Economics

Lawmakers are stymied over how to pay for road and bridge repairs without raising taxes or fees, which Mr. [Scott] Walker has ruled out. The governor’s fellow Republicans rejected his proposal to borrow $1.3 billion for the roadwork, arguing that adding to the state’s debt is irresponsible.

In other words, Walker also has yet to come up with a state-level fiscal policy which consistently melds spending and taxing decisions; Trip Gabriel at NYT has more to say.  As I argued earlier, these approaches to fiscal policy at the state level are not in every instance perfectly thought out.  Just to be clear, this is not just a Republican vice: the Democrats have run the finances of states such as Illinois in a manner which is not entirely enviable.

The New England Conference of United Methodist Churches, a group of 600 churches, has issued a resolution calling for an end to the war on drugs. The resolution draws on ethical principles and also a remarkably astute reading of economics and social science:

Whereas: The public policy of prohibition of certain narcotics and psychoactive substances, sometimes called the “War on Drugs,” has failed to achieve the goal of eliminating, or even reducing, substance abuse and;

Whereas: There have been a large number of unintentional negative consequences as a result of this failed public policy and;

Whereas: One of those consequences is a huge and violent criminal enterprise that has sprung up surrounding the Underground Market dealing in these prohibited substances and;

Whereas: Many lives have been lost as a result of the violence surrounding this criminal enterprise, including innocent citizens and police officers and;

Whereas: Many more lives have been lost to overdose because there is no regulation of potency, purity or adulteration in the production of illicit drugs and;

Whereas: Our court system has been severely degraded due to the overload caused by prohibition cases and;

Whereas: Our prisons are overcrowded with persons, many of whom are non-violent, convicted of violation of the prohibition laws and;

Whereas: Many of our citizens now suffer from serious diseases, contracted through the use of unsanitary needles, which now threaten our population at large and;

Whereas: To people of color, the “War on Drugs” has arguably been the single most devastating, dysfunctional social policy since slavery and;

Whereas: Huge sums of our national treasury are wasted on this failed public policy and;

Whereas: Other countries, such as Portugal and Switzerland, have dramatically reduced the incidence of death, disease, crime, and addiction by utilizing means other than prohibition to address the problem of substance abuse and;

Whereas: The primary mission of our criminal justice system is to prevent violence to our citizens and their property, and to ensure their safety, therefore;

Be it Resolved: That the New England Annual Conference supports seeking means other than prohibition to address the problem of substance abuse; and is further resolved to support the mission of the international educational organization Law Enforcement Against Prohibition (LEAP) to reduce the multitude of unintended harmful consequences resulting from fighting the war on drugs and to lessen the incidence of death, disease, crime, and addiction by ending drug prohibition.

What depresses us is how little attention has been paid to one major area of Greek government spending that seems ripe for the ax: defense spending.  Greece spends a whopping 2.2% of GDP on defense, more than any NATO member-state save the United States and France.  Bringing Greece into line with the NATO average would alone achieve ¾ of what the IMF is demanding through pension cuts.

There is more here from Benn Steil and Dinah Walker.  And here is further discussion of the issue.

It’s possible that there’s an economic impetus behind it. “The price of land is going up, which pushes up the value of each table,” said Cowen. “That makes moving people along more important.”

A similar trend, after all, sees many restaurants hoping that diners don’t order dessert, because the course isn’t terribly profitable and it encourages people to linger.

But maybe waiters are clearing individual plates because they believe that’s what customers want. I have heard as much from servers and restaurateurs.

Yet I have heard many people complain about this policy.  It’s almost as if the staff labor is unwilling to let their idle time go unused, perhaps for fearing of signaling shirking.  And so they must do something, which means taking your things away.  What other motives could there be?  My biggest pet peeve actually is when they pour more of your drink into your ice than a Hotelling rule would suggest for an optimal pace of temperature equalization.

That is from Roberto A. Ferdman.

Addendum: Kevin Drum comments.

Arrived in my pile

by on June 23, 2015 at 2:01 pm in Books, Economics, History | Permalink

Eric Rauchway, The Money Makers: How Roosevelt and Keynes Ended the Depression, Defeated Fascism, and Secured a Prosperous Peace.

Due out this October.

A Supreme Court ruling could gut an important facet of the Affordable Care Act as early as this week, but you wouldn’t know it from what the Republican presidential candidates have been talking about.

In the lead-up to the key 2012 Supreme Court ruling on health care reform – in which the justices decided the penalty paid by anyone without health coverage was a tax, and therefore constitutional – Republicans were abuzz about the possibility that the law could be overturned, and the issue featured prominently in campaign trail rhetoric.

But this time the GOP candidates for president have uttered barely a peep, even though the high court could decide the federal government cannot subsidize health insurance purchased through the federal exchange, which would leave millions of people without insurance and effectively unravel Obamacare as we know it.

