Month: December 2007

Here, here, and here.  I agree all around, noting only that inflation does, for mysterious reasons, seem to be a slight tax on savings (nominal interest rates don’t adjust completely to inflationary expectations, but don’t ask me why not).  But that doesn’t change the overall argument very much.  I’ll put the main point yet another way: with a commodity standard the money supply is often pro-cyclical, shrinking during business downturns.  Who wants to risk that?

I haven’t followed Ron Paul closely, and while I like many of his libertarian ideas, I am discomforted by his overall anti-intellectual demeanor.  He strikes me as the kind of person who has a natural attraction to conspiracy theories.  However he is only allowed to believe the ones that coincide with his libertarian ideology.  Which isn’t so many (most of those theories are dreamt up by non-libertarians and thus have anti-libertarian elements), and that means he ends up sounding more somewhat sensible than he really is.

I don’t doubt Paul’s sincerity, but I would like to know his theory of why most economists — even market-oriented ones — don’t agree with him on monetary policy.  I suspect he thinks he knows some secret that others do not. 

There’s what a politician believes, and how a politician believes.  As I get older I put increasing weight on the latter.  As a protest vote, Ron Paul seems fine, but hearing him or reading about him just makes me depressed.  A good rule of thumb is not to get too excited about any candidate whose actual election would make the Dow lose thousands of points.

Addendum: If you’d like a different point of view, here is Alina Stefanescu on Ron Paul.

Robin Hanson writes:

For good policy advice, what is the best weight to place on economic theory, versus (individual or cultural) intuitive judgment? [TC: that’s Robin reproducing someone else’s words]

My guess is over 75% weight, so I try to mostly just straightforwardly apply economic theory, adding little personal or cultural judgment [TC: that’s Robin].

In a nutshell, this is the major difference between Robin and me.  In my view there is no such thing as "straightforwardly applying economic theory," unless your prescriptions are limited to "we cannot prove that Giffen goods do not exist."  Theories are always applied and interpreted through our personal and cultural filters and there is no other way it can be.  Robin believes in an Archimedean point for using theory, I do not.  Furthermore we often need to apply personal and cultural judgment to offset the sometimes-erroneous judgments and biases built into the economic way of thinking.  Robin’s post is the clearest example I have seen of what I call Robin’s logical atomism.

Jim Cramer says buy index funds.

The Yale Economic Review informs me:

…stickK.com , scheduled to launch in December 2007, will provide "commitment contracts" that let individuals set a goal, choose consequences for failing to comply, and decide how to verify their progress.  With the options of choosing to lose money every time they fail and designating third-party verifiers to check their success, users will face powerful incentives to meet their goals.

The very smart Dean Karlan and Ian Ayres are behind the idea.  I’ve long predicted this won’t work; one group of potential customers doesn’t really want to change, the other group is unwilling to give up control.  It’s not exaggerating to say that human nature is on the line here, and that if I am wrong this is probably the most important idea you will ever encounter.

Despite all the deductions, loopholes and clever accountants the federal income tax is strongly progressive.  Moreover the federal tax system remains progressive even if you include the payroll tax, corporate taxes and excise taxes.  The chart below with data from the Congressional Budget Office, shows the effective tax rate by income class from all federal taxes. Effective tax rates are considerably higher on the rich than the poor.

The effective tax rate is higher on the rich and the rich
have more money – put these two things together and we can calculate who pays
for the federal government. The final
column in the table shows the share of the 2.4 trillion in federal tax
revenues that is paid for by each income category. The remarkable finding is that the rich and
especially the very rich bear by far the largest share of the federal tax
liability.  The top 10% of households by
income, for example, pay more than half of all federal taxes and the top 1% alone pay over a quarter of all federal taxes.

(Click the table if it is not clear.)

Matt Yglesias points us to the following:

Federal Reserve Chairman Alan Greenspan said Monday [February 2004] that Americans’ preference for long-term, fixed-rate mortgages means many are paying more than necessary for their homes and suggested consumers would benefit if lenders offered more alternatives.

By the way, Greenspan’s recent Op-Ed claims he is not to blame, plus he disavows blame in his NPR segment the other morning. 

The other day I wrote of widespread fraud; I was referring to the fact that many lower income borrowers lied on their mortgage applications or failed to provide documentation of income.  Do any of you have figures here?

The New York Times today blames many factors, including lax and fragmented regulators, but most of all the irresponsible practices of mortgage-lending affiliates of nationally chartered banks.  Here are the now well-known warnings of Ed Gramlich.

If you are curious to evaluate my record as a prognosticator, my earlier posts on whether we are in a housing bubble are here [TC: it turns out I didn’t buy close to the peak] and here.  Am I to blame?  Here is Alex’s insightful post.  Most to the point, here is my post "If I Believed in Austrian Business Cycle Theory."

Some of the Austrians blame Greenspan for lowering short-run interest rates to one percent.  From another direction, here are tales of a real estate bubble on the moon.

I browsed through a New York Fed conference summary the other day; it was about "systematic risk" and it was held about a year ago.  I did not see a word about housing bubbles.  The surprise was not the bubble, but rather than its collapse could be such a source of systemic risk and that it could freeze broader credit markets so much. 

Paul Krugman claimed that the fundamental problem is lack of solvency, but he doesn’t make a clear enough distinction between insolvent homeowners (for sure) and insolvent banks (has he bought puts?).  I haven’t seen an estimate of the losses that is large enough to imply anything close to widespread bank insolvency.

Matters would be easier to understand if they were either much better or much worse than they are; it is the current state of hovering which is so puzzling.

Here is Bob Dylan on what went wrong.  It’s the best account I’ve heard so far.