Category Archives: links to my essays

New Commanding Heights Watch

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Timothy Taylor writes,

there are clearly countries that spend less per student than you would expect given their level of per capita GDP, like Iceland, which is labelled, and Italy, which is the unlabelled point more-or-less under Spain. There are also countries that spend more per student than you would expect given their GDP, including Ireland, Canada, and especially the United States.

He is referring to higher education.

Returning to the Oregon Medicaid study, Tyler Cowen writes,

The key question here is how we should marginally revise our beliefs, or perhaps should have revised them all along (the results of this study are not actually so surprising, given other work on the efficacy of health insurance). For instance should we revise health care policy toward greater emphasis on catastrophic care, or how about toward public health measures, or maybe cash transfers? (I would say all three.) One might even use this study to revise our views on what should be included in the ACA mandate, yet I haven’t heard a peep on that topic. I am instead seeing a lot of efforts to distract our attention toward other questions.

Nick Schulz and I have referred to health care and education as the new commanding heights. That is, they are as important in the 21st century as steel and electric power were in the 20th. However, steel and electric power had major scale economies that lent themselves to top-down, bureaucratic management. Health care and education do not.

What I think this means that those who want to apply centralized, technocratic solutions in health care and education (“Obamacare,” “No Child Left Behind”) are on the wrong side of history. Perhaps my views are mistaken. But in any case, I wish that people were less emotionally invested in the technocratic approach, so that if it does prove to be dysfunctional they are able to back off.

Scott Sumner Explains the Monetary Approach to Macroeconomics in Nine Lessons

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The index is here. Highly recommended.

For my perspective on this topic (including where I disagree with Sumner), see my “million mutinies” essay series:

part one

part two

part three

In the last essay in my series, I wrote

For mainstream economists, the financial crisis has produced a new intuitive model of the economy which has yet to be articulated in any formal theory.

Scott Sumner, on his blog The Money Illusion, articulates what I believe would have been the consensus five years ago, which is that fiscal and monetary policy (he emphasizes the latter)—as opposed to bank capital management—are the tools of macroeconomic stabilization. Today, his views are classed as “heterodox.”

I write so much that I sometimes forget earlier pieces that meant a lot to me, such as this one. I was looking for some more “color” to add to this post, and I stumbled on the series.

Charles Calomiris on Politics and Banking

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From the WSJ:

That anti-populist political system — known in political science as liberal constitutionalism or liberal democracy — is a key ingredient in Canada’s stable banking track record, Mr. Calomiris contends in his paper, which is a summary of a much longer book he’s written with Stephen Haber due out in September. That’s because this kind of political system makes it difficult for political majorities to gain control of the banking system for their own purposes, the authors contend.

Having only experienced the American system, I think of politics and banking as hopelessly entangled. As I recently put it,

Politicians want to make credit allocation decisions. Whatever its nominal purpose, bank regulation is used to enable politicians to undertake credit allocation.

Calomiris seems to take the same point of view, but he argues that some political systems are less susceptible to interest groups gaining control of bank regulation. I am interested in reading more about the research. Meanwhile, you should at least read the whole WSJ piece.

Kling’s Law of Bank Capital Regulation

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Thomas L. Hogan, Neil Meredith, and Xuhao Pan write,

we find that the standard capital ratio is significantly better than the RBC ratio as an indicator of bank risk and performance and that using both ratios simultaneously does not produce better results. Taken in conjunction with the other available evidence, our findings indicate that RBC regulations lead to more risk-taking by individual banks, and more overall risk in the banking system, without improving the effectiveness of the Fed’s capital regulations.

RBC = risk-based capital. Kling’s law is that the capital measure used by regulators will, over time, come to be outperformed by a measure that the regulators are not using. So, if you are using standard capital, risk-based capital measures will better predict bank risk, and conversely.

The reason can be found in my essay, The Chess Game of Financial Regulation.

Regulatory systems break down because the financial sector is dynamic. Financial institutions seek to maximize returns on investment, subject to regulatory constraints. As time goes on, they develop techniques and innovations that produce greater returns but which can also undermine the intent of the regulations.

A Book I Will Not Review

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Because I contributed a chapter. The book is the Routledge Handbook of Major Events in Economic History, edited by Randall E. Parker and Robert Whaples. The handbook tends to be U.S.-centric, with some surprising exceptions, such as a brief, fascinating chapter on World War I. The chapters are predominantly about events in the twentieth century. The book is priced out of your range, unless you are a library.

