Alex Tabarrok

How does a stop for jaywalking turn into a homicide and how does that turn into an American town essentially coming under military control with snipers, tear gas, and a no-fly zone? We don’t yet know exactly what happened between the two individuals on the day in question but events like this don’t happen without a deeper context. Part of the context is the return of debtor’s prisons that I wrote about in 2012:

Debtor’s prisons are supposed to be illegal in the United States but today poor people who fail to pay even small criminal justice fees are routinely being imprisoned. The problem has gotten worse recently because strapped states have dramatically increased the number of criminal justice fees….Failure to pay criminal justice fees can result in revocation of an individual’s drivers license, arrest and imprisonment. Individuals with revoked licenses who drive (say to work to earn money to pay their fees) and are apprehended can be further fined and imprisoned. Unpaid criminal justice debt also results in damaged credit reports and reduced housing and employment prospects. Furthermore, failure to pay fees can mean a violation of probation and parole terms which makes an individual ineligible for Federal programs such as food stamps, Temporary Assistance to Needy Family funds and Social Security Income for the elderly and disabled.

Ferguson1new report from Arch City Defenders, a non-profit legal defense organization, shows that the Ferguson municipal courts are a stunning example of these problems:

Ferguson is a city located in northern St. Louis County with 21,203 residents living in 8,192 households. The majority (67%) of
residents are African-American…22% of residents live below the poverty level.

…Despite Ferguson’s relative poverty, fines and court fees comprise the second largest source of revenue for the city, a total of $2,635,400. In 2013, the Ferguson Municipal Court disposed of 24,532 warrants and 12,018 cases, or about 3 warrants and 1.5 cases per household.

You don’t get $321 in fines and fees and 3 warrants per household from an about-average crime rate. You get numbers like this from bullshit arrests for jaywalking and constant “low level harassment involving traffic stops, court appearances, high fines, and the threat of jail for failure to pay.”

If you have money, for example, you can easily get a speeding ticket converted to a non-moving violation. But if you don’t have money it’s often the start of a downward spiral that is hard to pull out of:

For a simple speeding ticket, an attorney is paid $50-$100,
the municipality is paid $150-$200 in fines and court costs, and the
defendant avoids points on his or her license as well as a possible
increase in insurance costs. For simple cases, neither the attorney nor
the defendant must appear in court.

However, if you do not have the ability to hire an attorney or pay
fines, you do not get the benefit of the amendment, you are assessed
points, your license risks suspension and you still owe the municipality
money you cannot afford….If you cannot pay the amount in full, you must appear in court on that night to explain why. If you miss court, a warrant will likely be
issued for your arrest.

People who are arrested on a warrant for failure to appear in court
to pay the fines frequently sit in jail for an extended period. None of the
municipalities has court on a daily basis and some courts meet only
once per month. If you are arrested on a warrant in one of these
jurisdictions and are unable to pay the bond, you may spend as much as
three weeks in jail waiting to see a judge.

Of course, if you are arrested and jailed you will probably lose your job and perhaps also your apartment–all because of a speeding ticket.

As a final outrage, consider this story which ties together Ferguson, the courts, and the arrest of parents, often minority parents, for leaving their kids to play in parks (just as my parents did).

According to local judge Frank Vatterott, 37% of the courts responding to his survey unconstitutionally closed the courts to non-defendants. Defendants are then faced with
the choice of leaving their kids on the parking lot or going into court. As Antonio Morgan described after being denied entry to the court with his children, the decision to leave his kids with a friend resulted in a charge of child endangerment.

A Reason-Rupee poll asked

Do you think all kids who play sports should receive a trophy for their participation, or should only the winning players be awarded trophies?

Overall, an estimated 57% Americans said that only the winning players should be awarded trophies but there were big differences according to gender, race, politics, education and income. 62% of men, for example, said that only the winning players should be awarded trophies compared to 52% of women. These results are consistent with experiments in which women tend to shy away from competition (perhaps with long-run consequences in the workforce). Whites opt for trophies to the winners-only at 63% compared to African Americans at just 44% and Hispanics at 39%. A whopping 80% of libertarians say that trophies should go only to the winners compared to conservatives at 63% and liberals and progressives both at 53%. More educated respondents were more likely to opt for trophies for only the winners.  Trophies for the winners also increased strongly in income which could be because people with high income feel that they are winners or perhaps because people with high incomes are the types of people who enjoy competition.

