Executive Nullification, Once Again

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The latest news in this slow 4th-of-July week is that the Obama Administration has announced that it will not enforce the law mandating that employers provide health insurance coverage. This is not the first time the Administration has nullified a law in this way.

I could make a case that Congress should insist that the President enforce the law, or else face impeachment. The fact that this suggestion seems absurd says something about the state of the health care law. However, it says even more about the state of our Republic.

UPDATE: Charles Murray has a similar take.

The Bipartisan Mortgage Reform Proposal

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Bipartisan because both parties are captive to special interests. Bloomberg, among others, covered the story, shallowly.

A bill to be offered by Senators Bob Corker and Mark Warner reflects a prevailing view among lawmakers that the two government-sponsored enterprises should cease to exist while a federal role in backing mortgage lending should remain. Corker, a Tennessee Republican, and Warner, a Virginia Democrat, held a news conference to introduce the measure yesterday.

Mortgage-backed securities have not proven that they can survive without a government guarantee. Without mortgage-backed securities, the mortgage banking industry probably would do very poorly. Hence the head of their trade association is quoted as praising the bill.

The big winners in the bill would be Wall Street, which has always wanted a government-guaranteed mortgage securities industry minus Freddie and Fannie. If you think that Wall Street firms did such a great job in helping the mortgage market over the past ten years that they deserve to be rewarded, then this is the bill you want to get behind.

Peter Wallison also sees this as the same-old, same-old.

It would be easy to love a bill that gets rid of these two institutions [Freddie and Fannie]—unless it fosters the same loose lending that led to the housing debacle. By keeping the government in charge, this bill does just that.

Re-Reading David Brin

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I write,

Early in June 2013, a major news story was the revelation of a government program called PRISM, which taps into electronic communications in an effort to identify and disrupt threats to America. The controversy over this discovery sent me reaching to my bookshelf for David Brin’s 1998 work, The Transparent Society: Will Technology Force Us to Choose Between Privacy and Freedom? Re-reading it made me realize that Brin articulated more than just an unusual approach for addressing the issue of surveillance technology. He offers a perspective on the relationship of citizens and the state which challenges conventional libertarian thinking.

Read the whole thing. I really enjoyed going back to Brin’s book and writing this essay.

UPDATE: Here is Brin on Snowden.

Snowden — and Julian Assange (of WikiLeaks) — are part of a vital trend. I do not find either spectacularly admirable. Given that the heinous things they have revealed were kind of yawners, it strikes me both were propelled by today’s addictive high — self-righteous sanctimony.

Information and Order

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Hundreds of conservative economists have followed Friedrich Hayek into the intellectual swamp of “spontaneous order” and self-organization…

Predictability and order are not spontaneous and cannot be left to the invisible hand. It takes a low-entropy carrier (no surprises) to bear high-entropy information (full of surprisal). In capitalism, the predictable carriers are the rule of law, the maintenance of order, the defense of property rights, the reliability and restraint of regulation, the transparency of accounts, the stability of money, the discipline and futurity of family life, and a level of taxation commensurate with a modest and predictable role of government.

That is George Gilder, in his new book Knowledge and Power. Here is one review. My advice is to be skeptical toward anyone who would either laud the book uncritically or dismiss it categorically.

I was not very far into it before I determined that it is self-recommending in several senses of the word. I saw so much that pertains to my world view that I looked myself up in the index. I found, among several entries, this:

the source of the title for my book was Arnold Kling, Unchecked and Unbalanced: How the Discrepancy Between Knowledge and Power Caused the Financial Crisis and Threatens Democracy…which begins; “This book represents an attempt to explore the problem of the discrepancy between the trends in two phenomena: knowledge is becoming more diffuse, while political power is becoming more concentrated.” My book shows that Kling’s insight finds deep roots in the information theory that underlies the modern world economy.

Generally speaking, the thinkers Gilder attacks are more renowned than those, like me, he spares. Several of the attacks are caricatures (his misrepresentation of Burton Malkiel is particularly glaring). He devotes nearly an entire chapter to an attack on “Tyler Cowan,” and I leave it to Tyler Cowen to determine whether his ideas are as misconstrued as his name.

I will compose a longer review, emphasizing what I find valuable about the book, later.

To Ponder

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From Enrico Spolaore and Romain Wocziarg

one may erroneously infer a major role for specific national institutions in Africa, even though, as shown by Michalopoulos and Papaioannou (2010), national institutions have little effect when looking at the economic performance of homogeneous ethnic groups divided by national borders.

The survey article focuses on very long persistence in differences in productivity across different ethnic groups. Pointer from Jason Collins.

