Month: September 2015

Must-Read: The very sharp Steve Teles’s implicit claim that the rise of the financial plutocracy shows that we need less financial regulation seems to me to be completely wrong. There are a huge number of important economic areas–health insurance, health care, education, pensions, defense, infrastructure, land use, social insurance–in which market failures are so pervasive and powerful that we have no choice but to regulate. The hope is that we can curb rent-seeking when we do. But saying that we reduce the problem of rent-seeking by reducing regulation misses the most important aspect of the problem: in those key areas we find that we are often creating other problems as well. If he were focused on reducing the “regulations” that are original appropriation and inheritance I might say he has a strong case. But there seems to me to be a little too much seeking of common ground that isn’t there with libertarians here…

Steve Teles: The Scourge of Upward Redistribution: “Start for simplicity’s sake with… the occupations of the top percentile…

…the huge over-representation of financial-service providers, doctors, dentists, and lawyers, all of which are professions characterized by large-scale market distortions…. Doctors, dentists, and lawyers are all licensed professionals, and licenses are an obvious barrier to entry and competition. In addition, the specific regulatory structures of some of these licensed professions (which are almost always functions of state-level regulations) serve to redistribute income upward…. Medicine displays a similar pattern because the law specifies tasks that only licensed doctors can perform, even though nurses are capable of performing them…. Licensing statutes frequently define “dental practice” or “veterinary practice” very broadly, allowing dentists and veterinarians to swallow up activities that involve none of the risks that justify licensing…. The bottom of the top 1% is full of owner-proprietors who, in a more deregulated market, would be lower-paid employees of larger, more efficient firms. Car dealers, for instance… burial services….

A concentration of high incomes also characterizes the field of government contractors… [in] industries are characterized by dependence on government as a nearly exclusive source of revenue, by extraordinary levels of lobbying, and by asymmetries of power…. Management consulting[‘s] outsized incomes of consultants do not come from their ability to recommend innovative practices to firms… [but] from performing a legally mandated due-diligence ritual…. Rents are pervasive in the fields of finance, entertainment, and technology….

Finally, rents also play a critical role in the increasing concentration of wealth among the already-wealthy few…. Matthew Rognlie… housing-price appreciation. Housing is a highly regulated and subsidized sector… constraints on housing supply relative to demand are especially severe in the areas with the highest concentrations of high earners…. By preventing housing supply from equilibrating with housing demand, insiders in these expensive housing markets… take resources from housing outsiders…

http://www.nationalaffairs.com/publications/detail/the-scourge-of-upward-redistribution

Must-Read: I must say, I think the sharp Tim Kane is indulging in a great deal of wishful thinking here. My reading was that the word “deport” was not mentioned because Trump did not think he needed to, and because others did not wish to give Trump an opportunity to remind the base how much they like him. The chances for sane, incremental, technocratic immigration policies thus look much less promising to me than they do to Tim:

Tim Kane: Immigration and The GOP: “At the first GOP presidential debate… moderator Chris Wallace of Fox News focused the night’s first question on…

…immigration…. Many of the immigration talking points of 2012, 2008, and before were absent. Nobody talked about the need for ‘comprehensive’ legislation…. We can hope this signals a recognition that Obama’s insistence on comprehensive legislation on immigration has yielded nothing but partisan point-scoring, and also signals a shift toward pragmatic, incremental reform. Still… incremental, piecemeal, and step-by-step were not uttered at all. Likewise, amnesty was not the centerpiece…. The word was mentioned, but never defined. Better yet, not a single candidate uttered the word ‘deport’…

In witness of my position, let me highlight two of Tim’s quotes from the candidates:

DONALD TRUMP: So, if it weren’t for me, you wouldn’t even be talking about illegal immigration, Chris. You wouldn’t even be talking about it. (APPLAUSE) This was not a subject that was on anybody’s mind until I brought it up at my announcement. And I said, “Mexico is sending.” Except the reporters, because they’re a very dishonest lot, generally speaking, in the world of politics, they didn’t cover my statement the way I said it. The fact is, since then, many killings, murders, crime, drugs pouring across the border, are money going out and the drugs coming in. And I said we need to build a wall, and it has to be built quickly. And I don’t mind having a big beautiful door in that wall so that people can come into this country legally. But we need, Jeb, to build a wall, we need to keep illegals out. (CHEERING AND APPLAUSE) Border Patrol, I was at the border last week. Border Patrol, people that I deal with, that I talk to, they say this is what’s happening. Because our leaders are stupid. Our politicians are stupid. And the Mexican government is much smarter, much sharper, much more cunning. And they send the bad ones over because they don’t want to pay for them. They don’t want to take care of them. Why should they when the stupid leaders of the United States will do it for them? And that’s what is happening whether you like it or not.

