I’ve gone from being a rah-rah enthusiast for mass immigration to one who is more skeptical of its virtues. That’s because I think the melting and fusing of different ethnic groups is essential to building a more cohesive and humane society, and that slowing down immigration would help this process along.
I am sympathetic to his concern that immigrants may be assimilating too slowly. I am not convinced that his solution of slowing the pace of immigration is aligned with the problem.
Robert Shiller has always said no. But Katharina Knoll, Moritz Schularick, and Thomas Steger write,
Real house prices have approximately tripled since 1900, with virtually all of the increase occurring in the second half of the 20th century
Pointer from Mark Thoma. They are looking at house price data from around the world. They say that transportation improved more rapidly before 1950, and that increased the effective supply of land. Since then, the slowdown in transportation improvement and tighter land-use regulations have raised land prices.
I still want to know why their data appears to be so different from Shiller’s.
In his latest book, Political Order and Political Decay, he writes,
Though no one will ever find a smoking gun linking bank campaign contributions to the votes of specific congressmen, it defies belief that the banking industry’s legions of lobbyists did not have a major impact in preventing the simpler solution of simply breaking up the big banks or subjecting them to stringent capital requirements.
It is taking me a long time to finish Fukuyama’s book. It is long and repetitive. I think that every time I read something from him, my temptation is to condense it to something much shorter. If I post a review, I will let you know, and my guess is that if you read my review you will not need to read the book.
He favors a combination of state capacity, rule of law, and democracy. In terms of our three branches of government, the executive branch is responsible for state capacity, the courts are responsible for the rule of law, and legislatures are to respond to democracy.
(Bryan Caplan is not happy with the concept of state capacity. He suspects that it is a meaningless yay-word. If nothing else, Fukuyama seems to me to endow the word with meaning. It means that bureaucrats are effective and ethical, as in Singapore, rather than ineffective and corrupt, as in India.)
Many on the right consider the administrative state, meaning government agencies operating independently, to be a bug. For Fukuyama, it is a feature. In his view, one main reason that these agencies function poorly in this country is that they face too much interference from Congress and from the courts. In my view, agencies are as easily captured by special interests as are legislators.
If David Brooks ever gets around to reading this book, he will heart it. Like Brooks, Fukuyama longs for a political system in which an autonomous elite governs on behalf of the public good. In Fukuyama’s view, the libertarian efforts to constrain government, including checks and balances as well as federalism, end up backfiring. They make government less effective while not constraining its growth.
The ideas are worth chewing on. Do I believe that the elites would, for example, fix the unsustainable entitlements promises if we had a parliamentary system? Or do I believe that a stronger government would be worse rather than better? It’s a tough call.
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.
1. Narrative: Subprime mortgages were a consumer protection failure. Thus, we need the Consumer Financial Protection Bureau.
Reality: By a strict definition, predatory lending is when the loan is made with the intent of going to foreclosure and allow the lender to take possession of the house. This was not a factor in the subprime boom, which was fueled by the originate-to-distribute model. In the originate-to-distribute value chain, there is no one whose goal is to take the house from the borrower.
I think you could accuse loan originators of Ponzi lending. That is, lending to borrowers who could only avoid defaulting on the loan by taking out a new loan. Taking out a new loan in turn required continual increase in home prices, so that the borrower could use the equity in the house as collateral. But I would say that the biggest pushers of Ponzi lending were the “affordable housing” lobby, and I think that the last thing we will ever see is the CFPB take on the affordable housing lobby.
2. Narrative: The 1980s deregulation in banking was driven by the free-market ideology of Reagan and Greenspan.
Reality: The three main regulations that were dropped were the restrictions against banks paying market rates for deposits, the restrictions on interstate banking, and the restrictions on combining commercial banking with investment banking. I do not recall any pushback by the left on any of these–until 2008, when they made the retroactive claim that getting rid of Glass-Steagall caused the financial crisis.
In fact, these three regulatory boats had started sinking in the 1960s. The legislation that was passed in the 1980s and 1990s was simply the final order to abandon ship.
In the 1970s and 1980s, the big fight in bank regulation was not left vs. right, or deregulation vs. regulation. It was interest groups battling it out. Wall Street, big banks, savings and loans, and small banks had divergent interests, and that caused gridlock in Congress until things unraveled so much that Congress had no choice but to act.
If you want a parallel today, look at the battles between Amazon and the book publishers, or between Verizon and Google. You aren’t seeing legislators line up on ideological lines in those contests.
