Category: Current Affairs

Has there been a shift in the political balance of power?

by  Tyler Cowen in

Brad DeLong writes:

One possibility is that Cantor and Boehner have figured out something that has been inherent in the system since FDR but that few people recognized. Perhaps the President is now the ultimate status quo player in the government: Whatever goes wrong the public takes to be his fault and his responsibility. If anything goes badly wrong his political adversaries pick up the pieces and are strengthened.

In that case, whenever the desires of the president conflict with the desires of the speaker of the House, the president has little leverage. Any speaker who does not fear disaster can roll any president. In this future, any bill that a speaker insists is must-pass gets attached to a debt-ceiling increase, and–unless there are people in the Senate equally willing to risk disaster, which is unlikely because senators are status-quo players too–so becomes law.

It’s like a parliamentary system, with the debt-ceiling votes filling the role of votes of confidence.

An alternative possibility is that Obama abetted the entire deal and in essence worked with the Tea Party to roll the Left.  But let’s say this first hypothesis is correct.  It suggests that the value of holding the Presidency is less than it used to be.  For some policy changes, the value of holding the Presidency may be negative for a political party or political movement (Obama brings along some Democratic votes, for the final deal, that Mitt Romney could not).  Will the Republicans tank the fight for the Presidency?  No, that is hard to imagine.  Will they be more willing to nominate a non-centrist and risk a greater chance of losing the election?  Maybe so.  That could be one legacy of this deal.

Hard Determinism and Punishment

by  Alex Tabarrok in

Determinists argue that fault and blame have no place in criminal “justice”. Neuroscientist David Eagleman, for example, made this argument recently in The Atlantic:

The crux of the problem is that it no longer makes sense to ask, “To what extent was it his biology, and to what extent was it him?,” because we now understand that there is no meaningful distinction between a person’s biology and his decision-making. They are inseparable.

While our current style of punishment rests on a bedrock of personal volition and blame, our modern understanding of the brain suggests a different approach. Blameworthiness should be removed from the legal argot. It is a backward-looking concept that demands the impossible task of untangling the hopelessly complex web of genetics and environment that constructs the trajectory of a human life.

Eagleman and other determinists are against punishment but they recognize that incarceration still has a role to play because the public has a right to be safe. Philosopher Saul Smilansky now pounces with a timely paper on determinism and punishment.

It is surely wrong to punish people for something that is not their fault or under their control. (Hard determinists agree with this premise.) But incarceration is a type of punishment so under the hard determinist view, justice
requires that when we incarcerate criminals we must also compensate them to make up for the unjust punishment. Smilansky has a bit of a silly name for punishment with compensation, funishment.

Funishment, however, is very likely to cause a big increase in crime and that is also unjust. Smilansky concludes, therefore, that hard determinists have a problem:

[B]y its nature funishment is a practical reductio of hard determinism: it makes implementing hard determinism impossible to contemplate.

Smilansky has put hard determinists into a corner but I fear that they have a type of escape at least in practice if not in theory–it is the one used by many humanitarians in the past–punish people under the guise or belief that you are really doing them good. The inquisitors surely recognized that it was unjust to torture someone who was controlled by the devil. Nevertheless, if torture is what it takes to get the devil out, then torture is not punishment but treatment…and vice-versa. The record of the psychiatric profession and non-punishing treatment of criminals (and others) is not without blemish.

Eagleman goes to some lengths to distance himself from such conclusions. He says, for example, that

 To help a citizen reintegrate into society, the ethical goal is to change him as little as possible while bringing his behavior into line with society’s needs.

The tension, as I see it, is that if free will is a myth then it’s not clear why we should have an ethical goal of changing people as little as possible.

From the comments

by  Tyler Cowen in

This is from James:

The reason why the rest of western civilization, the majority of living economists, the world markets, most people on the floor of the US stock exchange, most businesses who are following the drama, the CBO, the president, the Senate, and the majority of American voters in every major recent poll support Reid’s plan over Boehner’s plan is that Boehner’s plan seeks to redo this entire farce again in 6 months. In other words, Boenher wants to continue the damage that is being done right now to the national prestige, credit rating, and status as a safe haven for investment while Reid wants to postpone it for at least another 12 months. We don’t even have to delve into the affect extreme austerity measures will have on economic growth and job growth to see that the debate getting us there is itself a drain on our economic growth engine.

I stand in awe that you all are convincing yourselves that the current debate is productive. It comes off like a self defense mechanism. First, serious damage has already been done by the very nature of the debate itself. Second, doing this all over again in 6 months would do further tangible damage to the national credit. I’m surprised, really, in your abilities to ignore the obvious. I became interested in economics, and consider myself a Conservative, because I value sober analytics to emotional/idealistic appeals. I don’t see how anyone of a similar mindset can view the current debate as beneficial to the country.

By the way, by this measure Apple now has a greater cash reserve than does the U.S. government.

The bond market *vigilantes*

by  Tyler Cowen in

More than 150,000 state employees, whose salaries support a million people, had their wages cut in half this month. Palestinian banks have lent the government more than $1 billion and do not want to lend more. Some ministries have temporarily lost electricity because they have not paid their bills. Last week, the government ordered a reduction in the price of bread, leading to bakery strikes. Garbage is piling up.

