Spare the Bank, Spoil the Economy

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George Selgin writes,

In contrast to the Fed’s actions in August 2007, its subsequent turn to sterilized lending had it, not buying, but selling Treasury securities, with the aim of preventing its emergency lending from resulting in any overall increase in the supply of bank reserves. Financial conditions were thus “eased,” not generally, but for particular institutions and their creditors. For the rest, credit was actually tightened. Because it serves to redistribute credit rather than to alter its overall availability, sterilized lending is properly regarded, as Marvin Goodfriend insists, as an exercise in fiscal policy rather than one in monetary policy in the strict sense of the term. The principle beneficiaries of this fiscal policy were the creditors of the aided institutions, while the losers were those prospective borrowers who were denied credit because the Fed had directed the reserves that might have supported lending to them elsewhere.

The bailouts were done in the name of saving the economy. What Selgin points out (read the whole thing) is that the Fed went out of its way to offset whatever stimulative effects the bailouts might otherwise have had on the economy.

Also, go back and read what I wrote on September 27, 2008.

What macroeconomic theory says that we run the risk of a Depression if we don’t have a bailout? Try to come up with an argument that is either already in a textbook or that you would put in a textbook. If macro is a genuine discipline, it has to consist of something more rigorous than “If Bernanke is worried, then so am I.”

I was angry then, and I am angry now. Leading pundits and economists will tell you that the bailouts were heroic. They have no use for any thinking that contradicts that narrative.

How Should We Fix Higher Education?

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Daniel Drezner warns against some of the standard nostrums.

When politicians and pundits argue in favor of reallocating resources from one college major to another, they’re trying to say that they can pick disciplinary winners and losers better than universities, foundations or the students themselves.

My instinct is that he is correct that the various tweaks proposed are not going to make a big difference. My thoughts:

1. Reduce federal involvement in higher education. This is probably hopeless, given that higher education is one of the most powerful lobbies in Washington. I think that both aid to higher education (including student loans and grants) as well as regulations are largely used to protect incumbents. That makes cutting back on aid and regulations both politically difficult and better for the general public.

2. Encourage alternatives to college degrees as credentials. For example, Congress could require every Federal government agency to provide an avenue by which people could obtain positions based on demonstrated competence rather than the basis of educational credentials. Similarly, the process of approving government grants should be de-credentialized.

Peter Lawler on Higher Education

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He writes,

the traditional forms of the college serve the genuinely higher forms of liberal education that conservatives often champion. The study of philosophy in light of great texts always serves viewpoint diversity by reminding us that what just is is a perennial and invincibly difficult question that has a variety of plausible answers. When the study of justice is replaced by the activist or engaged championing of “social justice,” viewpoint diversity always suffers, because those with different views of the place and significance of justice are marginalized or worse. It’s the true study of philosophy that keeps “academic freedom” from being displaced by some dogmatic or partial and endlessly questionable view of “academic justice.”

As I see it, he is saying is that conservatives should not be focused on getting more conservatives onto the faculty at elite schools. Instead, just focus on academic rigor. If students take real courses, not “___ studies” courses, then they will learn to think for themselves. I agree.

My Opportunity to be Wrong

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In my post on Libertarians and Mass Shootings, I wrote,

As of this morning, that still would be my guess. A Charles Manson who happens to be Arab-American.

Of course, I have plenty of opportunity to be wrong.

Just to be clear, I was wrong. What made me doubt that Islamic radicalism was a factor was the place where the couple committed terrorism. I am still puzzled that they chose a low-value target. I find myself wondering that perhaps their real goal was to kill police with the bomb that they reportedly left at the scene (which either did not explode or was not a bomb), and the initial murders were a way of getting the police to come en masse. But in any case, the facts as they have emerged do not make a good case for gun control as a solution.

Scott Sumner’s Theory of Hysteresis

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In The Midas Paradox, he writes,

if depressions do encourage statist policy interventions, then deflationary policies may impose costs that are much larger that [sic] those predicted by natural rate models of the business cycle.

Recently, Blanchard and Summers have argued that demand shocks cause supply shocks in the private sector. That is, if you have a recession, the economy’s potential output falls. Sumner’s view is that demand shocks cause governments to come to power that implement bad supply-side policies. Examples he gives include Roosevelt’s NRA and Argentina’s left-wing government of the early 2000’s. Perhaps the U.S. after 2008 will turn out to be another example.

Of course, I am not as ready as Sumner to go with the AS-AD paradigm.

Scott Sumner on Targets, Instruments, and Indicators

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When I was in graduate school, Benjamin Friedman’s paper on targets, instruments, and indicators of monetary policy (appears to be gated) was assigned in several courses. So I think of it as a classic, but mine may be an idiosyncratic perspective.

A target is a policy goal: Unemployment. Inflation. Nominal GDP.

An instrument is something that the Fed controls. The three old-fashioned textbook examples are the amount of reserves (or reserves plus currency), the required reserve ratio, and the discount rate. More recently, the Fed funds rate is the instrument that economists focused on. Even more recently, there is the size of the Fed’s balance sheet.

An indicator is something that the Fed can watch to see whether the economy is moving toward or away from its target. There are plenty of such indicators: private forecasts of NGDP, high-frequency data, such as retail sales figures, etc.

