Sentences to ponder

by  Tyler Cowen in

The caveat about financial arrangements is important with respect to Germany’s apparent prosperity. Germany, like China, is less prosperous than it seems, because its surplus production is geared to sale for claims that cannot credibly be redeemed for what the country’s citizens would want should they exercise their option to consume.

That is from Interfluidity.  Is it a Keynesian point or an Austrian point?  You guess.

Foreign banks and the Fed

by  Tyler Cowen in

I am surprised this has not really hit the U.S. headlines yet:

The biggest cumulative borrower from the Term Auction Facility was Barclays of the UK, which bought the US broker-dealer unit of Lehman Brothers out of bankruptcy in September 2008.

Barclays borrowed a cumulative $232bn from the TAF through various subsidiaries. The TAF provided one or three-month loans to banks from December 2007 until it closed this year.

…Bank of Scotland and RBS of the UK, Societe Generale of France, Dresdner Bank and Bayerische Landesbank of Germany, and Dexia of Belgium were all amongst the top 10 users of TAF. The second largest user was Bank of America, which bought Merrill Lynch during the financial crisis, and borrowed a cumulative $212bn.

The biggest seller of commercial paper to the Fed’s Commercial Paper Funding Facility, which bought up illiquid paper, was UBS of Switzerland followed by the insurer AIG. Five of the top 10 CPFF users were European banks.

A simple theory of WikiLeaks

by  Tyler Cowen in

Recall Timur Kuran's theory of preference falsification: many people follow the herd rather than revealing their true views, and this is most common in autocracies.  In those cases, public opinion may suddenly flip.  WikiLeaks, by making some truths common knowledge, has its biggest effects on autocracies, even if the leaks are from the United States.

Two possible results of the recent revelations could be that the Sunni Arab autocracies will have to cozy up more to Iran (their citizenries don't hate Iran so much, and so they might filp against their own leaders) or that China abandons North Korea altogether.  In the former the government has to match the public opinion and in the latter case perhaps the public opinion can flip against North Korea and confirm a trend already underway in the government.

What about democracies?  The most likely result (though not from this recent batch) is to encourage war-mongering attitudes against potential enemies, due to perceived slights.  Such feelings are usually produced collectively, and subject to sharp triggers, following the revelation of knowledge or pseudo-knowledge.  Remember the Zimmermann telegram?

Here are comments from Douthat and Wilkinson.

Was private or public debt at fault in Europe?

by  Tyler Cowen in

Drawing an analogy with the ill-fated Exchange Rate Mechanism (ERM) of the pre-eurozone era, Paul De Grauwe argues in a new CEPS Commentary that the creation of a sovereign debt default mechanism is a very bad decision that will make the eurozone more fragile by making financial crises an endemic feature.

The full (short) paper is here, recommended.  Excerpt:

[apart from Greece]…the root cause of the debt problems is to be found in the unsustainable debt accumulation of the private sectors. From 1999 until 2008, when the financial crises erupted, private households in the eurozone increased their debt levels from about 50% of GDP to 70%. The explosion of bank debt in the eurozone was even more spectacular and reached more than 250% of GDP in 2008. Surprisingly, the only sector that did not experience an increase in its debt level during that period was the government sector, which saw its debt decline from 72 to 68% of GDP. Ireland and Spain, two of the countries with the severest government debt problems today, experienced the strongest declines of their government debt ratios prior to the crisis. These are also the countries where the private debt accumulation was the strongest.

Once sovereign default is in play, De Grauwe predicts self-reinforcing downward spirals can  destroyithe eurozone.  His points are well-taken, but I would add a few observations:

1. To be a small country, and to "play with matches" without good fire insurance, is also a form of fiscal irresponsibility.  It is a more important form of fiscal irresponsibility than we had thought.  A'la Robert Eisner, the government's measured budget position is not the key magnitude for measuring its fiscal stance.  The three percent rule is partly to blame here, although a lot of countries couldn't even follow that.

2. The distinction between private and public debt ain't what it used to be.

3. Fiscal union was, is, and will remain a fantasy.  The best the eurozone could have done was to abolish national banking systems and have a truly European banking market.  It's too late for even that, though.

Anthony Powell eBooks

by  Tyler Cowen in

U. Chicago Press informs me:

Next month we'll be publishing e-book editions of all the twelve individual novels that make up Anthony Powell's widely acclaimed epic novel of twentieth-century English life, A Dance to the Music of Time–and, for the month of December, we'll be giving away the first volume, A Question of Upbringing, free A Dance to the Music of Time is one of the most acclaimed novels of the twentieth century. 

You can get the first one for free, here, or in other eBook locales.  The rest of the volumes will be $8.00 apiece.

*The Phone Book*

by  Tyler Cowen in

The first American president to have a telephone on his desk was Herbert Hoover, who had one installed in 1929.  The White House did have a telephone well before most of the country, as Rutherford B. Hayes had had one installed in the telegraph room of the executive mansion in 1878.  It received little use at first, since so few other people had telephones at that time.  The very first telephone book for the city of Washington, D.C. lists this presidential telephone simply as "No.1."

