Month: October 2017
3. Paul Krugman responds on corporate tax incidence. I see this as a classic case of “as usual the truth lies somewhere in between.” In response to Paul, foreign capital goes after American rents all the time (ask Toyota), exchange rate overshooting models have little validity in the data (“news” moves exchange rates), and I don’t see why the long-run is a bad guide to tax policy. That said, I do think more of the burden of capital taxation falls on capital than labor, but plenty falls on labor nonetheless. See the most recent comments from Summers, stronger arguments overall.
4. “The Seattle Sperm Bank categorizes its donors into three popular categories: “top athletes,” “physicians, dentists and medical residents,” and “musicians.”” Link here.
The subtitle is How the First Global Conflict Was Fought and Won, and the author is Victor Davis Hanson. I loved this book, even though before I started I felt I didn’t want to read yet another tract on WWII. Most of the focus is on the logistics and management side:
By 1944, the U.S. Navy was larger than the combined fleets of all the other major powers.
At the start of the War, the United States accounted for about 55-60 percent of world oil output.
The U.S. soldier was treated for psychiatric disorders at a rate ten times that of German troops. The average hospital stay for an American soldier was 117 days and 36 percent were not returned to the front. Supplies for a typical American soldier exceeded 80 pounds per day.
The German army killed about 1.5 GIs for every German soldier lost.
The highest American fatality rate was in the Pacific, at 4 percent, still a remarkably low rate for the war as a whole. America did so well because of high gdp and remarkably efficient supply lines and equipment and air and naval support.
Poland alone lost more citizens than all of the Western European nations, Britain, and the U.S. combined.
WWII took place in a strange technological window when weapons had advanced much more rapidly than protective body armor. That is one reason why casualties from the fighting were so high. The war is also unusual for having had so many battles and fronts where the victor gave up more lives than the loser, including of course the war as a whole.
Hanson considers the American submarine offensive against Japan as perhaps the most “cost-efficient” offensive from the war.
“No navy in military history had started a war so all-powerful as the Japanese and ended it so utterly ruined and in such a brief period of time…”
Strongly recommended, a shoo-in for the top tier of the year’s best non-fiction list, the writing is gripping too.
A key argument:
Here’s an interesting way to think about it: Imagine a patient arriving in an ambulance to Hospital A, a typical modern hospital. The patient’s heart stopped 15 minutes before the EMTs arrived and he is immediately pronounced dead at the hospital. What if, though, the doctors at Hospital A learned that Hospital B across the street had developed a radical new technology that could revive a patient anytime within 60 minutes after cardiac arrest with no long-term damage? What would the people at Hospital A do?
Of course, they would rush the patient across the street to Hospital B to save him. If Hospital B did save the patient, then by definition the patient wouldn’t actually have been dead in Hospital A, just pronounced deadbecause Hospital A viewed him as entirely and without exception doomed.
What cryonicists suggest is that in many cases where today a patient is pronounced dead, they’re not dead but rather doomed, and that there is a Hospital B that can save the day—but instead of being in a different place, it’s in a different time. It’s in the future.
Kurzgesagt and CGP Grey also have a new two part video series on why we should stop aging forever. The first one is below. The second is here.
Am I seeing a trend? I hope so. To quote CGP Grey:
Humans must discard the learned helplessness that the reaper and their own brains have imposed on them.
From John Cochrane:
That paragraph contains a classic economic fallacy, that of composition; the confusion of relative prices and the level of prices and wages overall. If labor markets get “tight,” companies finding it hard to find workers, then yes, one expects wages to rise. But one expects wages to rise relative to prices. You only tempt workers to move to your company by offering them wages that allow them to buy more. Similarly, if there is strong demand for a company’s products, its prices will rise. But those prices rise relative to other prices and to wages. Offering a company higher prices when its wages, costs, and competitor’s prices are all rising does nothing to get it to produce more.
So, in fact, standard economics makes no prediction at all about the relationship between inflation — the level of prices and wages overall; or (better) the value of money — and the tightness or slackness of product and labor markets! The fabled Phillips curve started as a purely empirical observation, with no theory.
