Category Archives: links to my essays

Tyler Cowen vs. the Club Model

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He writes,

In the old days one heard speculation about bundling a great number of newspapers and blogs into a single-price access model, but in retrospect this probably never had much financial potential, for reasons which by now should be clear. What would an “all-you-can-eat buffet for economists” mean? And who if anyone would benefit from it?

What such a buffet would mean would be that by paying one amount per month you could read as much as you want from the NYT, WSJ, existing blogs, plus all of the new economics blogs that would emerge because bloggers would now be directly compensated by getting a share of the subscription money, perhaps in proportion to the number of views of their posts or some other metric. The beneficiaries would be readers who would read more NYT and WSJ articles if there were no paywall and readers of the new blogs that emerge.

And the biggest beneficiaries of all will be people who save time not having to click on the “close” window on all those unwanted pop-up ads!!!! Because with a bundled subscription, we can finally have content without advertising. The current newspaper model is headed toward the opposite.

This “club” might not be the most viable model. I once thought it would be, but over time I have become convinced that the patronage model will win out. That is, in the end, the NYT will be a money-losing enterprise, but some wealthy patron or patrons will be happy to keep it going. Similarly, those bloggers who want money will have to find patrons to support them. Whether content is better under a patronage model or under a club model is not clear.

Central Planning, Capital Regulations, and the Risk Premium

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Per Kurowski writes,

current credit-risk-weighted capital (equity) requirements for banks, allow banks to hold government debt and loans to the AAAristocracy against much less equity than when financing “risky” small businesses and entrepreneurs, and so that is de facto what you get.

Risk-based capital regulations may or may not help regulators manage bank risk. (I argued here that the results were quite the opposite.) But they certainly affect the allocation of capital.

Many economists say that there is a huge demand for risk-free assets, as if this were a puzzle. Why is the “free market” so risk averse? Well, the government tells banks that they can earn a higher return on equity holding what the government defines as risk-free assets. AAA mortgage securities, Greek sovereign debt, whatever.

Kurowski’s post reminds me that financial regulation serves to allocate capital, and capital allocation by government can be thought of as central planning. There is a major socialist calculation problem involved. Moreover, there is a tarbaby problem. As the capital regulations produce perverse outcomes, policy makers look for policies to correct the outcomes, and these policies lead to other perverse outcomes, etc.

Mission-Driven vs. Philanthropic

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Peter Thiel says,

mission-oriented companies are often defined by a unique mission that maybe others don’t think is important, whereas a lot of the social entrepreneurship efforts gravitate towards things where you have many copycats doing relatively similar things.

From an interview with Ezra Klein. Pointer from Tyler Cowen.

One of the main recommendations of the Colander-Kupers book is to expand what they call the “for-benefit” sector. By that, they mean corporations that seek both profits and social benefits. To be fair, they tout this more as an alternative to government programs than as an alternative to profit-maximizing firms. As you know, I have been given to ranting against non-profits, on more than one occasion.

Cato Growth Forum

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Brink Lindsey writes,

1. Arnold Kling proposes alternatives to the regulatory status quo at the FCC and FDA, respectively: a spectrum arbitration board and prize-grants for medical research.

2. Robert Litan calls for more high-skill immigration and higher pay for teachers in exchange for an end to tenure.

3. Douglas Holtz-Eakin provides an overview of structural reforms needed to reduce government debt levels and restore growth.

4. Lee Drutman argues that tripling the budget for congressional staff can lead to improved policymaking.

The links go to our essays. More essays will be posted every day. This is all part of a run-up to a conference in December.

Public Officials and Cameras

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I first advanced the idea on this blog, and I have now elaborated on it.

Perhaps the best approach to this issue would be an experimental one. Agree on criteria for measuring the quality of decision-making processes. Randomly assign some government agencies and some local governments to two different groups, one that wears cameras and one that does not. Then observe how policies evolve among the two groups over a period of five years or so, using the criteria for assessment. I am sure that neither group’s policy process will be perfect. However, I think that there is good chance that the transparent group will earn a better grade.

