Category Archives: Timothy Taylor is my Favorite Blogger

The Financial Cycle

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Claudio Borio writes,

Financial liberalisation weakens financing constraints, supporting the full self-reinforcing interplay between perceptions of value and risk, risk attitudes and funding conditions. A monetary policy regime narrowly focused on controlling near-term inflation removes the need to tighten policy when financial booms take hold against the backdrop of low and stable inflation. And major positive supply side developments, such as those associated with the globalisation of the real side of the economy, provide plenty of fuel for financial booms: they raise growth potential and hence the scope for credit and asset price booms while at the same time putting downward pressure on inflation, thereby constraining the room for monetary policy tightening.

Pointer from Timothy Taylor.

Borio’s writing is a bit too colorful for my tastes. He uses exclamations! In a working paper!

Still, read the paper. There may be something to the idea that financial sector expansions and contractions are a phenomenon outside of the conventional macroeconomic model. I am quite sympathetic to that point of view.

What is the Meaning of Too Big to Fail?

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Timothy Taylor writes,

It seems to me that the key here is to remember that maybe some institutions are too big to fail, but they aren’t too big to suffer! In particular, they aren’t too big to have their top managers booted out–without bonuses. They aren’t too big to have their shareholders wiped out, and the company handed over to bondholders–who are then likely to end up taking losses as well. One task of financial regulators should be to design and pre-plan an “orderly resolution” as they call it. The trick is to devise ways so that if these systemically important firms run into financial difficulties, the tasks and external obligations of certain large financial firms will not be much disrupted, for the sake of financial stability,but those who invest in those firms and who manage them will face costs.

Taylor points to an interesting report on the banks that are currently classified as too big to fail.

I think that when the time comes, “orderly resolution” will always seem to be an oxymoron. The bankruptcy of Lehman Brothers was resolved in an orderly way. The only problem was that one creditor, Reserve Primary, had loaded up on Lehman paper, so its money market fund shares were no longer worth a dollar each. The Wall Street-Washington axis saw this as a catastrophic event, and thus was launched TARP and other bailouts. In restrospect, these seem to have been mostly robbing Peter to pay Paul: taking money from GM investors and giving it to the unions, selling off AIG’s profitable lines of business in order to provide cash to Goldman Sachs and foreign banks, etc.

The way to think about this issue is to remember how Freddie Mac and Fannie Mae handled their too-big-to-fail status. They knew that their biggest risk was political risk, so they acquired tremendous political muscle. Conversely, members of Congress knew that Freddie and Fannie would be pliable, so these members leaned on Freddie and Fannie to pursue “affordable housing” goals. We know how that worked out.

Political officials and big banks have plenty of opportunities for mutual gains at the expense of taxpayers. That is why I have long favored breaking up big banks. It’s not that big banks produce more inherent instability. It’s that they produce more inherent cronyism.

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.

Pre-School Education

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Grover J. “Russ” Whitehurst writes,

I am concerned that preschool education has become like organic food — a creed in which adherents place faith based on selective consideration of evidence and without weighing costs against benefits. The result may be the overselling of generic preschool education as a societal good and a concomitant lack of attention to the differential impact of different types of preschool experience on different categories of children. So just as some but not all foods grown under some but not all organic conditions may be worth their price because of their extra nutritional benefits and lower environmental impacts, some but not all children exposed to some but not all preschool programs may experience lasting benefits. And because preschool education like organic food is expensive, it pays to know what works best, for whom, under what circumstances.

He proceeds to cite Head Start as an example of a program with high costs and negligible long-term benefits. See also Timothy Taylor.

In a follow-up post that discusses research into other programs, Whitehurst writes,

This thin empirical gruel will not satisfy policymakers who want to practice evidence-based education. Their only recourse if they have to act is to do so cautiously and with the awareness that they are going to make some mistakes and need to be in a position to learn from them. They and the general public need to be wary of the prevailing wisdom that almost any investment in enhancing access to preschool is worthwhile. Some programs work for some children under some conditions. But, ah me, which programs, children, and conditions?

Nicholas Kristof also talks about research into cost-effectiveness of anti-poverty programs. He wants to see taxpayers spend more money on the pre-school programs that have been shown to have success. But he does not want to spend any less on worthless programs. He even insists on hanging on to Head Start.

Solar Power

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Noah Smith writes,

I guess I should give a concrete prediction about when solar will actually start being cost-competitive with fossil fuels, without subsidies, in some locations for some customers. My prediction is: around 2020, or 7 years from now. 95% credible interval would be…um, let’s see…2014 to 2040. So that’s a fairly wide interval.

He mentions some promising technologies. What has to be stressed is that once solar power becomes cost-competitive, we will never go back. That is, solar power is going to continue to get cheaper at a faster rate than other technologies (barring some spectacular discovery of a new energy source or a dramatic development in nuclear energy).

Having said that, in 2005, I quoted the Department of Energy as predicting that solar power would be cost-competitive within 10 years, which at this point would be 2 years from now. So, relative to predictions made during the Bush Administration, solar power seems to have fallen short.

I strongly support funding research into solar technologies. I strongly oppose subsidizing deployment of uneconomical solar power, particularly by companies led by the President’s political cronies.

