Tyler Cowen's Blog, page 56

Equine markets in everything

Circa the late nineteenth century, in urban America:

Even the wastes of horses were commodified.  The collection of urban manure had old, even ancient roots.  Again, the process is most easily documented in New York City.  Before 1878, individuals roamed the street and picked up manure.  In that year the Common Council supposedly sold an exclusive license to a William Hitchcock, who sold the street sweepings to farmers for fertilizer.  Street sweepings varied in quality and were worth more if from an asphalt street than if from a gravel street or a dirty alley.  They were always worth less than stable manure, a purer product.  The older pattern of individuals collecting street manure for urban gardens never fully went away, and as late as the first half of the twentieth century neighborhood children in the Italian American neighborhood of East Harlem did a thriving business collecting horse manure from the streets for backyard gardens in the area.

That is from Clay McShane and Joel A. Tarr, The Horse in the City: Living Machines in the Nineteenth Century, an excellent book from 2007.  I am sorry it took me so long to discover this work.  It has wonderful sentences such as:

Stables rarely make it into the histories of the built environment, although they constituted a substantial part of that environment.

How can you go wrong with that?  There is a good economics on every page of this book.

Good sentences from Nick Rowe

The right won the economics debate; left and right are just haggling over details.

And here is another bit, one which is in danger of falling down the memory hole:

We easily forget how daft the 1970’s really were, and some ideas were much worse than pet rocks. (Marxism was by far the worst, of course, and had a lot of support amongst university intellectuals, though not much in economics departments.) When inflation was too high, and we wanted to bring inflation down, many (most?) macroeconomists advocated direct controls on prices and wages. And governments in Canada, the US, the UK (there must have been more) actually implemented direct controls on prices and wages to bring inflation down. Milton Friedman actually had to argue against price and wage controls and against the prevailing wisdom that inflation was caused by monopoly power, monopoly unions, a grab-bag of sociological factors, and had nothing to do with monetary policy.

Imagine if I argued today: “Inflation is dangerously low. In order to increase inflation, governments should pass a law saying that all firms must raise all prices and wages by a minimum of 2% a year, unless they apply for and get special permission from the Prices and Incomes Board to raise them by less.” What are the chances my policy proposal would be accepted?

Friedman had a mountain to move, and he moved it. And because he already moved it, we simply cannot have a Friedman today.

There is more here, mostly on Milton Friedman.

Frances Coppola asks

In short, did the ECB tell the SNB to remove the cap in order to clear the way for ECB QE?

Don’t stand in the way of a forthcoming freight train.  There is more here.

Gavyn Davies on the Swiss central bank and why it folded

The SNB balance sheet at the end of December was about 85 per cent of GDP, mostly in foreign currencies, and we do not know whether this has increased markedly during the bout of euro weakness in January. The SNB’s mark-to-market currency losses on Thursday were probably around 13 per cent of GDP (SFr75bn). Paul Meggyesi of JPMorgan says that “the SNB would have been bankrupted by this de-pegging had it not made such a large profit last year”. The SFr38bn profit in 2014 was announced only last week, which is surely not a coincidence.

Many economists believe that balance sheet losses are irrelevant for a central bank, so they should play no role in policy. But the SNB is 45 per cent owned by private shareholders, many of whom are individuals, who receive dividends from the SNB. The rest is owned by the cantons, which have been complaining recently about insufficient cash transfers from the SNB.

This ownership structure contrasts sharply with most other central banks, which are in effect government departments, wholly owned by the treasury and therefore the taxpayer. The Swiss set-up makes the SNB particularly concerned about balance sheet losses, especially since disgruntled citizens can directly force changes in monetary and reserves policy via referendum.

Excellent points, there is more in the FT here.  Here is my post earlier today on whether central banks require capital, financial, political, or otherwise.

Assorted links

1. A bigger and better classical music meta-list (the mega-meta list?).

2. Did the Romans (Tiberius) try QE?  And John Quiggin has three predictions for 2015.

3. Claims about teeth.  And the Obama tax plan.

4. Edward Snowden on cyberwarfare.

5. Can nudges help students?  And a short history of Kim Fowley.

6. Paul Krugman on Mongols and the herring trade.

7. Scott Sumner responds on the Swiss central bank.  And here is James Hamilton.

Has U.S. procurement gone wrong?

In Foreign Affairs, James Bessen writes:

U.S. procurement programs worked so well in part because the Pentagon gave its business to a diverse group of private firms, including start-ups and university spinoffs such as Bolt, Beranek and Newman (now BBN Technologies), one of the companies that helped develop the Internet. It also required contractors to share their technologies with universities and other private firms, encouraging further innovation outside the government. By contrast, France and the United Kingdom often used government contracts to promote national telephone and computer companies, and the United Kingdom and the Soviet Union limited the interaction between government researchers and their civilian counterparts, cutting off the private sector from high-tech advancements. The Pentagon also encouraged contractors to adopt open technical standards—such as the set of protocols, established in 1982, that specified how data should be packaged and transmitted on the Internet—which allowed knowledge to spread quickly and easily.

