Central Banking’s New Normal

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Tyler Cowen writes,

Were not these exit strategies supposed to be easy and painless? Maybe they are, except having no exit strategy is all the more easy and painless.

The title of his post is Will the major central banks evolve into mega-hedge funds? But perhaps the title should be, will the major central banks ever give up their mega-hedge fund activities?

In the wake of the financial crisis, the Fed has decided that credit allocation is too delicate and important to be left alone. The financial crisis did to the Fed what the 9-11 attacks did to national security agencies. I think that the chances that central banks will decide that they no longer need to behave like hedge funds are about as high as the chances that our national security apparatus will decide that they no longer need to treat terrorism as a major threat.

Solar Power Issues

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Richard Swanson, founder of a major solar power company:

Solar panels now account for less than half of the cost of a solar panel system. For example, installers spend a lot of time and money designing each rooftop solar system. They need to have a certain number of panels in a row, all getting the same amount of sunlight. A bunch of companies are automating the process, some with the help of satellites. One of the most exciting things is microinverters [electronics that control solar panel power output] that allow you to stick solar panels anywhere on a roof—it’s almost plug and play.

Read the whole short interview.

Failure Gets Rewarded

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Reihan Salam writes,

Yesterday, the Congressional Budget Office announced that it believes the bill will cost $35 billion over three years, ramping up to as much as $50 billion a year if its programs are made permanent. As, of course, they will be, meaning that this is an absolutely gigantic expansion of the VA.

The way capitalism works, if a private firm fails its customers, it goes bankrupt and someone else takes over. (Crony capitalism does not work that way, of course. Instead, you get bailed out.) When a government organization fails its customers, it gets a huge budget increase.

I guess the idea of selling the VA facilities to the private sector and instead giving veterans money to shop around for the best available health care is just too silly to consider.

Niall Ferguson on Networks and Hierarchies

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He writes,

European history in the 17th, 18th, and 19th centuries was characterized by a succession of network-driven waves of innovation: the Scientific Revolution, the Enlightenment, and the Industrial Revolution. In each case, the sharing of novel ideas within networks of scholars and tinkerers produced powerful and mainly positive externalities, culminating in the decisive improvements in economic efficiency and then life expectancy experienced in the British Isles, Western Europe, and North America from the late 18th century. The network effects of trade and migration were especially powerful, as European merchants and settlers exploited falling transportation costs to export their ideas, as well as their techniques and goods, to the rest of the world. Thanks to those ideas, this was also an era of political revolutions. Ideas about liberty, equality, and fraternity crossed the Atlantic as rapidly as pirated technology from the cotton mills of Lancashire. Kings were toppled, aristocracies abolished, and churches dissolved or made to compete without the support of a state.

Yet the 19th century saw the triumph of hierarchies over the new networks. This was partly because hierarchical corporations—which began, let us remember, as state-sponsored monopolies like the East India Company—were as important in the spread of industrial capitalism as horizontally structured markets. Firms could reduce the transaction costs of the market as well as exploit economies of scale and scope. The railways, steamships, and telegraph cables that made possible the first age of globalization had owners.

He argues that networks once again have gained an advantage, but he backs away from forecasting the demise of hierarchical corporations and states.

An Attempt to Explain Bill Dudley?

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Ryan Tracy of the WSJ discusses a new paper on the revolving door between Wall Street and regulators.

its findings suggest that the revolving door may be driven by an entirely different force. Instead of “regulatory capture,” the paper provides evidence consistent with “regulatory schooling” – the idea that people take regulatory jobs to become experts on complex regulations before cashing in with a private sector job. Instead of having an incentive to go easy on banks, the “regulatory schooling” hypothesis suggests regulators have an incentive to make rules more complex.

The paper comes from the research staff at the New York Fed.

Questions on Iraq

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1. There is a Sunni group that seems to be aligned with Al Qaeda fighting a government that seems to be aligned with Iran? Which dog do I have in that fight?

2. President Obama is looking into emergency military aid for the government. Republican hawks want air strikes. Which dog do I have in that fight?

Disability and Employment

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Sarah Portlock of the WSJ reports,

In 2013, just over one in six — or 17.6% — of people who were disabled had a job, down slightly from the prior year. The report tracks workforce characteristics of people with a disability, which includes hearing, sight, cognition, mobility or other impairments.

…The Labor Department report comes as new regulations require federal contractors to ask their employees if they have a disability in an effort to reduce joblessness in the community. Companies must employ a minimum of 7% disabled workers, or prove they are taking steps to hire more, or else they could face penalties or lose their government contracts.

In the first paragraph, she links to a report from the Department of Labor.

Government policies shift the supply curve of disabled workers to the left, by offering benefits for not working. The second paragraph describes a policy to shift the demand curve to the right. What would standard economic analysis predict?

One Thought on Illegal Immigrants

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I sometimes wonder what would happen if we were to use a jury system to deal with illegal immigrants. That is, let an immigrant who is here illegally appeal to a jury of citizens for the right to become a citizen.

I think that a jury system might do two things. It might lead some anti-immigrant citizens who serve on such juries to appreciate the human issues involved for, say, a 16-year-old of Mexican origin who has lived for 14 years in the U.S. and known nothing of Mexico. It also might lead the immigrants themselves, about to come before juries, to think in terms of how they can assimilate and thereby come across as more appealing to a jury of citizens.

It seems to me that the defeat of Eric Cantor will be interpreted, probably correctly, as making it very difficult for Republicans to compromise on immigration issues. My guess is that this will help Democrats. I think that group-identity wedge issues tend to be their comparative advantage, but I could be wrong about that.

The Consensual Hallucination

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William J. Luther and Lawrence JH. White write,

An inelastic supply in the face of volatile demand makes the value of bitcoin unstable relative to established currencies. While a drawback, this need not preclude bitcoin from spreading as a medium of exchange. Entrepreneurial innovations—market exchange pricing and instantaneous exchange facilities—enable bitcoin to function as a medium of exchange while allocating the speculative risk of holding it to those who are most willing to bear it (for a small price). Although it is still too early to know how greatly these innovations will widen bitcoin use, they give it a better chance of becoming a commonly accepted medium of exchange. If nothing else, the evolution of bitcoin and rival crypto-currencies will continue to provide us with the opportunity to ponder alternative payment systems and the possibilities for non-state money.

One way to think of money is to use William Gibson’s famous description of cyberspace: a consensual hallucination. We accept it as payment because other people accept it as payment. We think that prices will be pretty stable because other people think that prices will be pretty stable.

This takes us away from the mechanical quantity theory of money. Instead it suggests that there are multiple equilibria, one of which we happen to be experiencing. The behavior of prices is part of our consensual hallucination.

If the consensual hallucination concerning the dollar should break down, my guess is that another state currency will serve as the anchor. Swiss Franc? Canadian dollar? Singapore dollar?

Delivering Flexible Benefits

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Wired reports,

At a recent event, hosted by Andreessen-Horowitz, on the future of retail, Berland pointed out that there are two things you always have with you: a credit card and a smartphone. The day is coming when we combine them. “What we are hyper-focused on is how do we merge those two things,” she says. “Especially as one day the physical card will disappear.”

Even before I read that story, I was thinking of using two media to deliver flex-benefit dollars: smart phones, for people who have them; and paper, for people who don’t. With smart phones, you require use of biometric ID to spend flex-benefit dollars, and I assume you make fraud a lot harder to pull off. With paper, you could print the person’s photo on the paper in order to make fraud difficult.