Month: July 2011

The Gang of Six plan

Ezra Klein links to a founding document.  David Wessel summarizes some of it.  It’s complicated and a lot of it will be re-legislated.  We still have an OK path forward.  It seemed to me that gdp+1 for Medicare does lot of the medium-term work.  The entire tax discussion was unclear and I feared that some revenue losses were perhaps not acknowledged.  At this point the real questions are about public perceptions, not the principles of public finance as they might be debated by Musgrave and Buchanan.  The estimated level of social capital in the U.S. political system will very shortly be revalued, one way or the other.

Here is Dan Mitchell on the plan.  Here is a Hayekian argument on the debt ceiling.  Here is Peter Leeson on the history of “God Damn!”

On Europe, it’s as simple as that.  The Greek bond yield topped 39 percent.  As I said to a reporter today, France gave birth to it (the euro), faltered and left it on the doorstop of some distant, passive-aggressive German parents, and they are willing to feed the thing but not to pay the bill at Harvard.

Addendum: Ezra has a lengthy summary and analysis.  Blog-lengthy, that is.  Chait doesn’t think it can pass.

Assorted links

1. Many WWII bombs in Germany remain unexploded, and live, and they are (still) tracked with WWII reconnaissance photos.

2. Krugman can’t bring himself to present the figures on government spending.  Herbert Hoover raised spending and raised taxes too, in a slightly expansionary combination.  It is incorrect to take, say, a state governor who is pursuing a contractionary fiscal policy and liken that person to Hoover.  Krugman would do better to simply cede this historical point, which need not infringe upon his more general critique of contractionary policy.

3. What is a high mortgage default rate?, from Arnold Kling.  And Rortybomb, with links to Min, responds on GSEs, a useful post.

4. Are all non-Africans part Neanderthal?

5. A sign that “the Left” is falling apart too; how many hackneyed or false memes or misguided examples of us. vs. them thinking or mistakes of mood affiliation are in this blog post?  It is a veritable feast of fallacy and it should be studied by future historians.  (If you are looking for balance, try David Brooks on the contemporary right.)

A realistic portrait of Argentina

…beyond the stellar growth numbers, the picture is mixed. To start with, the boom owes much to global factors. Amid a surge in global prices, Argentina is a leading food commodities producer, with agriculture making up 35 per cent of foreign sales. Furthermore, not only is China clamouring for Argentina’s natural resources, but the middle class in neighbouring Brazil – its main trading partner – are also avidly buying cars, its biggest manufacturing export.

“The terms of trade are now at a historic high. This is the best possible world for Argentina,” says Lucio Castro of Cippec, a Buenos Aires-based think-tank. “But take out the natural-resource intensive sectors and productivity in the rest of the economy is bad and informality extremely high.”

Unemployment, at 7.4 per cent in the first quarter, is low, but investment is lacklustre – 19.4 cent of gross domestic product. Meanwhile, productivity is “not bad, it’s dismal”, says Mr Castro.

Moreover, following years of underfunding, the country’s once admired education system is a shadow of its former self.

Repeat after me three times: real shocks really, really matter.  That adds up to six “reallys.”  The link is here.

*The Other Barack*

The author is Sally H. Jacobs and the subtitle is The Bold and Reckless Life of President Obama’s Father.  But forget about “our Obama” and read this as a biography of colonialism, the 1960s, interracial relations, and most of all the East African intelligentsia.  In addition to being a life story, it’s an excellent treatment of those topics.  Here is one of the soggier excerpts:

As suddenly as it began, however, his ascent was over.  Six years after he returned from the United States, Obama had been let go from one promising job and was fired from another, his career abruptly dead-ended.  All three of his marriages had failed, and he was barely on speaking terms with any of his children.  Penniless and increasingly dependent on his beloved Johnnie Walker Black, he collapsed at night on the floor at a series of friends’ homes and lived for periods alone in a solitary hotel room.  It was a monumental fall.

…”He didn’t commit a crime.  He didn’t do anything wrong particularly.  He just didn’t finish the race.  As schoolboys, we were always taught that you must finish the race no matter what.  But he didn’t.  He just collapsed.”

Barack Obama Sr. spent two years in the Harvard economics Ph.d. program and had a very good knowledge of econometrics.  Edward Chamberlain, Robert Dorfman, Roger Noll, Sam Bowles, Lester Thurow, and John Dunlop make cameos in this part of the book.  Barack wanted to write his Ph.d. thesis on an econometric investigation on the staple theory of development, but after two years he lost his departmental funding and had to leave, eventually having to leave the U.S. as well.  Harvard was upset that he seemed to be married to two women at once and they looked to ease him out of the program; it’s an ugly story.

There are interesting bits on his time working at Shell, at the tourism bureau, his four months in traction following a major auto accident, his connection to domestic Kenyan political disputes, his role as a Kenyan urban planner, and how he would chat up women.  This book was very extensively researched.

