Jason Collins on Colander and Kupers

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He writes,

Overall, Complexity and the Art of Public Policy is a good book. However, the last third of the book did not convince me that complexity theory arms us with many new policy tools. A complexity frame punches holes in many of our methods of analysis and the policy options we put on the table using standard economic frameworks. But the very nature of complex systems makes it a challenge to propose options that we can claim with any confidence to have positive effect. Roland and Kupers have ventured into that area – which I am grateful for. I was glad to read a complexity book with an attempt to give some policy relevance without yet another description of the El Farol Bar problem. But the particular examples they provided leave me of the view that the strongest contribution of complexity theory will be to tell us when our standard economic policy tools will work, and when they won’t. That’s no small accomplishment, but in a world where we need to “do something”, it’s not an easy sell.

I called it the best book of 2014, and I think hardly anyone agrees with me. However, I found myself often frustrated by its flaws, and Collins shares my frustration. I strongly recommend reading Collins’ entire piece. I agree with every sentence in it.

Real Political Science

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Hans Noel writes,

What is a special interest? Why, it is an interest opposed to the “general interest” or collective will. But see items #2 and #3 above: There ain’t no such thing.

Special interests are labor and business. They are environmentalists and developers. They are pro-life and pro-choice activists. They are gays and they are fundamentalist Christians. They are you. They are me. It is hard to think of any political outcome that does not satisfy some interests and oppose others. Political scientists rarely talk about special interests. We used to use language like “interest-group pluralism” to describe the resulting political environment. The most important distinction in this world is not between special and general interests, but between organized interests (like unions, religious groups, and the NRA) and unorganized interests (like the unemployed or homeless). Today, many find “interest-group pluralism” to be an incomplete picture, because it does not capture the important role of political parties in managing these various groups (See, for instance, Cohen et al. 2008, Karol 2009). Yet the point remains: interests are just interests. They are not so special.

Read the whole piece, which is called “Ten things political scientists know that you don’t.” The quoted paragraphs are similar to what I often heard from my father, a political scientist. Thanks to a commenter on yesterday’s post on Ira Katznelson for the pointer.

Ira Katznelson is this respected?

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I just finished Fear Itself, his book on the Roosevelt-Truman years. My final reaction was, “Well written, interesting perspective, looks at political economy with about as much sophistication as Occupy Wall Street.” I looked him up to see if he had any connection to the Occupy movement, figuring he might be the sort of fringe professor who would get into it.

Boy, was I off. He is a major force in the academic world. Past President of the American Political Science Association. Current head of the Social Science Research Council. Fear Itself was recently awarded the Bancroft Prize.

I keep forgetting that it is people whose views of political economy resemble mine who are on the fringe in academia.

As for my disagreements with Katznelson, I barely know where to start. He acknowledges the consensus that Roosevelt’s National Recovery Act was a failure, but he has no idea why. He seems to think that it would have worked had it been better executed.

The view of most economists is that the last thing the American economy needed in the Depression was government-organized industry cartels, which is what the NRA was all about. In Randall Parker’s book interviewing economists on the Great Depression, even James Tobin said that Roosevelt was “lucky” that the Supreme Court invalidated the NRA. Of course, Tobin is a Keynesian, and Keynes is too far to the right for Katznelson, who is very sorry that “fiscal policy” took the place of “planning” as the main tool of government for managing the economy.

I found the book valuable. Actually better than any of the flawed books of 2014 (it was published in 2013). I plan to write a longer review, which will focus on Katznelson’s analysis of the politics of the period.

But right now I am sitting here dumbfounded that someone can attain such lofty professional status and be so clearly ignorant of Public Choice theory or the Knowledge Problem.

One possibility is that everyone is intellectually isolated nowadays. Everybody stays within their own bubble. But I doubt that. Conservatives and libertarians did not ignore Rawls. They did not ignore Piketty.

Instead, I think this reflects the ease with which someone on the left can obtain high status in academia, and the corresponding difficulty for those on the right. If you’re on the right, you have to demonstrate awareness of important left-wing academic ideas, or you will be will be widely denounced as an ignoramus. But the converse is not true. I would bet that I am the first person to dare to suggest that Katznelson suffers from ignorance.

Charles A.E. Goodhart Does Not Heart SPOE

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He writes,

there is no doubt that it is a clever and subtle idea. But there is no account of what might happen after this recapitalisation (of the op-co) has been put in place. In a game with many rounds, such as chess, the expert players are those that are trained to think many steps ahead. Within the bail-in process, the (main) operating subsidiary (the op-co) is meant to continue, so this is supposed to be a multi-stage exercise. Yet nothing is said in this paper about subsequent stages, nor the problems that might arise therein. I raise some queries about what might happen after the initial resolution is triggered.

