Month: September 2009

The WSJ offers up some predictions, although not for economics.

For this year (NB: I've never been right in the past) I am predicting a joint prize for Oliver Williamson and Jean Tirole.  Williamson is by some accounts the most cited living economist, Tirole is European, the pick would not look "political," and yet agency problems have proven to be pretty important as of late.  The selection would look relevant.  I used to pick Fama each year but the time is no longer right for him, whether that is fair or not (I would say not).

My dark horse pick is a joint prize to environmental economists, including William Nordhaus for the concept of "green accounting."

I thank Akshay for the pointer.  What do you all predict?

One of the themes of Paul Krugman’s theya culpa is that the economics profession was so entranced by efficient markets theory that “Discussion of investor irrationality, of bubbles, of destructive speculation had virtually disappeared from academic discourse.” Alan Greenspan comes in for particular criticism:

Finance theorists continued to believe that their models were essentially right, and so did many people making real-world decisions. Not least among these was Alan Greenspan, who was then the Fed chairman and a long-time supporter of financial deregulation whose rejection of calls to rein in subprime lending or address the ever-inflating housing bubble rested in large part on the belief that modern financial economics had everything under control..[and]… a general belief that bubbles just don’t happen.

That sort of optimism cannot last; stocks that are too highly priced will inevitably fall, perhaps over a long period, as they did in the mid-1970’s. Mr. Greenspan, who is 71, lived through that painful downturn as a top economic adviser in the Ford Administration.

This time, a falling stock market might have a broader impact. Many more Americans own stocks today than in the past, and a downturn could cut deeply into their sense of well-being. The result could be a severe cutback in spending, hurting the economy. For that reason, the stock market has become increasingly important in the deliberations of the Federal Reserve over interest rates — whether to raise them to slow the economy or lower them to encourage spending and growth.

Greenspan in Uchitelle’s piece is the one raising questions about market prices.  Furthermore, no economist in Uchitelle’s piece says that prices are always correct or that markets are perfectly efficient or that bubbles are impossible–the mainstream view according to Krugman.  Robert Shiller is quoted not Eugene Fama.  And, of course, it was Robert Shiller who would later author two bestsellers warning of bubbles, another discomforting fact for those who argue that dissenting economists were marginalized.

The point is not to defend Greenspan.  Indeed, in some sense Greenspan was as wrong about stocks in 1996 as he was about housing in 2004 but the errors were of opposite signs–this in itself is a telling point and a key element of a more nuanced story about how economists got things wrong and the difficulties of getting things right.

The point is that if we are to understand recent history it’s neither true nor useful to argue that Greenspan and other economists thought the price was always right.

This kind of observation is becoming popular:

Almost everyone I’ve ever spoken to in Hank Paulson’s old Treasury
Department agrees that without the immediate panic caused by the Lehman
default, the government would never have agreed to make the loans
needed to save A.I.G., a company it knew very little about. In effect,
the Lehman bankruptcy caused the government to panic, which in turn
caused it to save the firm it really had to save to prevent
catastrophe. In retrospect, if you had to choose one firm to throw
under the bus to save everyone else, you would choose Lehman.

Here is much more, by Joe Nocera.

This hypothesis has its own paper, by Robert Wassner and David Edwards.  Here is the bottom line:

The more land use decisions in a state are driven by fiscal considerations, the more likely may be the degree of sprawl observed in the state’s urban areas. The reason is that outlying local governments in an urban area, with a greater likelihood of possessing undeveloped land, are more likely to use revenue considerations in choices related to land use. As discussed next, the extent that outlying local governments in a state’s urban areas weigh fiscal considerations in land use decisions is expected to depend on the relative reliance by local governments in the state on the different possible forms of local revenue. That is, greater statewide reliance on a form of local revenue that rises and falls with differences in land use choices can result in forms of land use decisions in an urban area that generate greater sprawl. The theoretical connection between sales tax reliance by local governments in a state and greater urban decentralization centers on the ability of local government officials to influence the location of retail activity in an urban area. The amount of overall retail activity in an urban area is determined by factors such as population, income, age distribution, etc. in the region and is unlikely to change due to local government influences. But local land use decisions can shape the distribution of overall retail development in an urban area. Local this land for retail activity if local greater retail generates for them. This surplus comes in the forms of (1) non-residents paying local sales taxes and (2) the lower alternate land uses.

The paper offers a good bit of evidence, though the authors are very careful to claim this is not the only or even the major factor behind sprawl.  Lots of little local governments, of course, also enhance educational competition and the quality of the local schools, which further encourages sprawl.