Definitely recommended to anyone interested in East Africa.  Here is David Garrow’s review of the book.

Is a eurobond a possible solution?

I don’t see how, though I understand the arguments in its favor.  I can imagine a German leader saying to her citizens: “We need to pay this one-time clean-up cost, hold your nose and support it.”  (Actually maybe I can’t imagine that, but that’s another story.)  I cannot imagine such a leader saying “From here on in, we’re in the same boat with them.”  The latter seems to be like too much affiliation for anyone’s comfort, and on the back Greek end the associated long-term fiscal restrictions would rankle to say the least.

Imagine that you had an insolvent relation of uncertain future creditworthiness.  You could either make a one-time transfer of $10,000, to help pay off a debt, or co-sign a mortgage.  Wouldn’t the latter be psychologically harder to do, even if it involved a smaller expected subsidy in real terms?

Assorted links

1. Can you digitally organize your friends (acquaintances, enemies, etc.)?  (By the way, I haven’t yet figured out how to respond to Google+ queries, thanks if you sent me one though.)

2. Can the neuroeconomics revolution revolutionize psychiatry? (gated, in any case I am skeptical)

3. The new Tim Groseclose book on media bias is now out.

4. Professorial hobbies.

5. The demographic depression in household formation, or why housing may not recover anytime soon.

6. Star Trek vs. Anti-Star Trek.

From which country do these doggie sentences come?

He opened the car door to let the dog escape but an officer jumped out and pulled a gun on the dog, he says. “I threw myself on my dog and said, ‘You have to shoot me before you kill him,'” Milad says.

The article is interesting throughout.  And here is some arbitrage:

The flight from Ukraine to Tehran has been nicknamed “the puppy flight” because many of its passengers, mostly university students, are carrying puppies for sale, according to several pet website owners who import from Ukraine.

When airport authorities caught on last year, they increased the tax on importing pets from $50 to $800, according to sellers. Some dog vendors diverted their operation so dogs are transported from Ukraine to Armenia and Turkey and from there smuggled in the cargo section of tour buses and trucks returning to Iran, vendors say.

“We have a large and very capable network expanding from Iran to Europe and beyond to help unite Iranians with dogs,” says the 30-year-old owner of Petpars, who asked that his name not be published.

…The Petpars website promises a puppy equipped with a faux international passport hand-carried from Ukraine via a flight passenger.

For the pointer I thank Ian Robinson.

The *four* flavors of financial crisis (more on the mortgage agencies)

Here is a response from Brad DeLong on Fannie and Freddie.  It is hard to excerpt so read the whole thing, as it is full of substance.  Matt Yglesias makes related arguments.

I agree with many of Brad’s specific points, but he is underestimating how simple and direct my initial argument was.  I explicitly wrote that the agencies did not cause the crisis.  The agencies, along with several other government policies, did increase the size and leverage of the real estate sector, as well as parts of the financial sector, namely those dealing with securitization.  That made the blow-up — as caused by other factors — worse than it otherwise would have been.  And that’s the fourth flavor of the crisis.  Here is a simple parallel argument to my case on the agencies:

1. The U.S. government put a lot of additional people into its Embassy in Ruritania.

2. Terrorists blew up the Embassy with a really big bomb.

3. Because of the U.S. government’s previous staffing policy, the tragedy was worse than it otherwise would have been.

4. The U.S. government did not cause those deaths, but #3 is still true.  And since Ruritania was a dangerous country with lax security (analogous to the financial sector!  analogous to the poor decisions of low income borrowers!), #1 was a very unwise policy.

The early part of Brad’s post doesn’t counter that argument.  Both Brad and Matt are trying to semantically rope off some pre-2008 events and call them “not part of the crisis,” or rather only a part of Brad’s Crisis1.  They are neglecting Fischer Black’s point that the longer-run causes of underlying economic vulnerability are important and it is not just about the shocks themselves.

Brad’s fifth point is more directly on my thesis:

Fannie and Freddie did not make the crisis worse but rather made it better. The really bad parts of the crisis–crisis2 and then the subsequent failures of political economy that have given us crisis3 started with the uncontrolled bankruptcy of Lehmann Brothers, in which it was all of a sudden no longer clear where the government stood and which financial assets had value. But people knew one thing at least: they knew that the government stood behind Fannie and Freddie. If every Fannie and Freddie bond and mortgage guarantee had suddenly dropped to the quality of Lehmann Brothers’ liabilities–as would have happened if they had not been GSE’s–things would have been much much worse. Crisis1 phenomena encourage overleverage during the boom, but they are a fountain of confidence and stability and make crisis2 much less severe when the crunch comes.

