Some Uncharitable Thoughts

Regarding Mark Thoma’s links from the other day.

1. Will Americans ever vote for a far-reaching wealth tax?–Roger Farmer.

No, but we will have one, anyway.

2. Enhance Stability by Improving Culture–William Dudley.

Look who’s talking.

3. Is mortgage credit too tight?–Calculated Risk.

Not by the standards currently set by politicians. If you tell banks you have zero tolerance policy for making type I errors (making loans that eventually default), you have to expect many type II errors (passing up good loans). Of course, 10 years ago, the political pressure was the opposite.

Clarify the Connection

1. Melinda Pitts, John Robertson, and Ellyn Terry have a chart that seems to me to show that much of the decline in labor force participation in recent years can be accounted for by population aging, disability, and young people attending school.

Pointer from Mark Thoma.

2. James Pethokoukis has a chart showing that the number of people on food stamps has remained really, really high.

I would interpret (1) as saying that we are in a “nothing to see here, move along” sort of labor market. Given that the unemployment rate is normal, if labor force participation is just following natural demographic trends, then the economy is pretty much ok.

I would interpret (2) as saying that there is something to see here. With unemployment down, we should be seeing people fall off the food stamp rolls.

Are senior citizens, people on disability, and young students going on food stamps in droves? Are people who are still in the labor force and working staying on food stamps in droves?

I am not trying to make a point. I genuinely do not know how to connect these dots in the data. For those of you who follow algebra, we have

FS = food stamp recipients
POP = total population
UNEMP = employedunemployed
LF = Labor force

Then FS/POP = (LF/POP)(UNEMP/LF)(FS/UNEMP). We know that FS/POP is unexpectedly high, but LF/POP is low, and UNEMP/LF has come down. So FS/UNEMP must be quite high, right?

The Problem of Big Banks

Stephen G. Cecchetti and Kermit L. Schoenholtz write,

Imagine the following simple approach (like that of Acharya et al). Let the capital structure of a bank’s long-term liabilities be clearly stated and then honored if and when necessary. That is, think of the bank as having a hierarchy of long-term debt ranging from the most senior (call it tranche A) to the most subordinated (tranche Z for zombie!). Whenever a bank’s capital position is deficient – say, because the market value of its equity sinks below a threshold ratio to its book assets – the resolution authority automatically makes some of the debt into new equity, starting with the Z tranche and then climbing up the alphabet until there is sufficient capital to return the bank above the regulatory minimum. Provided that there is sufficient long-term debt to absorb the losses, the concern remains a going one. (The resolution authority could still replace management and shut down risky activities in an effort to prevent a serial failure.)

Pointer from Mark Thoma. This is an alternative to the idea of divesting the firm’s assets according to a “living will.” The authors write,

But let’s not overstate the attractiveness or simplicity of the phoenix plan. No scheme can eliminate policy discretion, as crises often lead governments to change the rules on the fly (think of the 2008 TARP legislation that followed the failure of Lehman).

The way I read this, we really cannot get back to the rule of law if we have too-big-to-fail banks. That is what I will be arguing in two weeks. These institutions will be given special treatment, particularly in a crisis. In 2008, AIG was eviscerated in order to provide a liquidity injection to Goldman Sachs, Deutsche Bank, and others. Does anyone think that the decisions would have come out the same if the Treasury Secretary had been a proud alumnus of AIG rather than of Goldman Sachs?

Some of my other thoughts for the panel.

1. Suppose that we were to limit any financial institution to $250 billion in liabilities that are not backed by capital. Currently, the largest banks in this country seem to have over $1 trillion in liabilities.

2. What can you not do with a $250 billion portfolio? What would such a bank be precluded from doing, other than buying another huge bank?

3. I think it is pretty hard to know for certain the extent of economies of scale and scope in banking. However, my intuition is that the big banks did not get where they are today through natural market competition. In other industries, dominant firms are characterized by focused excellence. Intel is very good at designing and manufacturing chips. Walmart is very good at logistics. What is JP Morgan Chase very good at? Citigroup?

Another characteristic of dominant firms in competitive markets is that they grow by doing more of what they are good at. In contrast, banks grow primarily through mergers and acquisitions.

