Ignorance, Exit, and Voice

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In this essay, I suggest that even if voters were knowledgeable about issues, our democratic process would still not be as desirable as having the exit option. This is in the context of talking about a recent book by Ilya Somin. In my view, an even more frustrating problem than voter ignorance is the enchantment that many people have with democratically elected leaders.

As I see it, reasonable government, including the protection of liberty, requires those in office to follow norms of behavior that are bound by Constitutional constraints and principles of limited government. The problem with democratic enchantment is that it sanctions whatever majority-elected political leaders can get away with.

And….?

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Nick Timiraos writes,

Mortgage rates could rise by as much as 1.5 percentage points for homeowners with weaker credit or smaller down payments under various legislative proposals to overhaul Fannie and Freddie Mac, according to a study prepared for an industry group.

The study purports to estimate what is seen. How about what is unseen? That is, suppose we reduce the distortions in capital markets that funnel money into high-risk mortgages. That means that the interest rate on high-risk mortgages goes up. And…? Some other interest rate goes down. It might even be the interest rate paid by firms undertaking productive investment.

But Inequality is the Defining Problem of Our Time

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Lawrence Kotlikoff writes,

The US fiscal gap now stands at an estimated $205 trillion, or 10.3 percent of all future US GDP. Closing this gap is imperative, and requires a fiscal adjustment of an immediate and permanent 37 percent reduction in spending (apart from servicing official debt), an immediate and permanent 57 percent increase in all federal taxes, or some combination of the two. The necessary size of this adjustment increases the longer it is put off.

Why I Want to Break Up the Big Banks

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Matthew C. Klein writes,

Using the lowest estimates, the big banks can attribute almost a fourth of last year’s profits to taxpayer largess. Higher estimates suggest that almost all of the big banks’ earnings in 2013 were due to subsidies rather than productive activity. The IMF notes that even “these dollar values likely underestimate the true TITF subsidy values” because, among other things, the calculations are based on the assumption that shareholders in bailed-out banks would lose everything, which isn’t usually what happens.

Pointer from Patrick Brennan.

Of course, the NY Fed will tell you that there are terrific economies of scale in banking, and that explains the profits of large banks.

UPDATE: Actually, one economist at the NY Fed, Joao Santos, thinks it’s a too-big-to-fail subsidy.

Using information from bonds issued over the past twenty years, this study finds that the largest banks have a cost advantage vis-à-vis their smaller peers. This cost advantage may not be entirely due to investors’ belief that the largest banks are “too big to fail” because the study also finds that the largest nonbanks, as well as the largest nonfinancial corporations, have a cost advantage relative to their smaller peers. However, a comparison across the three groups reveals that the largest banks have a relatively larger cost advantage vis-à-vis their smaller peers. This difference is consistent with the hypothesis that investors believe the largest banks are “too big to fail.”

Pointer from David Dayen via Mark Thoma.

Folk Pickettyism

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Harold Meyerson writes,

Indeed, Piketty’s book provides a valuable explanatory context for America’s economic woes. Wages constitute the lowest share of U.S. GDP, and profits the highest, since the end of World War II. And with heightened accumulations of wealth come heightened accumulations of political power — a shift toward plutocracy to which Wednesday’s Supreme Court decision, permitting the wealthy to contribute to as many electoral campaigns as they wish, adds a helpful push.

…Piketty gives us the most important work of economics since John Maynard Keynes’s “General Theory.”

1, It is interesting that Meyerson deems himself qualified to make this last statement.?

2. Suppose that the book becomes nothing but popular folk economics for “Workers are getting screwed. Tax the rich.” Will Picketty consider that a success or a failure?

3. “Wages and salaries” is mostly a return on capital, albeit human capital. Labor in its purest form (unskilled) earns a much lower share of GDP than Meyerson, Pickety, or anyone else has calculated.

4. How does the growth in equality of payments to individuals compare to the growth in inequality in payments for land? Has the ratio of rent for a square foot of office space in Manhattan to that for of a square foot of lowest-value land in the rural United States gone up as much as the ratio of CEO pay to the wages of unskilled workers? In both cases, where are looking at the ratio of improved to unimproved factors of production. Should we be appalled by the growth in land inequality?

An SNP Project?

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The Brooking Institution used to put out a grandiose document called Setting National Priorities. It was sort of a “shadow” budget document. I looked for a recent version, but I did not find one.

Anyway, I am in the midst of noodling over various possible projects. One idea is to try to produce a version of SNP that would be designed with a Republican Administration in mind.

I like the idea of a pyramid model. That is, there should be a few high-level objectives, and then below that would be initiatives that feed into those objectives, and below that would be components of those initiatives, and so on. There should be between three and five high-level objectives.

