Russell Roberts's Blog, page 1496

Hayek Poster Contest Winner

About a month ago I invited readers to illustrate the Hayek quote: "The curious task of economics is to illustrate to men how little they really know about what they imagine they can design." The top three illustrations would receive a copy of one of my books.

I received a bunch of creative and interesting designs and comments. I want to thank Christopher Bauer, Kames Kirtley, Ray Galkowski, Niklas Blanchard, Mark Kobey, Kelly Markson, Peter Barber, Guillaume Nicoulaud, Moussa Madou, Lianglin, Matt Harmon, Jorge Gonzalez, Ashley Guajardo, Charley Deist, and Alister Smith. The winner is Jorge Gonzalez for this design:

[image error]I wish I could make it a little bigger without it spilling over into the sidebars. Maybe Jorge can help me. There are many things I like about this poster. Beautiful, creative illustration of a top-down approach that fails. I also like the type face he chose and the background which has the words from the quote embedded in it.

I'd like to do something with this–put it on a t-shirt or a coffee cup or print it as a poster. If anyone (Jorge?) knows how to do this, that would be lovely.

Honorable mention goes to Matt Harmon and Peter Barber. Matt's illustration shows Paulson, Bernanke, and Geithner in the fall of 2008 making the case for TARP.

[image error] Peter Barber submitted a variety of posters for different Hayek quotes. I liked them all, but I was particularly taken by this one, though I don't know if the photo is in the public domain. Peter, can you let me know?

Thanks to everyone for participating.

[image error]

Open Letter to the President of the Sodexo Foundation

Mr. Stephen J. Brady, President

Sodexo Foundation

Gaithersburg, MD

Dear Mr. Brady:

Your foundation's website says that "Forty-nine million people in the United States are at risk of hunger."  While this statement's meaning is vague, I assume that you intend to suggest that 49 million people in America are so poor that they are at serious risk of suffering malnutrition.

Yet today's New York Times reports on a recent poll by the Pew Research Center that finds that the number of Americans who consider themselves to be middle-class is nine in ten ("So You Think You're Middle Class?" Dec. 23).  That's 277 million (out of a total of 308 million) Americans who don't think of themselves as being poor.  Even if we assume that every one of the 31 million other Americans thinks of himself or herself as being, not rich, but poor – and even if we further assume that every last one of those 31 million people is "at risk of hunger" – your figure of 49 million 'at-risk-of-hunger' Americans seems impossible to square with the Pew survey results.

Are there really 18 million people in America who are so unaware of their own circumstances that, even though you classify them as being "at risk of hunger," they classify themselves, not as poor, but as middle-class?  Seems dubious, to say the least.

While I applaud your efforts to extend a helping hand to needy Americans, you should do so honestly.  In fact, hunger is not a problem in America – not for 49 million people; not even for 31 million people.  In fact, no modern American this side of mental insanity or criminal captivity comes close to starving to death.

Our society's elimination of one of history's most consistent killers – starvation and malnutrition from too little food – is complete.  This victory should be celebrated rather than obscured by claims, such as that which adorns your website, that are somewhere between inexcusably obscure and blatantly false.

Sincerely,

Donald J. Boudreaux

Self-deception

I just finished taping an interview with Robin Hanson for EconTalk. If all goes well, it should be released on January 3. We spoke about the technological singularity, the idea that technological change is coming that will make the industrial revolution look like the hunter-gatherer era.  If you follow Robin, you know he has a lot to say on the subject.

After the conversation was over, we meandered into the question of self-deception and motives and why it's so hard to accept ourselves as we are. Why do we tell ourselves stories that aren't true of why we do what we do? Why do we find it hard to believe (often against the facts) that so-and-so is simply following his self-interest? Why is it so hard to see this in ourselves? Why do we lie to ourselves about why we do what we do? Robin believes that this is a central question to be answered if not the central question.

