What the Fed Represents

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John Cochrane writes,

The Fed should welcome limits on its responsibilities, and a clear and happy arrangement with Congress.

This might be true in a world where people were focused on implementation of Constitutional principles. But think about what the Fed represents. Do you remember when on health care people were saying that we need something like the Fed for health care?

The Fed represents the idea of experts with esoteric expertise who are independent from Congress. Their exercise of discretionary power is deemed vital for the health of society. The Fed thus represents the ultimate Progressive institution. Rational governance tames the free market. Non-partisan technocrats overcome the flaws in Constitutional democracy.

This mythical Fed is what is threatened by the sorts of laws that Cochrane was asked to testify about.

Don Kohn gives the mainstream response. Pointer from Mark Thoma.

Questions that came up at lunch yesterday

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Organized by Tim Kane, with John Cochrane, several GMU stalwarts, Tevi Troy, Brink Lindsey, and others. These were some of the questions I asked.

1. Are colleges deteriorating in quality as fast as I think they are? This was a side conversation, and several participants expressed the viewpoint (wishful thinking?) that all but the most well-endowed colleges could find themselves suddenly overwhelmed by alternative modes of education and credentialing.

2. In the 1950s, many of the large successful businesses (McDonalds, Holiday Inn) were founded by men who never attended college. Why does that seem unlikely today? One answer given was that in the 1950s, you could have only a high school education and still be well above average in terms of cognitive skills, self-control, and other traits.

3. There was a lot of talk about how things are not really as bad for the middle class as the left makes them out to be. I asked, if things are not so bad, then imagine giving a talk to people in a small town in Ohio or in rural Oklahoma. What sorts of advice about future jobs would you give? Some of the answers were glib (“Move to the city.”) Others suggested that the jobs would be in fields like nursing. But not everyone is cut out to be a nurse.

4. Think of a world with momentum investors (“the trend is your friend”) and contrarian investors “If something cannot go on forever, it will stop.”) Can we get bubbles when for a period of time momentum investors overwhelm contrarian investors? The response (I’ll take a risk that I am violating some implicit rules and give away that it was John Cochrane who gave it) is that this sort of thing is more likely to happen in real estate markets than in financial markets, because in real estate markets transaction costs are high. You cannot go short. It is hard to take a large long position (you buy one house at a time, not many houses).

One question that came up concerned the effect of Chinese exports on American wages. With manufacturing a relatively small share of GDP, it was argued that the effect on overall wages cannot be large. Still, the effect on some niches of workers seems to be large.

Someone else asked about the narrative that American workers are worse off than they were 50 years ago or 100 years ago. To those of us at lunch (all on the right side of the political spectrum), that seems ridiculously inaccurate. Yet it holds sway on the left, and it seems to work with the general public.

One answer is that people who take a pessimistic view of recent decades may be thinking in terms of the second derivative. That is, the standard of living is still increasing, but it is increasing much more slowly than it did 40 years ago, and thus it has disappointed expectations.

Another possible answer is that “average is over.” If you are poor and not always employed, then between government benefits and low-cost goods, you can get by. But if you work full time and aspire to be middle class, your consumption basket is more expensive and government is not helping you.

Later, it occurred to me that the left’s story has the advantage that there is a villain. The evil CEOs and capitalists have taken away something from ordinary workers. No matter how many facts you throw back at them, any story with a villain is more compelling than one without one.

Incidentally, that makes it pretty futile for conservatives to try to play the compassion card (sorry, Arthur Brooks). People respond to villains. To compassion, not so much.

Timothy Taylor on Nudging and Public Choice

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He writes,

think about elected officials and regulators in the spirit of behavioral economics: they often lack self-control; have a difficult time evaluating complex situations; tend to stick with rules-of-thumb and default options rather than accept the cognitive and organizational costs of re-evaluating their positions; do not evaluate costs and benefits in a consistent way across different contexts; are not good at evaluating risks accurately, instead often respond to limited information and hype; and are overly averse to the risk of taking responsibility for decisions that might turn out poorly. This perspective must have widespread implications for decisions involving the complexities of the tax code or government budgets, policies affecting the workforce and the environment, openness to new sources of domestic and foreign competition, and foreign policy as well.