Along these lines, Timothy Taylor writes,

The fundamental problem, Everett argues, is that showing something is possible at high cost is one thing, but commercializing it at low costs is quite another….

after 40 years of watching the U.S. government try to force energy markets on to a different path, it’s time for an alternative approach. The U.S. government should stop subsidizing commercial energy firms, and instead put that money into a dramatic increase in energy research and development.

The Health Dividend

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Timothy Taylor writes,

The proportion of U.S. adults who are “in the labor force”–that is, who either have jobs or are unemployed and looking for a job–has been falling for a decade, as I explored in an April 26, 2012, post on “Falling Labor Force Participation.” But for one demographic group, the elderly, labor force participation is rising substantially.

He cites a Census Bureau Study. This is a two-decade trend, and I think that the most plausible explanation is better health for those in the 65-75 age bracket.

The Recession and World Trade

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From the DHL Global Connectedness Index 2012.

The Netherlands retains the top rank on this year’s DHL Global Connectedness Index, and 9 of the 10 most connected countries are in Europe.

Pointer from Timothy Taylor. (How does he find these things?) Taylor writes,

Globalization is near an all-time high by this measure [world exports of goods and services divided by world GDP], but notice that it after the drop associated with the Great Recession, this measure of globalization is about the same in 2011 as it was in 2007.

It is not clear why a statistic with GDP in the denominator should experience a drop during a recession. However, my guess is that the answer has to do with the location of the recession. If some emerging economies continued growing while Europe slumped, one would observe world GDP holding up better than world trade.

From a PSST perspective, all GDP is trade. Some of it is intra-border and some of it is cross-border. Trade patterns that were based on unsustainable conditions, primarily inefficient firms remaining in business, were broken by the conditions that emerged in 2008. Firms go out of business all the time. All the time, new businesses are starting and some are growing. I take the view that since 2008 an unusually large number of troubled firms failed and unusually small number of high-growth businesses emerged. To me, calling this a decline in aggregate demand is begging the question–it is simply putting another label on the phenomenon, not explaining it. It could be that stress at banks is a cause of it, but I think instead that it is a symptom. But that leaves me struggling to tell a story that accounts for the sudden, sharp drop in GDP that took place in 2008-2009.

Mobility

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Timothy Taylor writes,

geographic mobility in 2011…all-time low since the start of the data in 1948

Read Taylor’s whole post, and you may also wish to click through to some of the links he provides. My thoughts:

1. After the Second World War, the U.S. population shifted for a variety of reasons. Blacks moved north, to escape segregation. Otherwise, because of air conditioning, the south became more attractive than it had previously. Factories left cities and were replaced by office buildings, eventually leading to an urban population that was more white-collar than blue-collar. The automobile gave rise to suburbia.

All of these shifts are now complete, more or less. There will always be new factors that provide an impetus to mobility, but they may not be as strong as the ones that operated in the 1950s and 1960s.

2. I think that it is often the case that in order to raise your income you have to be willing to move. Over time, people may have become less motivated (certainly less desperate) to increase their incomes.

3. Read (or re-read) Enrico Moretti’s The New Geography of Jobs. I am not saying that he directly explains the decline in mobility, but his data and analysis are relevant.

4. I believe that exit, not voice, is the best check on government. A reduction in mobility is likely to cause state and local government to get worse.

The U.S. Debt Problem

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Timothy Taylor discusses an article by Daniel Thornton on the origins of the debt problems in the United States.

Thornton locates the start of the problems back to about 1970. In the chart of annual deficits, for example, notice that after about 1970 a pattern of volatile but growing deficits emerges. The pattern is interrupted for a few years in the late 1990s by the higher tax revenues and lower social spending resulting from the unsustainable dot-com boom, but a return to the larger deficits was coming eventually.

Recall that in this post I said that in the 1960s two taboos were broken. One was a taboo against deficit spending in peacetime. The other was a taboo against Social Security surpluses in order to spend elsewhere.

In deference to the season, I would say that we face the ghosts of deficits past, deficits present, and deficits future. The ghost of deficits past is the debt we accumulated starting in the 1960s in spite of good economic performance and falling defense expenditures (as a share of GDP). The ghost of deficits present is what Keynesians call the “fiscal cliff,” meaning the horrible recessionary consequences that they predict would follow were Congress to actually follow through on its recent commitments to try to reduce deficit spending from currently high levels. The ghost of deficits future is the fact that projections for spending going forward show increases to unprecedented levels relative to GDP, driven largely by health care spending. The ghosts of deficits future mean that (a) we cannot count on a “peace dividend” to solve the budget problem and (b) we cannot easily inflate our way out of the problem (inflation will raise the cost of future obligations and send interest expense soaring).

Inflation and the U.S. Debt Problem

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Timothy Taylor wrote,

if federal deficits are first definitively placed on a diminishing path, then a quiet surge of unexpected inflation could help in reducing the past debts. But on the current U.S. trajectory of a steadily-rising debt/GDP ratio over the next few decades, inflation isn’t the answer–and could end up just being another part of the problem.

He links to analyses that support this conclusion.