James C. Bennett vs. Deirdre McCloskey

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Bennett writes,

Very briefly, and simplistically, the Industrial Revolution happened when it did because the English (and their available capital) were occupied gathering the plentiful low-hanging fruit available with pre-industrial (or what Mumford would call “eotechnic”) technology. Iain [Murray]’s ancestors had all the coal they could profitably dig and transport by human, animal, and wind power for a century or so before they needed steam pumps to be able to exploit deeper mines, and steam locomotives to pull coal from mines further from the Tyne, than they had before. Crude steam engines had been around for a while; suddenly it became profitable to build and use them. The Industrial Revolution happened when financing it became the best available use of capital. The middle class had had plenty of honor and dignity for centuries before that — due to the legacy of Anglo-Saxon culture that held that there was no such thing as “noble blood” — even if your father held a title, you were legally a commoner unless and until your father died and you inherited the title, unlike on the Continent.

From a Facebook thread discussing this post.

Andrew Biggs on Social Security

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He writes,

A Social Security reform that addressed the program’s structural and fiscal problems would begin by transforming today’s complex benefit formula into a two-part system consisting of a savings account and a flat universal benefit. Such a system could be implemented gradually — applying only to new workers as they entered the work force, and so very incrementally and slowly replacing today’s system without breaking any promises already made to working Americans.

First, everyone in this new system — rich and poor alike — would be given an opportunity and a strong incentive to save for retirement. Each worker would be enrolled automatically in an employer-sponsored retirement account such as a 401(k) or 403(b). Workers would contribute at least 1.5% of pay, matched dollar for dollar by their employers. Universal retirement savings accounts would allow Social Security to focus its efforts: If everyone saved as they should for retirement, Social Security could concentrate its resources on low earners who needed the program the most.

Read the whole thing. To me, it comes across as centrist. But he would described as a nutter by most of the people who I would describe as nutters.

DSGE Models–Blogs vs. Academics

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Tyler Cowen writes,

The blogosphere is more likely to criticize DSGE models, whereas the profession is more likely to see such models of as providing discipline for any business cycle explanation, Keynesian included.

…On all of these questions my views are closer to those of the specialists in the economics profession.

I count myself as strongly opposed to DSGE models. In my view, macroeconomic models are much more speculative and metaphorical than microeconomic models. Take supply and demand. In microeconomics, I believe that when you draw a supply and demand diagram, you are providing an interesting theoretical description that has empirical use. But “aggregate supply and demand” does neither.

DSGE constrains macroeconomic models to describe a “representative agent” undertaking “dynamic optimization.” This constraint does not make macro models any less speculative or metaphorical. The advocates of DSGE implicitly claim that a certain mathematical approach is both necessary and sufficient to make macro models rigorous. I view that claim as a baloney sandwich.

Outlaw Private Short-term Debt?

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That seems to be what John Cochrane is advocating.

In the 19th century, private banks issued currency. A few crises later, we stopped that and gave the federal government a monopoly on currency issue. Now that short-term debt is our money, we should treat it the same way, and for exactly the same reasons.

Read the whole thing. He argues against the conventional approach to financial regulation, which is to allow banks to issue risk-free liabilities with an explicit or implicit government guarantee and try to regulate their risk-taking on the asset side.

While I agree with those who favor a financial system with more equity and less debt, I would prefer a different approach to getting from here to there. I would like to phase out the subsidies to debt finance. These subsidies include deposit insurance, too-big-to-fail, and the favorable tax treatment of debt. All of these ideas are fairly drastic relative to current policy, but they are less drastic than outlawing outright the contracts that create short-term debt.

Consider this recent paper by Harry DeAngelo and Rene M. Stulz.

Debt and equity are not equally attractive sources of bank capital. Debt has a strict advantage because it has the informational insensitivity property – immediacy, safety, and ease of valuation – desired by those seeking liquidity. High bank leverage is accordingly optimal when the MM model is modified to include a price premium to induce (socially valuable) liquidity production.

Or, in my terms, the nonfinancial sector wants to issue risky liabilities and hold safe assets, and the financial sector accommodates this by doing the reverse.

Another recent essay, Taming the Megabanks, comes from James Pethokoukis.

Math Tests and Mortgage Default

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The story is here and http://blogs.discovermagazine.com/d-brief/?p=1771. The claim is that mortgage borrowers with poor math skills defaulted at a much higher rate than other mortgage borrowers.

Levels of IQ and financial literacy showed no correlation with likelihood to default, but basic math skills did.

I refuse to draw the inference that the reason these folks defaulted was that they misunderstood math. First, we are talking about a sample size of 339 borrowers. That is a very small sample. Second, there are a bunch of explanatory variables that are highly correlated: credit score, IQ, and math score. That makes it much harder to separate the effect of any one of those variables. Someone else using the same data might try slightly different specifications and get very different results. Especially in such a small sample.

Do I think that low math skills are correlated with default? Absolutely. Do I believe that there is a high marginal contribution to default of low math skills, conditional on other known factors such as credit score (and IQ, if known)? Not until this sort of study is replicated in other samples using other specifications.