Simon Johnson's Blog, page 13
May 19, 2015
Over at Medium: The Importance of Taxing Capital
By James Kwak
“At present, when zero interest rates make capital costs as low as they have ever been but corporate profits are at record levels, there needs to be much less concern with capital costs and more concern with the distributional aspects of capital taxation.”
That’s Larry Summers — with whom I have often disagreed in the past — at a Brookings event on the tradeoff between equality and efficiency. For most of our lives, government policy in the United States and most of the developed world has been focused (at least in theory) on efficiency: colloquially speaking, making the pie bigger rather than worrying about how the pie is divided up. Rising tide, boats, you know the rest: Laffer Curve, unleashing the job creators, and so on. Inequality is something we profess to regret while doing nothing about it.
May 13, 2015
Why Your Wages Aren’t Going Up
By James Kwak
Unemployment is down to 5.4%! Yay!
That was the summary of last week’s unemployment report. Yet the two-track “recovery” — about to enter its seventh year — continues. Average hourly wages increased by only 0.1% in April and 2.2% for the past twelve months, which amounts to basically nothing when you take inflation into account.
This is what the new normal looks like. Wages barely rise during periods of economic “expansion” (you know, the opposite of recession), then fall when unemployment spikes during a recession. In the long run, that means that average real earnings actually go down, and household income can only keep up if people work more hours. Yet the number of full-time jobs is lower today than it was before the financial crisis.
May 4, 2015
Greg Mankiw Forgot What He Teaches
By James Kwak
I’ve written several times about what I call the Economics 101 ideology: the overuse of a few simplified concepts from an introductory course to make sweeping policy recommendations (while branding any opponents as ignorant simpletons). The most common way that first-year economics is misused in the public sphere is ignoring assumptions. For example, most arguments for financial deregulation are ultimately based on the idea that transactions between rational actors with perfect information are always good for both sides — and most of the people making those arguments have forgotten that people are not rational and do not have perfect information.
Mark Buchanan and Noah Smith have both called out Greg Mankiw for a different and more pernicious way of misusing first-year economics: simply ignoring what it teaches — or, in this case, what Mankiw himself teaches. At issue is Mankiw’s Times column claiming that all economists agree on the overall benefits of free trade, so everyone should be in favor of the Trans-Pacific Partnership, among other trade agreements.
April 30, 2015
The Dysfunctions of Sodor Railways
By James Kwak
The neolithic political ideology of Thomas and Friends is so overbearing and obvious that it’s not worth writing about (except in parody, which I won’t attempt here). Duncan Weldon has taken up the more interesting question of what Thomas, Percy, and their friends can tell us about the economy of Sodor, that strange island trapped somewhere off the coast of Great Britain and in a weird time warp that vaguely resembles the mid-twentieth century.
Like Duncan, I have watched plenty of Thomas videos, in my case in the company of my three-year-old son Henry. One thing that has often struck me about Sodor Railways is the vast amount of excess capacity. The most common plotline goes like this: Some engine has a job to do. However, said engine chooses to do something else out of vanity, unwillingness to go out in bad weather, curiosity, or something similar. Late in the episode, either the engine realizes the error of his ways and does his job, or some other engine does it for him. In either case, the original engine learns his lesson: that it is best to be Really Useful and not to cause Confusion and Delay. (Only, he never really learns the lesson — see the next episode.)
April 19, 2015
Say It Ain’t So, Ben
By James Kwak
Is it the money?
No.
Federal Reserve Chair Ben Bernanke, the man who saved the global economy, is becoming an adviser for Citadel, a hedge fund management company. Bernanke will provide advice to Citadel’s fund managers and will also meet with its clients (that is, the limited partners who invest in those funds).
It’s easy to see why Citadel wants Bernanke. He’s a smart man. He knows the inner workings of the world’s central banks as well as anyone. Although he won’t be a registered lobbyist, he can pick up the phone and get anyone in the world to answer, if he wants to. And, perhaps most importantly for the bottom line, the wow factor of having Bernanke meet with investors will help immeasurably with sales — bringing investments in the door.
The bigger question, as always, is why Bernanke wants Citadel.
April 15, 2015
No More Cheating: Restoring the Rule of Law in Financial Markets
By Simon Johnson
The political debate about finance in the US is often cast as markets versus regulation, as if “more regulation” means the efficiency of private sector decisions will necessarily be impeded or distorted. But this is the wrong way to think about the real policy choices that – like it or not – are now being made. The question is actually what kind of markets do you want: fair and well-functioning, with widely shared benefits; or deceptive, dangerous, and favoring just a relatively few powerful people?
In a speech on Wednesday, Senator Elizabeth Warren (D., MA) laid out a vision for better financial markets. This is not a left-wing or pro-big government agenda. Senator Warren’s proposals are, first and foremost, pro-market. She wants – and we should all want – financial firms and markets that work for customers, that encourage innovation, and that do not build up massive risks which can threaten the financial system and bring down the economy.
Senator Warren puts forward two main sets of proposals. The first is to more strongly discourage the deception of customers. This is hard to argue against. Some parts of the financial sector are well-run, providing essential services at reasonable prices and with sound ethics throughout. Other parts of finance have drifted, frankly, into deceiving people – on fees, on risks, on terms and conditions – as a primary source of profits. We don’t allow this kind of cheating in the non-financial sector and we shouldn’t allow it in finance either.
The unfortunate and indisputable truth is that our rule-making and law-enforcement agencies completely fell asleep prior to 2008 with regard to protecting borrowers and even depositors against predation. Even worse, since the financial crisis, the Securities and Exchange Commission, the Justice Department, and the Federal Reserve Board of Governors proved hard or near impossible to awake from this slumber.