Trophy1

Note that these are raw differences not betas from a statistical regression and since income, race, education etc. aren’t independent we don’t know which are the most controlling although the results point in directions consistent with other evidence. The data can be found here.

In a great paper, The Impact of Jury Race in Criminal Trials, Shamena Anwar, Patrick Bayer and Randi Hjalmarsson exploit random variation in the jury pool to estimate the effect of race on criminal trials. The authors have data from nearly 800 trials in two Florida counties. On any given day, a jury pool is randomly drawn from a master list based on driver’s licenses. On some days, the pool of about 30 people contains some black members and on other days, purely for random reasons, it does not. The voir dire process–>For every $1 spent on legal aid, the savings can range from $1.60 to $30.removals, excuses and challenges–whittles down the jury pool to 6 jury members with typically 1 alternate.

The authors have data on the race, gender, and age of each member of the jury pool as well as each member of the ultimate jury. The authors also know the race and gender of the defendant and the charges. What the authors discover is that all white juries are 16% more likely to convict black defendants than white defendants but the presence of just a single black person in the jury pool equalizes conviction rates by race. The effect is large and remarkably it occurs even when the black person is not picked for the jury. The latter may not seem possible but the authors develop an elegant model of voir dire that shows how using up a veto on a black member of the pool shifts the characteristics of remaining pool members from which the lawyers must pick; that is, a diverse jury pool can make for a more “ideologically” balanced jury even when the jury is not racially balanced.

The author’s results show not only that blacks and whites are treated differently depending on the composition of the jury pool but also that random variation in the jury pool adds to the variability of sentences holding race constant. Like is not treated as like. The results also suggest that we don’t need racial quotas to increase fairness. We can increase fairness and reduce variability in a racially neutrally way by expanding the size of juries. Six-person juries have become common because they are cheap(er) but a return to twelve person juries would reduce the variability of sentences and greatly equalize conviction rates across race.

A Job is an Exchange

by on August 17, 2014 at 4:57 pm in Economics | Permalink

I love Natasha Singer’s parenthetical in her excellent NYTimes article about job exchanges like Uber, Lyft and Task Rabbit.

“These are not jobs, jobs that have any future, jobs that have the possibility of upgrading; this is contingent, arbitrary work,” says Stanley Aronowitz, director of the Center for the Study of Culture, Technology and Work at the Graduate Center of the City University of New York. “It might as well be called wage slavery in which all the cards are held, mediated by technology, by the employer, whether it is the intermediary company or the customer.”

(Disclosure: For two weeks in the summer of 1988, I had a gig as the au pair for Professor Aronowitz’s daughter, then a toddler.)

FDA Device Regulation

by on August 13, 2014 at 7:20 am in Economics, Law, Medicine | Permalink

In the interests of length I had to sacrifice a few points in my WSJ review of Innovation Breakdown by Joseph Gulfo (excerpted on MR yesterday). In the review, I argued that the FDA could speed the approval of medical devices and reduce uncertainty by not reviewing directly but becoming a certifier of certifiers as is done in Europe.

In fact, a US model is already in place. OSHA, the Occupational Safety and Health, requires that a range of electrical products and materials meet certain safety standards but it outsources certification to Underwriters Laboratories and other Nationally Recognized Testing Laboratories. We could and should do the same for medical devices and for drugs. Indeed, if a device or drug is permitted in a developed, advanced economy such as in Europe, Australia and Japan then I see no reason why it ought not to be provisionally approved in the United States (and vice-versa).