Here is more; in part the problem is that Arab leaders are slow to deliver large amounts of aid, if that is what one should call it.

Will Norway get a do-over?

by  Tyler Cowen in

In large countries, single events are not usually taken as defining that country.  So if the police in America botch a response to a mass murderer, soon enough another mass murderer will come along.  There is almost always a do-over, usually many of them.  If need be, we Americans can start a new war to create a do-over.

Norway doesn’t work this way.  The country won’t soon have an event which generates comparable international or national publicity to the recent murders.  That makes those murders, and the lack of an effective police response, sting all the more.  There is no do-over on the horizon.

It turns out for instance that the helicopter crew of the Oslo police force was on vacation.  In expected value terms, maybe that wasn’t a mistake but it sure didn’t turn out well.  Here is an article on Norway not very much arming its police force.

The Norwegian resistance movement from WWII has a heroic reputation, but now there’s been a do-over of Norwegian response capability, so to speak, or at least a perceived do-over.

Americans have a hard time understanding the concept of not getting many do-overs.

When it comes to our debt-ceiling crisis, we are acting as if we will get a do-over for sure; I wonder if that’s justified.

The Winner’s Curse

by  Alex Tabarrok in

Tim DeChristopher has been sentenced to two years in a Federal prison. DeChristopher was an economics major at the University of Utah when he fraudulently bid on a number of oil and gas leases pushing up the prices on some leases and winning others.

The sentence appears to be out of proportion to the crime, even if you don’t accept DeChristopher’s environmental justifications as a mitigating factor. The other bidders did walk away with lower profits than they otherwise would have but their claims should have been made in civil court. The Federal government may even have made money on net because DeChristopher pushed prices up.  It is certain that they would have made money had they chosen to resell the rights that DeChristopher “bought.” But a judge later ruled that the Department of the Interior’s environmental impact statement was inadequate and most of the auctions were annulled.

DeChristopher’s big mistake appears to have been winning some auctions as it would have been difficult to prosecute him for simply pushing up bids.

USA fact of the day

by  Tyler Cowen in

Of the world’s share of AAA sovereign debt, we issue 59 percent of it.  (Next is Germany with ten percent and then France with nine percent of the total.)  You can read this a few ways:

1. Wow, we really abuse that AAA privilege.

2. Losing the AAA rating would spell disaster for repo markets and the like.

3. The world trusts us enormously, isn’t that wonderful?

4. All of the above.

An Unbalanced Budget Amendment

by  Alex Tabarrok in

The main argument against a balanced budget amendment is that it makes it more difficult to engage in Keynesian counter-cyclical fiscal policy. The main argument in favor is that without some legal or moral constraint, the ordinary rules of politics will push costs onto unrepresented and unorganized future taxpayers, as Jim Buchanan argued. In order to transcend these arguments I propose an unbalanced budget amendment.

The unbalanced budget amendment is a requirement that in good times the government must run a budget surplus. The virtues of such a rule are that it allows for counter-cylical fiscal policy during a recession. Indeed, it reduces the cost of counter-cyclical fiscal policy because it guarantees a reserve fund for just such emergencies. The unBBA is thus a type of automatic stabilizer of the kind I have argued for before (e.g. here).

A simple version of the unBBA requires surpluses but more generally the rule would be a surplus or a similarly sized reduction from the previous year’s deficit. The size of the required surplus/deficit reduction would be tied to a function of current and recent GDP growth rates.

Notice that while making counter-cyclical fiscal policy easier the unBBA would tend to create budget balance as surpluses in good times were spent in bad times. Thus over a period of time the unBBA has similar results to a BBA. By requiring surpluses (and thus taxes) to be high(er) in good times,however, rather in bad times the unBBA has a lower cost and a better chance of being passed than the BBA.

Overall, an unbalanced budget amendment seems much preferable to a balanced budget amendment.

Blogging the debt ceiling

by  Tyler Cowen in

At this point, what is there to say?  The Asian markets open soon.  The InTrade contract, which for some reason is defined around the end of August, is up somewhat today.  Who knows why?  Brad DeLong and Rortybomb wrestle with the question of how to respond to the credit rating agency vigilantes.

Calculated Risk surveys options.  Ezra Klein’s coverage continues to be very useful.  Keith Hennessey defends some version of a “Republican point of view.”

A Twitter search on “Boehner” yields good updates.  What else works?

Shortly I’m headed out for some food from Sierra Leone, we’ll see what I come back to.  I’m currently predicting a two-stage process, announced fairly soon, without the deal itself quite being there, but the confidence intervals on that call are pretty wide.

Via Michelle Dawson, here is an article on what happens to seven-footers after they retire from the NBA.

