Category Archives: Tyler Cowen is my Favorite Blogger

AEA Conference Highlights On Line

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Tyler Cowen speaks on a panel on media and economics. He gives a very optimistic take, based on the availability of blogs, Twitter, and online education.

The fact that the panel is online is an example of what he is talking about. It is one of five highly-rated panels from the recent American Economic Association conference. All of them are self-recommending.

I have only been to the AEA meetings once or twice since graduate school. A few economists really love it. They get a sort of “high” from the crowd. I do not. For me, folk dancing with a large crowd is fun, but milling around a hotel with economists is not.

So using these videos to attend the AEA meetings virtually is a win-win for me.

Cowen on Cochrane on Macro

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Tyler Cowen writes,

I get nervous when I read Keynesians claiming that the real rate of return is negative these days. Is civilization moving backwards? (And if so, don’t we really have a budgetary problem?) I prefer instead to think about segmented rates of return and wonder why that has come about, and if so how we actually measure opportunity costs for projects. If the risk premium on private projects is quite high, motivating a rush to T-Bills, is then the risk premium on government projects high or low? Does “the chance that the government repays my loan,” as measured by bond rates, equal “actual comovement consumption risk of the government project itself”? I see those two variables confused all the time.

He refers to a long post by John Cochrane on New Keynesianism vs. Old Keynesianism. Trying to avoid the math, I think of old Keynesianism, new Keynesianism, and real business cycle theory in terms of their answers to two questions:

1. Is there market clearing in the aggregate labor and product markets?

2. Do consumers base decisions on permanent income (rather than one year’s income)?

The real business cycle theory answers “yes” to both. Old Keynesians answer “no” to both. New Keynesians answer “no” to (1) and “yes” to (2).

Cochrane writes,

Now, a spontaneous outbreak of thrift, to the point of valuing the future a lot more than the present, seems a bit of a strained diagnosis for the fundamental trouble of the US economy.

I think that the (New) Keynesian view is that the outbreak of thrift is due to the collapse of house prices. People who had bought homes see a decline in permanent income, so they try to spend less and save more. This saving, rather than being channeled into capital investment, gets put into the mattress. To answer Tyler’s question, there is a huge mismatch between what consumers want to hold in order to assure future consumption (riskless assets) and the risky projects that are available to entrepreneurs. This lowers the demand for aggregate output and, with sticky wages and prices, this leads to low output and high unemployment.

To me, this is a just-so story for the current recession. If we are going to tell just-so stories, I prefer a PSST story. A lot of patterns of trade that were not really sustainable in 2006 became blatantly unsustainable in 2008 and 2009. Construction employment is a tiny part of that. A lot of it is jobs in firms that were not well suited to the Internet era, from labor-wasting manufacturing firms to retailers like Borders Books.

Circling back to Tyler’s question, perhaps the bailouts had the ironic effect of making investment seem much riskier. As Holman Jenkins points out,

In the Chrysler and General Motors GM -0.60% bankruptcies, government played the role of “debtor-in-possession” financier, then behaved as no DIP financier would, using its leverage to do favors for an important Democratic constituency group, the United Auto Workers, at the expense of debt holders.

The regulator of Fannie Mae FNMA +1.79% and Freddie Mac FMCC +2.11% trumpeted them as solvent and well-capitalized amid the crisis, then gave their boards immunity from shareholder lawsuit in the government takeover that followed a short time later, wiping out their shareholders.

Not directly related to the financial crisis but coming in the same moment of untrammeled government discretion was the BP oil spill. The White House dictated a $20 billion compensation program, funded by BP shareholders, without benefit of any legal process at all.

A big increase in the uncertainty of property rights should raise the risk premium on private-sector projects, making government debt relatively low risk.