As I see it, one of Scott Sumner’s objectives, in his blog and in his new book The Midas Paradox which I have just started reading, is to get people to pay less attention to certain indicators of monetary policy. In particular, interest rates and the quantity of money are not reliable indicators, in his view. He wishes that policy makers would forget about such indicators. They should instead turn instruments in order to hit the target.

For example, in recent years, he has said that all you need to know to say that money has been too tight is to look at the growth rate of NGDP. It dropped way below trend, which tells you that monetary policy should have been looser. If you insist on having an indicator, you should use the forecast for NGDP. But even if you respond only to NGDP after it is reported, you should have had a looser policy.

In the 1930s, we did not have a lot of the data that we have today, including NGDP. Sumner regards the Wholesale Price Index as the best target variable available. As I understand it (Scott, if you read this, please correct me), he thinks that the instrument that mattered most at the time was the ratio of gold reserves to currency. When this is high, government is hoarding gold and tightening monetary policy. When this is low, government is dis-hoarding gold and loosening monetary policy.

The private sector also can hoard gold, and this has the same effect as a monetary tightening. If I understand Scott’s thinking correctly, when the private sector does more hoarding, if the central bank wants to hit its nominal target it will have to do some offsetting dis-hoarding.

My own view is that the connection between instruments and targets is very loose. In the current environment, think of the Fed’s instrument as M0, which is currency plus reserves. Think of the money used for transactions as Mt, which is some complex (and variable) weighted average of currency, checking accounts, money market funds, credit lines, frequent-flyer miles, you-name-it. Because these two definitions of money are so different, the Fed can turn its dial a long way without any result, and then when it starts to get results they could end up all over the map.

This is also my instinct for the 1930s, but to be fair I need to read through Sumner’s book before I make up my mind.

Libertarians and Mass Shootings

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I think that any way that you cut it, mass shootings will make people more statist. I have been saying for quite some time that this is not a libertarian moment, primarily because of concerns with terrorism.

The San Bernadino shooting is going to strengthen support for the anti-libertarians on both left and right. On the left, there will be more calls for gun control. On the right, there will be more calls for tightening immigration policy.

My reaction to the initial reports that said that there were three shooters was to think Charles Manson. That is, a psychopath with enough charisma to draw in some other people. As of this morning, that still would be my guess. A Charles Manson who happens to be Arab-American.

Of course, I have plenty of opportunity to be wrong. [update: one argument that goes against my view here.] But if my guess turns out to be right, then I do not think that this undermines the libertarian position in favor of admitting Syrian refugees or against intervening in the Middle East.

On the other hand, if my guess is correct, then I do think that this undermines the libertarian opposition to gun control. I believe that people who want guns for self defense do not need weapons that can fire many bullets rapidly. It should not take more than a couple of shots to ward off an intruder. There are a lot of proposals for gun control that serve only to take away liberty and do nothing to prevent mass shootings. But I can imagine proposals that would do a little bit to prevent mass shootings and do very little to take away liberty.

Piketty, Inequality, and Terrorism

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The WaPo reports,

The new argument, which Piketty spelled out recently in the French newspaper Le Monde, is this: Inequality is a major driver of Middle Eastern terrorism, including the Islamic State attacks on Paris earlier this month — and Western nations have themselves largely to blame for that inequality.

To say that his views have not been well received might be an understatement. An essay in Quartz says,

But empirical studies suggest that poverty and inequality aren’t behind terror attacks. In the wake of the 9/11 attacks, Alan Krueger, the Princeton economist and future Obama administration official, examined databases of terror attacks to identify trends among the participants. Surprisingly, he found most were well-educated and not poor.

Even if terrorists are not poor, inequality still might cause terrorism. A terrorist could be a rich person who is jealous of people who are even richer.

Still, Piketty is not my type of thinker. As translated by Google, Piketty’s essay begins

It is obvious that terrorism feeds on the Middle Eastern powder keg of inequality

When I make highly speculative statements, I start out by saying “my guess is that,” not “it is obvious that.” Piketty’s approach may work better with some personality types.

When pressed, he seems to back off of strong claims and concede points to others. But I think that economists should be trained not to make such claims in the first place.

Bill Gates’ Energy Initiative

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Tech Insider reports,

The Gates-led Breakthrough Energy Coalition will be investing over $1 billion dollars, the Wall Street Journal reports. The exact dollar amount pledged is unknown, but a Gates spokesperson told Tech Insider that “it represents many billions of dollars in willing capital.”

The report links to an essay by Gates, who writes,

Today’s batteries also have a far lower energy density—that is, they store much less by weight—than fossil fuels. Coal provides 37 times more energy per kilogram than the best lithium-ion batteries available today. Gasoline provides 60 times more

Like the Obama Administration, Gates thinks that throwing money at firms attempting to solve this and other problems related to energy is a good idea. I do not think that either Obama’s people or Gates are particularly skilled at this sort of investment, but I have much more respect for Gates because he is throwing money that he and other investors are providing voluntarily, rather than appropriating taxpayers’ money to fund his dubious scheme.

Unfortunately, elsewhere in the essay, Gates touts the virtues of government-funded research and development. He should read Matt Ridley’s analysis of that in The Evolution of Everything. Ridley offers a refutation of Gates’ recycled cliches.

For another optimistic take on batteries, see Seth Borenstein’s article.