Tyler Cowen's Blog, page 149
July 15, 2014
Bernanke v. Friedman
Milton Friedman argued that the Great Depression was caused by a banking collapse that reduced the money stock and decreased velocity leading to a massive failure of aggregate demand that was not countered by the Federal Reserve. The title of his book with Anna Schwartz is apt, A Monetary History of the United States. Ben Bernanke also put the banking crisis at the center of his story of the Great Depression but the propagation mechanism was quite different. Bernanke argued that the banking crisis led to a collapse of credit. His contribution to Great Depression literature is also aptly titled, Nonmonetary Effects of the Financial Crisis in the Propagation of the Great Depression.
In an excellent paper from Boom and Bust Banking, Jeff Hummel shows that these two stories have different implications for policy. (FYI, B&BB was edited by David Beckworth and also contains excellent papers by Scott Sumner, Nicholas Rowe, Larry White and others. Full disclosure, I was the general editor.) In Friedman’s story what is required is monetary policy, an increase in the money stock to keep nominal GDP from falling. In Bernanke’s story what is required is actually fiscal policy (albeit fiscal policy performed by the Fed), namely emergency lending to banks to keep credit flowing. These two approaches are not mutually exclusive and in ordinary times the differences are subtle. Under the immense pressure of the great recession, however, the differences became large and important. Instead of primarily pursuing a Friedman policy of injecting liquidity into the system, Bernanke followed his nonmonetary prescription and injected credit. Bernanke’s approach has turned the Fed into what Hummel calls a central planner of credit (e.g here), an unprecedented change with potentially very large consequences for the future.
What brought Hummel’s paper to mind today was strong support from a surprising source, a broadside against Bernanke’s handling of the great recession from the President of the Federal Reserve Bank of Richmond, Jeffrey Lacker (writing with Renee Haltom). Lacker and Haltom don’t cite Hummel but they support his analysis and although they write in careful, measured tones you don’t have to be a Straussian to recognize that it’s a direct attack on Bernanke:
When the central bank utilizes “lender of last resort” powers to allocate credit to targeted firms and markets, it encourages excessive risk-taking and contributes to financial instability. It also embroils the central bank in distributional politics and jeopardizes the independence that is critical to the central bank’s ability to ensure price stability. The lesson to be learned from the expansive use of the Fed’s emergency-lending powers in recent decades is that it threatens both financial stability and the Fed’s primary mission of ensuring monetary stability.
One thing Lacker and Haltom don’t do, however, is say how the Fed can unwind its positions. During the crisis the Fed pulled a genie out of the bottle and the genie delivered trillions to grateful borrowers. But how can the genie be put back in the bottle? The problem, in my view, is not primarily one of inflation or economics but now of politics.
The Prison Boom and the Lack of Black Progress
There is a new and extremely distressing NBER paper by Derek Neal and Armin Rick:
More than two decades ago, Smith and Welch (1989) used the 1940 through 1980 census files to document important relative black progress. However, recent data indicate that this progress did not continue, at least among men. The growth of incarceration rates among black men in recent decades combined with the sharp drop in black employment rates during the Great Recession have left most black men in a position relative to white men that is really no better than the position they occupied only a few years after the Civil Rights Act of 1965. A move toward more punitive treatment of arrested offenders drove prison growth in recent decades, and this trend is evident among arrested offenders in every major crime category. Changes in the severity of corrections policies have had a much larger impact on black communities than white communities because arrest rates have historically been much greater for blacks than whites.
The paper is here. There are ungated copies here.
July 14, 2014
*The Falling Sky*
The subtitle is Words of a Yanomami Shaman, and the shaman is Davi Kopenawa from the Amazon, with transcription and assistance from French anthropologist Bruce Albert. Imagine 487 pp. of a highly intelligent, articulate shaman telling you what he thinks, and perhaps more importantly telling you what he thinks about. Here is one bit:
As children, we gradually start to think straight. We realize that the xapiri [spirits] really exist and that the elders’ words are true. Little by little, we understand that the shamans do not behave as ghosts without a reason. Our thought fixes itself on the spirits’ words, and then we really want to see them. We take hold of the idea that later we will be able to ask the elders to blow the yakoana into our nostrils and give us the xapiri’s songs. This is how it happened for me a long time ago. The spirits often came to visit me in dreams. This is how they started to know me well.
For those who are willing to swerve in the direction of the mystical, I recommend this strongly, read the Amazon reviews at the first link above. Here is a brief excerpt from one: “This is an astonishing book, a gripping story, and a poetic revelation of an entirely different world view than our own. Every single page sparkles with provocative meditations on the impact that industrial societies have on the environment and the role of Yanomami shamans in protecting it for the sake of all humanity.” You won’t find cost-benefit analysis here. Here are some selections from the book. Here is one blog review from LSE. Google is not turning up too many other reviews, but this came out in late 2013 and it is a truly significant work deserving of further attention and it is rather dramatically under-reviewed.
Arrived in my (classical liberal) pile
1. Jason Brennan, Why Not Capitalism?
2. Steffan Hentrich und Sascha Tamm, editors, Regeln für eine freie Gesellschaft: Ein James-Buchanan Brevier.
3. Jason Brennan and Lisa Hill, Compulsory Voting: For and Against. I like Jason’s chapter entitled “Should We Force the Drunk to Drive?”