4. How much does too-big-to-fail matter? Well, try to imagine what the computer industry would look like if the government had designated the dominant firms as of 1970 as too big to fail. We would still have Wang and DEC, but I doubt that we would have Apple or Microsoft.

5. If we imagine banks without TBTF, then it is likely that at times in the past the stock prices of some of the large banks would have been very low, which would have halted their growth through acquisitions and perhaps forced management to divest poorly-managed business lines in order to appease shareholders.

We cannot have large banks without TBTF. We cannot have TBTF without an unfair playing field and mockery of the rule of law. So we should break up large banks.

Jean Tirole on French Government

In 2007, he wrote,

Every action of the State must be subject to a double independent evaluation. The first should be before the action: Is public intervention necessary? What are the costs and benefits? The second is after. Did it work? Was it cost effective? On this point, it would be necessary to require that the audit recommendations (for example, those of the Audit Court) be either followed according to a strict schedule, or rejected with a convincing justification.

Interesting throughout. Pointer from Mark Thoma.

No Economic Experts Agree with Piketty

The IGM forum asked its panel of leading economists to agree or disagree with

The most powerful force pushing towards greater wealth inequality in the US since the 1970s is the gap between the after-tax return on capital and the economic growth rate.

Actually, one economist agreed with the statement, newly-added panelist Hilary Hoynes. Let me know if you can find another panelist with a less impressive resume or a narrower body of work.

Six economists, including Raj Chetty, answered “uncertain.” Seven economists strongly disagree. The remaining twenty economists who gave an answer (including Emanuel Saez!) checked “disagree.”

UPDATE: Brad DeLong speculates that Piketty himself would have answered “disagree” to the poll. (Pointer from Mark Thoma). Brad thinks that the IGM forum should have asked a different question, but he does not say what that question should be. Let me suggest this, and I hope this would make Brad happy: Going forward, the most powerful force pushing towards greater wealth inequality in the U.S. will be the gap, etc.

Larry Summers Favors Nirvana

He writes,

the IMF finds that a dollar of investment increases output by nearly $3. The budgetary arithmetic associated with infrastructure investment is especially attractive at a time when there are enough unused resources that greater infrastructure investment need not come at the expense of other spending. If we are entering a period of secular stagnation, unemployed resources could be available in much of the industrial world for quite some time.

Pointer from Mark Thoma.

If we assume that government invests perfectly rationally and efficiently, then I think we have to agree that infrastructure spending is likely to be a free lunch. That is because it is impossible for the private sector to allocate resources perfectly rationally and efficiently.

Of course, in order to assume that government spends money rationally and efficiently, one has to ignore public choice theory. A bridge to nowhere is not a free lunch. A huge loan guarantee to a “green energy” company that goes bankrupt is not a free lunch.

In the real world, human fallibility does not disappear when the decision-maker crosses from the private sector to the public sector. In my area, a highway called the “Inter-County Connector” has cost billions of dollars, caused construction-related disruption for years, and carries almost no traffic. A “transit center” near where I live was structurally unsound, and the excess costs probably will be in the billions. No free lunches there, either.

QE and Fiscal Offset

Tony Yates writes,

As Summers reportedly put it, while the Fed was engaged in quantitative easing, the Treasury was doing ‘quantitative contraction’. And surely the two arms of government should be better coordinated than that.

Pointer from Mark Thoma. My remarks.

1. Read the rest of his post.

2. Larry Summers is quite late to the party. Some of us have been talking about this issue for years. For example, almost four years ago, James Hamilton wrote,

since 2008, the Treasury has been issuing more long-term debt faster than the Fed has been buying it… What we find in the latest data is that this trend has continued over the last 3 months, even with QE2.

3. Wikipedia defines superstition as

the belief in supernatural causality—that one event causes another without any natural process linking the two events—such as astrology, religion, omens, witchcraft, prophecies, etc

I think that belief in the macroeconomic impact of the Fed can be properly regarded as a superstition. The Fed’s rules and regulations affect the allocation of credit, and it can aid particular banks when they get in trouble. However, its ability to control interest rates and nominal GDP is far less than most economists and investors believe.