My paper with DiMasi and Milne showed that some FDA drug divisions appear to be much more productive than other divisions suggesting possibilities for substantial improvements if best practices were uniformly adopted. There also appear to be substantial differences between the regulation of drugs and devices especially in recent years. Ian Hathaway and Robert Litan have a new paper on Entrepreneurship and Job Creation in the U.S. Life Sciences Sector that shows that new firm creation in the medical device sector has fallen drastically since 1990 and far more than in the drug sector. Although there are likely many causes, the drop in the number of new firms is consistent with Gulfo’s experience of regulatory uncertainty and may suggest increases in regulatory cost for devices relative to drugs. Here is Hathaway and Litan:

The medical devices and equipment sector, on the other hand, saw new firm formations decline steadily and persistently between 1990 and 2011—falling by 695 firms or 53 percent during that period. Its share of new life sciences firms fell to 31 percent in 2011 from 50 percent in 1990. Unlike its life sciences sector counterparts, the decline in new firm formations in this segment appears to stretch beyond the cyclical effects of the Great Recession.

new device firms

Innovation Breakdown

by on August 12, 2014 at 7:47 am in Economics, Law, Medicine, Uncategorized | Permalink

From my review today in the WSJ of Innovation Breakdown by Joseph Gulfo:

Yo is a smartphone app. MelaFind is a medical device. Yo sends one meaningless message: “Yo!” MelaFind tells you: “biopsy this and don’t biopsy that.” MelaFind saves lives. Yo does not. Guess which firm found it easier to put their product in consumers hands? Oy.

In “Innovation Breakdown: How the FDA and Wall Street Cripple Medical Advances,” Joseph Gulfo tells the tumultuous history of MELA Sciences, the company that invented MelaFind. When Dr. Gulfo joined the firm as president and CEO in 2004, the company’s brilliant team of scientists had spent many years and tens of millions of dollars to develop MelaFind, a “camera with a brain”—optical technology that would scan potential melanomas in multiple spectra and then, using sophisticated algorithms and large datasets, diagnose which were most likely to be cancerous.

MELA Sciences conducts an extensive clinical trial according to a protocol agreed on by the FDA and all looks good. After the clinical trial is completed, however, the FDA backs away from the protocol and comes out against MelaFind.

…The title of Dr. Gulfo’s book is “Innovation Breakdown” but “Innovator’s Breakdown” might have been more apt. The letter sent the author into survival mode. He battled the FDA, calmed investors, and defended against the lawsuit all while trying to keep the company afloat. Under stress, Dr. Gulfo’s health began to decline: He lost 29 pounds, his hair began to fall out, and the pain in his gut became so intense he needed an endoscopy. When his wife begged him to quit, he refused. They turned into roommates. “We were nothing more than cordial. I basically shut my wife out of my life,” he writes.

…The climax to this medical thriller comes when, in “the greatest 15 minutes of [his] life,” Dr. Gulfo delivers an impassioned speech, à la “Twelve Angry Men,” to the FDA’s advisory committee. The committee voted for approval, 8 to 7, and, perhaps with the congressional hearing in mind, the FDA approved MelaFind in September 2011.

It was a major triumph for the company, but Dr. Gulfo was beat. He retired from the company in June 2013—just in time to save his marriage.

Yet remarkably, given his experience, Mr. Gulfo writes that he still believes in a strong FDA. He argues in the book that better “leadership” and a few tweaks to existing rules can fix the problem. He’s wrong.

Compare MelaFind’s experience in the U.S. with its reception in Europe: MelaFind was submitted for marketing approval in Europe in May 2011. It was approved just five months later. One key reason for Europe’s efficient approval process is that European governments don’t review medical devices directly. Instead they certify independent “notified bodies” that specialize and compete to review new products. The European system works more quickly than the U.S. system, and there is no evidence that it results in reduced patient safety. Rather than tweak the current system, why doesn’t the U.S. just adopt the European model and call it a day? Our health and our economy would be better off for it.

Google’s Sergey Brin recently said that he didn’t want to be a health entrepreneur because “It’s just a painful business to be in . . . the regulatory burden in the U.S. is so high that I think it would dissuade a lot of entrepreneurs.” Mr. Brin won’t find anything in Dr. Gulfo’s book to persuade him otherwise. Until we get our regulatory system in order, expect a lot more Yo’s and not enough life-saving innovations.

Thinking Inside the Box

by on August 8, 2014 at 11:21 am in Books, Education, Travel | Permalink

I like this library building in Nice, France.

NiceBlockHead

In Defense of Johns

by on August 7, 2014 at 2:58 am in Economics, Law, Medicine | Permalink

Jim Norton writing in Time:

…When I first began soliciting sex for money, it never occurred to me that some of them are possibly forced into prostitution or have abusive pimps. I must have known it deep down on an intellectual level, but hadn’t witnessed anything to confirm it.