Econometric papers on the Israeli-Palestinian conflict

by  Tyler Cowen in

Ending violent international conflicts requires understanding the causal factors that perpetuate them. In the Israeli–Palestinian conflict, Israelis and Palestinians each tend to see themselves as victims, engaging in violence only in response to attacks initiated by a fundamentally and implacably violent foe bent on their destruction. Econometric techniques allow us to empirically test the degree to which violence on each side occurs in response to aggression by the other side. Prior studies using these methods have argued that Israel reacts strongly to attacks by Palestinians, whereas Palestinian violence is random (i.e., not predicted by prior Israeli attacks). Here we replicate prior findings that Israeli killings of Palestinians increase after Palestinian killings of Israelis, but crucially show further that when nonlethal forms of violence are considered, and when a larger dataset is used, Palestinian violence also reveals a pattern of retaliation: (i) the firing of Palestinian rockets increases sharply after Israelis kill Palestinians, and (ii) the probability (although not the number) of killings of Israelis by Palestinians increases after killings of Palestinians by Israel. These findings suggest that Israeli military actions against Palestinians lead to escalation rather than incapacitation. Further, they refute the view that Palestinians are uncontingently violent, showing instead that a significant proportion of Palestinian violence occurs in response to Israeli behavior. Well-established cognitive biases may lead participants on each side of the conflict to underappreciate the degree to which the other side’s violence is retaliatory, and hence to systematically underestimate their own role in perpetuating the conflict.

That link is here.  One of the researchers, Johannes Haufhofer, has a Ph.d. in economics from the University of Zurich and a Ph.d. in neuroscience from Harvard.  His other papers are here.  Here is one of his recent grants, it looks quite interesting.

For the pointer I thank a loyal MR reader.

The new Greek bailout plan, digested

by  Tyler Cowen in

By now I’ve read many more other commentaries.  My basic opinion hasn’t changed much, but here’s another way to frame it.  The EU pledges that Greek creditors will take a hit but that this will never ever happen again, not with Spain or Italy in particular.  That’s not a credible promise, if only because of the magnitudes involved, and so over time it shouldn’t influence the borrowing rates of those countries very much.  It’s worth a small amount to have the promise made at all, but the comparable promises made about Greece were just broken so who is being fooled here?

Behind the scenes, Merkel probably committed to a more direct German financial support of the bailout fund, although that pledge is not yet ready for public consumption.  That’s arguably the biggest event of the day.  If that’s not the case, it’s not clear where the fund gets its extra oomph from.  It’s also not clear how many other parliaments will have to approve comparable financial commitments or backstops and that is potentially a stumbling block for the whole plan.

It is also suggested that the bailout fund will be enabled to recapitalize banks in ailing countries on a preemptive basis.  If you’re pro-bailout and wish to give this a positive spin, that may be your best bet.  Private recapitalization probably isn’t in the cards; are you running out to buy equities in Greek, Irish, and Portuguese banks right now?  Spanish and Italian?  The prices have been falling but I bet you’re sitting on your hands.

There is also acceptance of Greek default, a theory (ha) that it will be regarded as temporary, and some still not yet transparent deal with the ECB, so that the ECB continues to prop up Greek banks (i.e., accept Greek government bonds as collateral for loans) post-default.

The truly credible signal is that all future EU aid will be doled out with an eeny-weeny, itsy-bitsy eye drop squeezer.  It’s an extra signal that there will be no big “step up to the plate.”

On top of that toss in a renewed pledge to contractionary macro policy, lower rates for Ireland and Portugal too, a semi-voluntary rollover of Greek debt from the private sector (twenty percent haircut?…with complicated options), and lots of empty, reassuring words, all packaged with a bunch of press releases.  I would discount the talk of a new Greek “Marshall Plan.”

The bottom line: Whatever your forecast was in the first place, this probably shouldn’t change it.

The draft Eurozone plan

by  Tyler Cowen in

It is here (and further detail here), via Paul Krugman, who rightly slams it.  Matt offers comment, so does Wolfgang, many more details and updates here.  If you had told me it was an Onion-like satire of all the previous plans, and not an actual serious plan at all, I would have believed you.  Here is one of the stranger, funnier, sadder, and more Straussian paragraphs:

6. All other Euro countries solemnly reaffirm their inflexible determination to honour fully their own individual sovereign signature and all their commitments to sustainable fiscal conditions and structural reforms. The Euro area Heads of States or Government fully support this determination as the credibility of all their sovereign signatures is a decisive element for ensuring financial stability in the Euro area as a whole.

In other words: “We know you are worried about Italy and Spain so we promise you that they are fine.”  There is a good deal of ah, optimism about the real side of these economies:

9. All euro area Member States will adhere strictly to the agreed fiscal targets, improve competitiveness and address macro-economic imbalances. Deficits in all countries except those under a programme will be brought below 3% by 2013 at the latest…

Here’s an important sentence, and I view the exclusive reference to “Member States” as throwing in the towel:

As a follow up to the results of bank stress tests, Member States will provide backstops to banks as appropriate.

It is also promised that the bailout model for Greece won’t be used again.

Time to blast the Brahms!  In all fairness to the plan, maybe that’s the only disc in anyone’s collection these days.

Addendum: “The proposed expansion of the EFSF’s role would have to be ratified by national parliaments, and could fall foul of critics in Germany, the Netherlands and Finland.”