That is from Rebecca Berg.

Greece facts of the day

by on June 22, 2015 at 2:44 pm in Economics, Law | Permalink

“There’s a real issue of moral hazard . . . Around 70 per cent of restructured mortgage loans aren’t being serviced because people think foreclosures will only be applied to big villa owners,” one banker said.

Dimitris, formerly a high-flying advertising executive, sold his brand new loft conversion at a knockdown price to help pay off debts when his agency folded three years ago.

“I still owe money on the car and motorboat I can’t afford to use. Even a holiday loan I’d forgotten about,” he says. “I’m living with my mother looking for work and waiting for the bank to come up with another restructuring offer.”

That is from Kerin Hope at the FT.

Paid by pages read? (model this)

by on June 22, 2015 at 2:32 am in Books, Economics | Permalink

Soon, the maker of the Kindle is going to flip the formula used for reimbursing some of the authors who depend on it for sales. Instead of paying these authors by the book, Amazon will soon start paying authors based on how many pages are read—not how many pages are downloaded, but how many pages are displayed on the screen long enough to be parsed. So much for the old publishing-industry cliche that it doesn’t matter how many people read your book, only how many buy it.

That is from Peter Wayner, via Craig Richardson.

Aaron C. Davis has an excellent piece on this theme.  Here is one bit:

Once a profitable business for cities and private employers alike, recycling in recent years has become a money-sucking enterprise. The District, Baltimore and many counties in between are contributing millions annually to prop up one of the nation’s busiest facilities here in Elkridge, Md. — but it is still losing money. In fact, almost every facility like it in the country is running in the red. And Waste Management and other recyclers say that more than 2,000 municipalities are paying to dispose of their recyclables instead of the other way around.

But why?  According to Davis:

1. “A storm of falling oil prices, a strong dollar and a weakened economy in China have sent prices for American recyclables plummeting worldwide.”

2. Consumers are bringing too many items to recycling centers, and with inadequate sorting.

3. Larger bins have encouraged indiscriminate contributions: “Residents have also begun experimenting, perhaps with good intentions, tossing into recycling bins almost anything rubber, metal or plastic: garden hoses, clothes hangers, shopping bags, shoes, Christmas lights.”  A lot of people simply put in their garbage.

4. Many small problems are accumulating in the user contributions to recycling, such as consumers no longer breaking down their cardboard boxes as they used to.

5. The value of recycled newsprint and glass just isn’t that high right now.

Previously I had simply assumed that recycling technologies would scale rather easily and effortlessly, but maybe that isn’t the case:

“If people feel that recycling is important — and I think they do, increasingly — then we are talking about a nationwide crisis,” said David Steiner, chief executive of Waste Management, the nation’s largest recycler…

Do read the entire article, and while you’re at it Adam Minter’s Junkyard Planet.

A San Francisco biotech startup has managed to 3D print fake rhino horns that carry the same genetic fingerprint as the actual horn. It plans to flood Chinese market with these cheap horns to curb poaching.

And this:

The company plans to release a beer brewed with the synthetic horn later this year in the Chinese market.

rhino

The full story is here, via Max Roser.

Ekaterina V. Peneva and Jeremy B. Rudd have a new paper with the Fed (pdf):

We use a time-varying parameter/stochastic volatility VAR framework to assess how the passthrough of labor costs to price inflation has evolved over time in U.S. data. We find little evidence that changes in labor costs have had a material effect on price inflation in recent years, even for compensation measures where some degree of passthrough to prices still appears to be present. Our results cast doubt on explanations of recent inflation behavior that appeal to such mechanisms as downward nominal wage rigidity or a differential contribution of long-term and short-term unemployed workers to wage and price pressures.

Economists knew or figured that to be the case a while ago, I am glad to see it being relearned.

It is called Bank Underground, a clever title.  There is one interesting post on insurance for driverless cars, and another on deflation risk.

Can you imagine the Fed doing the same?  The bloggy voice and the need for institutional conformity are not always in perfect synch.  Still, perhaps central banks are learning that if they do not define their own image, others will do it for them.

Let’s keep our fingers crossed…

Normative Sociology

by on June 19, 2015 at 7:29 am in Economics, Philosophy | Permalink

Excellent post by Joseph Heath:

The whole “normative sociology” concept has its origins in a joke that Robert Nozick made, in Anarchy, State and Utopia, where he claimed, in an offhand way, that “Normative sociology, the study of what the causes of problems ought to be, greatly fascinates us all”(247). Despite the casual manner in which he made the remark, the observation is an astute one. Often when we study social problems, there is an almost irresistible temptation to study what we would like the cause of those problems to be (for whatever reason), to the neglect of the actual causes. When this goes uncorrected, you can get the phenomenon of “politically correct” explanations for various social problems – where there’s no hard evidence that A actually causes B, but where people, for one reason or another, think that A ought to be the explanation for B. This can lead to a situation in which denying that A is the cause of B becomes morally stigmatized, and so people affirm the connection primarily because they feel obliged to, not because they’ve been persuaded by any evidence.