Read the whole thing for specifics. Pointer from Mark Thoma.

SPOE stands for Single Point of Entry, which I think relates to what Goodhart calls TLAC. My hypothesis is that the regulators will start to look one step ahead just when the first big bank failure occurs, and what they see will convince them to do a bailout instead.

Why Did the South Not Converge?

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From Ira Katzelson’s Fear Itself,

For even as industrialization was proceeding elsewhere, the South remained overwhelmingly rural and poor, with depleted land, a lquasi-feudal tenure system based on debt and fear, and many bankruptcies and foreclosures. The New Deal thus was a boon for a hardscrabble region that faced many barriers to economic development. These included a poorly educated and low-skilled white and black population, inferior roads, the outmigration of ambitious workers, a shortage of local investment capital, fewer native mineral resources than other regions, and a paucity of industrial research facilities. The South also experienced high freight rates, high tariffs, low commodity prices, and patterns of ownership that placed the control of financial, mining, manufacturing, transportation, and communications corporations mainly in the hands of northeastern capitalists, a pattern many southern commentators thought to be colonial in nature.

Some thoughts:

1. In my book with Nick Schulz, we emphasize that countries differ mostly in terms of intangible wealth. We focus on institutions (think of North Korea vs. South Korea). The main institutional difference that the South had was its Jim Crow laws. Were they enough to keep the region improverished?

2. Remember that there are many ways for regions to converge within the U.S. People can move to where incomes are higher. Capital can move to take advantage of cheaper labor. Why did these mechanisms not work? Again, race may have played a factor. Until after the second World War, the poorest part of the southern population, namely poor African Americans, was discouraged from moving north, because racism also existed in the north. By the same token, a large part of the southern labor supply that might otherwise have attracted northern capitalists to build factories was African American, and it would have been hard to find whites willing to work with blacks doing similar jobs or under black supervisors.

3. Divergence remains a feature of the American economy. Both within and across metropolitan areas, there are large income differences. Again, this poses the questioh of why there is not more movement of people to high-income locales and/or more movement of firms to low-wage areas.

4. Katzelson’s point is that politicians of the south actively sought redistribution, and this factored into their support for New Deal legislation.

5. Bryan Caplan offers a theory of coincidental advantages that may or may not be a convincing explanation for lack of convergence.

More Never-Married Women than Men?

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Pew’s George Gao writes,

the share of American adults who have never been married is at an historic high. In 2012, one-in-five adults ages 25 and older had never been married. Men are more likely than women to have never been married. And this gender gap has widened since 1960.

This puzzles me a bit. Suppose you have a population with 100 men and 100 women, and that all marriages are heterosexual. The data say that 23 men have never been married and 17 women have never been married. How can that happen? At any given time, the same number of men and women must be married. The only way I can make the arithmetic work is to assume that some of the now-married women are married to men who are married for the second time (and thus the men are not removed from the never-married total), and that some of the formerly-married women are now single, and hence are not included in the never-married total. Apparently, men have an easier time re-marrying.

More interesting data points on a variety of topics at the link.

Another puzzling one:

Brazil and Mexico, which now have a younger population than the U.S., will potentially have an older one than the U.S. by the middle of this century.

I guess that this is a result of our baby boom generation? As we Boomers die off, the age of our population will grow more slowly than that of countries that did not have such large baby booms. Is that the story?

The Threat of Debt

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Luigi Buttiglione, Philip R. Lane, Lucrezia Reichlin and Vincent Reinhart write,

Contrary to widely held beliefs, the world has not yet begun to delever and the global debt-to-GDP is still growing, breaking new highs. At the same time, in a poisonous combination, world growth and inflation are also lower than previously expected, also – though not only – as a legacy of the past crisis. Deleveraging and slower nominal growth are in many cases interacting in a vicious loop, with the latter making the deleveraging process harder and the former exacerbating the economic slowdown. Moreover, the global capacity to take on debt has been reduced through the combination of slower expansion in real output and lower inflation.