RICK SANTORUM: Donald Trump actually seized on it when he talked about immigration. And I think the reason he did is because immigration is sort of an example of what’s broken and what’s wrong in Washington, D.C. You see, you have one side, the Democrats, and with immigration, all they care about is votes. They don’t care about American workers, they just care about bringing as many people in so they can get as many votes as they can. On the other side, you have so many Republicans, and what do they care about? Helping business make profits. There’s nobody out there looking out for the American worker. I’m looking out for the American worker. I’m the only one on this stage who has a plan that’s actually reduced—actually going to reduce immigration. Actually going to do something to help the American worker.

Must-Read: Barry Eichengreen, Donghyun Park, and Kwanho Shin: The Global Productivity Slump: Common and Country-Specific Factors: “In 2014, according to the Conference Board’s Total Economy Data Base, the growth of total factor productivity (TFP) hovered around zero…

…for the third straight year, down from 1 per cent in 1996-2006 and ½ per cent in 2007-12…. We identify previous episodes of sharp and sustained decelerations in TFP growth using data for a large sample of countries and years… as many as 77 such episodes…. Low levels of educational attainment, unusually high investment rates and weak political systems are among the significant country-specific correlates of TFP slumps, while increases in risk (higher TED spreads) and energy-price shocks are among the significant global factors.

Must-Read: I confess I have sometimes thought that new classical macro is nothing but a circuitous way of pretending that the Sonnenschein-Mantel-Debreu-theorem does not exist via the following road:

• We can only study models we can solve.
• Macro models are complex to solve.
• If we can restrict our study only to models we can transform into a planner’s problem, we can simplify our models.
• Therefore we study only models which have one optimal equilibrium.

Lars Syll: “The purported strength of New Classical macroeconomics is that it has firm anchorage in preference-based microeconomics…

…and especially the decisions taken by inter-temporal utility maximizing ‘forward-looking’ individuals. To some of us, however, this has come at too high a price. The almost quasi-religious insistence that macroeconomics has to have ‘microfoundations’… has put a blind eye to the weakness of the whole enterprise of trying to depict a complex economy based on an all-embracing representative actor equipped with superhuman knowledge, forecasting abilities and forward-looking rational expectations. It is as if–after having swallowed the sour grapes of the Sonnenschein-Mantel-Debreu-theorem–these economists want to resurrect the omniscient Walrasian auctioneer in the form of all-knowing representative actors equipped with rational expectations and assumed to somehow know the true structure of our model of the world. That anyone should take that kind of stuff seriously is totally and unbelievably ridiculous.

Must-Read: Charlie Stross guessed that it requires a population of at least 100 million to operate our current division of labor at our current level of productivity. Here Andy George goes about the division of labor from the other end–and he cheats: he doesn’t domesticate and evolve his wheat, for example…

Andy George: How to Make Everything:

I spent 6 months and $1500 to completely make a sandwich from scratch. Including growing my own vegetables, making my own salt from ocean water, milking a cow to make cheese, grinding my own flour from wheat, collecting my own honey, and killing a chicken myself.

My quest does not just cover food. In my new video series, I set out to challenge myself to make many every day items we take for granted from scratch. Subscribe to my channel and watch the full episode… and catch my next episode, where I make a suit from scratch, which after factoring in production costs and labor totals to around $4,000!

Must-Read: Gabriel Zucman: The Hidden Wealth of Nations: The Scourge of Tax Havens:

http://gabriel-zucman.eu/hidden-wealth

Must-Read: Kenneth Arrow: Samuelson Collected: “Samuelson has not addressed… the relation between microeconomics and macroeconomics…

…Neoclassical microeconomic equilibrium with fully flexible prices presents a beautiful picture of the mutual articulations of a complex structure, full employment being one of its major elements. What is the relation between this world and either the real world?… If the neoclassical model with full price flexibility were sufficiently unrealistic that stable unemployment equilibrium be possible, then in all likelihood the bulk of the theorems derived by Samuelson, myself, and everyone else from the neoclassical assumptions are also contrafactual. The problem is not resolved by what Samuelson has called “the neoclassical synthesis,” in which it is held that the achievement of full employment requires Keynesian intervention but that neoclassical theory is valid when full employment is reached….