Note that, once again, my views turn out to be those of someone from the Bipartisan Policy Center, with a minus sign.

Teenagers in the Court System

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Jan Hoffman’s post

What none did, however, was exercise his constitutional rights. It was not clear whether the youths even understood them.

Therefore none had a lawyer at his side. None left, though all were free to do so, and none remained silent. Some 37 percent made full confessions, and 31 percent made incriminating statements.

These were among the observations in a recent study of 57 videotaped interrogations of teenagers, ages 13 to 17, from 17 police departments around the country. The research, published in Law and Human Behavior, adds to accumulating evidence that teenagers are psychologically vulnerable at the gateway to the criminal justice system. Youths, some researchers say, merit special protections.

reminded me of a personal experience when I sat on a jury.

At a cognitive level, the video of the detective and the defendant showed an incriminating confession, obtained by the book, without threats, intimidation, or promises. At an emotional level, it showed a teenage boy, in an awful mess, with no adult there to help him. He was polite, and almost endearing. The majority of jurors had children, and the main effect of the video was to trigger our Parent Reflex. In our particular courtroom drama, the role that many of us chose was that of the defendant’s Surrogate Parents.

It was a traumatic experience, and we let a guilty young person off. Go back and read my whole essay.

Patent Pools

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Josh Lerner and Jean Tirole (the latter was just awarded a Nobel Prize) write,

Innovations in hardware, software or biotechnology often build on a number of other innovations owned by a diverse set of owners.

Pointer from Joshua Gans. For more on Tirole, see Tyler Cowen and subsequent posts by Alex and Tyler.

Two (or more) firms may hold complementary patents. That is, the value of using firm A’s patented innovation is higher to a licensee who can also use firm B’s patented innovation. Lerner and Tirole ask when a social planner would want these firms to pool their patents, that is to license them together. If you do not care to follow their mathematical analysis, you can skip to the end where they summarize their conclusions.

The situation is a form of the dual-monopoly problem. As I once explained,

suppose that a single company has a monopoly in both peanut butter and jelly. When it sets the price of jelly, it knows that the more jelly it sells the more peanut butter it will sell. Therefore, at the margin, it will tend to want to set a lower price for jelly than if it were just looking at jelly as a stand-alone product.

If you then break up the PB and J monopoly into two separate companies, the incentives of the two separate monopolies will change. The peanut butter company is not going to worry about the fact that higher peanut butter prices will reduce jelly consumption, and the jelly company is not going to worry about the fact that higher jelly prices will reduce peanut butter consumption. The net result of the breakup is that prices to consumers will rise.

This theory goes all the way back to Cournot.

It seems to me that we observe patent pools more often internally than externally. Think of Apple Computer as one gigantic internal patent pool. Or a large pharmaceutical company. It might be easier for one firm to internalize complementary patents than for several firms to get together and pool them.

The State of Macroeconomic Analysis

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Olivier Blanchard, who in August of 2008 describe it as “good,” has modified his views. Concerning the consensus methodology that he praised back then, Blanchard writes,

However, these techniques only made sense under a vision in which economic fluctuations were regular enough so that, by looking at the past, people and firms (and the econometricians who apply statistics to economics) could understand their nature and form expectations of the future; and simple enough so that small shocks had small effects, and a shock twice as big as another had twice the effect on economic activity. The reason for this assumption, called linearity, was technical. Models with nonlinearities – those in which a small shock, such as a decrease in housing prices, can sometimes have large effects, or in which the effect of a shock depends on the rest of the economic environment – were difficult, if not impossible, to solve under rational expectations.

Pointers from Mark Thoma and Greg Mankiw. Read the whole thing. I have to give Blanchard credit for writing this:

The reality of financial regulation is that new rules open new avenues for regulatory arbitrage, as institutions find loopholes in regulations. That in turn forces authorities to institute new regulations in an ongoing cat-and-mouse game (between a very adroit mouse and a less nimble cat). Staying away from dark corners will require continuous effort, not one-shot regulation.

That is the theme of The Chess Game of Financial Regulation.

