Must-Read: Bradley A. Hansen: Ironic Origins of Libertarianism:

“Some liberty-loving soul had donated a copy of John Hospers’s Libertarianism: A Political Philosophy for Tomorrow (1971) to my local public library…

“…While I doubt I would find Hospers’s book impressive today, at the time it was a thrilling read. I had never heard the ‘standard libertarian arguments’ before.” (Bryan Caplan)

“When I was about thirteen, I decided I wanted to read all of the good books in the public library…. At the public library I found Ayn Rand; my grandmother also recommended her to me. Capitalism: The Unknown Ideal had a big influence on me, as did Atlas Shrugged. Hayek and Rothbard followed shortly thereafter.” (Tyler Cowen)

“I had some unusual early influences. In the eighth grade I borrowed an H.L. Mencken book from the city library. I couldn’t understand why everybody didn’t think and write like he did. Also, I became enamored of the Barry Goldwater legend.” (Karen De Coster) 

“That experience led me to the public library and a host of books on economics, one of which was a book whose table of contents I could not understand and which had never before even been checked out: Mises’s Human Action.” (Robert Formaini) 

Must-Read: One of the pieces of the Bagehot rule for dealing with a financial panic is the penalty rate piece: the managers, option holders, and shareholders of institutions that need the lender of last resort should not profit thereby. Lender-of-last-resort loans should be made at painfully high interest rates. And if the institution is too close to insolvency to stand a penalty rate, the right policy is for the central bank to TAKE THE EQUITY.

I have never heard an explanation from anyone in the Treasury or the Federal Reserve for why so little was done to implement this piece of the Bagehot rule in 2008-2009:

James Hamilton: Too Systemic to Fail:

Bryan Kelly at the University of Chicago, Hanno Lustig at Stanford and Stijn van Nieuwerburgh….

The authors constructed an option-pricing model that incorporated this perception on the part of option traders which allowed them to estimate parameters of the perceived policy to be able to explain the observed option prices. They then used this model to ask, suppose there had been no government guarantee, but you wanted to buy an insurance policy covering the entire financial sector that would function the same way. They concluded that such a policy would have cost $282 billion… meaningful effects of government guarantees on the value of equity and equity-linked securities.

There are those who claim that the government’s goal was to protect the banks. I do not share that view, and maintain that instead the government’s goal was to prevent collateral damage from a financial-sector collapse. The trade-off all along was to try to make sure that as much of the out-of-pocket costs as possible were paid by bank owners and management while minimizing collateral harm to the non-bank public. Whether we found the right way to balance those trade-offs is something that will still be debated.

But I think we can all agree that what the government did was a pretty big deal.

Must-Read: Patrick Wallis et al.: Puncturing the Malthus Delusion: Structural change in the British economy before the industrial revolution, 1500-1800:

Accounts of structural change in the pre-modern British economy vary substantially. We present the first time series of male labour sectoral shares before 1800, using a large sample of probate and apprenticeship data to produce national and county-level estimates. England experienced a rapid decline in the agricultural share between the early seventeenth and the beginning of the eighteenth centuries, associated with rising agricultural and especially industrial productivity; Wales saw only limited changes. Our results provide further evidence of early structural change, highlighting the significance of the mid-seventeenth century as a turning point in English economic development.

Must-Read: Richard Mayhew: A Thousand and One Posts:

Wow, that last post was my 1,000th post here at Balloon Juice. I was not expecting that when I first got started here…

I saw a lot of good questions about the ACA and how it would effect our community. I… asked if I could write a couple of posts to answer a couple of questions…. I figured that I would twenty to thirty thousand words in forty or fifty posts and then I would be done. Over the past three years, I have eight hundred or more health insurance posts with about half a million words written. That was a slight miscalculation….

My education has deepened as the community here and a second community of wonks, advocates and researchers. If I need to know about anti-trust law, I have a couple of world class experts who share their time with me. If I need to know more about Medicare, I can talk to people who are on it, I can talk with CMS techno-wonks, and national level advocates. If I need to learn more accounting, there are plenty of people who will share their knowledge and expertise with me. I never thought I would have written here for more than a couple of months. But between all of you, the community and John’s amazing ability to let things flow, I am more energized than I ever thought I would be a thousand posts ago.