To get there, you need some mechanism to fool people — for workers to see their wage rise, but not realize that other wages and prices are also rising; for companies to see their prices rise, but not realize that wages, costs, and competitors’ prices are also rising. You need some mechanism to convert a rise in all prices and wages to a false perception that everyone’s relative prices and wages are rising. There are lots of these mechanisms, and that’s what economic theory of the Phillips curve is all about. The point today: it is not nearly as obvious as newspaper accounts point out. And if central bankers are a bit befuddled by the utter disappearance of the Phillips curve — no discernible relationship, or actually now a relationship of the wrong sign, between inflation and unemployment, well, have a little mercy. Inflation is hard.
There is more at the link.
Eric Crampton makes many good points, here is one of them:
But that gets us to one of the risks: the intersection of Labour, Green and New Zealand First’s core beliefs is distrustful of markets and of foreigners. I can’t see how we get anywhere close to the proposed 100,000 houses built in any reasonable time without allowing foreign workers, materials, capital and expertise to help.
New Zealand’s Overseas Investment Regime already makes us the most restrictive in the OECD. Any land adjacent to a reserve must go through the screening regime, and it will be tough to ease that back under the current coalition. Heck, even New Zealand’s Fletcher Construction has to jump through Overseas Investment Act hurdles because it has foreign shareholders. New Zealand First has proposed cutting immigration numbers substantially, and Labour and the Greens have been very sympathetic to that view. The incoming government has also signaled an intention to re-negotiate trade agreements to allow banning non-residents from buying houses. If supply issues are appropriately addressed, the ban does no good and could backfire if it prevents foreign investors from building houses here to rent out.
Vernon Small offers a more pessimistic take.
7. This study shows police body cameras don’t matter so much (NYT). And the myth of Fed independence (NYT).
The equity of 100% equity financed banks would be incredibly safe. 1/10 the volatility of current banks. It would be an attractive asset. The private sector really does not have to hold any more risk or provide any more money to an equity financed banking system. We just slice the pizza differently. If issuing equity is hard, banks can just retain profits for a decade or so.
Or, better, our regulators could leave the banks alone and allow on on-ramp. Start a new “bank” with 50% or more equity? Sure, you’re exempt from all regulation.
And, in case you forgot, we live in the era of minuscule interest rates — negative in parts of the world; and sky high equity valuations. All the macroeconomic prognosticators are still bemoaning a “savings glut.” A scarcity of investment capital, needing some sort of fine pizza slicing to make sure just the right person gets the mushroom and the right person gets the pepperoni does not seem the key to growth right now.
He chose the excellent title “Tyler: Equity financed banking is possible!” Do read the whole thing, it is a very good and useful post.
I would add a few points in response. First, I think equity banking would have to be very tightly regulated to remain as such, more than the status quo. There always would be incentives to take on more off-balance sheet risk for higher returns. Second, a much bigger commercial credit sector would have its own maturity mismatch problems. It might be better than the status quo, but it too likely would end up with a lot of bad regulation, or maybe it would become a no-less-dangerous form of shadow banking. In general, I don’t think our current form of government can precommit to “no regulation.” Third, money market funds work pretty hard to maintain fixed nominal value for their depositors. Admittedly this is a theoretical puzzle, but that we don’t understand the prevalence of debt at various levels (and that prevalence is all the stronger outside the U.S.) does not lead me to think we can alter it as we might wish. That the theory of capital structure is so weak I do not take to mean that capital structure is so remarkably flexible. Finally, I don’t think the savings glut is all that relevant for SMEs, and traditional banks still seem to be more efficient at matching borrowing and lending at the local level. Again, this is a phenomenon we do not understand very well (Fama 1985), but I am not so confident we can undo it. I also don’t think the savings glut will last much longer, given Asian demographics.
That all said, I would gladly experiment more with equity banking and indeed have written as such in the past. I am less sure it will do away with our current regulatory dilemmas. I don’t think it is easy to get around having a part of the economy which is both systemically risky, and also debt-intertangled, as the evolution of shadow banking over the last fifteen years seems to indicate.
That is the title of my latest Bloomberg column, here is one excerpt:
Now enter the Fed, which I think of as a tool of Congress and the president. It gives Congress a means of promoting economic growth and stability (one hopes), as well as a path for deflecting the blame if tough decisions must be made. Congress insists that the Fed is “independent,” precisely for this reason. But if voters hated what the Fed was doing, Congress could rather rapidly hold hearings and exert a good deal of influence. Over time there is a delicate balancing act, where the Fed is reluctant to show it is kowtowing to Congress, so it very subtlety monitors its popularity so it doesn’t have to explicitly do so.