Dramatic historical episodes–most recently the reconversion of the United States from World War II and the postwar European recovery–suggest that an economic mechanism exists which is capable of adaptation to radical shifts in demand and supply conditions. On the other hand, the Great Depression and the problems of developing countries remind us dramatically that something beyond, but including, neoclassical theory is needed…

Must-Read: The fact that the sources of win-win value in finance are subtle and second-order–having to do with liquidity, patience, diversification, and incentive alignment–makes phishing for phools much more profitable relative to building relationships with customers and suppliers than in “normal” industries. I am pleased that the… I was going to say Nobel Prize-caliber minds, but looking again at the Economics prize recipients I realize that is not a compliment… extremely-sharp minds of Shiller and Akerlof are thinking of this:

Robert J. Shiller: Fraud, Fools, and Financial Markets: “Because we can be manipulated or deceived or even just passively tempted…

…free markets also persuade us to buy things that are good neither for us nor for society… an important codicil to Smith’s vision… one that George Akerlof and I explore in our new book, Phishing for Phools: The Economics of Manipulation and Deception…. Routine phishing can affect any market, but our most important observations concern financial markets…. Borrowers are lured into unsuitable mortgages; firms are stripped of their assets; accountants mislead investors; financial advisers spin narratives of riches from nowhere; and the media promote extravagant claims. But the losers in the downturns are not just those who have been duped. A chain of additional losses occurs when the inflated assets have been purchased with borrowed money. In that case, bankruptcies and fear of bankruptcy spawn an epidemic of further bankruptcies, reinforcing fear. Then credit dries up and the economy collapses. This vicious downward spiral for business confidence typically features phishes–for example, the victims of Bernard Madoff’s Ponzi scheme–discovered only after the period of irrational exuberance has ended….

We found out many years ago, to the world’s great regret, what happens when a financial epidemic is allowed to run its course. Our analysis indicates that not only are there endemic and natural forces that make the financial system highly volatile; but also that swift, effective intervention is needed in the face of financial collapse. We need to give free rein to fiscal and monetary authorities to take aggressive steps when financial turmoil turns into financial crisis. One Dark Age is one too many.

Must-Read: I know that Ben Bernanke is depressed and unhappy at his consistent overoptimism while Fed Chair about the likely pace of recovery. But what I do not know is what steps the Federal Reserve has taken to rejigger its model to cure it of what is by now nearly a decade of overoptimism. I hope there has been a deep rethink, rather than just the ascription of bad performance to a whole bunch of negative residuals in sequence:

Dan McCrum: A dirty dozen decisions deferred: “Forward guidance under Ben Bernanke and then Janet Yellen has been…

…changeable, notes David Kelly, chief strategist for JP Morgan Asset Management, who shares a reminder of the shifting timescale. Here’s the Federal Reserve on when it would be appropriate to raise the target range for the federal funds rate: January 2009 — not ‘for some time’. March 2009 — not ‘for an extended period’. The US would have exceptionally low rates…: August 2011 — ‘at least through mid-2013″. January 2012 — ‘at least through late 2014″. September 2012 — ‘at least through mid-2015″. December 2012 — ‘at least as long as the unemployment rate remains above 6-1/2 per cent, inflation between one and two years ahead is projected to be no more than half a percentage point above the committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored.’

Actually, it would be appropriate to maintain the target range of rates at 0 to 25 basis points until…: December 2013 — ‘well past the time that the unemployment rate declines below 6-1/2 per cent, especially if projected inflation continues to run below the Committee’s 2 per cent longer-run goal.’ March 2014 — ‘for a considerable time after the asset purchase programme ends’. Still waiting? January 2015 — ‘the Committee judges that it can be patient in beginning to normalise the stance of monetary policy.’ The Fed thinks it will be appropriate to raise rates…: March 2015 — ‘when it has seen further improvement in the labour market and is reasonably confident that inflation will move back to its 2 per cent objective over the medium term.’ July 2015 — ‘when it has seen some further improvement in the labour market and is reasonably confident that inflation will move back to its 2 per cent objective over the medium term.’ Yeah, so about that…: September 2015 — ‘The Committee continues to see the risks to the outlook for economic activity and the labour market as nearly balanced but is monitoring developments abroad.’ The futures market now implies a 45 per cent probability of a first rate hike by December, and 54 per cent for January. Or will it be 13 times a charm?