Much of the debt increase has taken place in emerging markets, notably China. I remain suspicious of aggregate debt-to-GDP numbers as an indicator. Indeed, the paper speaks to many of the issues with this measure that trouble me). However, the authors make a reasonable case to worry about two risks. One is that any adverse economic development will be multiplied by the defaults that result from high leverage. The other is that a “confidence crisis,” in which creditors lose faith in some debt instruments, becomes self-fulfilling. As the authors put it,

we outline the nature of the leverage cycle, a pattern repeated across economies and over time in which a reasonable enthusiasm about economic growth becomes overblown, fostering the belief that there is a greater capacity to take on debt than is actually the case. A financial crisis represents the shock of recognition of this over-borrowing and over-lending, with implications for output very different from a ‘normal’ recession. Second, we explain the theoretical foundations of debt capacity limits. Debt capacity represents the resources available to fund current and future spending and to repay current outstanding debt. Estimates of debt capacity crucially depend on beliefs about future potential output and can be quite sensitive to revisions in these expectations.

This report came out two months ago, and I do not recall it getting much play. I think it deserves your attention. Read the whole thing. For the pointer I thank Jon Mauldin’s email newsletter.

American Politics in the 1930s

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Carl Eric Scott reviews some books on the period, including Fear Itself by Ira Katznelson.

Katznelson shows us that there were German Nazi efforts in the 1930s to find and cultivate political allies in the American South, i.e., ones willing to emphasize the similarity of their racial ideology to that of Hitler, and that these efforts came away entirely empty-handed. Perhaps with the offense bred by a recognition of an unwelcome similarity, the Democratic South found Nazi Germany utterly repugnant. This had something to do with greater felt kinship to Britain in the Southern states, and to stronger military traditions and hopes for federal military bases, but it goes well beyond those factors. For whatever reasons, it seems the world might owe the survival of Britain in 1940 and then the defeat of Nazi Germany (42-45) to the South. To that South.

Nick Rowe on Money and Expectations

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He writes,

The value of any financial asset, like money, is always and everywhere about expectations of the future. All financial assets are just promises, written on bits of paper. They are commitments about the future, and nothing more, and those commitments create expectations, and those expectations are what determine the demand for those financial assets. What happens right “now”, in the “current period” is always irrelevant, except insofar as it affects expectations of the future.

For monetary theorists who write down models, this creates another degree of freedom. You can say that a Fed action/statement of X will have an effect on expectations of Y, and this will have consequence Z for the economy. You can get just about any sort of result that way, and if you review the literature you will see that theorists have, indeed, gotten all sorts of results–one theorist can say that policy X will raise prices, and another theorist can say that policy X will lower prices.

Personally, I would use that degree of freedom to say that, to a first approximation, any Fed action/statement has zero effect on expectations. My view appears to be clearly false, in that investors hang on every word of the Fed, and Fed announcements often move markets–for a day or so. Then they go back to looking at other news. Whether there is any durable effect on markets is something you can believe or doubt, as you wish. I doubt.

Mortgage Servicers Bite Back

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Laurie Goodman writes,

Average foreclosure timelines, or the length of time between the first missed payment on a loan to its liquidation, have continued to increase, particularly in judicial foreclosure states, where a court order is required to evict a borrower. This increase reflects a number of factors: borrowers are being given more opportunities to stay in their home through mortgage modifications, state attorneys general have imposed various foreclosure moratoriums to increase consumer protections, and courts are backlogged.

Pointer from WSJ’s Joe Light.

A mortgage servicer is a company that operates in a specialized niche in the securitization process. The loan originator approves the loan, which is sold to a securitizer, who packages the loan and sells it to investors. But once the loan is originated, none of those folks actually want to have any contact with the borrower. That task falls on the loan servicer, who takes your monthly payments and distributes them to where they need to go–taxes, insurance, and payments to the securitizers, who pass them through to investors. The servicer also deals with you when you become delinquent, and if appropriate, takes you to foreclusre. Servicing has been traditionally a very low-margin business, with the whole ballgame about keeping costs low.

Back in 2009, policy makers treated mortgage servicers like a piñata. They beat on servicers to provide foreclosure relief, loan modifications, and so forth. They told them to administer new programs that combined loan origination procedures with loan servicing procedures. They sought to punish servicers for noncompliance.

Well, guess what. Now servicers do not want anything to do with any loan that might become delinquent. The cost of dealing with such loans has skyrocketed, thanks to Washington’s piñata-bashing. So if you originate a loan to someone with a low credit score, the servicer charges a hefty premium. That in turn means that risky borrowers either have to pay that premium or get rationed out of the market altogether.

And so now policy makers are beating up on originators to be nicer to risky borrowers. It really is like something out of Atlas Shrugged.

I could see all of this coming back in 2010. When I testified on HAMP (I start about 90 minutes in), I was the only one who focused on the plight of mortgage servicers.