In the past few decades, however, procurement has strayed from this successful formula. Instead of awarding contracts to start-ups and spinoffs, the Pentagon has favored traditional defense contractors. The Defense Department tasks these contractors with meeting the military’s narrow needs and too often prohibits them from sharing their work with universities or other companies. An example from the past reveals how problematic such policies can be. In 1977, when the Pentagon sought to create high-speed semiconductor chips, Congress prohibited the contractors hired from sharing their research. University researchers were effectively excluded from the program, and chipmakers were forced to separate their defense work from their commercial operations. Unlike the government procurement programs in the 1950s and 1960s, which spawned many start-ups, this billion-dollar program did little to commercialize new technology.

The article offers other points of interest, mostly about how special interests have undermined entrepreneurship.  I have recently pre-ordered Bessen’s forthcoming book on this theme.

For the pointer I thank Spencer England.

Do central banks need capital?

Here is the abstract of a 1997 Peter Stella paper:

Central banks may operate perfectly well without capital as conventionally defined. A large negative net worth, however, is likely to compromise central bank independence and interfere with its ability to attain policy objectives. If society values an independent central bank capable of effectively implementing monetary policy, recapitalization may become essential. Proper accounting practice in determining central bank profit or loss and rules governing the transfer of the central bank`s operating result to the treasury are also important. A variety of country-specific central bank practices are reviewed to support the argument.

More concretely, I am not persuaded by the view that a kind of sheer internal commitment to good outcomes, however sincere, can sustain a peg or nominal target.  The outside world always impinges on the logic of commitment, and thus capital is required.  This is also why I do not agree with Scott Sumner’s claim that a truly credible Swiss target, eliminating the need to expand the SNB balance sheet to make it stick, is possible circa January 2015 or for that matter anytime soon.

I do not, however, see time inconsistency as the central problem.  More likely the government either just doesn’t want to take the specified action (e.g., Germany with higher inflation), or part of the government would like to do something but it doesn’t have enough political capital (Draghi at the ECB).  Time consistency models have some neat analytic properties but often they distract our attention from these more fundamental constraints.

The pointer is from Alen Mattich, a financial journalist who by the way has just published another detective novel, Heart of Hell.

Henry Manne has passed away at age 86

He was one of the original builders of the GMU Law School, and an important founding scholar of law and economics, very sad news of course.

Addendum: David Henderson comments.

Assorted links

1. How is that higher-order polynomial shaping up?

2. Do academic sociologists discriminate against the poor?

3. Are youth sports one of our biggest signaling problems?  They were great for me (Little League especially, seven years), but much cheaper back then.

4. The movie A Most Violent Year is excellent on the creeping nature of corruption, the operation of credit markets, upward mobility and the nature of the American dream, and the New Jersey heartland circa 1981.  Here is a good article on it.  I liked Selma too.

5. Which are the disproportionately popular ethnic cuisines in each state?  They get most states right, but surely Virginia should be El Salvadoran, not Peruvian, unless they miscount some of the more generic Latino chicken places as Peruvian.  And “Belgian” for D.C.?  I can think of two or three places, although I suspect North Dakota has fewer than that.  Most people might guess Ethiopian.

6. Harvard economics exam from 1953, for senior undergraduates.

7. New drone will hunt other drones.  And “…domestic criticism of the SNB’s large buildup of exchange-rate reserves (euro assets) was mounting.”

No, A Majority of US Public School Students are Not In Poverty

In widely reported article the Washington Post says a Majority of U.S. public school students are in poverty. The article cites the Southern Education Foundation:

The Southern Education Foundation reports that 51 percent of students in pre-kindergarten through 12th grade in the 2012-2013 school year were eligible for the federal program that provides free and reduced-price lunches.

Eligibility for free and reduced-price lunches, however, depends on eligibility rules and not just income levels let alone poverty rates. The New York Times article on the study is much better:

Children who are eligible for such lunches do not necessarily live in poverty. Subsidized lunches are available to children from families that earn up to $43,568, for a family of four, which is about 185 percent of the federal poverty level.

The number of children eligible for subsidized lunches has probably increased in part because the federal Agriculture Department now allows schools with a majority of low-income students to offer free lunches to all students, regardless of whether they qualify on an individual basis or not.

Frankly I suspect that this study was intended to confuse the media by conflating “low-income” with “below the poverty line”. Indeed, why did this study grab headlines except for the greater than 50% statistic? It is very easy to find official numbers of the number of students in poverty according to the federal poverty standard. Here is what the National Center for Education Statistics says about school-age children and poverty (most recent data):

In 2012, approximately 21 percent of school-age children in the United States were in families living in poverty.

The number of school-age children living in poverty today is relatively high and not surprisingly did increase with the 2008 recession and its aftermath (green line in figure below – the numbers here differ slightly from NCES but the time line is longer). But recent numbers do not look like especially remarkable compared to the history.

It’s certainly worthwhile discussing why poverty has increased. The economy is one possible reason as are issues to do with family formation and marriage rates. Another possibility is immigration. A higher poverty rate caused by the immigration of more low-income children is compatible with everyone becoming better off over time and not necessarily a bad thing. Those are just a few possible topics worthy of investigation. I don’t claim that any of them are correct.

I do claim, however, that we won’t get very far understanding the issue by shifting definitions and muddying the waters with misleading but attention grabbing statistics.