4. Jason L. Riley, Please Stop Helping Us: How Liberals Make It Harder for Blacks to Succeed.
Decriminalizing indoor prostitution
There is a new NBER paper by Scott Cunningham and Manisha Shah:
Most governments in the world including the United States prohibit prostitution. Given these types of laws rarely change and are fairly uniform across regions, our knowledge about the impact of decriminalizing sex work is largely conjectural. We exploit the fact that a Rhode Island District Court judge unexpectedly decriminalized indoor prostitution in 2003 to provide the first causal estimates of the impact of decriminalization on the composition of the sex market, rape offenses, and sexually transmitted infection outcomes. Not surprisingly, we find that decriminalization increased the size of the indoor market. However, we also find that decriminalization caused both forcible rape offenses and gonorrhea incidence to decline for the overall population. Our synthetic control model finds 824 fewer reported rape offenses (31 percent decrease) and 1,035 fewer cases of female gonorrhea (39 percent decrease) from 2004 to 2009.
Alas, I do not see ungated versions on Google, or maybe try this one (pdf).
How will we know if the ACA is working?
I have read a good deal on this topic and I am not very satisfied with most of it, from either side. Too often citing and then refuting weaker claims from the other side is conflated with showing that one’s own view is right. Here are a few issues we ought to consider and indeed focus on:
1. Five to ten years from now, how much do we think employment will have gone down as a result of ACA? (That is from the employer mandate, high implicit marginal tax rates because of the subsidies, and also from a lesser need to stay employed to have health insurance.) By the way, you can’t in other contexts believe strongly in rigidities and then confidently point to a small employment response within a one year time frame and claim to know these labor market effects are small ones.
1b. How will the effort to introduce greater equality of health care consumption fare if wage and income inequality continue to rise? Will this attempt at consumption near-equalization require massively distorting incentives?
2. Given your answer to #1, and given how much employment itself boosts health, will ACA even have improved overall health in America? What outcome indicators might show this?
3. Given that prices in the individual insurance market already seem to have gone up 14-28 percent, and may go up more once political scrutiny of insurance companies lessens, what is the overall individual welfare calculation from this policy change? I mean using actual economic policy analysis, of the CBA sort, not just noting that more people have health insurance.
4. Given supply side constraints, how much did ACA increase the consumption of health services in the United States? (I take the near-universal bafflement over the first quarter gdp revision a sign of how poorly we understand what is going on.) And how good or bad a thing is the ongoing but accelerated shift to narrow provider networks?
5. How much of the apparent slowdown of health care cost inflation is a) permanent, b) not just due to the slow economy, and c) due to ACA? Or how about d) the result of trends which have been operating slowly for the last 10-20 years?
Is there one of these questions we know the answer to? Know the answer to much better now than before?
July 13, 2014
Why the Taylor Rule isn’t a rules-based approach to monetary policy
From Gavyn Davies:
…these three different interpretations of the Rule were expected by Ms Yellen to differ by as much as 2 per cent in the appropriate level for the Fed Funds rate from 2012-15. Given these wide discrepancies, any of which could presumably be chosen by the Fed under the proposed legislation, it seems pointless to try to force a rule-based system on the FOMC just for the sake of it.
Furthermore, the Rule does not really help with several key problems faced by the FOMC today. The first is how and when to reduce the size of the Fed’s balance sheet, and how that decision should relate to the appropriate level of short rates. Next is how to determine the right relationship between economic objectives and financial stability when setting short rates. Based on their views on these two issues, the FOMC might decide that short rates should be either much higher, or much lower, than suggested by the Rule.
The Rule is also largely silent on another of the Fed’s main headaches right now, which is whether to treat the official unemployment rate as a good indicator of the amount of slack in the labour market. Many members of the FOMC, including the Chair, have argued that the amount of slack is greater than implied by the unemployment rate, because the labour participation rate has been temporarily depressed by the recession. The use of the Taylor Rule does not solve this debate, it simply treats it as if it does not exist.
From the FT there is more here. You don’t have to regard any of those points as arguments against a “Taylor Rule.” But it is disingenuous to think that peddling the Taylor Rule as a monetary option counts as a rule for those who have general reasons for believing in monetary rules over discretion. The Taylor Rule is lucky enough to be called a “rule,” and besides, any reaction function can be described as a rule of sorts. In those two senses it is indeed a rule. But the Republicans who are behind this are fooling themselves if they think this will yield the (supposed) traditional benefits of monetary rules, namely stability, predictability, non-ambiguity, transparency, and so on.
Addendum: Nick Rowe has some comments.
Will Helsinki make automobiles obsolete?
The Finnish capital has announced plans to transform its existing public transport network into a comprehensive, point-to-point “mobility on demand” system by 2025 – one that, in theory, would be so good nobody would have any reason to own a car.
Helsinki aims to transcend conventional public transport by allowing people to purchase mobility in real time, straight from their smartphones. The hope is to furnish riders with an array of options so cheap, flexible and well-coordinated that it becomes competitive with private car ownership not merely on cost, but on convenience and ease of use.
Subscribers would specify an origin and a destination, and perhaps a few preferences. The app would then function as both journey planner and universal payment platform, knitting everything from driverless cars and nimble little buses to shared bikes and ferries into a single, supple mesh of mobility. Imagine the popular transit planner Citymapper fused to a cycle hire service and a taxi app such as Uber, with only one payment required, and the whole thing run as a public utility, and you begin to understand the scale of ambition here.
The story is here, via s. Here is a further and very different installment in The Culture that is Finland, nice visual on the igloos. Or try this Finland Bitcoin link, blockchain-by-air.
Assorted links
1. Why is the college wage premium robust?
2. John Gray on the “rackety life” of Michael Oakeshott.
3. Seven reasons not to write novels and only one reason to write them, by Javier Marias. Does this apply to non-fiction books as well?
4. Interview with William Vollmann.
5. Finding the most beautiful route across a city.
6. Guardian list of best books of 2014 (not my list).
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