that sound correct, and if necessary you wiggle out of those that sound incorrect by pointing out the conditions or taking advantage of their vagueness. I am not accusing Eichengreen of doing this. I have others in mind. But what might Baldwin have found had he had searched through past articles and looked for bad predictions?

2. How best to generalize this point? My guess is that “Economists’ predictions should always be taken as gospel”

3. Is the correct lesson that we should pay attention when economists warn about sovereign debt issues? Consider that many of us have issued warnings about the United States.

Unwinnable Arguments and Normative Sociology

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Young African-American males experience a high incarceration rate. Progressives, conservatives, and libertarians each have a
desired cause for this.

Progressives: racism in the criminal justice system
Conservatives: high propensity of young African-American males to commit crimes
Libertarians; the war on drugs

Progressives prefer the oppressor-oppressed axis, which makes racism the desired cause. Conservatives are most comfortable with the civilization-barbarism axis, which makes criminal behavior the preferred cause. Libertarians prefer the freedom-coercion axis, which makes the war on drugs the preferred cause.

I claim that trying to argue that one of these is the cause is an unwinnable argument. Each of these causal forces has an element of truth, or at least plausibility. The chances are slim of coming up with an empirical analysis that decisively rules in favor of one cause and rules out all other causes.

In general, an unwinnable argument about causality is any argument in which one tries to affirm that X is the sole cause of Y or that X is not at all a cause of Y under circumstances of high causal density.

For example, arguments about the role of financial deregulation in the financial crisis of 2008 tend to be unwinnable. The case for seeing financial deregulation as the sole cause is compelling only to people who are inclined to espouse it. The case for seeing financial deregulation as not a factor at all is compelling only to those of us who are inclined to emphasize other causes.

Some further claims:

1. When there is a desired cause (meaning a cause that fits well with one’s political axis in the three-axes model, chances are the issue involves an unwinnable argument.

2. If your objective is to win an unwinnable argument, then you will tend to engage in normative sociology. To turn your desired cause into the cause, you have to filter out evidence that might support another causal factor and only discuss evidence that supports your desired cause.

It hardly requires saying that I think that it is counterproductive to try to win an unwinnable argument. It is almost as counterproductive to try to reason with someone who is convinced that they can win an unwinnable argument.

I am not saying that it is counterproductive to try to make an argument for or against something being a causal factor. However, I think that it does help to keep in mind that when a desired causal factor is involved it is challenging to remain objective in assessing the evidence.

There is a Cowen-Hanson paper Are Disagreements Honest? that you should read if you have not done so already. One of the reasons that disagreements can persist is because the protagonists engage in normative sociology.

What Bureaucracies Do

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Megan McArdle writes,

Does Congress need to give agencies a freer hand in developing good systems? I’m all for it. Should Congressional Republicans commit to support the president in hardening our government against cyber-attacks and other disasters, rather than simply holding political show hearings? Heck yes. But these things won’t happen unless the president makes fixing government IT a bigger priority — and starts enforcing accountability for every disaster that happens on his watch.

Along similar lines, David Strom, an IT consultant, writes,

If a private industry CIO had this sort of security record, they would never work in IT ever again, unless to become a motivational speaker and tell people what not to do. Instead, because they are the Feds, we just shake our heads and wonder what is going on, and some how give them a free pass to mess something else up again. It really boils my blood.

In my view, bureaucracies are notable for two things.

1. They filter out new ideas.

2. They blur accountability. When you make a reasonable request and are turned down because of “policy,” you have encountered this blurred accountability.

I understand the constructive value of filtering out new ideas. A large organization can only focus on a few major initiatives. Those initiatives had better be good ones. Most new ideas are bad. Think of a Type I error as making a catastrophically bad bet and a Type II error as missing out on a profitable opportunity. Bureaucracies help to curb Type I errors but tend to make Type II errors. And every middle manager who has ever had an idea die in the bureaucracy is convinced, usually incorrectly, that the organization committed a Type II error.

Perhaps there is also a constructive value for blurred accountability. But I cannot think of one.

Opaque Defaults

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James Hamilton writes,

The bottom line for me is that Greece’s current debts and any new loans that get extended from here are not going to be repaid in the present-value sense defined above. The current debt load and its associated interest bill are simply too big. The only solution is default on a significant portion of outstanding Greek debt. Indeed, significant debt restructuring is a necessary step for Greece to move forward, whether within the euro or based on a new currency. My view is that any realistic negotiations at this point simply have to take those facts as given.

My bottom line is to suggest that in forecasting the outcome of sovereign debt crises, assume that everyone’s goal is to make defaults as opaque as possible. For a small country like Greece, there ought to be many ways to do this. When the crisis hits Japan, it will be more difficult. When it hits the U.S., it will be more difficult still. But by then the international technocrats will have had a lot of practice.

Brink Lindsey on Progressive Deregulation

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He writes,

Despite today’s polarized political atmosphere, it is possible to construct an ambitious and highly promising agenda of pro-growth policy reform that can command support across the ideological spectrum. Such an agenda would focus on policies whose primary effect is to inflate the incomes and wealth of the rich, the powerful, and the well-established by shielding them from market competition. A convenient label for these policies is “regressive regulation”—regulatory barriers to entry and competition that work to redistribute income and wealth up the socioeconomic scale. This paper identifies four major examples of regressive regulation: excessive monopoly privileges granted under copyright and patent law; restrictions on high-skilled immigration; protection of incumbent service providers under occupational licensing; and artificial scarcity created by land-use regulation.

The subtitle is “Low-hanging fruit guarded by dragons,” by which he means that “the interest groups that benefit from the status quo are politically powerful, well organized, and highly motivated.” For me, it is clear that concentrated political power can explain why three of the four regressive regulations persist. The book publishers and incumbents in the entertainment industry want infinite copyright protection, and patent lawyers want powerful patent laws. Hair braiders and interior decorators want occupational licensing. Owners of developed property want land-use regulation.

The one I don’t quite get is high-skill immigration. Employers want it, and the high-skilled workers who might be threatened by it do not have a formidable lobbying organization.

I do not follow the issue closely, and I could be wrong about this, but I believe that Democrats do not want any legislation passed on immigration that is not comprehensive, and the Republican base does not want comprehensive immigration legislation that includes a path to citizenship for illegal immigrants. The high-skilled immigration question is caught in the middle.

Desired Causes and Actual Causes

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Joseph Heath writes,

Often when we study social problems, there is an almost irresistible temptation to study what we would like the cause of those problems to be (for whatever reason), to the neglect of the actual causes. When this goes uncorrected, you can get the phenomenon of “politically correct” explanations for various social problems – where there’s no hard evidence that A actually causes B, but where people, for one reason or another, think that A ought to be the explanation for B. This can lead to a situation in which denying that A is the cause of B becomes morally stigmatized, and so people affirm the connection primarily because they feel obliged to, not because they’ve been persuaded by any evidence.

Pointer from Alex Tabarrok. Heath, borrowing an off-hand joke from Robert Nozick, calls this “normative sociology.” But it is by no means limited to sociology. Think of people blaming snowstorms on global warming. Or blaming the financial crisis on “an atmosphere of deregulation.” Or blaming inequality on the decline in labor unions.

We can also find this normative analysis among libertarians. Blaming terrorism on blowback for foreign intervention.

Or we can find it among conservatives. Blaming the financial crisis on loose monetary policy.