Let me give just one example, to get the juices flowing. I routinely hear extraordinary causal powers being ascribed to “racism” — claims that far outstrip available evidence. Some of these claims may well be true, but there is a clear moral stigma associated with questioning the causal connection being posited – which is perverse, since the question of what causes what should be a purely empirical one. Questioning the connection, however, is likely to attract charges of seeking to “minimize racism.” (Indeed, many people, just reading the previous two sentences, will already be thinking to themselves “Oh my God, this guy is seeking to minimize racism.”) There also seems to be a sense that, because racism is an incredibly bad thing, it must also cause a lot of other bad things. But what is at work here is basically an intuition about how the moral order is organized, not one about the causal order. It’s always possible for something to be extremely bad (intrinsically, as it were), or extremely common, and yet causally not all that significant.

I actually think this sort of confusion between the moral and the causal order happens a lot. Furthermore, despite having a lot of sympathy for “qualitative” social science, I think the problem is much worse in these areas. Indeed, one of the major advantages of quantitative approaches to social science is that it makes it pretty much impossible to get away with doing normative sociology.

Incidentally, “normative sociology” doesn’t necessarily have a left-wing bias. There are lots of examples of conservatives doing it as well (e.g. rising divorce rates must be due to tolerance of homosexuality, out-of-wedlock births must be caused by the welfare system etc.) The difference is that people on the left are often more keen on solving various social problems, and so they have a set of pragmatic interests at play that can strongly bias judgement. The latter case is particularly frustrating, because if the plan is to solve some social problem by attacking its causal antecedents, then it is really important to get the causal connections right – otherwise your intervention is going to prove useless, and quite possibly counterproductive.

He goes on to discuss four reasons why people are attracted to normative sociology 1) they want to have a causal lever so they blame what they think they can change 2) they don’t want to blame or appear to blaming the victim so they avoid some explanations in favor of others 3) confusing correlation and causation 4) a metaphysical desire for bad things to have big and bad effects.

Addendum: My review of Heath’s book, Enlightenment 2.0.

“Fiscal austerity” is a clever label that somehow has stuck, but I think it is misleading. What has really been going on that Greece has been spending borrowed money, and they kept borrowing at a faster clip than what is sustainable. Suppose you do that as a household. What has to happen? At some point, you need to stop borrowing, you need to live within your means, and you have to either try to repay your debt or default. Everyone would like to spend more than what they receive! And, of course, it limits “growth” if you can no longer do that. But who is supposed to give you the resources for living beyond your means? What gets forgotten with the “fiscal austerity” label is this. Greece is free to borrow as much as they want on private markets, but private markets were no longer willing to lend to Greece. If Europe and the ECB had not stepped in and replaced much of that lost lending, if the debt terms would not have been renegotiated, it would have had a much more drastic effect on fiscal resources in Greece. So, one could argue (and I think it is fair to argue), that the European policies actually were the opposite of “fiscal austerity” compared to the benchmark case of only borrowing on private markets.

The full interview is here, via Garett Jones.  And here is your Greece fact of the day:

The Greek banks might be able to survive [under Grexit] depending on what happens to their liabilities to the Eurosystem but it isn’t encouraging that more than half of their regulatory capital comes from deferred tax assets, which only have value if the banks are profitable and the Greek government has cash to pay.

That is Matthew C. Klein, from a longer post on the pros and cons of Grexit.  And here is my earlier post Is Greece Really Going to Leave the Eurozone?, still a good guide.

Claims about liquidity

by on June 18, 2015 at 2:25 pm in Economics | Permalink

Robin Wigglesworth at FT Capital Markets has a long and interesting post on this currently important topic, most of all for corporate bond markets.  The hot topic these days is why liquidity seems to have dried up along so many fronts at once.  Here is one excerpt:

The causes of these illiquidity phenomena are manifold, and vary from market to market. But Matt King, a senior strategist at Citi, argues that the one common thread is the dominance of central banks over markets.

The paradox, he argues, is that the extra money pumped into the global economy by central banks is leading to “herding” by investors, as they run in and out of markets in a uniform fashion, prodded by shifts in monetary policy.

“Unfortunately, it leads to a rather ominous conclusion,” Mr King writes. “The bouts of illiquidity will continue until central banks stop distorting markets. If anything, they seem likely to intensify: unless fundamentals move so as to justify current valuations, when central banks move towards the exit, investors will too.”

Do read the whole thing, there are further points and charts of interest.