I don't know the answer, but I think Adam Smith had part of the answer when he said in The Theory of Moral Sentiments:

Man naturally desires, not only to be loved, but to be lovely; or to be that thing which is the natural and proper object of love. He naturally dreads, not only to be hated, but to be hateful; or to be that thing which is the natural and proper object of hatred. He desires, not only praise, but praiseworthiness; or to be that thing which, though it should be praised by nobody, is, however, the natural and proper object of praise. He dreads, not only blame, but blame-worthiness; or to be that thing which, though it should be blamed by nobody, is, however, the natural and proper object of blame.

We value authenticity. We want to be loved but that is not enough. We want to be loved for what we truly are, not what someone imagines us to be. We want love and respect to be earned. We value it so much that we imagine the love of others to be earned even when we don't deserve it. The idea that we do not deserve the love and praise we receive is so unbearable that we would rather delude ourselves than accept it as true.

These thoughts are related to this post on how people in power behave. We like the idea that people are principled. It is hard to accept that people are just responding to incentives. We like to believe that the Fed is trying to stabilize the economy. The fact that they act as if they're trying to make Wall Street rich is very unpleasant. Maybe it would force us to look into our own hearts about our own motives.

UPDATE: Robin comments.

Please support the next rap video

John Papola and I are working on the next rap video. The first one, Fear the Boom and Bust, now has over 2,000,000 views–1.7 million from the main version on YouTube and over 300,000 views in subtitled versions: 85,000 in Spanish, 14,000 in Italian, 28,000 in Czech, 50,000 in Polish, 35,000 in Chinese, 29,000 in Japanese, 100,000 in French, 41,000 in Portuguese plus thousands more in Greek and Slovenian.

We are working on the next one. It will again star Keynes and Hayek. This time they will be arguing about whether government spending financed by debt can create jobs and stimulate an economy in recession. They argue about the underlying economics of stimulus, about whether war can create prosperity and along the way, they each make the case for their principles. Fear the Boom and Bust was about how we got into this mess. This one will be about whether government can get us out–the economics, the politics, and the philosophy of recovery.

We want the next video to be as good or better than the first. John and I have written 20 verses and we're in the process of honing the words and the music. We hope the visuals will be as entertaining and striking and fun as the first one. We'd like to film it next month and get it edited and up on the web close to the second anniversary of Federal stimulus spending.

To make this happen we need your help. We have received some very generous contributions but there is a long way to go.

Donations are tax deductible. Go to this page to make a secure donation. Feel free to email me at russroberts@gmail.com if you'd like more info.

UPDATE: Brian in the comments asks about our fundraising goal. We have about $100,000 to go. If every subscriber to Cafe Hayek gave $10, we'd be all set with some extra money to fund the next video. Given that many subscribers will give zero, I hope some of you out there can make up the difference or encourage someone else to help.

A Soup of Confusion

Here's a letter to the Washington Post:

E.J. Dionne writes, "if we offshore the manufacturing that results from home-grown innovation, we will eventually lose our advantages in innovation itself" ("Even progressives need CEOs," Dec. 20).

Mr. Dionne is confused.  The chief source of the loss of manufacturing jobs over the past several decades is not offshoring; rather, it's the very innovation that Mr. Dionne praises.

In other words, "the manufacturing that results from home-grown innovation" is manufacturing that relies heavily upon the intensive use of machines, chemical processes, and other non-human means of production.  And one essential pre-requisite for much of this labor-saving innovation is global trade that expands the size of markets and, thus, increases the potential returns to innovation.

If Mr. Dionne and his fellow "Progressives" really wish home-grown innovation to continue, they should stop lamenting the loss of manufacturing jobs and other consequences of progress – and start championing free trade.

Sincerely,

Donald J. Boudreaux

Simpler story

I recently interviewed Joe Nocera, co-author with Bethany McLean of All the Devils are Here. I really enjoyed the conversation and the book. Nocera and McLean describe various "devils," people who made the crisis worse or who failed to stop it, despite their responsibilities as regulators. In the latter group, among others, they mention Alan Greenspan who repeatedly dismissed efforts to regulate the explosion in subprime lending and the securitization of subprime mortgages because of his ideological bias in favor of markets and their self-regulating properties.