Until I did.

The only experience I’ve had with an element of violence being present was driving on 48th Street in New York once and talking to a girl through my passenger window….As we were speaking, a van full of girls stopped and a guy who I assume was her pimp, bounced her across the hood of my car and threw her in the van.

This is why I’m a firm believer that prostitution should be legalized and pimps should be thrown down an elevator shaft.

Law enforcement stings designed to shame men who pay for sex are nothing more than the state blowing its own morality horn. Being a comedian who is single allows me a luxury most johns don’t have, which is the freedom to discuss the topic openly. And not from a ‘case study’ point of view, but from the honest point of view of someone who has spent the equivalent of a Harvard Law School education on purchasing sex.

By keeping prostitution illegal because we find it “morally objectionable,” we allow (or, more accurately, you allow) sex workers to constantly be put into dangerous situations. Studies have shown that rapes and STDs dropped drastically between 2003 and 2009 in Rhode Island after the state accidentally legalized it. The American Journal of Epidemiology showed that the homicide rate for prostitutes is 50 times higher than the next most dangerous job for a woman, working in a liquor store. You don’t need a Masters in sociology to understand it would be much safer for sex workers if they were permitted to work in places that provided adequate security. Legalizing prostitution would also alleviate the fear a sex worker may have about reporting the abusive behavior of a john out of fear of arrest.

…Give sex workers rights. Give johns a break.

Ebola and the FDA

by on August 5, 2014 at 7:20 am in Economics, Medicine | Permalink

The Telegraph reports:

The two American doctors who have caught Ebola have been treated with a new “secret serum” which could potentially save their lives.

…A source close to the Atlanta hospital, where Dr Brantly is being treated, told CNN: “Within an hour of receiving the medication, Brantly’s condition was nearly reversed. His breathing improved; the rash over his trunk faded away.”

One of his doctors reportedly described the events as “miraculous.”

…Dr Writebol was also administrated with the drug, which was transported to Liberia in a special sub-zero container. She showed a less remarkable recovery, but is hoped to travel to the US on Tuesday to continue her treatment.

According to CNN, the drug was developed by the biotech firm Mapp Biopharmaceutical, based in California. The patients were told that this treatment had never been tried before in a human being but had shown promise in small experiments with monkeys.

…health workers said drugs that could fight Ebola are not particularly complicated but pharmaceutical firms see no economic reason to invest in making them because the virus’ few victims are poor Africans.

Of course, pharmaceutical firms are not going to invest millions in getting a drug through FDA trials for a disease that has only killed a few thousand people since being discovered in 1976. Nevertheless, some people find this simple logic difficult to accept.

 Prof John Ashton, Britain’s leading public health doctor, termed the “moral bankruptcy” of profit-driven drugs developers.

The logic of profit-driven drug developers is no different than the logic of profit driving automobile manufactures. It isn’t profitable to make cars for people who can’t afford them but the auto firms are rarely called morally bankrupt for not giving cars away to the poor. Moreover, it’s not at all obvious why the burden of producing unprofitable drugs should fall on the drug manufacturers. To the extent that there is an ethical case for developing drugs for the poor it’s a burden that falls on all of us.

As Eric Crampton notes there are at least two possible solutions. Either ensure at taxpayer expense a return on investment by subsidizing, offering prizes (as I suggested in Launching) or publicly investing in orphan drugs or

ease up the FDA trials for drugs in this kind of category. Does it really make sense to mandate placebo trials for drugs hitting diseases with 60% fatality rates? We are condemning people to a very high risk of death for the sake of ensuring that there aren’t drug side effects and that the drugs are more effective than placebos (pretty easy to tell quickly where the fatality rate is otherwise 60%!).

Nearly 30% of children in India (ages 6-14) attend private schools and in some states and many urban regions a majority of the students attend private schools. Compared to the government schools, private schools perform modestly better on measures of learning (Muraldiharan and Sundararaman 2013, Tabarrok 2011) and much better on cost-efficiency. Moreover, even though the private schools are low cost and mostly serve very poor students they also have better facilities such as electricity, toilets, blackboards, desks, drinking water etc. than the government schools (e.g. here and here).