Must-Read: Matt Levine: Hedge Fund Results:

Since the end of 2011, hedge funds as a whole have (1) produced negative alpha and (2) added almost $900 billion of assets…

Why? This seems to be the best explanation:

There are various reasons why investors are still by and large faithful to Hedge Funds, even if they are disappointed by their recent performance. One of the most important reasons is that it is difficult to find an alternative with similar risk / return characteristics. And when the risk-adjusted returns are combined with the low correlation they tend to have, the impact on investors’ portfolios tend to be positive. Indeed, according to our analysis in Figure 13, a majority (55%) of HFs, even in a year like 2015 where HFs did not perform particularly well, would have been additive and improved the efficient frontier of the 60 / 40 portfolio. Thus while performance may have seemed poor on a stand-alone basis, there appears to be a role for HFs in investors’ portfolios.

Improving the efficient frontier of the 60/40 portfolio is a rather lower bar than providing alpha, but there you go. A lot of sophisticated investors pay hedge funds’ fees because they think — often correctly! — that those hedge funds, as part of a balanced diet, improve the overall performance, and reduce the overall risk, of their investments. It is not a magic-masters-of-the-universe-doubling-your-money-every-year sort of explanation, but it seems to get the job done.

Must-Read: Pierre-Olivier Gourinchas et al.: The Greek Crisis: An Autopsy:

The Greek crisis is one of the worst in history, even in the context of recorded ‘trifecta’ crises – the combination of a sudden stop with output collapse, a sovereign debt crisis, and a lending boom/bust…

This column quantifies the role of each of these factors…. While fiscal consolidation was important in driving the drop in output, it accounted for only for half of that drop. Much of the remainder can be explained by the higher funding costs of the government and private sectors due to the sudden stop. For its sheer intensity and duration, the Greek crisis has been quite unprecedented. One measure says it all – real income per capita declined every single year between 2007 and 2013, a cumulated drop of 26%. Since then, it has barely risen….

Incorporating debt, default, and price stickiness yields rich interactions between the creditworthiness of the government and that of banks, firms, and households…. We decompose the movements in output, investment, and other key macroeconomic variables into the contribution of each type of shock. This helps us determine which shocks were the most important in driving the crisis dynamics. Second, we perform a number of ‘counterfactual exercises’ to identify the role played by different aspects of the institutional environment…

Must-Read: Olivier Coibion et al.: Monetary Policy and Inequality in the United States:

We study the effects of monetary policy shocks on—and their historical contribution to—consumption and income inequality in the United States since 1980…

Contractionary monetary policy systematically increases inequality in labor earnings, total income, consumption and total expenditures… account for a non-trivial component of the historical cyclical variation in income and consumption inequality…. a contractionary monetary policy shock is characterized by a widening of the earnings distribution above the median but a tightening of the earnings distribution below the median, leading to only small effects (if any) on inequality as measured by the difference between the 90th and the 10th percentile. In contrast, we find more heterogeneity in total income responses. Incomes of those at the 90th percentile rise persistently relative to the median household while those at the 10th percentile see their income decline relative to the median, especially at longer horizons…. In the 1990s, labor income accounted for nearly 80% of total income for the highest quintile, but less than 40% for the bottom quintile.

Must-Read: Marc Andreessen: Software Programs the World:

We frequently have delegations from all over the US and the world who come in and ask: “What can we do to have our own Silicon Valley?”…

…So we go through it–you want rule of law, ease of migration, ease of trade, R&D investments, no non-competes, fluid labor laws, ability to start and fold companies quickly…and at some point, the visitors get this stricken look on their face..and at the end of it, they’re like “What if we want Silicon Valley, but can’t do any of those things?”

So I’d argue the formula is well known, it’s just that people don’t want to apply it, for all kinds of reasons…. The good news is that it can be done, and then the other good news is that it is happening everywhere: South America, India, China, Middle East, Africa, Korea etc….