3. Free-market economists wanted to turn bankers loose to take whatever risks they wanted, and they got their wish.
Reality: Free-market economists were the strongest proponents of higher bank capital regulations and the biggest skeptics of the Basel risk-based capital regulations. We see the same thing today, with free-market economists skeptical of Dodd-Frank, and mainstream, establishment types like Stan Fischer saying things like
The United States is making significant progress in strengthening the financial system and reducing the probability of future financial crises.
In other words, this time will be different. Pointer from Timothy Taylor.
Notice that as Keynes, Tobin and subsequently Brad Delong and I have emphasized, wage and price flexibility may well exacerbate the problem. The more flexible wages and prices are, the more they will be expected to fall during an output slowdown leading to an increase in real interest rates. Indeed there is the possibility of destabilizing deflation with falling prices leading to higher real interest rates leading to greater output shortfalls leading to more rapidly falling prices and onwards in a vicious cycle.
Read the whole thing. There were many sentences I wanted to excerpt. Pointer from Mark Thoma.
In AS-AD, if your Y-axis is inflation rather than the price level, then AD slopes upward. That is, the more inflation you have, the lower the real interest rate, and the higher is AD. If AD gets steeper than AS, then have a nice day. Because if that happens, then a “favorable” supply shift leads to lower employment and output. One way to interpret secstag is as a claim that we have been experiencing an AD curve that is upward-sloping and steeper than AS.
Keep in mind that Summers and other mainstream macro economists talk about potential GDP as if it were some tangible quantity, rather than a made-up number. In mainstream macro, we all work in a GDP factory, and the factory has a capacity that we call potential GDP.
The PSST story rejects that. It says that we produce many different types of output, and we only have the potential to produce the output for which we have discovered patterns of sustainable specialization and trade. If we could discover other patterns of sustainable specialization and trade, we could produce a different mix of output, and perhaps this would raise the level of GDP. But raising GDP by discovering patterns of specialization and trade is akin to raising GDP by discovering a practical cold fusion technology. Complaining about the economy operating below potential is like complaining that we do not have cold fusion.
Related: Tyler Cowen on the difficulty of disentangling AD from AS. Plus Scott Sumner commenting on Tyler Cowen.
As I have said many times before, giving a bias a name is not theory.
He refers to a new paper by Owen Jones, from which Collins quotes
[S]aying that the endowment effect is caused by Loss Aversion, as a function of Prospect Theory, is like saying that human sexual behavior is caused by Abstinence Aversion, as a function of Lust Theory. The latter provides no intellectual or analytic purchase, none, on why sexual behavior exists. Similarly, Prospect Theory and Loss Aversion – as valuable as they may be in describing the endowment effect phenomena and their interrelationship to one another – provide no intellectual or analytic purchase, none at all, on why the endowment effect exists.
Read the whole thing.
1. I am worried that breaking up the biggest banks would not make the system safer.
I do not believe that having smaller banks would have prevented the 2008 crisis or the next crisis. I do not believe that regulatory policy can prevent such crises. My only solution for systemic financial risk is to try to make the financial system easier to fix when it does break. I think it is easier to fix when there is less debt, so I would look for ways to reduce incentive to take on debt. Instead of subsidies for mortgage borrowing, how about subsidies for down-payment saving? Instead of favorable tax treatment for debt, why not favor equity–or at least be neutral between the two? etc.
For me, breaking up the banks is not a safety issue. It is instead an issue of restoring democracy and the rule of law. Really big banks are crony banks, whose interactions with government officials are at the highest levels. Instead, I would like to see the biggest banks dealt with by career civil servants who are following clear, predictable rules and guidelines.
2. I am worried that it would be difficult to define size.
Once you decide that banks above a certain size should be broken up, you need a definition of size. Among the problems with doing this, the first one that comes to my mind is accounting for derivatives. If you ignore derivatives, then in very short order banks will mutate their loan portfolios into derivative books. But if you try to include derivatives, then the whole notional-value vs. market-value argument is going to kick in. Also, gross exposure vs. net exposure.
Instead, I am attracted to using the amount of insured deposits as a measure of size. It is a clean measure that cannot be gamed using accounting transactions. It is a measure of the potential impact of the bank on the FDIC. Charging a risk premium that is graduated by size would be a reasonable rule-of-law approach to discouraging large banks. Banks could avoid the risk premium by spinning off branches. The giants that were assembled by mergers could be dis-assembled by spin-offs.