PSST–It’s Raghuram Rajan

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He writes,

It is easy to see why a general stimulus to demand, such as a cut in payroll taxes, may be ineffective in restoring the economy to full employment. The general stimulus goes to everyone, not just the former borrowers. And everyone’s spending patterns differ – the older, wealthier household buys jewelry from Tiffany, rather than a car from General Motors. And even the former borrowers are unlikely to use their stimulus money to pay for more housing – they have soured on the dreams that housing held out.

Pointer from Tyler Cowen.

The question I pose is whether workers will return to old jobs or whether new jobs have to emerge. My belief is the latter.

Neo-Georgist?

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The proposed Commonwealth of Belle Isle (near Detroit).

There are three sources of revenue. The first is user fees, which apply primarily to the monorail. A 10% sales tax provides a second source. Importantly, sales taxes encourage thrift and are collected outside the cost structure of the products. Real estate taxes provide the third, but the system is radically different than that employed in the U.S. Only the raw land value is taxed, not what the owner builds on it. This follows the principle of government only receiving compensation for what it provides. Government didn’t pay to construct buildings on the owner’s land, nor does it bear the risk of loss. We encourage development of property, not discourage it.

With no offense meant to Paul Romer, Michael Strong, or other folks in the movement to establish a free city, I have always felt that the best qualification to execute this project is experience in real estate development. The main proponent behind this concept has such a background.

Tip from Tyler Cowen.

If You Could Change History

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One of Tyler Cowen’s readers asks,

Which avoidable/contingent event in history did the greatest harm? (e.g. the burning of the library of Alexandria)

As Tyler points out, you never know whether avoiding catastrophe X could mean that worse catastrophe Y is in store. But with that caveat, when I think of avoidable events that did harm, here is what comes to mind:

World War One. You can start with the direct, immediate harm, in terms of death and destruction. Then proceed to the post-war flu epidemic, the Communist Revolution in Russia, the collapse of Germany and subsequent rise of Nazism and a second world war; the retreat from globalization and the destabilized world economy, which arguably helped to cause the Great Depression; the fondness that American leaders developed for central planning during the war, which was highly influential in the way that they responded to the Depression–a lot of New Deal initiatives that ratcheted up government were inspired by World War I era government boards.

In summary, before the first world war, global trade was expanding, governments were small, and many people lived in peace. The war unleashed numerous plagues, some of which are still with us a hundred years later.

The Greek Phillips Curve

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Tyler Cowen writes,

Prices are sticky, AD is falling, and almost all of the adjustment is in quantities. Yet this still doesn’t explain why prices are inching up, and furthermore it is grossly at variance with the actual empirical literature on price stickiness (much neglected in the blogosphere I should add), which is not nearly as strong as wage stickiness.

This is one of several explanations Tyler finds unsatisfactory for the fact that unemployment is so high in Greece and yet inflation is still greater than zero there. In a follow-up, he writes,

For a simple point of comparison, the rate of U.S. price deflation in 1932 was greater than ten percent with overall deflation running at about twenty-five percent over a period of a few years. More recently, Japan had nine straight years of core CPI deflation and Greece cannot even manage anything close to that. Just what is the Greek Phillips Curve supposed to look like?

I recommend a recent article by Marga Peeter and Ard den Reijer. I may be confused about what I am reading, but it appears to me that the Phillips Curve in Greece shifted adversely over a period of a decade. To put this another way, the natural rate of unemployment in Greece may be quite high.

If my reading is correct, then aggregate demand policies, including converting to a cheaper currency, would not do much for Greece. If workers’ reservation wages are high relative to productivity, you are going to have a lot of unemployment.

Seeing Like a Central Bank

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Tyler Cowen writes,

Eurogeddon is here, as a variety of countries have situations worse, in relative terms, than the Great Depression of the 1930s. It seems the bailout funds, especially the ESM, have given up on the notion of detaching sovereign and bank liabilities from each other. The so-called banking union is at best a common supervisor rather than real risk-sharing for deposit liabilities. The fact that we don’t have daily bond market crises, filling up my Twitter feed, is certainly welcome but constitutes a remarkable lowering of the bar for what success means.

