Monthly Archives: September 2015

Eugene Fama on Fed Impotence

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He writes,

Section II uses autoregressions with error correction terms to document that the day-to-day
variation in rates for maturities of a month or more has little or nothing to do with the Fed’s target rate.
This is consistent with a Fed that has little control of rates, but we shall see that it is also consistent with a
powerful Fed whose predictable actions with respect to TF are built in advance into interest rates.

Thanks to John Cochrane for the pointer. Note that TF is the Fed funds rate. My remarks:

1. I do not trust any time series regressions.

2. I think it is interesting that a framework in which the Fed has no influence is observationally close to a framework in which the Fed controls interest rates but market participants anticipate the Fed’s actions very well.

3. We may be in an environment today in which long-term rates over-react to short-term changes in the Fed funds rate.

4. Still, I take the view that the Fed is not big enough in the financial markets to have much durable influence on market interest rates.

Deirdre McCloskey on Intangible Forces in the Economy

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She writes,

what mattered were two levels of ideas—the ideas in the heads of entrepreneurs for the betterments themselves (the electric motor, the airplane, the stock market); and the ideas in the society at large about the businesspeople and their betterments (in a word, that liberalism). What were not causal were the conventional factors of accumulated capital and institutional change. They happened, but they were largely dependent on betterment and liberalism.

Pointer from James Pethokoukis, via Don Boudreaux.

Nick Schulz and I call this the software layer of the economy. Innovations account for our prosperity. Bad institutions account for poverty. McCloskey’s thesis is that bad ideas about society account for bad institutions. In terms of the Book of Arnold, when too many people think of merchants and traders as defectors, you get bad institutions.

There is much more to McCloskey’s summary of her thinking. For example,

For reasons I do not entirely understand, the clerisy after 1848 turned toward nationalism and socialism, and against liberalism. It came also to delight in an ever-expanding list of pessimisms about the way we live now in our approximately liberal societies, from the lack of temperance among the poor to an excess of carbon dioxide in the atmosphere. Anti-liberal utopias believed to offset the pessimisms have been popular among the clerisy. Its pessimistic and utopian books have sold millions.

Reining in the Administrative State

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Kevin R. Kosar writes,

Congress should establish a commission to identify archaic and wasteful regulations and another to identify failed or needless executive-branch programs. Each would take suggestions from the public and work with congressional support agencies to ensure the cuts are sensible. Upon completion, each commission’s report would be delivered to Congress for introduction and a prompt up-or-down vote. So long as the program and spending reductions and terminations are modest and defensible, congressmen would have a difficult time voting against such a package.

The latest issue of National Affairs contains a few articles on the topic of Congressional weakness vis-a-vis the administrative state. In a subscriber-only article, Charles J. Cooper, after despairing of role of the Supreme Court in protecting the administrative state, offers this:

The only other way to correct the Court’s constitutional mistakes is for the people to do it themselves. The Constitution provides a procedure for the American people — ”the only legitimate fountain of power,” as Madison emphasized in Federalist No. 49 — to rein in an out-of-control federal bureaucracy, even in the face of congressional opposition. That procedure is the Article V convention process, by which two-thirds of the states can call a convention “for proposing amendments,” subject to ratification by three-fourths of the states.

You may recall that my suggested remedy is to have Congress focus on re-chartering each agency every few years. One goal would be to remind agencies that they are answerable to Congress. My thought is that this might make the FCC or the EPA less frisky about expanding their power and scope.

Judging Performance from Outside an Organization

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Adam Ozimek writes,

I do think that those who are skeptical of our ability to meaningfully measure school performance are expressing a level of data and empirical skepticism that is not applied elsewhere.

You should read the whole post. I’ve seen excerpts from Tyler Cowen and Don Boudreaux, and neither their excerpt nor mine really conveys what Ozimek is complaining about.

My own view is that judging an organization from the outside is hazardous. I remember when Harvard’s David Cutler was touting pay-for-quality as the solution for compensating doctors, and I considered the notion absurd. If people in Washington know what individual doctors should be doing and how they should be paid, then they must also know what individual middle managers throughout the business world should be doing and how they should be paid.

Organizational outcomes should not be judged by statisticians running regressions. They should be judged by consumers voting with their dollars (using vouchers would count as voting with their own dollars).

Individual performance in the context of an organization should not be judged by Harvard economists. It should be judged by their managers, who know the context in which they work.

The problems with education and medical care is that we insulate consumers from paying with their own money for those services. This imposes a socialist calculation problem, with adverse consequences in both areas.

Steve Teles on Rent-seeking

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He writes,

State regulation of doctors, Commodity Futures Trading Commission rules for derivatives, and local land-use planning decisions rarely if ever occur to citizens and policymakers as having anything to do with the larger social debate about inequality. If the case is made effectively — if policymakers do start seeing these diverse policies as part of a larger problem — then it would be possible to generate political conflict in arenas that are currently too quiet and uncontested. This happened in the 1970s and 1980s when policymakers connected regulatory capture in areas like trucking and airlines to widespread concern with inflation. It could happen again if policymakers across the spectrum start to believe that rent-seeking, in all its forms, is deeply implicated in the problem of inequality.