In an op-ed Vipin Veetil and Akshaya Vijayalakshmi argue that the private schools may also reduce caste discrimination:

It’s no secret that government schools in India are of poor quality. Yet few know that they are also breeding grounds for caste-based discrimination, with lower-caste students in government schools often asked to sit separately in the classroom, insulted in front of their peers and even forced to clean toilets. This despite the fact that caste discrimination is illegal in India.

…Government-school teachers aren’t necessarily more prejudiced than their private-school counterparts. But private-school teachers find it more costly to discriminate. In a survey of over 5,000 children, academic researchers James Tooley and Pauline Dixon found that students in private schools felt more respected by their teachers than children in government schools.

Caste discrimination in the government schools is also one of the reasons why the private schools focus on teaching English. Among the Dalits, English is understood as the language of liberation not just because it offers greater job prospects but even more because Hindi, Sanskrit and the regional languages are burdened by and interwoven with a history of Dalit oppression. As one Dalit put it“No one knows how to curse me as well as in Tamil.”

The Demand and Supply of Sex

by on July 28, 2014 at 4:25 am in History, Religion, Science | Permalink

Alternet: The idea that men are naturally more interested in sex than women is [so] ubiquitous that it’s difficult to imagine that people ever believed differently. And yet for most of Western history, from ancient Greece to beginning of the nineteenth century, women were assumed to be the sex-crazed porn fiends of their day. In one ancient Greek myth, Zeus and Hera argue about whether men or women enjoy sex more. They ask the prophet Tiresias, whom Hera had once transformed into a woman, to settle the debate. He answers, “if sexual pleasure were divided into ten parts, only one part would go to the man, and and nine parts to the woman.” Later, women were considered to be temptresses who inherited their treachery from Eve. Their sexual passion was seen as a sign of their inferior morality, reason and intellect, and justified tight control by husbands and fathers. Men, who were not so consumed with lust and who had superior abilities of self-control, were the gender more naturally suited to holding positions of power and influence.

Early twentieth-century physician and psychologist Havelock Ellis may have been the first to document the ideological change that had recently taken place. In his 1903 work Studies in the Psychology of Sex, he cites a laundry list of ancient and modern historical sources ranging from Europe to Greece, the Middle East to China, all of nearly the same mind about women’s greater sexual desire.

The ancient belief is consistent with the well known fact that in ancient times when a man went to a bordello the women would line up and bid for the right to sleep with him.

In other words, the ancients believed a lot of strange things at variance with the facts (which isn’t to say that the switch in belief and its timing isn’t of interest or that these kinds of beliefs no longer sway with the times). More at the link.

Now seems like an apposite time to remember, Congress intends no more than Congress smiles. As Ken Shepsle put it in his classic paper Congress is a “They,” not an “It”:

Legislative intent is an internally inconsistent, self-contradictory expression. Therefore, it has no meaning. To claim otherwise is to entertain a myth (the existence of a Rousseauian great law giver) or commit a fallacy (the false personification of a collectivity). In either instance, it provides a very insecure foundation for statutory interpretation.

Shepsle’s point is that Arrow’s impossibility theorem shows that not only do collectives not have preferences they can’t even be understood as if they had preferences. As I wrote earlier:

Suppose that a person is rational and that we observe their choices. After some time we will come to understand their choices in terms of their underlying preferences (assume stability–this is a thought experiment).  We will be able to say, “Ah, I see what this person wants. I understand now why they are choosing in the way that they do.  If I were them, I would choose in the same way.”

Arrow showed that when a group chooses, there are no underlying preferences to uncover–not even in theory. In one sense, the theorem is trivial. We know or should always have known that a group doesn’t have preferences anymore than a group smiles. What Arrow showed, however, is that without invoking special cases we can’t even rationalize group choices as if leviathan had preferences.

Put differently, if we do try to rationalize a leviathan with preferences and intention we will find that such a leviathian has the preferences and intention of a madman. Quoting Shepsle again:

…the Hart and Sacks (1958) notion that legislation should be treated as the result of “reasonable people pursuing reasonable purposes reasonably” is insufficient. Even if we do adopt this posture, even if legislators are the kinds
of reasonable people Hart and Sacks envision, it is still fruitless to attribute intent to
the product of their collective efforts. Individual intents, even if they are unambiguous,
do not add up like vectors. That is the content of Arrow; that is the malady of
majority rule….