My chapter is called The 1970′s: The decade the Phillips Curve died. My main point is that except for the 1970′s, the Phillips Curve has performed really well. However, because of the 1970′s, macroeconomics went through great contortions from which it has not recovered.

This is not to say that we should go back to the macroeconomic consensus as it existed in 1970 (although that is where I see Paul Krugman coming out). But I do not think that the macroeconomic consensus as it existed in 2007 was any better. Hence PSST.

There is another chapter on the 1970′s by Robert Hetzel, which covers much of the same ground as my chapter. And he got to use graphs, which makes me jealous (my chapter would have worked better with graphs).

He and I would differ in our interpretation of the 1980-1983 period. Hetzel writes,

The Volcker-Greenspan FOMCs succeeded in controlling inflation without the need to engineer periodic bouts of high unemployment.

But we had the highest spike in the unemployment rate since the Great Depression–higher than the peak unemployment rate in 2009.

Macro-Prudential Tools

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Olivier Blanchard explains, (link fixed)

It’s very clear that the traditional monetary and fiscal tools are just not good enough to deal with the very specific problems in the financial system. This has led to the development of macro-prudential tools, which what may or may not become the third leg of macroeconomic policies.

[Macroprudential tools allow a central bank to restrain lending in specific sectors without raising interest rates for the whole economy, such as increasing the minimum down payment required to get a mortgage, which reduces the loan-to-value ratio.] In principle, they can address specific issues in the financial sector. If there is a problem somewhere you can target the tool at the problem and not use the policy interest rate, which basically is kind of an atomic bomb without any precision.

The big question here is: How reliable are these tools? How much can they be used? The answer — from some experiments before the crisis with loan-to-value ratios and during crisis with variations in cyclical bank capital ratios or loan-to-value ratios or capital controls, such as in Brazil — is this: They work but they don’t work great. People and institutions find ways around them. In the process of reducing the problem somewhere you tend to create distortions elsewhere.

Although Blanchard is appropriately cautious about these tools, I do not think that he is sufficiently cynical. I wrote,

Politicians want to make credit allocation decisions. Whatever its nominal purpose, bank regulation is used to enable politicians to undertake credit allocation.

Deschooling Society

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My latest essay.

within a decade or two, the idea that learning can be located in time and space will no longer seem natural. The essence of the revolution that I foresee will be our embrace of anywhere-anytime learning. It could be that schooling as an institution will adapt to this paradigm, but I would bet against it.

Meanwhile, a more moderate proposal (still radical by today’s standards) is to get rid of school districts. As Bruno Behrend points out, the case against school districts is a strong one. Still,

people can’t yet envision an education system without the bureaucracy, powerless boards, “group rights” (what a frightening, tribal, concept), and the millions of unnecessary jobs that school districts force upon us.

As I have said before, people are really afraid of letting go of coercion in education. They think that we need adults to be in a position to coerce children, school officials need to be in a position to coerce parents and teachers, local politicians need to be in a position to coerce school officials, state politicians need to be in a position to coerce local officials, and national politicians need to be in a position to coerce state politicians. And, of course, teachers’ unions need to have particularly strong power.

Secretary Sebelius: Insurance != Insurance (paging Ezra Klein)

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She is quoted saying,

At a White House briefing Tuesday, Health and Human Services Secretary Kathleen Sebelius said some of what passes for health insurance today is so skimpy it can’t be compared to the comprehensive coverage available under the law. “Some of these folks have very high catastrophic plans that don’t pay for anything unless you get hit by a bus,” she said. “They’re really mortgage protection, not health insurance.”

My differing views are here:

The health coverage most Americans have is what I call “insulation,” not insurance. Rather than insuring them against risk, most families’ health plans insulate them from paying for most health care bills, large and small.

I would like to know Ezra Klein’s take on this. Some possibilities:

1. He is alarmed that such an important person and the aides who prepared her talking points are clueless, and he will write a column along those lines.

2. He recognizes that she is clueless, but he thinks it is not an important story. If so, perhaps he will leave a comment here explaining why.

3. He recognizes that she is clueless and that this is an important story, but this is not the sort of thing he wants to call to the attention of Washington Post readers. (This is the least charitable possibility, so it does not really belong on this blog.)

4. He has received a background briefing that “clarifies” her remarks, and he will write a column along those lines.

5. He himself believes that catastrophic health insurance should not qualify as health insurance, and he will write a column along those lines.