In the interview with Nocera, I challenged this assessment of Greenspan. Greenspan certainly spoke like an ideologue at various times, particularly when he gave reasons for leaving things alone. The problem with this explanation is that it does not explain all the times Greenspan did intervene in markets, especially to bail out Wall Street. Those times would include his reaction to the October 1987 stock market fall, or his support for the US bailout of Mexico via loan guarantees:

This program, in my judgment, is the least worst of the various initiatives that present themselves as possible solutions to a very unsettling international financial problem. Our concerns are not so much with potential losses to the US. taxpayer, which we believe will be minimized, but with what economists call moral hazard–when the active involvement of an external guarantor distorts the incentives perceived by investors. Thus, appropriate conditionality must be associated with the guarantees to underline the fact that they are being provided at high cost and on rigorous terms in exceptional circumstances. Moreover, Mexico's economic policies are the key to ensuring that the guarantee facility actually does help to stabilize the Mexican economic and financial situation; ultimately only sound policies that are sustained over time will restore investors' confidence in Mexico. External guarantees can only offer temporary support. Nonetheless, I see no viable alternative to the type of program that is being presented to the Congress if the financial erosion is to be stanched before it threatens to become a wider problem.

So while he recognized the moral hazard problem and understood that this intervention was a compromise with his so-called free-market principles, he supported the intervention as a "least-worst" solution. And while he justified the support on the grounds of preventing a "wider problem," he surely knew that Wall Street banks who had lent money to Mexico and who earned fees from Mexico's international finance activity, would be some of the beneficiaries of the guarantees. Was Greenspan's ideology the real reason he opposed regulation of the subprime and the derivatives market?

In the book, Nocera and McClean fault Greenspan and Robert Rubin for failing to heed the warnings of Brooksley Born and others about derivatives:

Her efforts to stop that from happening ran afoul of some of the most influential men in Washington, men with names like Greenspan and Levitt and Rubin and Summers — the same Larry Summers who is now a key economic adviser to President Obama.

Why did Rubin oppose Born? Nocera and McClean suggest that Born was insufficiently deferential to Rubin whose ego demanded more stroking. They say Summers had the same problem. Nocera and McClean also mention Ed Gramlich, a Fed governor who saw the warning signs that subprime was heading in a bad direction but was too polite and diffident to push back when his warnings were dismissed.

So Greenspan's ideology, Rubin and Summers's ego, and Gramlich's lack of one explain their mutual failure to do something about subprime.

I have a simpler explanation. All of those folks had an incentive to ignore subprime. Ideology was just window-dressing. They liked their jobs. They wanted to stay in them. Helping Wall Street or at least not rocking Wall Street's boat was the politically savvy thing to do. Ignore what people say is their motivation. Look at what they do. What Treasury Secretaries and Fed governors and Fed Chairmen do is protect creditors when they are large financial institutions. That makes a bunch of people happy –especially the people who profit from being able to borrow lots of money and make highly leveraged bets. It allows firms to become interlinked and further justifies creditor bailouts in the name of preserving stability. When the crisis comes, instead of injecting liquidity, funnel money to particular firms. Both keep the economy relatively steady, but one helps generally. The other saves particular people who made bad bets and keeps them very happy with you. So the whole argument that x or y had to be done to save the system is doubly dishonest. One, it's not clear the system needed saving. But more importantly, the way the system is saved time and time again insures that individuals who are politically important are able to make a great deal of money.