However, my overall take on Blanchard’s essay will be harsh.*

1. He still wants to believe in equations and technical brilliance. He implies that if we were just better at manipulating nonlinear models, all would be well. Once again, an MIT economist is unable to grasp Hayek’s insight that there is knowledge embedded in the economic order that no individual can possess. No thanks to MIT, and long after I had left it, I wound up on the side of Hayek. In fact, when it comes to macro I would argue that I am more Hayekian than Hayek.

2. Rational expectations helped make the careers of Fischer, Blanchard, and other MIT contemporaries, and refusal to tool up in rational-expectations modeling is what un-made my own academic career. In hindsight, and with an assist from Frydman and Goldberg, I would say that rational expectations was the ultimate anti-Hayek proposition. In effect, Chicago said that everyone knows everything. Eventually, MIT countered with “behavioral economics,” which said that some people are often mistaken while assuming at least implicitly that the technocratic elites know everything.

3. My least favorite paragraph:

Now that we are more aware of nonlinearities and the dangers they pose, we should explore them further theoretically and empirically – and in all sorts of models. This is happening already, and to judge from the flow of working papers since the beginning of the crisis, it is happening on a large scale. Finance and macroeconomics in particular are becoming much better integrated, which is very good news.

I’ll be uncharitable (and sarcastic) and say that he is telling us once again that the state of macro is good, because the same modeling hubris still predominates. The way I see it, the drunks are still looking under the same lamppost.

As for integrating finance and macroeconoimcs, my prediction is that this will accomplish nothing. I believe that mainstream macroeconomists are over-stating the importance of the financial crisis. Instead, I am inclined to treat the financial crisis as a blip, one whose apparent macroeconomic impact was made somewhat worse by the very policies that mainstream economists claim were successful.

This blip took place in the context of key multi-decade trends:

–the transition away from goods-producing sectors and toward the New Commanding Heights of education and health care

–the transition of successful men away from marrying housekeepers and toward marrying successful women

–the integration of workers in other nations, most notably China and India, into the U.S. production system

–the increasing power of computer technology that ise more complementary to some workers than others

These trends are what explain the patterns of employment and relative wages that we observe. The financial crisis, and the government panic in response, pushed the impact of some of these developments forward in time. Overall, however, the focal points of mainstream macroeconomics, including fiscal and monetary measures, are not nearly as significant to the actual economy as they are on paper in the models.

I have always been harsh on Blanchard. You should discount for that.

The Wedge Between Compensation and Wages

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Mark Warshawsky and Andrew Biggs write,

Most employers pay workers a combination of wages and benefits, the most important of which is health coverage. Economic theory says that when employers’ costs for benefits like health coverage rise, they will hold back on salary increases to keep total compensation costs in check. That’s exactly what seems to have happened: Bureau of Labor Statistics data show that from June 2004 to June 2014 compensation increased by 28% while employer health-insurance costs rose by 51%. Consequently, average wages grew by just 24%.

The kicker:

Health costs are a bigger share of total compensation for lower-wage workers, and so rising health costs hit their salaries the most. The result is higher income inequality.

I don’t think you can blame company-provided health insurance as a first-order cause. Suppose that there were no company-provided health insurance, and everyone instead bought health insurance on their own. In that case, more of the compensation of employees would have been in the form of wages and salaries. If health insurance in the individual market had gone up as rapidly as it has in the company-provided market, then this would have a stronger effect on the cost of living for low-income workers. So even if you did not have company-provided health insurance, you would still have the “wedge” between compensation and disposable income after health insurance.

As a second-order effect, you can argue that company-provided health insurance, and its tax exemption, push in the direction of raising health care costs. But that is not such a compelling argument.

I do think that it is increasingly misleading to speak of a single “cost of living,” when so much of the market basket consists of medical procedures and college expenses that not everyone undertakes. That is, I still believe that Calculating trends in the real wage is much harder than we realize, because every household has different tastes.

Related, from Timothy Taylor:

it’s also intriguing to note that since 1984, the share of income spent on luxuries is rising for each income group, and the share of income spent on necessities is falling for each income group.

He refers to a study by LaVaughn M. Henry.