I agree with the specific claims but not with the general conclusion as embodied in the first sentence.  Had we abolished the agencies in, say 2008, matters would have been much worse, as Brad is suggesting.  It does not rebut my claim that never having created the agencies would have led to a smaller blow-up in the first place.  Imagine that 2006 rolls around, full of financial shenanigans and bad derivatives trading, but homeownership rates had been lower, credit had been tighter, and a lot more people had had twenty percent down.  2008 would not have been nearly so bad.  Work-outs would have been easier too.  On this entire question, the time horizon really matters.

In similar fashion the mortgage interest deduction made matters worse, though again without causing the crisis in any active or temporally-specific sense.

Here is Arnold Kling and his reply.  To pursue the Embassy analogy, I would say that Brad is simply claiming that the “added employees” had a lower than average fatality rate.  Maybe so, but it was still a mistake to stick them where we did, when we did.  Furthermore a crisis is not just about loan default.  What about the wealthy family that bought extra homes and flipped them, ended up getting caught by the price crunch, never defaulted but now has to cut back significantly on consumption?  Default rates won’t give you the true measure of the malinvestments and AD problems caused by the mortgage agencies.  These days, household leverage is a problem per se.

From Ilya N.

Blog fan here.

I wanted to inform you that there will be a new book published called “First Thing We Do, Let’s Deregulate All the Lawyers” by Robert W. Crandall, Clifford Winston and Vikram Maheshri. I thought you and your fellow GMU economists would be very interested in this book. I provide you a link and a quick summary, if you are interested. Best wishes!

Lawyers are prominent among the 20 percent of the U.S. labor force that needs to obtain a government license to practice their profession. Even people who have a legal education are prevented from practicing law in all but a few states unless they graduated from a law school accredited by the American Bar Association (ABA). ABA regulations also prevent licensed lawyers who work for firms that are not owned and managed by lawyers from providing legal services to parties outside of their firm. At the same time, a slate of government policies has increased the demand for lawyers’ services. Basic economics suggests that entry barriers to the legal profession, regulations on the type of legal services that firms and individuals can provide, and government-induced demand for lawyers will raise the price of legal services.

In First Thing We Do, Let’s Deregulate All the Lawyers, Clifford Winston, Robert Crandall, and Vikram Maheshri argue that this higher price cannot be justified as the “cost” of ensuring that uninformed consumers of legal services are served by competent lawyers and that socially desirable policies are implemented and executed. Instead, the forces that reduce the supply of, and increase the demand for, lawyers create significant social costs from higher legal fees, less innovation by law firms and lawyers, misallocation of the nation’s labor resources, and socially perverse incentives for attorneys to support inefficient policies that preserve and enhance their wealth.

To address those costs and improve social welfare, the authors propose that it is desirable to deregulate entry by individuals and firms into the legal profession. This will force lawyers to compete more intensely with each other and to face competition from nonlawyers and firms that are not owned and managed by lawyers. Allowing an ABA monopoly on law school accreditation is not necessary to facilitate informed decisions by consumers of legal services, and neither are statewide licensing-exam requirements.

The book provides a much-needed analysis of a profession whose services have long been seen as enormously expensive. Too little has been done to identify a large source of the costs to consumers and to explain that the system of regulation enables those costs to persist.

The Amazon link is here.

The game

Democrats hate tough budget votes — as evidenced by the Senate’s failure to even bring up a budget for so long. And Republicans love tough-sounding votes but often fix the deck so they lose and can score political points without having to live with the results.

That’s why the debt ceiling presents such a quandary: It requires both parties to take a tough vote — and it must pass.

From Politico, here is further analysis.  With this and the euro crisis, in the next few weeks (days?) “the world” is going to have to step up to the plate in a big, big way.  Stay tuned.  If you’re not afraid, you haven’t been paying attention.

The economics of Al Qaeda?

Such analyses are often highly speculative, but this one seems to be based on concrete data:

And, contrary to speculation that Al Qaeda in Iraq was reliant on international donations, this wasn’t a source of funding either. The group was self-financing. In fact, the core organization of Al Qaeda in Iraq in Anbar province was so profitable that it sent revenue to associates in other provinces of Iraq, and perhaps even further afield. The group raised millions of dollars annually through activities such as simple theft and resale of valuable items such as cars, generators, and electrical cable, and hijacking truckloads of goods, such as clothing. And their internal financial record-keeping was diligent, with all the requirements of expense accounts in regular businesses. A central unit of Al Qaeda in Iraq’s hierarchy required operatives to keep records of even the smallest outlay and to turn over their “take” to upper-level leaders, who made the spending decisions.

There are five new popular books on water this year

The two I will recommend are:

Steven Solomon, Water: The Epic Struggle for Wealth, Power, and Civilization.  It offers a very good history of water technologies, here is one good review.

David Zetland, The End of Abundance: Economic Solutions to Water Scarcity.  Of the five books, this one has the most policy truth.  Also, David reviews one of the other books.