He is riffing off a paper by W. Kip Viscusi and Ted Gayer.

Defining Money Like a State

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Kathleen McNamara writes,

single currencies are never the product of debates about optimal economic solutions. Instead, currencies like the U.S. dollar itself are the result of political battles, where motivated actors try to centralize power. This has most often occurred “through iron and blood,” as Otto van Bismarck, the unifier of Germany put it, as a result of catastrophic wars. Smaller geographic units were brought together to build the modern nation state, with a unified fiscal system, a common national language that was often imposed by force, a unified legal system, and, a single currency. Put differently (with apologies to sociologist Charles Tilly), war makes the state, and the state makes the currency.

The U.S. case is instructive. America used to have a chaotic multitude of state currencies and privately issued bank notes, with complex exchange rates between them. This only changed thanks to the Civil War. The American greenback was created in 1863 when Abraham Lincoln’s Republican Party muscled through legislation giving the federal government exclusive currency rights. It was only able to do this because Southern legislators, who opposed more centralization of power, had seceded from the American union.

Pointer from Mark Thoma, who comments, “whether the euro was politically motivated for the most part, or not, economics matters for the sustainability of a political union.”

Price Stickiness is Only One Coordination Failure

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Steven Randy Waldman writes,

For both firms and individuals, resistance to downward price adjustment is often rational, even when at a macroeconomic level universal downward adjustment would be desirable (perhaps because the central bank and/or state have failed to accommodate the expected path of nominal incomes, perhaps because nominal exchange rates are rigidly misaligned). If we could wave a magic wand and have wages, prices, and especially debts all simultaneously scale downward, that might be awesome. But, unfortunately, we can’t.

I think both Tyler Cowen and Mark Thoma pointed to this post. Read the whole thing.

The problem with the macroeconomic perspective is that when you think of the economy as a GDP factory, then the only reason you can think of for it not to operate at capacity is that the ratio of M to P is too low. Instead, if you think in terms of PSST, you can think of all sorts of reasons for coordination failure.

The chains of production are really long and complex. Somebody has a job doing “business development” for a company trying to make money out of an app. That job is so far from producing widgets that it is ridiculous.

In addition, pretty much everything we buy is discretionary. The seller of almost any product or service could wake up tomorrow and find the demand for that product or service poised to fall off. Need I cite landline telephones, retail music stores, or taxi drivers?

In the PSST story, the rigidities that matter are the burdens of trying to start a new business and the reluctance of people to relocate and to change occupations. The ratio of M to P just doesn’t amount to a hill of beans in an economy that depends on deep, complex coordination in the market process.

Fashions Change on Campus

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From an article in the Washington Post.

As colleges grapple with the widespread problem of sexual assault, there is a growing consensus that the nation’s schools need to do more to educate young people about sex and relationships before they ever set foot on campus.

The focus of the article is on attempts to use sex education in grades K-12 to explain the concept of consent to young people.

My point is not to say whether this is good or bad. What strikes me is how swiftly the fashions have changed on elite college campuses. As recently as five or six years ago, if you had asked me, I would have have said the colleges do too much to encourage casual sex–telling the resident assistant to keep a set of condoms in a candy dish so that anyone could come by and grab one as needed. Now, the colleges seem to be headed in the complete opposite direction. Not that they want to get rid of the condoms, but they seem to be trying to make sure that no one can have fun using them.

On a rather different note, Bart Hinkle gives an example of the campus fashion for “inclusion.”

Among other things, candidates should “include a list of activities that promote or contribute to inclusive teaching, research, outreach, and service”; they should report information about their “contributions to an inclusive campus”; they should write about their “active involvement in diversity and inclusion”; demonstrate that they have pursued “training in inclusive pedagogy”; incorporate “the Principles of Community into course development”; and so on. A spokesman for the university says providing such information is purely voluntary — but who applying for promotion or tenure is likely to see it that way?

He points out that if someone were to impose a similar requirement on professors to demonstrate their patriotism, people would be properly outraged.

I am becoming increasingly concerned that sending children to college is dangerous for their intellectual health. I am afraid that instead of being told how to think, students are being told not to think. They are being ideological role models, not intellectual role models.