For example, a high-level objective could be to revive the economy by unleashing entrepreneurship in nonfinancial business, including education and health care.

Another high-level objective could be to put fiscal policy on a sustainable path.

Another high-level objective could be to align regulatory missions and policies to 21st-century technological reality in energy and telecommunication.

One can imagine this being presented in WIKI format. Comments on the pros and cons of that for this project are welcome.

I realize that I need to do a lot more to flesh out this idea. Assuming it has some appeal (to others, but most of all to me), I will post more about it as it evolves.

Gary Burtless on the Redistribution Recession

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He writes,

CBO’s newest estimates confirm the long-term trend toward greater inequality, driven mainly by turbo-charged gains in market income at the very top of the distribution. The market incomes of the top 1% are extraordinarily cyclical, however. They soar in economic expansions and plunge in recessions. Income changes since 2007 fit this pattern. What many observers miss, however, is the success of the nation’s tax and transfer systems in protecting low- and middle-income Americans against the full effects of a depressed economy. As a result of these programs, the spendable incomes of poor and middle class families have been better insulated against recession-driven losses than the incomes of Americans in the top 1%. As the CBO statistics demonstrate, incomes in the middle and at the bottom of the distribution have fared better since 2000 than incomes at the very top.

Pointer from Greg Mankiw. Burtless says that the recession caused redistribution toward the bottom. Casey Mulligan says that redistribution toward the bottom did a lot to deepen the recession.

Brad DeLong’s Hierarchy of Work

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He writes,

We (1) move things with large muscles; (2) manipulate things with small muscles; (3) use our hands, mouths, brains, eyes, and ears to make sure that ongoing processes and procedures stay on track; (4) via social reciprocity and negotiation try to keep us all pulling in the same direction; and (5) think up new things for us to do. The coming of the Industrial Revolution –the steam engine to power and the metalworking to build machinery — greatly reduced the need for human muscles and fingers for (1) and (2). But it enormously increased (3), for all those machines needed to be minded and all of that paper needed to be shuffled. Each improvement in machines made each human cybernetic control element more valuable as well.

Think of (1) as working without tools. (2) is working with tools, but without machinery. (3a) is working with machinery in large organizations. (3b) is working in middle management in large organizations. (4) is managing large organizations, but without creativity and innovation (I think of accountants, m. (5) is creativity and innovation.

Brad’s point is that over historical time, you can watch machines move up the food chain. Today, the computer revolution is in the process of taking away jobs at level (3). The question is whether it is possible to find matches at level (4) and level (5) for most workers, or whether they are instead doomed to a lower-level existence.

Along similar lines, see Kevin Maney’s column, which I arrived at via Irving Wladawsky-Berger (who writes that “larger numbers of people will have to invent their own jobs”) by following a pointer from James Pethokoukis.

Matt Rognlie Proposes a Solution

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In the comments on this post, he suggests a possible way to reconcile secular stagnation with a high return on capital.

One way to reconcile the two is to say that Piketty’s return on capital includes the equity premium (and other premia for privately held businesses, etc.), whereas the secular stagnation idea of a perpetual ZLB deals with only the riskfree rate.

Some remarks:

1. Fischer Black said that finance is about time and risk. The risk-free rate is the price of time. The equity premium might be a proxy for the price of risk.

2. In Keynesian terms, perhaps one can think of a low risk-free rate as reflecting the desire to hoard and a high risk premium as reflecting low animal spirits.

3. As Matt notes, this approach to reconciling secular stagnation with a high return on capital implies that those earning the high returns are being rewarded for taking risks in an economy in which such risk-taking is scarce. Picketty seems to be pretty confident that high earners will not change their behavior much in response to higher taxes. Perhaps this might be true of labor supply. But can one rule out a significant dampening effect on risk-taking?

Read Matt’s entire comment. As he points out, the secular stagnation story is difficult to reconcile with some fairly basic calculations concerning capital and investment.

Joel Mokyr on Innovation

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He writes,

Many of the most important inventions of the late nineteenth and twentieth centuries are things that we would not want to do without today; yet they had little effect on the national accounts because they were so inexpensive: aspirin, lightbulbs, water chlorination, bicycles, lithium batteries, wheeled suitcases, contact lenses, digital music, and more.

Later,

All the same, I will venture a guess about one feature of the future: technology will go “small.” Twentieth-century technology was primarily about “large” things. …Energy was generated by massive power stations. Materials were produced by gigantic steel mills. Huge airplanes and tall cell towers embodied what the twentieth century could do. But the twenty-first century may be very different. …sorting cells, and sequencing and splicing genes may offer a better path to a better future than building supersonic planes.

Read the whole thing. I think that it may deserve one of David Brooks’ annual awards for magazine pieces.