If we imposed a monetary rule on the Fed, even a theoretically optimal rule, it would stop the Fed from playing this political game. Many monetary rules call for higher rates of price inflation if the economy starts to enter a downturn. That’s often the right economic prescription, but voters hate high inflation. The Fed would probably lose its political capital if it had to follow through on the rule, and monetary policy would end up politicized for a long time.
Central bank quasi-independence is a quite a fragile institution, and it is maintained only by allowing central banks to juggle lots of balls at once. If you make a rule too tough, even a good rule, sometimes what you get is a rule that snaps and breaks.
Do read the whole thing.
That is the new Peter Leeson book, and it is just out. Here is the Amazon summary:
This rollicking tour through a museum of the world’s weirdest practices is guaranteed to make you say, “WTF?!” Did you know that “preowned” wives were sold at auction in nineteenth-century England? That today, in Liberia, accused criminals sometimes drink poison to determine their fate? How about the fact that, for 250 years, Italy criminally prosecuted cockroaches and crickets? Do you wonder why? Then this tour is just for you!
Here are the book’s rather spectacular blurbs. Here is a short Peter piece on medieval ordeals. Here is a Reddit thread on whether medieval ordeals actually were an effective test of guilt. And he has this piece on superstition and Friday the 13th in Newsweek. I would like to see a media outlet excerpt his piece on the rationality of gypsy culture.
I would say that Peter has written a very effective book within the Beckerian tradition, namely trying to explain economic phenomena in terms of a neoclassical rational actor model. Nonetheless I am much less of a Beckerian than Peter is, at least for the socially-oriented issues he is considering. Here is a simple typology of approaches:
1. Beckerians and the rational actor model. I slot Peter in here, along with many Chicago School economists, Marvin Harris, and much of public choice economics. An explanation shows how a social outcome stems from the interaction of means-end maximizing individuals, translated into some aggregate result.
2. Behavioral economics. By now this is old news, but these researchers find what I consider to be relatively small deviations from the rational actor model. This is usually done by measurement, rather than through more complete models.
3. Cultural economics, anthropologists, and many sociologists. Peer effects are paramount, and Frenchmen see the world differently than do Americans, not to mention Bantus or Pygmies. This is due to a social contagion of perception that does not boil down to rationality in the sense that economists understand it (you can build a model in which social mimicry at young ages is rational, but that model won’t generate much insight into the particular phenomena we are trying to explain, nor does that model pick up the mimicry mechanism very well). Historical study plus thick description plus economic rationality at various margins (but margins only) plus some statistics is the way to go. Mostly we’re trying to understand how and why other groups of people see the world in fundamentally different terms.
The economists who can best grasp other points of view thus are the masters of explaining macro-phenomena (by which I mean something quite distinct from traditional macroeconomics).
I am much closer to #3 than are most economists. Furthermore, I view economists as patting themselves excessively on the back for #2, when #3 is far more important. Peter has written a very good book mostly in the tradition of #1, though due to his Austrian background with periodic forays into #3. I once wrote to Peter: “Gypsy culture rational? How about Episcopalian investment bankers in Connecticut being rational?” Probably neither are.
That is the new and very important book by Kyle Harper, with the subtitle Climate, Disease, & the End of an Empire. I am just reading through this now, but it appears to be an significant revision of our views on the decline of Rome. p.21 offers a capsule summary, which I will summarize in turn:
1. During the reign of Marcus Aurelius, a pandemic “interrupted the economic and demographic expansion” of the empire.
2. In the middle of the third century, a mix of drought, pestilence, and political challenge “led to the sudden disintegration of the empire.” The empire however was willfully rebuilt, with a new emperor, new system of government, and in due time a new religion.
3. The coherence of this new empire was broken in the late fourth and early fifth centuries. “The entire weight of the Eurasian steppe seemed to lean, in new and unsustainable ways, against the edifice of Roman power…and…the western half of the empire buckled.”
4. In the east there was a resurgent Roman Empire, but this was “violently halted by one of the worst environmental catastrophes in recorded history — the double blow of bubonic plague and a little ice age.”
Here is a key passage from the book:
The centuries of later Roman history might be considered the age of pandemic disease. Three times the empire was rocked by mortality events with stunning geographical reach. In AD 165 an event known as the Antonine Plague, probably caused by smallpox, erupted. In AD 249, an uncertain pathogen swept the territories of Roman rule. And in AD 541, the first great pandemic of Yersinia pestis, the agent that causes bubonic plague, arrived and lingered for over two hundreds years. the magnitude of these biological catastrophes is almost incomprehensible.
I do not feel I can assess the veracity of this thesis, but it does seem to be intelligently and reasonably argued.
Sometimes proportional representation systems throw up surprising results, as they just did in New Zealand. National won the biggest share of the vote at 44%, but the new government is a coalition between Winston Peters and Jacinda Ardern:
Ardern’s stunning popularity was dismissed as “stardust” by English, but she went on to experience huge support from young voters and women and was credited with breathing life back into the New Zealand political scene.
Her personal popularity and the huge crowds she drew around the country was hailed “Jacindamania”, and she was compared to rock-star politicians such as Barack Obama and Justin Trudeau.
A Labour government has pledged to wipe out child poverty, make tertiary education free, reduce immigration by 20,000-30,000, decriminalise abortion, introduce a water tax and make all rivers swimmable within 10 years.
Here is the full story, further evidence that politics is changing for good, and not just because of narrow economic reasons. Last year the New Zealand economy grew 3.9%. Jacinda by the way “Was brought up as a Mormon but left the church over its anti-homosexual stance.”
1. “The fast food chain has recently introduced mobile phone lockers in one of its branches in Singapore, encouraging diners to take a break from the virtual world and have real conversations over meals.”
7. A tale of non-replication in social psychology (NYT). An important piece, related also to the issues surrounding blogs, what you can/should believe, and positive vs. negative coverage. And Gelman responds.
Emailed to me:
What do you think would happen if we returned to a world where commercial bank leverage was much reduced? (E.g. 2X max.) Or, maybe equivalently, if central banks didn’t act as a lender of last resort? Is that “necessary” for a modern economy?
Asset prices would fall a lot (presumably). What else? How much worse off would current people become? (Future people are presumably somewhat better off, growth implications notwithstanding—they are less burdened with the other side of all these out-of-the-money puts that central banks have effectively issued.) > > How should we think about the optimization space spanning growth rates, banking capital requirements, and intergenerational fairness?
First, these questions are in those relatively rare areas where even at the conceptual level top people do not agree. So maybe you won’t agree with my responses, but don’t take any answers on trust from anyone else either.
I think of the liquidity transformation of banks in terms of two core activities:
a. Transforming otherwise somewhat illiquid activities into liquid deposits. That boosts risk-taking capacities, boosts aggregate investment, and makes depositors more liquid in real terms. Those are ex ante gains, though note that more risk-taking, even when a good thing, can make economies more volatile.
b. Giving private depositors more nominal liquidity, but in a way that raises prices and thus doesn’t really increase real, inflation-adjusted liquidity for depositors as a whole. There is thus a rent-seeking component to bank activity and liquidity production.
Less bank leverage, you get less of both. In my view a) is usually much more important than b). For those who defend narrow banking, 100% fractional reserves, or just extreme capital requirements, a) is usually minimized. Nonetheless b) is real, and it means that some partial, reasonable regulation won’t wreck the sector as much as it might seem at first.
There is however another factor: if bank leverage gets too high, bank equity takes on too much risk, to take advantage of bank creditors and possibly taxpayers too. Or too much leverage can make a given level of bank manager complacency too socially costly to bear. This latter factor seems to have been very important for the 2007-2008 crisis.
So bank leverage does need to be regulated in some manner, and the better it is regulated the more the system can dispense with other forms of regulation.
That said, the delta really matters. Requiring significantly less bank leverage, at any status quo margin, probably will bring a recession. The recession itself may make banks riskier than the lower leverage will make them safer. In this sense many economies are stuck with the levels of leverage they have, for better or worse. It is not easy to pop a “leverage bubble.”
I don’t find the idea of 40% capital requirements, combined with an absolute minimum of regulation, absurd on the face of it. But I don’t see how we can get there, even for the future generations. We’ll end up doing too many stupid things in the meantime; Dodd-Frank for all its excesses could have been much worse.