It's not a conspiracy. I don't think the chair of the Fed, be it Bernanke or Greenspan or their predecessors or the Secretary of the Treasury be it Paulson or Rubin, sit around thinking about how to take care of rich investment bankers. And I don't think the men themselves see themselves as pawns of Wall Street. Just like a journalist sees different motives for different people, each of these decision makers tells himself that he is doing the right thing. But he isn't. He's doing the thing that makes his patron in the White House or on Capitol Hill happy–he is taking care of a few really important people and spreading the costs over the rest of us. They are not really devils. They are people caught up in the incentives who convince themselves that what they are doing is the right thing. They honestly feel they had no choice. The journalist comes along after the fact and sees the flaw. But I think it's the wrong flaw. The flaw isn't in the man who is the ideologue or the egotist or the gentle one. The flaw is the system that gives a louder voice to some rather than others.

One of the deepest things I have learned from Bruce Yandle is his observation that we ourselves have a bootlegger and baptist inside of us–a good motive and a bad motive. And when we do bad, we find ways to convince ourselves, to deceive ourselves, that we are doing good. My homage to Bruce's ideas, this essay, tries to capture the role self-deception plays in ourselves, and then in the political process.

The challenge of economics and of journalism is to remind us that motives are less important than actions. People lie about their motives. Look at what they do, not what they say. Alan Greenspan was a lousy ideologue. He may have thought otherwise. He may have deceived himself. But we don't need to be deceived.

Brad Delong's analysis of the housing crisis

In this post, Delong comments on debate between Joe Nocera and Peter Wallison and then sums up his view of Fannie and Freddie and the crisis:

When the housing bubble took off–and when mortgage loans and MBSs became really risky–that's when Fannie Mae and Freddie Mac pulled back. The GSEs were dominant players in the market up through the end of 2002: most of the loans made through the end of 2002 are still good. The GSEs were small players by the start of 2004–which is when the mortgages that have turned out to be toxic assets started to come through.

This is the counter-argument to the view that Fannie and Freddie caused everything. Well, they didn't. But that doesn't mean they didn't contribute to the crisis in a significant way.

First, Delong makes it sound like the bubble started in 2002 or maybe 2004. Here is the Case-Shiller housing price indices for the nation and for the ten largest cities:

[image error]The boom in housing prices began in the mid to late 1990s. It does accelerate sometime in the early 2000s.

Next, let's ask the question, when did loans start getting really risky. In 2001, Josh Rosner chronicles the deterioration in underwriting standards in this paper. Rosner notes (writing in 2001) that Fannie Mae had begun a push toward low downpayment loans, away from 20% down and was beginning to buy loans with 5% down and 3% down. Here are the data:

[image error]The chart, from my paper, shows Fannie and Freddie's purchases of owner-occupied loans where the loans have less than 5% down. Having Fannie and Freddie purchase these loans means that a lot more people are going to be able to buy houses than before. It also means they are willing to pay more for a given house. This helped create the housing bubble. In 2004, Fannie and Freddie did "pull back" as Delong mentions and as Krugman has claimed as well, in the sense that they did buy fewer low downpayment mortgages in 2004 relative to 2003. But it was still about triple what they bought in 1999. And the number rises steadily between 2004 and 2007. Not really a pull back.

Delong says Fannie and Freddie were "small players by 2004." No. They weren't. Here is the picture of Mark Thoma's that Krugman cites to show that "Fannie and Freddie pulled back sharply after 2003."

[image error]It's a busy picture but it shows that Fannie and Freddie's market share of all mortgage originations grew pretty steadily from 1973 to 2000 or so, peaking at just about 50%. Then it fell after their accounting scandals and as Wall Street began securitizing subprime mortgages. Fannie and Freddie bought significant amounts of Wall Street MBS, helping to create the demand for those assets. But they weren't the whole story. Not even close. Wall Street investment banks played a crucial role in the subprime crisis. Fannie and Freddie's role was helping to create the bubble that Wall Street tried to exploit. Still, defenders of self-regulation have to explain Wall Street's frenzy that was independent of Fannie and Freddie.

