Month: July 2009

Independent Central Banks and Inflation

A number of prominent economists have signed a petition calling for Congress and the Executive Branch to reaffirm their support for and defend the independence of the Federal Reserve System."  The petition is disingenuous. 

The petition argues that "central bank independence has been shown to be essential for controlling inflation."  "Essential," is a big exaggeration.  There is evidence that more independent central banks are better at controlling inflation (e.g. Alesina and Summers 1993).  Consider, however, New Zealand's central bank; it has been very successful at reducing inflation but in some ways it is one of the least independent central banks in the world precisely because (unlike in the U.S.) the governor can be fired if inflation moves outside of a target region.

Furthermore, the petition says that central bank decisions should not be "politicized."  Again,this is disingenuous.  Why are more independent central banks better at fighting inflation than less independent central banks?  There is nothing magical about independence that makes for low-inflation.  Suppose we pick someone at random and give them complete power over monetary policy.  Such a central banker would be very independent but I wouldn't count on this policy resulting in much in the way of systematically lower inflation.

The primary reason that independent central banks are better at controlling inflation is that absent direct political control the default selection mechanism favors bankers, i.e. lenders, people whose interests make them more favorable towards lower inflation.

Thus, independence is a political decision that favors lenders in the decisions of monetary policy.  Now, depending on the alternatives, there may be good reasons for making this choice but we should not fool ourselves into thinking that we have depoliticized money.  We should not be surprised, for example, that "independent" central banks tend to make lender of last resort decisions that protect banks and bankers.

Addendum: See also Robert Higgs on the petition and Arnold Kling offers cogent comments on the closely related issue of whether the Fed should be "audited," whatever that means.

Ben Casnocha on placebos and education

Ben sequences it well:

In his new book, which I review here, Tyler Cowen writes:

Placebo effects can be very powerful and many
supposedly effective medicines do not in fact outperform the placebo.
The sorry truth is that no one has compared modern education to a
placebo. What if we just gave people lots of face-to-face contact and told them they were being educated?

He reluctantly provides the terrifying conclusion: Maybe that's what current methods of education already consist of.

Is financial innovation good?

Felix Salmon, for one, writes:

Net-net, financial innovation is a bad thing: the downside, during
times of crisis, is higher than the upside in more normal years.

Maybe I am taking Felix and others too literally but I am genuinely puzzled by this attitude.  I can understand that particular financial innovations might be bad, but financial innovation overall?  Surely this claim was false in years 1200, 1900, and also 1950.  (Of course you’ll find very harmful financial explosions between those years and the current day but still on net you’ll take the progress.)  If the U.S. economy resumes growing at an average rate of about two percent a year, eventually our economy will look very, very different than it does today.  It’s hard for me to see running the economy of 2100 with the banking system of…what is the nostalgic year?  1992?  1957? 

We’ll need more than better ATMs, which is not to say we need approve of every step along the way.

High bank profits

Mark Thoma has good links and good discussion.  I don't know the "inside scoop" on the bank books, but in purely theoretical terms a bit of chicanery may be socially optimal now.  In general, bank moral hazard-induced-risk-taking may move closer to socially optimal, the closer banks are to insolvency.  Let's say that banks are generating high profits now by, one way or the other, pursuing short run profits and "going short" on market volatility.  In the long run this investment strategy will bite them, sooner or later but probably later.  In the meantime they likely will become solvent.  If insolvency has a high fixed cost this can be a good risk, even from the taxpayer or social point of view.

Of course one does not want for this game to continue forever and it is hard to stop once it gets rolling.  But on a period-by-period basis, now is not the ideal time to stop.  Now may be the time to allow such opportunistic behavior to get banks out of the range of possible insolvency.  Tolerance is a kind of invisible subsidy that costs us something only stochastically or in the more distant future.

*Your Religion is False*

The author is Joel Grus and the link to the book is here.  I am a pro-religion non-believer, but if you wish to hear from an anti-religion non-believer, this is the place to go.  He will tell you that your religion is false.

In addition to its humor, I prefer the content of this book to the better-known "new atheist" tracts.  Grus yields many of the strongest arguments.  For instance the biographical and sociological correlates with belief (most people choose the religion they grew up with, or encountered through a friend, etc.) suggest that, in this area, intuitions which feel "certain" simply cannot be trusted.

Good advice from the FT

Tyler Cowen, the economist, advises readers to “snap up foreign fiction
translated into English, if only because the selection pressures are so
severe”: in order for a publisher to think a work of fiction worth the
risk of translating and promoting to a foreign audience, its quality
has on average to be higher than the average for homegrown work.

Here is more.  The best place to follow new releases of such fiction is the blog Literary Saloon.