That is from the interesting and new The Phone Book: The Curious History of the Book That Everyone Uses But No One Reads, by Ammon Shea.

Here is a post on Chaim Weizmann's passport.

*Perfecting Parliament*

by  Tyler Cowen in

The author is the highly intelligent Roger Congleton (my colleague) and the subtitle is Constitutional Reform, Liberalism, and the Rise of Western Democracy.  Here is the home page summary:

This book explains why contemporary liberal democracies are based on historical templates rather than revolutionary reforms; why the transition in Europe occurred during a relatively short period in the nineteenth century; why politically and economically powerful men and women voluntarily supported such reforms; how interests, ideas, and pre-existing institutions affected the reforms adopted; and why the countries that liberalized their political systems also produced the Industrial Revolution. The analysis is organized in three parts. The first part develops new rational choice models of (1) governance, (2) the balance of authority between parliaments and kings, (3) constitutional exchange, and (4) suffrage reform. The second part provides historical overviews and detailed constitutional histories of six important countries. The third part provides additional evidence in support of the theory, summarizes the results, contrasts the approach taken in this book with that of other scholars, and discusses methodological issues.

The book's introduction is here (pdf).  It is the best public choice/historical account of the rise of democracy that I know of and there is also a very interesting chapter on Japan.

Will Employers Undermine Health Care Reform by Dumping Sick Employees?

by  Tyler Cowen in

Amy Monahan and Daniel Schwarcz write:

This Essay argues that federal health care reform may induce employers to redesign their health plans to encourage employees who are likely to consume a greater-than-average amount of medical services to opt out of employer-provided coverage and instead acquire coverage on the individual market. Although largely overlooked in public policy debates, this prospect of employer dumping of high-risk employees raises serious concerns about the sustainability of health care reform more generally. In particular, it threatens the viability of individual markets and insurance exchanges by raising the prospect of adverse selection in these markets caused by the entrance of a disproportionately high-risk segment of the population. This risk, in turn, simultaneously threatens to increase the cost to the federal government of subsidizing coverage for qualified individuals and to exempt more individuals from complying with the so-called “individual mandate.” The Essay offers several legislative solutions to the prospect of high-risk employee dumping that can substantially mitigate these risks.

I found the critique section of the paper more convincing than the legal remedies, but in any case it is an important piece.  Schwarcz wrote in the MR comments section:

The worry over employers shedding employees onto the exchange is exactly right, but in a different way than almost everyone seems to think. The real risk is NOT that employers will completely drop coverage, leaving their employees to purchase coverage on the exchange. Instead, it is that employers will offer all employees revised plans that are specifically designed to induce ONLY THE LEAST HEALTHY employees to opt for coverage on the exchange. Most seem to ignore this risk because such employees would not be eligible for subsidies. But employers would nonetheless find this an extremely desirable strategy because (i) they would avoid any penalty under the "employer mandate," (ii) their health care costs would decrease substantially by virtue of reducing coverage and shedding high-cost employees, (iii) high-cost employees would not be much worse off, as they could acquire coverage on the exchange with no medical underwriting or preexisting conditions. While coverage for high risk employees would cost more on the exchange than employer coverage, the employer could defray this cost by putting it's normal contribution into a tax free HRA Account, which could be used for coverage. The employer and its employees would be better off, and exchanges would be subjected to the risk of adverse selection from a disproportionately risky pool of policyholders. For much more on this, see: http://ssrn.com/abstract=1651308.

Addendum: Austin Frakt comments.

The culture that is Washington

by  Tyler Cowen in

As the Washington region begins an important effort to fix Metro's outdated, unwieldy governing apparatus, here's a way to appreciate the scale of the challenge: The task requires eight separate governmental bodies representing 12 distinct political jurisdictions to agree to rearrange how they oversee a ninth body, the transit system itself.

…If that's not daunting enough, consider that the biggest changes would require four entities – Maryland, Virginia, the District and Congress – to agree unanimously on identical wording to change the 44-year-old regional compact that created Metro.

The story is here.  

How willing are you to believe another human being?: the case of Picasso’s alarm installer

by  Tyler Cowen in

A 71-year-old retired electrician is at the centre of a legal battle after coming forward with more than 200 hitherto unknown paintings by Pablo Picasso, a French newspaper reported Monday.

Experts who have examined the collection have estimated it could be worth some 60 million euros (80 million dollars), Liberation reported.

…Le Guennec said he had worked installing alarm sytems at a number of Picasso's residences, including a villa in Cannes in the south of France, during the last three years of Picasso's life — he died in 1973.

He said he had had been given the works as presents, either by Picasso's wife or from the artist himself. The collection included 271 works, Liberation reported.

For the pointer (more here) I thank Chris F. Masse.