Monthly Archives: February 2013

Virginia Money?

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Here is one story. I winced at this sentence:

Inflation is below 2 percent even though the Fed has tripled the amount of money in circulation since the 2008 financial crisis.

No, the Fed has not tripled the amount of money in circulation. If it had, you can be quite sure that inflation would not be below 2 percent.

What the Fed has done is pump banks full of excess reserves. If the banks ever lose the desire to hold excess reserves, then things will get interesting. Will the Fed sell bonds in massive quantities in order to sop up reserves? Raise reserve requirements drastically?

Anyway, suppose that Virginia, or some other state, issues a state coin and gets away with it–meaning Congress does not outlaw state coins. What will determine the coin’s value? Presumably, it floats against the dollar–it would be pointless to keep it at a fixed exchange rate. Does Virginia mint only a fixed number of coins, say, one million, and then let the market determine their value? Or does it fix the value of coins in terms of, say, gold, and issue an amount that it can back with gold reserves held at the state level?

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.

Patents in Reality

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Petra Moser writes,

Historical evidence suggests that in countries with patent laws, the majority of innovations occur outside of the patent system. Countries without patent laws have produced as many innovations as countries with patent laws during some time periods, and their innovations have been of comparable quality. Even in countries with relatively modern patent laws, such as the mid-nineteenth-century United States, most inventors avoided patents and relied on alternative mechanisms when these were feasible.

From the latest Journal of Economic Perspectives. Timothy Taylor shares the table of contents.

Recall Alex Tabarrok’s patent napkin.

The Unintended Consequences of God

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In The Chosen Few, Maristella Botticini and Zvi Eckstein offer an explanation for how Jews wound up in high-skilled, urban occupations. They argue (p. 95) that between 200 and 650 AD,

world Jewry became a small population of literate individuals (“the chosen few”). The unintended consequences of the religious ruling that required Jewish fathers to invest in their sons’ literacy and education fully displayed themselves

Jews became much more literate than other populations, but at a cost of numbers, as those who could not afford to educate their sons converted to other religions. Over this time period (p. 113)

the general population decreased by about 12 percent, whereas the Jewish population collapsed by roughly two-thirds

In those days, most people were farmers, for whom literacy’s costs generally outweighed its benefits. However, in an urbanized society with skilled occupations, literacy pays off. As urbanization gradually increased in the late Middle Ages, Jews came to fill high-skilled occupations. Botticini and Eckstein argue that literacy, rather than persecution, is what led Jews into these occupations.

Urbanization is a very important process in economic development. Jane Jacobs made that argument convincingly. So has Ed Glaeser. Specialization and trade take place in cities, by necessity and by convenience. Without modern transportation, rural areas are cut off from trade. Even today, city dwellers account for a disproportionate share of wealth.

This year’s Super Bowl commercial featured Paul Harvey speaking on the theme that God created the farmer. The commercial has a lot of overtones along the civilization-barbarism axis. If Harvey is correct, then God’s gift of the bible to the Jews had some unintended consequences. Ultimately, according to Botticini and Eckstein, the first monotheists embarked on a course that ultimately led them away from farms and into the urban world of specialization and trade.

Government Pay

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My latest essay:

I would recommend replacing the system of automatic step increases with a system of automatic step decreases. That is, a government worker’s salary should go down as the worker spends more years at an agency.

Awhile back, I mentioned that I thought that the “revolving door” between government and the private sector ought to revolve faster. Instead of a lifetime sinecure, government employment should be a temporary period of service. I think that this might reduce the disconnect between bureaucrats thinking and the way that the private sector works. More important, I believe that this would change the mindset of government workers, so that they try to resolve problems rather than become invested in programs.

Tracking the Financial Crisis Lawsuits

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Let’s see.

1. The Justice Department is suing a rating agency (Standard and Poor’s). The rating agencies are creatures of the SEC (which created their oligopoly and encouraged them to be paid by the raters rather than the customers of the ratings).

2. The SEC is suing Freddie and Fannie, which are creatures of the Department of Housing and Urban Development, under which the two firms were regulated and also given lending quotas for “affordable housing.”

So, when is HUD going to sue a company that is a creature of the Justice Department, just to complete the circle?

One way to view the period 2005-2009 is as a massive destruction of property rights by the government. First, they destroy the right of Freddie, Fannie, and commercial banks to maintain lending standards. Then they confiscate the property of holders of securities in GM and Chrysler to pay off the labor unions. Then they sell off AIG’s assets in order to bail out Goldman Sachs and several large foreign banks. And of course, the government has made every effort to keep banks from enforcing mortgage contracts, while extracting large fines from banks.

It’s beyond crony capitalism. It’s protection-racket capitalism.

No, I am not saying that the private firms did everything right. But whatever the problem with markets, government extortion is not likely to prove to be a good solution.

The Three-Axis Model and Social Security

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A while back, John Goodman wrote,

No one questions why we provide help to people who are sick or disabled. Or why we provide benefits to people who are temporarily out of work and looking for a job. But why subsidize people who want to play golf?

The short answer is that the elderly are treated as an oppressed class. They receive “senior discounts,” for example. (To be fair, in some cases this is price discrimination, intended to maximize revenue.)

From a conservative point of view, Social Security undermines the incentive to work, and not just for seniors. It is funded by the payroll tax. It also undermines the incentive to save, because people count on Social Security instead. Thus, Social Security goes against an important value for civilization–deferred gratification.

Are the elderly today truly an oppressed class? I think it would be hard to argue that case. However, the same might be said for many of the oppressed classes as defined by the progressive model. All unionized workers, including public-sector workers making more than the median income? All women?

One issue that I have not addressed in the oppressor-oppressed axis is how these classes come to be defined.

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.

What I’ve Been Reading

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Coolidge, by Amity Shlaes. (Should she have titled it The Forgotten Man?) In the end, I found myself more interested in the times in which he lived than in the man himself. For example, immigration restriction really came to the fore during his Presidency. What were the forces that produced it? Was it part of the Progressive era (tied in with eugenics and Prohibition, perhaps), part of a general post-WWI xenophobia (Palmer raids, Ku Klux Klan), or the result of changes in political economy due to urbanization and industrialization? I found myself longing for more context on some of these issues. As it is, the book is long, but that is because she is trying to zero in on Coolidge–what he did and how he thought.