My explanation is that past bailouts of creditors allowed Wall Street to use excessive leverage to buy toxic assets. Previous bailouts reduced prudence. I tell that story in detail here. But my point here is that Fannie and Freddie were not small players in the mortgage market as Delong claims. Even with their loss in market share, they were the dominant player. They were not the dominant player in subprime. But they did contribute to the housing bubble and allowed lots of dangerous prime loans to be made by buying loans with little money down.

Delong does have a chart to support his case. It is a mystery chart with data from March '98 to March 2008:

[image error]I'm sorry it's so hard to read. But it purports to show that Fannie and Freddie, the GSE's shown as the green line were unimportant after 2004 and their activity only surged in 2007. I don't know what to make of this chart. The title is "Who makes the mortgage loans? (the short view)" Now the GSE's don't make loans, they buy them or guarantee them. So I suppose it is supposed to really mean who financed the mortgage loans. The lines in the chart are supposed to represent "Share of net home mortgage lending (percent)" yet the lines go from -100 up to 200. How does one's share of lending become negative? What does the word "net" mean in the legend? Is it the share of new home lending. I don't know.

It took me a while to find where Delong got the chart. I think he got it from this blog post (from July of 2008) at Time magazine. There you'll see the exact same chart along with another one called "Who makes the mortgage loans? (the long view)" with a longer period of time for the data. What I think the chart actually shows is the change (not the share) in lending activity by the various groups or maybe the change in market share.So when the green line goes down to zero in the 2003-2004 period, it's because Fannie and Freddie are reducing their activity. But they don't have zero market share as Delong is implying.

Now maybe the chart shows something else entirely that I'm missing. I look forward to hearing from Delong. I'm sure he has a good explanation. But I'd stick with the Thoma chart I showed above that Krugman cites. It shows that yes, Fannie and Freddie lost market share in the 2003-2004 period but they were still the dominant financer of mortgages even after they "pulled back." And yes, their share fell, but they were still aggressively expanding into risky low downpayment loans during that period and that helped inflate the bubble.

The size of things

Beautiful interactive graphic to compare the size of things in the universe. HT: Gregg Easterbrook.

Pay Back

Here's a letter to the Wall Street Journal:

You report that "Giant companies such as Bank of America Corp., J.P. Morgan Chase & Co., Goldman Sachs Group Inc. and Morgan Stanley that are considered critical to the U.S. economy, could be forced to award half or more of their executives' pay in the form [of] stock or other deferred compensation, instead of up-front cash" ("U.S. Mulls New Push to Shape Bank Pay," Dec. 21).

Proponents of government regulation insist that no institution is more critical to the U.S. economy than is the U.S. government.  So reason dictates that the same rules that apply to executives at the likes of Morgan Stanley should apply also to those who set and execute Uncle Sam's policies.  Members of Congress and all top White House officials – including the President – should receive at least half of their pay in the form of ten-year bonds whose redemption values are structured to rise with decreases in the national debt and fall with increases in the national debt.

Sincerely,

Donald J. Boudreaux

A big man and a little man

Here are two videos for Patriots fans and students of human effort. The first one you may have seen, which is Dan Connelly, officially listed at 313 pounds, running 71 yards on a kickoff return. Notice that once he gets going, he is holding the football vertically, point down, rather than cradling it. But watch him run at full speed. I guess the verb is rumbling. The second is a video of Danny Woodhead. Danny Woodhead is not just small. He did not just attend a small college. He is officially listed at 5-8 and 195 pounds. That's what he's listed at. He attended Chadron State. Not only is Chadron State not Oklahoma or USC. It's a Division II school and I've never heard of it. The video (HT: Sports Illustrated) is a hidden camera of him posing as a Modell's salesperson trying to sell his own jersey. He is 27 years old. He doesn't look 27 and he certainly doesn't look like a football player. The video is amusing. It's worth it just to hear one customer pronounce Wes Welker the way someone from Boston should pronounce it.

Videos below the fold.

Here is the Connelly run:

Here is the Woodhead sales video: