The Cochrane Tax

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John Cochrane proposes,

I think a simple tax is the answer – though since “tax” is a dirty word, let’s call it a “systemic externality fee” – on debt, and especially on short-term debt or any other contract where the investor has the right to demand payment, and fail the firm if not received. Every dollar of such funding will cost, say, a 10 cent fee. Payments due later generate smaller fees.

The idea is that all short-term debt contracts end up being implicitly insured by taxpayers. So from the standpoint of incentives and fairness, those contracts ought to be taxed.

Retirement and Wealth

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Timothy Taylor points to some sobering news.

those in the 1980s were more likely to be ready for retirement than those in the 1990s; those in the 1990s were more likely to be ready for retirement than those in the 2000s; and those in 2010 were least likely of all to be ready for retirement.

I know many people in close to 60 years old, currently living upper-middle class lives, with less than $200,000 in non-housing savings. I do not think they have thought ahead very far. Some questions:

1. What does this mean for their lifestyles during retirement? Less expensive meals? Less expensive vacations? Less choice about where to live?

2. What does this mean for their level of dependence on government benefits?

3. What does this mean for the prospects of reducing Social Security or Medicare benefits?

The DC Car Chase

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I don’t usually blog about the latest news, particularly when there is no economic content. But I happened to be driving in suburban Maryland and listening to the car radio as the story broke on Thursday afternoon. Friday morning’s Wapo reports,

A woman with a 1-year-old girl in her car was fatally shot by police near the U.S. Capitol on Thursday, after a chase through the heart of Washington that brought a new jolt of fear to a city already rattled by the recent Navy Yard shooting and the federal shutdown.

I think this is a good way to write the lead sentence. It gets to the fact that a woman was killed, which is sad. And it gets to the fact that security issues in DC are really top of mind.

From the first report I heard, about half an hour after the shooting, my instincts were that the woman was mentally ill and that she was black. This was before it was reported that there was a child in the car, and long before the woman had been identified. Why were my instincts what they were? Perhaps because mental illness has been on my mind, just because I’ve encountered some sad cases recently. Or perhaps the actions of the driver just sounded like someone mentally ill.

And I guess my instinct that she was black was based on a presumption that the police would not have been in shoot-to-kill mode with a white woman. I am not saying that I consciously thought “the police would shoot a black woman, but not a white woman.” All I know is that the image that popped into my head was that of a black woman, and I think the reason that it did is that I had a harder time picturing the police killing a white woman.

Given these instincts, I felt uncomfortable listening to the reporters on the radio heaping praise on the police and expressing gratitude for how quickly and effectively they had secured the situation. The reporters were proud of the police and happy with the outcome. My instinct was that it was a misunderstanding and a tragedy. I am not saying that the police were necessarily unjustified in what they did. One can argue that they acted appropriately under the circumstances as they understood them (what if the woman was a threat to detonate a bomb in the car?).

My final thought: had this woman taken her mental illness anywhere but near the President and Congress, my guess is that she would be alive and getting treatment.

Risk Premiums and Short-term Rates

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Jeremy Stein sees a connection.

over a sample period from 1999 to 2012, a 100 basis point increase in the 2-year nominal yield on FOMC announcement day–which we take as a proxy for a change in the expected path of the federal funds rate over the following several quarters–is associated with a 42 basis point increase in the 10-year forward overnight real rate, extracted from the yield curve for Treasury inflation-protected securities (TIPS).

…These changes in term premiums then appear to reverse themselves over the following 6 to 12 months.

…Banks fit with our conception of yield-oriented
investors to the extent that they care about their reported earnings–which, given bank accounting rules for available-for-sale securities, are based on current income from securities holdings and not mark-to-market changes in value. And, indeed, we find that when the yield curve steepens, banks increase the maturity of their securities holdings.

Thanks to Tyler Cowen for the pointer.

If this is correct, then monetary policy affects long-term real rates, although having the effect reverse itself within 6 to 12 months makes me wonder. In fact, this whole thing makes me wonder….

The Fiscal Multiplier

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An IMF paper writes,

there is even stronger evidence than before that fiscal multipliers are larger when monetary policy is constrained by the zero lower bound (ZLB) on nominal interest rates, the financial sector is weak, or the economy is in a slump.

Reading further, it turns out that some of the “evidence” consists of simulations of macroeconometric models, which I personally do not find convincing. Also, I would have liked to see more discussion of the the “monetary offset” issue.

The main point of the paper is that although the pre-crisis conventional wisdom was that discretionary countercyclical fiscal policy was not necessary, the post-crisis conventional wisdom is that it is a good idea. What I suggest in the book that I am writing is that this is normal in macroeconomics. That is, the conventional wisdom at time t always seems to be that the conventional wisdom at time t-1 is wrong. Yet if you think about what this model implies for the conventional wisdom at time t as viewed in time t+1, it is quite subversive.

Thanks to Timothy Taylor for the pointer.

The Rentership Society

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From the econtalk with Russ Roberts and Tyler Cowen. Tyler says,

I do think there will be a big generational shift away from the physical product. There will be a general decline of stuff, including the desire to own a home of your own. And we see this in the data–lower rates of household formation, lower rates of owning stuff… we see in collectibles markets is that overall the prices of collectibles have fallen after the advent of e-Bay. That to me suggests a net desire to get rid of stuff

I hear that the bike-sharing network in Manhattan is doing well. Driverless cars, if and when they become commonplace, call out to be rented rather than owned.

Foreclosure Relief Has Consequences

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Nick Timiraos writes,

it’s become more expensive to process loans that default. While banks typically sell to other investors the mortgages they make, they often hold onto what’s known as the mortgage “servicing”—that is, the process of collecting loan payments on behalf of investors. Because the foreclosure crisis has led to higher costs associated with servicing delinquent loans, the easiest way to avoid against having to service a defaulted loan, of course, is to make risk-free loans.

The “foreclosure crisis” is the huge outcry against foreclosures, which caused politicians to impose all sorts of new procedures and fines against mortgage servicers. As a result, nobody wants to service anything other than a squeaky-clean loan. I’ve tried to explain the economics of mortgage servicing in testimony on the Hill and in my housing finance course for MRuniversity.

Unemployment: Long-term vs. Short-term

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Tyler Cowen points to an analysis that says that short-term unemployment is at reasonably low levels, but long-term unemployment is much higher than normal. I have written about this before, and there is no single uncontested interpretation. Possibilities:

1. The long-term unemployed really are different. They are destined to drop out the labor force. In some sense, we are now close to full employment.

2. As I wrote before, when the job-finding rate falls, it is natural for some unemployment spells to lengthen.

3. Firms have finished firing, but they have not started hiring. So initial claims for unemployment insurance are low, and short-term unemployment is low. But the job market is still weak. However, the problem is concentrated among young people, who transition in and out of the labor force quickly. Instead of remaining unemployed for a long time, they might go back to school.

By the way, from a PSST perspective, I cringe at writing “the job market is still weak.” Jobs are not some commodity that is scarce. Jobs are created when the decentralized trial-and-error of entrepreneurs leads to the discovery of comparative advantage.

Sentence to Ponder

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From Peter Stella.

What many are calling central bank “money creation” “helicopter money” or “rolling the printing presses” may – in combination with tighter leverage ratios – lead to a tightening of bank credit and deflationary pressures.

Pointer from John Cochrane.

Read (and re-read) the whole thing. Stella’s interesting argument is that highly-rated securities are more liquid than bank reserves. Therefore, when the Fed supplies bank reserves in exchange for highly-rated securities, it is draining liquidity from the system.

My initial reaction is that this is just too cute. It makes it sound as though investment bankers make loans, using securities as reserves. I think of investment bankers as holding inventories of securities, financed by short-term debt. The larger the inventories they have to finance, the lower their demand for securities, and the higher the interest rates on those securities. So I still think that the Fed’s purchases go in the direction of pulling down rates on securities. Of course, I count myself as a skeptic that these effects are significant.

The Macro Book: An Update

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I think that the basic approach is now stable. I might have a draft completed by the end of October. It is now a drama in four acts (have I said that before?). I have no idea how it will work for readers, but if I try appealing to an imaginary reader, I can’t write the book at all. As Ricky Nelson sang, “you can’t please everyone, so, you’ve got to please yourself.”

The “drama” approach allows me to speak favorably of points of view that I do not really share. I make a case for DSGE models. I try to make Scott Sumner’s case. Below the fold are some excerpts from the current version of the book.
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