The Return of the Puppet Masters

In a post from a few years ago titled, Do you love cats?, I wrote this:

Toxoplasma gondii is a favorite parasite of evolutionary biologists because it has an incredible property.  The parasite lives in the guts of cats where it sheds eggs in cat feces that are often eaten by rats.  Now how to get back from the rat to the cat?  Amazingly, Toxoplasma gondii infects the brains of rats making them change their behavior in a subtle way that increases the genetic fitness of the parasite.  Toxoplasma makes the infected rats less scared of cats and so more likely to be eaten! 

Now here is the kicker.  Toxoplasma gondii also infects a lot of humans.

Now here is the latest research finding;

Toxoplasma gondii infects 20–60% of the population in most countries…We confirmed, using for the first time a prospective cohort study design, increased risk of traffic accidents in Toxoplasma-infected subjects…Our results show that …subjects with high titers of anti-Toxoplasma antibodies had a probability of a traffic accident of about 16.7%, i.e. a more than six times higher rate than Toxoplasma-free… subjects.

People with RhD blood factor have some protection – see the article for more.  No word yet on whether this increases the probability of being eaten by cats although I suppose it would have to.

Inequality and consistency

I agree with Will Wilkinson's point that real social inequality has (mostly) been falling for some time in the United States.  Today many an upper middle class person is plausibly happier than many a billionaire.  Yet most self-made billionaires work very hard to get to that position, which creates a possible tension between cardinal and "observed choice" or "ordinal" metrics of welfare.  Why work so hard for so little?  Presumably many of these billionaires really want to "be there," even if they are only marginally better off or in some cases worse off.

Here are a few possible implications, not all of which are (or can be) true:

1. Higher marginal tax rates aren't very unjust, because lower incomes don't make wealthy people much less worse off.

2. Higher marginal tax rates are very unjust, because they undo results that the wealthy have worked very hard for and cared very deeply about.

3. Work is fun for the (self-made) wealthy, so higher marginal tax rates won't much discourage their work effort.

4. Greater wealth is barely worth it for the wealthy, so higher marginal tax rates will very much discourage their work effort.

Will's paper convinces me that the distinction between ordinal and cardinal measures of human welfare is more important than ever. Conservatives often cite #2 and #4, or in other words they have an ordinal normative theory and a cardinal predictive theory.  Liberals are more likely to cite #1 and #3, giving them a cardinal normative theory and an ordinal predictive theory.  In neither case is there an outright contradiction, but arguably both groups end up holding an odd mix of positions.

It would be interesting to take each group aside and present them with the abstract questions of cardinal vs. ordinal understandings of well-being, yet without explaining to them the possible policy implications of their answers.

Fairhope, Alabama

Fairhope, Alabama,
is one of two single tax colonies remaining in the United States (the
other is in Arden, Delaware). The community was established in 1894 by
a group from Des Moines, Iowa, headed by Ernest B. Gaston, who wanted
to establish a colony based on the single tax theories of economist,
journalist and social reformer Henry George.

rent paid to the Single Tax Corporation by lessees includes an amount
due for state, county and local taxes, plus an administration fee to
operate the Single Tax Corporation office, plus a “demonstration fee”,
intended to demonstrate the usefulness of the single tax concept. Funds
from the demonstration fee are used to enhance the community by
supporting such things as the public parks, the public library, the
historical museum, etc.

is located on the Eastern Shore of Mobile Bay…About 4,500 acres of land in and around Fairhope is owned by
the Fairhope Single Tax Corporation. This includes the downtown area
and a little less than half of the remainder of the city.

The link is here. Here is Wikipedia on Fairhope.  Fairhope never succeeded in being a formal single tax "colony," but here is a short history and they are arguably the "purest" remaining example of the Georgist idea.  One public choice lesson in this history is that later economic pressures will overwhelm virtually any initial constitution.  It is a pretty city to visit and they still have a plaque in honor of the single tax concept.

Via Kevin Vallier, here is a guidebook for Fairhope.

Predictions about immigration and attractiveness

Sebastian Flyte, an unusual commentator, wrote:

A man's mate value is tied to status – if he
emigrates he throws away whatever mate value he built up in his life. A
girl's is tied to youth and beauty. These are carried with her luggage.

He has a point.  Female migrants should on average be prettier, ceteris paribus, than those who stay in the old country.  That means holding constant income, education, and some other variables.  Female immigrants should find it easier to marry into the receiving country's population than do male immigrants.  From a public choice point of view, the women in the country receiving the immigrants should be more suspicious of liberal immigration policies than should be the men in the receiving country.  It is up for grabs whether male immigrants should be handsomer or uglier than average, relative to their home country populations, again holding constant some relevant variables.