…The courts cannot defer to something that is nonsense.

By the way, if legislative intent was nonsense in 1992 when Shepsle wrote, then today, when Congress is more divided than ever, it is nonsense on stilts.

Addendum: Zywicki and Stearn’s excellent book, Public Choice Concepts and Applications in Law has a good discussion of the issue and some of the alternative methods of interpreting a statute. One might begin with Holmes statement, “We do not inquire what the legislature meant; we ask only what the statutes mean.”

Woodford on QE

by on July 24, 2014 at 12:47 pm in Economics | Permalink

Interesting interview by David Andolfatto of Michael Woodford. Woodford is skeptical of QE.

Andolfatto

You talk about Fed purchases of risky assets. I mean, do you have in mind some loose connection of the Fed’s purchase of the mortgage-backed securities, the agency debt?

Woodford

I think that the main argument that’s been made for the desirability of the Fed asset purchases relies upon the idea that certain types of risk are going to be taken onto the Fed’s balance sheet, and the claim that taking those types of risk out of the portfolios that people in the private sector have to hold is going to make a difference for the pricing of risk in the economy. And so the whole idea that you’re concentrating certain kinds of risks on the balance sheet of the central bank, I think, is entirely the theory behind what’s going on. It’s not just an accidental effect.

And so then you have to ask: What do you think that does? And I think it’s a mistake to say, well, the central bank just takes the risk away. It doesn’t take it away. It can affect who is, in fact, going to bear the risk, because essentially it means that a public institution is taking on the risk, and that means that taxpayers as a group are going to have no choice about bearing that kind of risk. And the question is whether you think that concentrating the risks in that way is facilitating an allocation of risk that was, in fact, desirable and that the markets would have been achieving themselves through voluntary trades if financial constraints hadn’t been impeding it, or whether you’re bringing about an allocation of risk that people would have liked to trade away from if financial constraints weren’t keeping them from doing it. And you’re pushing them even further into a corner they don’t want to be in.

Moral Effects of Socialism

by on July 19, 2014 at 7:25 am in Books, Economics, Philosophy | Permalink

Dan Ariely and co-authors have an interesting new paper looking at moral behavior, specifially cheating, in people who grew up in either East or West Germany.

From 1961 to 1989, the Berlin Wall divided one nation into two distinct political regimes. We
exploited this natural experiment to investigate whether the socio-political context impacts
individual honesty. Using an abstract die-rolling task, we found evidence that East Germans
who were exposed to socialism cheat more than West Germans who were exposed to
capitalism. We also found that cheating was more likely to occur under circumstances of
plausible deniability.

…If socialism indeed promotes individual dishonesty, the specific features of this socio-political
system that lead to this outcome remain to be determined. The East German socialist regime
differed from the West German capitalist regime in several important ways. First, the system
did not reward work based to merit, and made it difficult to accumulate wealth or pass
anything on to one’s family. This may have resulted in a lack of meaning leading to
demoralization (Ariely et al., 2008), and perhaps less concern for upholding standards of
honesty. Furthermore, while the government claimed to exist in service of the people, it failed
to provide functional public systems or economic security. Observing this moral hypocrisy in government may have eroded the value citizens placed on honesty. Finally, and perhaps most
straightforwardly, the political and economic system pressured people to work around official
laws and cheat to game the system. Over time, individuals may come to normalize these types
of behaviors. Given these distinct possible influences, further research will be needed to
understand which aspects of socialism have the strongest or most lasting impacts on morality.

It’s interesting that Ariely et al. try to explain cheating as a result of socialism. My own approach would look more to the virtue ethics of capitalism and Montesquieu who famously noted that

Commerce is a cure for the most destructive prejudices; for it is almost a general rule, that wherever we find agreeable manners, there commerce flourishes; and that wherever there is commerce, there we meet with agreeable manners.

See Al-Ubaydli et al. for a market priming experiment and especially McCloskey on The Bourgeoise Virtues for more work consistent with this theme.

Bernanke v. Friedman

by on July 15, 2014 at 7:05 am in Economics | Permalink

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.