Had someone expressed such sentiments to me fifteen years ago, I would have dismissed that person as a paranoid right-wing nutjob. I infer that in the meantime either I have turned into a paranoid right-wing nut job or there has been a significant erosion of intellectual integrity at American colleges, or both.

I am inclined to believe that it was rapid erosion of intellectual integrity. I think that the last 15 years have witnessed a change in the demographics of the professoriate. Professors with intellectual integrity have aged out or otherwise departed. An anti-intellectual conformity has appeared in their place. When you have intellectual integrity, you don’t see these sorts of abrupt fashion changes. I think of intellectual integrity as getting your beliefs from careful reflection. That means that you did not rely on fashions in the first place, and you do not change your beliefs to fit the latest fashion.

Questionable Journalism Regarding Maury Obstfeld

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The WSJ blog writes:

Mr. Obstfeld said in 2012 that, should Berlin agree to backstop the debt of European countries, the eurozone as a whole would be better off if the bailout was unconditional, rather than requiring labor market reforms and budget controls. If Germany failed to bailout out weak southern eurozone members, he believed it would hurt Germany’s economy more than an unconditional bailout.

…The currency union requires stronger integration to overcome its vulnerabilities, Mr. Obstfeld wrote in a study of the lessons from the euro crisis. That means member governments would have to sacrifice far more of their economic sovereignty than they currently allow.

I believe that he said something along the lines of the second paragraph. The first paragraph sounds too extreme for any mainstream economist. I have made a few attempts to find a citation, but without success. Note that the first paragraph also strikes me as somewhat inconsistent with the second paragraph, because the latter seems to imply that he would expect bailed-out countries to have to give up some sovereignty.

In any event, Maury is a nice guy who subscribes to a technocratic view of the world that is quite different from mine. There is a group of economists, heavily represented at the International Monetary Fund, who will tell you that the world’s economic problems are caused by “global financial imbalances” (some countries save too much, others save too little) and that more management by the IMF is the solution. I, on the other hand, am among those economists who think that the IMF logically should have been abolished in 1971, when President Nixon ended the regime of fixed exchange rates.

It is easy to understand why the IMF did not consider me for chief economist.

Why Regulate Medical Treatments for Efficacy?

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Recently, someone sent me a draft paper on this topic. My reaction is this.

1. I think that the default position of economists would be that while government may have a legitimate role in keeping unsafe drugs off the market, the best approach for dealing with ineffective drugs would be to help promote and disseminate research.

2. This default position is badly compromised, however, by the prevalence of third-party payments for medical treatment. Both government insurance programs and private insurance companies want clear guidance for when they can deny payment for a treatment. That implies that official government determination of the efficacy of treatments is going to be welcomed both by government programs and by private insurance companies. That in turn makes it difficult to extricate the FDA from ruling on efficacy.

Timothy Taylor on Coal’s Resurgence

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He cites in particular a paper by Jan Christoph Steckel, Ottmar Edenhofer, and Michael Jakob. Of all of the factors affecting carbon dioxide emissions, the most important is probably the increase in the carbon intensity of energy use in Asia and in developing countries, fueled (so to speak) by coal. Taylor notes that simply going for a global crackdown on coal use would punish countries that are well behind the U.S. and other developed countries in terms of wealth. He concludes,

if you aren’t a big supporter of near-term, large-scale, non-coal methods of producing electricity around the world, you aren’t really serious about reducing global carbon emissions.

Urban America and Public Policy

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Michael Evans and Andrew Hendrix write,

The Bay Area is not alone. Along with Boston, New York, and Washington, D.C., these four metro areas lost nearly 3 million people on net between 2000 and 2009 — even as cities became increasingly fashionable places to live. Meanwhile, the ten largest destinations for internal migration in the U.S. absorbed more than 3 million new residents. In these cities, the average newcomer found his wages to be 25% lower than at the job he left behind.

The cost of starting a business in coastal cities is high.

regulations won’t stop the next Facebook, but they may halt an immigrant hoping to set up a corner shop or an aspiring chef’s food truck. These mundane forms of entrepreneurship are the lifeblood of America’s cities, and they are slowly being choked by endless red tape. When an entrepreneur needs a miniature army of lobbyists to simply establish his business or develop a property, something is wrong.

It is unfortunate the there is so little political competition in these poorly-governed cities.