I also worry that 40% capital requirements would just push leverage elsewhere in the economy. Possibly into safer sectors, but I wouldn’t be too confident there. And reading any random few books on “bank off-balance sheet risk” will scare the beejesus out of anyone, even in good times.
Now, you worded your question carefully: “commercial bank leverage was much reduced.”
A lot of commercial bank leverage can be replaced by leverage from other sources, many less regulated or less “establishment.” Overall, on current and recent margins I prefer to keep leverage in the commercial banking sector, compared to the relevant alternatives. It may be less efficient but it is socially safer and held within the Fed’s and FDIC regulatory safety net, probably the best of the available politicized alternatives. That said, there is a natural and indeed mostly desirable trend for the commercial banking sector to become less important over time, in part because it is regulated and also somewhat static in basic mentality. (Note that the financial crisis interrupted this process, for instance Goldman taking up a bank charter. I would still bet on it for the longer run.)
Obviously, VC markets are a possible counterfactual. This all gets back to Ed Conard’s neglected and profound point that “equity” is what is scarce in economies, and how many troubles stem from that fact. Ideally, we’d like to organize much more like VC markets, partly as a substitute for bank leverage and the accompanying distorting regulation, and maybe we will over time, but there is a long, long way to go.
One big problem with attempts to radically restrict bank leverage is that they simply shift leverage into other parts of the economy, possibly in more dangerous forms. Should I feel better about commercial credit firms taking up more of this risk? Hard to say, but the Fed would not feel better about that, it makes their job harder. This gets back to being somewhat stuck with the levels of leverage one already has, until they blow up at least. There are pretty much always ways to create leverage that regulators cannot so easily control or perhaps not even understand. Again this bring us back to “off-balance risk,” among other topics including of course fintech.
I view central banks as “lenders of second resort.” The first resort is the private sector, the last resort is Congress. I favor empowering central banks to keep Congress out of it. Central banks are actually a fairly early line of defense, in military terms. And I almost always prefer them to the legislature in virtually all developed countries.
I fear however that we will have to rely on the LOLR function more and more often. Consider how it interacts with deposit insurance. If everything were like a simple form of FDIC-insured demand deposits, FDIC guarantees would suffice.
But what if a demand deposit is no longer so well-defined? What about money market funds? Repurchase agreements? Derivatives and other synthetic positions? Guaranteeing demand deposits is a weaker and weaker protection for the aggregate, as indeed we learned in 2008. The Ricardo Hausmann position is to extend the governmental guarantees to as many areas as possible, but that makes me deeply nervous. Not only is this fiscally dangerous, I also think it would lead to stifling regulation being applied too broadly.
But relying more and more on LOLR also makes me nervous. So I view this as a major way in which the modern world is headed for recurring trouble on a significant scale, no matter what regulators do.
I am never sure how much of the benefits of banking/finance are “level effects” as opposed to “growth effects.” It is easy for me to believe that good banking/finance enables more consumption at a sustainably higher level, in part because precautionary savings motives can be satisfied more effectively and with less sacrifice. I am less sure that the long-term growth rate of the economy will rise; if so, that does not seem to show up in the data once economies cross over the middle income trap. That said, if there were an effect, since growth rates slow down with high levels in any case, I don’t think it would be easy to find and verify.
The Mona Lisa is not the best artwork ever, and as a painter I am not sure Leonardo is much better than either Mantegna or Piero della Francesca, neither of whom is much known to the general public, much less Titian. He has no work as stunning as Michelangelo’s David, and too many of his commissions he left unfinished or he never started them. The Notebooks display a fertile imagination, but do not contain much real knowledge of use, except on the aortic valve, nor did they boost gdp, nor are they worth reading. Much of his science is weak on theory, even relative to his time. In Milan he was too content to serve as court impresario, and he seemed to have no idea of how to apply his own talents in accord with comparative advantage.
His ability to take an idea and turn it into a memorable sketch was his most remarkable ability, and in this he is without peer.
Plus he painted “woman as gorgon” very very well, but with a sweetness too.
I can recommend Walter Isaacson’s new book on Leonardo as a wonderful introduction, but it does not change my mind on these points.