Pointer from Mark Thoma.

But are other progressives willing to concede that government intervention in markets has such adverse consequences?

Dani Rodrik on Trade Across Borders

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He writes,

A libertarian might view much of the regulatory apparatus of the nation-state as superfluous at best and detrimental at worst. For me, the apparatus is what makes capitalism feasible and sustainable at the national level – and problematic at the global level.

Pointer from Tyler Cowen. Read Rodrik’s whole post.

Suppose that A trades voluntarily with B. Then C comes along and says that this trade harms D, so it should be prevented.

The libertarian position is that we know that A and B are better off, or they would not have done the trade in the first place. We doubt that C is such a wise, benevolent individual that we can trust his judgment that the harm to D is larger than the benefit to A and B.

Now it is true that the benefits of specialization and trade require trust, and it is possible that trust in general is higher when people believe that their government is wise and benevolent. However, I would bet that where you find people trusting their government to interfere with cross-border trade you find less overall trust and worse economic outcomes. It will take some demonstration on Rodrik’s part to convince me otherwise. It is one thing to conjure up “models” in which trade restrictions improve outcomes. I want to see examples of broad improvements in well-being arising from real-world trade restrictions.

Not surprisingly, Don Boudreaux has views on this.

What’s Missing From Refugee Cities?

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Matthew Kahn writes,

Why can’t we increase the menu of cities for individuals to choose from? What are the fixed costs for creating a city? Are these fixed costs shrinking over time? How durable would the new capital have to be? Think for a moment. The new urbanites in Gatesland would need;

1. shelter
2. food
3. water
4. electricity
5. sewage disposal
6. garbage disposal
7. transport services for moving within the city and for trading across cities
8. The children would need schools
9. basic health care

Pointer from Mark Thoma.

What is missing here are social capital and patterns of sustainable specialization and trade. I doubt that you can throw a million people together absent those elements and have it work out well.

Study Not Needed

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Ray Fisman and Daniel Markovits write,

We measured attitudes toward equality by asking hundreds of Americans to distribute a pot of money between themselves and an anonymous other person. Our subjects weren’t making hypothetical choices in responding to the survey—their decisions affected how much real money they would get when the experiment ended.

Pointer from Tyler Cowen. I added the emphasis on “themselves.” That is very different from what redistribution means in political terms. There, it means redistributing other people’s money.

The authors seem to suggest that we should be surprised that rich progressives are reluctant to redistribute their own money. I do not think we needed an experiment to show this. I think we already know from their behavior that rich liberals are averse to redistributing their own money. I believe that surveys have shown that instead conservatives and people lower down the income ladder give larger shares of their income to charity.

Political support for redistribution is costless, especially compared with actually giving away some of your wealth.

Would Universal Health Coverage Help the Poor?

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Apparently, Larry Summers wants to stake out that position. Pointer from Tyler Cowen.

I seriously doubt that medical services are the relevant margin for improving the health of the poor. Public health measures I can see. Otherwise, my bet is that economic growth and diffusion of knowledge are the relevant margins.

Of course, if Larry believes otherwise, he is always welcome to donate his own funds to relevant charitable causes. As long as he does not take my money to donate to his preferred causes.

A Fiery Analogy

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Robert Shiller writes,

The reluctance to acknowledge the need for immediate intervention in a financial crisis is based on a school of economics that fails to account for the irrational exuberance that I have explored elsewhere, and that ignores the aggressive marketing and other realities of digital-age markets examined in Phishing for Phools. But adhering to an approach that overlooks these factors is akin to doing away with fire departments, on the grounds that without them people would be more careful – and so there would then be no fires.

Pointer from Mark Thoma.

There is a school of thought (I am not a member) that would instead compare the Fed to the 10-year-old boy who starts a fire and then claims to be a hero because he then calls the fire department to come in to save it. Similarly, this school would argue, the Fed’s expansionary policies caused the housing bubble, and now the Fed earns praise for saving the economy from the resulting crisis.

Indeed, in recent interviews, Shiller has warned that stock prices are too high and we could see a crash. He would say that this is because markets are irrational. As far as I know, he is not calling on the Fed to raise interest rates in order to try to stop what he might call another financial epidemic. Again, I am not of the school of thought that thinks that the Fed is responsible for the stock market boom. But I think that Shiller ought to engage with those who are of that school of thought.

Incidentally, I received a review copy of Phishing for Phools, by Shiller and fellow Nobel Laureate George Akerlof. My views of the financial crisis are informed by my knowledge of institutional characteristics and history of housing finance. Their views are not. I find that this is the case with many economists who have written on the crisis, but their book left me especially frustrated. UPDATE: Alex Tabarrok also reviewed the book negatively.