What Tyler calls a “low bar” is in fact that same bar that central banks have always used. If the banks are not in crisis and the bond market is orderly, then everything is fine.

Recently, there were news stories in which AIG was considering joining a lawsuit against the government over loss of its value from the actions of the government during the financial crisis. Lawmakers talked AIG out of joining, but AIG may have had a case. The “AIG bailout” was arguably mis-named. In retrospect, it looks much more like a bailout of Goldman Sachs (and many other large banks, domestic and foreign), financed by the sale of some profitable AIG subsidiaries. From the vantage point of the central bank, that was good policy.

I would encourage economists to consider revising their model of central banks. The model in which the central bank is concerned primarily with inflation and/or unemployment is not necessarily the most predictive. What a central bank sees are banks and financial markets. When there are in turmoil, the central bank sees a need to act. When they are not in turmoil, the central bank is going to be in the mode of “It ain’t broke, don’t fix it.”

This model of central banking is what leads me to expect that, when push comes to shove, the Fed will tolerate much more inflation than most people think. Consider a scenario in which investors start to lose confidence in the ability of the U.S. government to get deficits under control. (This is the opposite of the crisis du jour, which is an artificial concern that Washington might stop living so far beyond its means.) Under such a scenario, bond interest rates soar. The Fed’s first priority will be to maintain an “orderly” bond market. They will do this by printing money to buy bonds. At that point, it will not matter whether inflation and nominal GDP are running above or below target. Inflation could already be high and rising, but if the bond market is in turmoil, seeing like a central bank will lead you to print more money.

Tyler Cowen on James Buchanan

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He writes,

He thought through the conflict between subjective and objective notions of value in economics, and the importance of methodologically individualist postulates, more deeply than perhaps any other economist. Most economists hate this work, or refuse to understand it, either because it lowers their status or because it is genuinely difficult to follow or because it requires philosophy.

This is the aspect of Buchanan that I picked up on, but that is only one of 13 items in Tyler’s post.

Charter Cities and Corporate Soap Opera

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I cannot recommend strongly enough listening to this edition of This American Life. Thanks to Tyler Cowen for the pointer.

The episode looks into what happened with the Charter City concept in Honduras. The reporters, Chana Joffe-Walt and Jacob Goldstein, hone in on exactly the aspect that most fascinated me about the story: what I call corporate soap opera. It’s all there–the egos, hurt feelings, control issues. I feel as though I have been, at one time or another, in the shoes of all the major participants in this story.

Human beings seem hard-wired to create conflict. That is why speaking of “the state” or “the corporation” as a unitary decision-maker strikes me as often misleading.

Organizational Mediocrity is No Accident

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Tim Kane’s book, Bleeding Talent, earns a review from the New York Times.

That act binds the military into a system that honors seniority over individual merit. It judges officers, hundreds at a time, in an up-or-out promotion process that relies on evaluations that have been almost laughably eroded by grade inflation. A zero-defect mentality punishes errors severely. The system discourages specialization — you can’t expect to stay a fighter jock or a cybersecurity expert — and pushes the career-minded up a tried-and-true ladder that, not surprisingly, produces lookalikes.

Pointer from Tyler Cowen. Reihan Salam has more praise for the book.

This reminds me of the Federal Reserve Board, or of the public school system. To some extent it reminds me of the way large corporations treat middle managers. As I explained almost fifteen years ago,

For corporations, encouraging middle managers to take good risks is not as easy as it sounds. Middle managers understandably do not want the same degree of personal downside risk as entrepeneurs. However, in the absence of personal downside risk, the middle manager’s incentives would be skewed toward taking unjustifiable risks. Bureaucratic controls and limits on upside incentives may be an appropriate adaptation for correcting this potential bias.

I think that mediocrity is the natural state of organizations. Only the discipline of competition serves to bring about improvement.