3. I am worried about large shadow banks.
You can do a lot of banking without a lot of deposits. You can finance with commercial paper. You can finance with repo. You can write a ton of derivatives. I do not think that this is bad per se. But, just as with large commercial banks, large shadow banks could acquire the political power of large commercial banks.
I welcome suggestions for dealing with shadow banking. I am not thinking about how to reduce the risk of shadow banking. My view is that systemic risk is systemic risk, and you cannot get rid of it by breaking up banks.
What I am concerned with is the political power that might be concentrated in a large financial institution. The problem is that, once you get away from deposits, measuring “large” becomes quite tricky.
[Wow. I wrote the rest of this post between Tuesday and Thursday, to go up Saturday. Friday’s Wapo has a very long front-page story on the influence of donors on the agenda at the Brookings Institution. Martin Baily and Doug Elliot, listed below, are with Brookings.]
Financial regulation experts said Tuesday breaking up large banks could be costly while offering no additional safety-benefits for the economy.
I was on the panel at the Bipartisan Policy Center, and I argued in favor of breaking up big banks, but I am not mentioned in the story.
The panel was called to discuss a research paper commissioned for the Center and written by Martin Baily, Doug Elliot, and Phillip Swagel. The paper says that (a) we have little reason to worry about too-big-to-fail, because the FDIC is on its way to having enough authority to resolve big bank failures, (b) there are economies of scale in banking at the very highest levels, (c) there are transition costs to breaking up big banks, in that employees and customers would be left hanging waiting to see how the re-org falls out, and (d) breaking up big banks would not get rid of systemic risk, anyway.
I agree entirely with (d). I thought that (c) was a fair point, but there is such a thing in the corporate world as a spin-off, and it can be done. I disagreed with (a) and I was unpersuaded by (b).
I was invited to a pre-panel breakfast. However, when I got there, I soon felt out of place. Part of it was that the breakfast sandwiches were not what I would eat for breakfast (or any time). Another part of it was that the setting was larger and more formal than I had expected. Instead of a few panelists milling around, it was an executive conference table, and Elliot, Swagel, and I were the only panelists there. The rest of the approximately fifteen men (plus one woman) around the table were from trade associations (such as the American Bankers’ Association), except for two from Bank of America.
So I excused myself to go to the bathroom, got back on the elevator, went downstairs to a cafe next door, got a little food and tried to collect my thoughts. I discarded most of my talking points, which had been focused on left-vs.-right issues in narrating the financial crisis and financial regulation. I tried to come up with something appropriate for an audience of bank lobbyists.
When I got back upstairs, the breakfast was still underway. Elliot and Swagel proceeded to give the main points of the paper, with the K street folks nodding in approval. Elliott made a crack about not being able to persuade opponents who refuse to be persuaded by evidence, and I was the only one who didn’t laugh. Meanwhile, I perused a copy of the annual report of the Bipartisan Policy Center, because it happened to be on a shelf behind my seat. I thumbed through the annual report, looking for its list of donors. I cannot say that I was surprised to find in that list Bank of America, the American Bankers’ Association, etc.
A few minutes before 10 AM, the rest of the panelists assembled. I asked Baily, as an expert on productivity statistics, whether he thought that any economist would claim to have a reliable measure of bank output. “Of course not,” he replied, nearly breaking into a laugh. I was glad to hear that response, because it reinforced my view that econometric estimates of scale economies in banking are not reliable. When you measure economies of scale, you are comparing the ratio of output to inputs at different-sized firms. It’s rather difficult to do that if you cannot measure the numerator.
Then came the panel. I was a bit embarrassed to be in a chair with no desk in front of me. I was wearing high-topped gym shoes, in order to lessen a mild but nagging foot injury. Continue reading
Responding to stories about police and student discipline, how hard it is to sit in class all day, and how many high-school graduates are unprepared for college.
1. How much would somebody have to pay you to be a teacher in the middle school that you attended?
2. How well do you think that evolution trained the human adolescent to sit in a desk and pay attention?
3. When you were aged 13-18, how easy was it for a teacher to gain your respect?
4. When you were aged 13-18, did you only take rational risks?
5. When you were aged 13-18, did you want your friends to shut up so that you could listen to the teacher?
6. When you were aged 13-18, did you do what you would advise an adolescent to do today?