We need simple, clear rules that ensure transparency and full disclosure in all financial transactions – and we need to enforce those rules. This is what was done with regard to securities markets after the debacle of the early 1930s. The Consumer Financial Protection Bureau (CFPB), for which Senator Warren worked long and hard, has started down a sensible road towards smarter and simpler regulation. The CFPB needs to go further – including on auto loans – and for this it needs renewed political support.
The second proposal is to end the greatest cheat of all – the implicit subsidies received by the largest financial institutions, structured so as to encourage excessive and irresponsible risk-taking. These consequences of these subsidies have already caused massive macroeconomic damage – this is why our crisis in 2008-09 was so severe and the recovery so slow. Yet we have made painfully little progress towards really ending the problems associated with some very large financial firms – and their debts – being viewed by markets and policymakers as being too big to fail.
If you could visit a casino with the prospect of keeping all your winnings, while your losses would be partially or completely paid by someone else, how much would you gamble? You would bet a huge amount – presumably as much as the house allows. Big banks are run by smart, rational people. The incentives they face – which themselves have worked long and hard to retain – are not acceptable from a broader social point of view.
Senator Warren wants to cut through the complex morass of modern regulation. Force the biggest half dozen banks to become smaller, simpler, and more transparent. Limit the tax deductibility of interest for large highly leveraged financial institutions, so they choose to fund themselves with relatively more equity and less debt.
And reform the emergency powers of the Federal Reserve – to strengthen its ability to deal with genuine disasters while also ensuring an appropriate level of democratic review and control. The days of secretive bailouts should end.
Senator Warren’s main point is this:
“without some basic rules and accountability, financial markets don’t work. People get ripped off, risk-taking explodes, and the markets blow up. That’s just an empirical fact – clearly observable in 1929 and again in 2008.”
Of course you cannot outlaw all cheating or prevent all forms of future potential macroeconomic problems. But the legislative framework and presidential priorities matter. This is demonstrated by what happened since the 1980s, when the deregulation of finance distorted incentives in very ways that proved very dangerous.
We can choose now to make markets function better. Put in place simpler, clearer rules and enforce them.
This is a completely centrist agenda. As a result, there is real potential here for bipartisan policy initiatives – and there are senators on both sides of the aisle who show signs of being willing to go to bat for exactly these kinds of sensible pro-market ideas.
All presidential candidates, Republican and Democrat, would be smart to embrace this agenda.
April 13, 2015
It Can Wait. Really.: The Real Solution to Notification Overload
By James Kwak
Beeping iPads! Buzzing phones! Zapping watches! Soon, apparently, we won’t be able to complete a thought without being interrupted by some “intelligent” piece of technology.
The solution, according to Steven Levy, is yet more technology:
a great artificial intelligence effort to comb through our information, assess the urgency and relevance, and use a deep knowledge of who we are and what we think is important to deliver the right notifications at the right time. . . .
the automated intake of our information will allow us to “know by wire,” as super-smart systems learn how to parcel things out in the least annoying and most useful fashion. They will curate better than any human can.
First of all, I’m skeptical. So is Levy, apparently; just a few paragraphs up, he writes, “the idea of One Feed to Rule Them All is ultimately a pipe dream.” The same factors that make it impossible for one company to create a perfectly prioritized feed make it impossible for one company to create a perfectly prioritized stream of notifications.
Good Ideas Are Not Enough
Dan Davies put together a brilliant roundup of the clever business models that financial technology startups are pitching to their investors — and why most of them are deeply flawed. Some of them apply much more broadly than to just the financial services industry. Number three, for example — “Hoping that a load of people who actively mistrust each other will trust you instead” — is a decent description of the business-to-business marketplaces that Ariba was trying to build when I worked there back at the beginning of the millennium.
I’d like to add two more general principles that apply to technology companies that are trying to serve the financial services industry — mainly learned during my years working at an insurance software company before going to law school.
(I’m going to try switching to a Brad DeLong-style approach in which I put the beginnings of my Medium posts here, and then you can decide if you want to read more or not. I can’t put the whole post here because they have thirty-day exclusivity.)
April 8, 2015
Vaguely Monthly Roundup
By James Kwak
Did you know that blogging is dead? That’s what I hear, anyway. I plan to say something about it once I figure out if I have anything to say on it.
Anyway, as you have probably noticed, I do most of my sporadic writing over at Medium these days. Since I last checked in here, I wrote stories about:
Why I crippled my smartphone;
The misleading campaign against the estate tax; and
The fallacy on the first page of Gregory Mankiw’s textbook
I also posted an essay by Walt Glazer about inequality.
You can see all of my Medium stories here, or you can read the whole Bull Market publication (now including Brad DeLong!).
February 27, 2015
“Middle-Class Economics”
By James Kwak
Supposedly President Obama is making “middle-class economics” one of the key themes of his final two years in office. I don’t really know what this is supposed to mean in a country where people making ten times the median household income call themselves “middle class” and there are tens of millions of people in poverty.
For starters, I think it’s important to understand the distribution of wealth in the country as it stands today. That’s the theme of a story I wrote on Medium earlier this week, “The Magnitude of Inequality,” which uses charts and pictures to try to convey just how unequal a society we live in.
Yesterday I published another story on Medium about one of Obama’s “middle-class economics” proposals: the forthcoming Department of Labor rule that will try to protect people’s retirement savings from financial advisers’ conflicts of interest. It’s a complicated topic to understand, and the administration proposal will undoubtedly help—but not very much, given the scope of the retirement security problem.
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