Note that, as with the vast majority of my posts, this was written a few days ago and scheduled to be posted at this time. I find that staying away from immediate publication encourages me to evaluate the wisdom of a post using my “future self.”

Mark Thoma on the State of Macro

He writes,

The problem with macroeconomics is not that it has become overly mathematical – it is not the tools and techniques we use to answer questions. The problem is the sociology within the economics profession that prevents some questions from being asked.

But I see these as the same problem. The sociology of the profession essentially forced anyone who wanted to have an academic career to engage in mindless mathematical self-abuse. If the sociology of the profession had been better, very different sorts of articles would have been published in journals, very different sorts of economists would have earned tenure at major universities, and very different sorts of techniques would have prevailed. And don’t just blame Lucas. Fischer is every bit as much of a villain.

Russ Roberts interviews Elizabeth Green

She says,

when universities took over teacher training and created the first real professors of education, what they did was they recruited people from other disciplines to do this job. So, they would recruit people who studied psychology, for example–that was one of the first major fields to be imported into schools of education. And then they would have these psychologists. .. You are studying learning, and teaching is very related to learning. But the professors of education, even in psychology, did not have any interest in teaching. In fact, the guy who is known as the father of Educational Psychology, Edward Thorndike, he told people that he thought schools were boring; that he didn’t like to visit them. And when he once was speaking to a group of educators and a principal asked him a real problem of practice–you know, this thing happened in my school today, what should I do, what would you do, Professor Thorndike? And Professor Thorndike told him: ‘Do? I’d resign.’ He had absolutely no interest in real problems of practice. And I think that’s carried through. Today we have, in education schools, we have people in the history of education, the psychology of education, the economics of education. But we have very few people who study teaching itself as a craft. And as a result, the folks who are left to train teachers in teaching methods are drawing on a very impoverished science. And they have very little to draw on. There’s been a little bit of a change in the last 20 years, and that’s what I write my book about. I think there are emerging ideas about what teachers should be able to do. But kind of no surprise that teachers don’t leave teacher training prepared for the classroom when we haven’t really put any resources into figuring out what we should be preparing them to do.

As a teacher, you need to know things like how to explain something to a student who is not getting it, or when to keep reinforcing a concept and when to move on to something else, or how to manage a classroom so you can accomplish what you intend to accomplish. Those are “craft” issues, as opposed to “theory” issues.

There is an analogy with business management. A business school can bring in economists to teach profit maximization using calculus, but that is of little practical value in the business world. Harvard and other business schools try to use case studies rather than rely on pure theory. And there are many books on management that are “craft” oriented with respect to handling people or improving sales.

I say that teaching equals feedback. That means that teachers need feedback in order to improve their teaching. I agree with Green that there are better ways to organize schools so that teachers get faster feedback and incorporate it more effectively. How rapidly that can improve teaching is less clear to me.

Listen to the whole thing.

UPDATE: Her book is also reviewed in the New Republic (pointer from Mark Thoma). The review, by Richard D. Kahlenberg, is tendentiously political and uninformative. He says that Green has “one big idea” and then fails to mention what it is, and in fact he seems to have missed it completely. Kahlenberg really likes the idea of raising teacher salaries a lot. But if Green is correct that good teaching is not just a talent you are born with, then you should not need to attract talented people into teaching by paying them more. Instead, you should put those resources into giving teachers better feedback and training.

I see Kahlenberg’s review as an illustration of the way that people look at education through biased political lenses (not that I claim to be innocent here). This only increases my skepticism about anyone’s solution.

Why Published Results Can be Unreliable

Mark Peplow reports on research by Neil Malhotra, who tracked research projects to compare those that were published with those that were not.

Of all the null studies, just 20% had appeared in a journal, and 65% had not even been written up. By contrast, roughly 60% of studies with strong results had been published. Many of the researchers contacted by Malhotra’s team said that they had not written up their null results because they thought that journals would not publish them, or that the findings were neither interesting nor important enough to warrant any further effort.

Pointer from Mark Thoma.

This is not shocking news. Can anyone find Malhotra’s paper?