Category: Economics

10% Less Democracy

My colleagues at GMU are awesome and you can see why by reading the opening to Garett Jones’s forthcoming new book, 10% Less Democracy.

ONCE I GOT THE CALL FROM CAMPUS POLICE, I knew I needed to write this book.

It was spring semester 2015, and I’d recently given a brief talk to a student group at my university. Natalie Schulhof, a reporter for the student newspaper, Fourth Estate, had come to the event and reported on my talk, entitled “10% Less Democracy.” That was the first time I’d spoken at any length about this book’s central idea: that in most of the rich countries, we’ve taken democracy, mass voter involvement in government, at least a little too far. We’d likely be better off if we kept the voters and even the elected officials a little further away from the levers of power. Let the government insiders run more of the show. After all, the insiders don’t have to be perfect for 10% less democracy to be an improvement; they just have to be better than the voters.

About a week after my talk, Schulhof’s piece came out, quite thorough and extremely accurate, complete with a photo of me standing before the small student audience. From the article: “Garett Jones, associate economics professor at George Mason University, says that there should be less democracy in the United States. . . . Less democracy would lead to better governance.”

But in our new age of social media, that article, accurate down to the last detail, wasn’t the article that became widely shared online. Instead, the subsequent firestorm was fed by ideology-driven websites, with authors posting articles loosely based on Fourth Estate’s original piece but filling in the blanks of the short, accurate article with their own vitriol and blue-sky speculation.

…In the days after these ideology-driven websites wrote about my talk, I discovered a torrent of hate polluting both my email inbox and my Twitter account. I welcome disagreement with my ideas, and passionate disagreement is part of a healthy public debate, but for a brief period, I had my sole experience (so far!) as an object of profanity-laced Internet rage. It culminated in the call from campus police—and in my dozen years at George Mason, that was the first and still the only time I’ve received such a call. An officer left a voice-mail message, and I called back at my first opportunity. She said someone had left an angry voice mail criticizing me on a general campus phone number, and the officer noted with great discretion that the voice mail contained at least one profane expression. Was there anyone who might be upset with me lately? the officer asked.

I had an idea. And that idea became this book. So to the unknown person who left that voice mail, I offer my heartfelt gratitude. I dedicate this book to you.

By the way, the title of Garett’s book might sound inflammatory but it’s only 10% inflammatory. Surely, we can talk about that rationally? Do we want all judges to be elected? Aren’t two year terms a little short in the modern age? Might we better off with an independent tax authority more like an independent central bank? Garett discusses these and many other ideas and unlike much of the constitutional economics of the past, Garett brings plenty of empirical evidence to bear–this is a good book to learn about modern political economy regardless of whether you buy the conclusions.

You can pre-order 10% Less Democracy at the link and you should, it’s very good.

My Portal podcast with Eric Weinstein

Eric and his team describe it as follows:

In this episode, Eric sits down with Tyler Cowen to discuss how/why a Harvard educated chess prodigy would choose a commuter school to launch a stealth attack on the self-satisfied economic establishment, various forms of existential risk, tech/social stagnation and more. On first glance, Tyler Cowen is an unlikely candidate for America’s most influential economist. Since 2003, Cowen has grown his widely read and revered economics blog Marginal Revolutions with lively thought, insight and prose resulting in a successful war of attrition against traditional thinking. In fact, his well of heterodox thinking is so deep that there is an argument to be made that Tyler may be the living person with the most diverse set of original rigorous opinions to be found in any conversation. The conversation takes many turns and is thus hard to categorize. We hope you enjoy it.

I recall it being about 2.5 hours long, and covering a lot of fresh material, Eric of course is superb.  Here is the link.  Here is the broader set of Portal podcasts, hosted by Eric.

My Conversation with Esther Duflo

Self-recommending if there ever was such a thing, here is the audio and transcript.  In addition to all of the expected topics, including gender in the economics profession, we even got around to Indian classical music and Bach cantatas (she prefers the latter).  Excerpt:

COWEN: Do you worry much that the RCT method — it centralizes authority in too few institutions? You need a certain amount of money. You need some managerial ability. You need connections abroad. It’s not like running regressions — everyone can do it on their PC. Is that, in some way, going to slow down science? You get more reliable results, but there’s much less competition of ideas, it seems.

DUFLO: I think it would be the case if we had not been mindful of this problem from the beginning. And it might still be the case to some extent. But I actually think that we’ve put a lot of effort in avoiding it to be the case.

When you take an organization like J-PAL, just in India we have 200 staff members. And we have, at any given time, 1,000 people running surveys. I say we, but these people are not running my project. These people are running the projects of dozens and dozens of researchers. When I started, I couldn’t have started without having the backing of my team because it was such a risky proposition that you needed to be able to easy risk capital kind of things.

But at this point, because of the infrastructure, it’s much more normal sense. People can get in with no funding of their own, in part because one of the things we are doing as a network is raising a lot of money to redistribute to other people widely. J-PAL has 400 researchers that are affiliated to it, or invited researchers, many of them quite, quite junior.

So that sort of mixture — it was very important to us, and I think we’ve been quite successful at making the tool marginally available. It’s never going to be like running a regression from your computer. But my philosophy is that if you have the drive and you’re willing to put in your own sweat equity, you can do it. And our students and many other students who are not at top institutions are doing it.

And:

COWEN: On the internet, there’s a photo of a teenage Esther Duflo — at least it looks like you — protesting against fascism in Russia on top of a tank, is it?

DUFLO: That was a bus, and it was me. It was me. So that was in 1991. This was not when I lived for one year there. I lived one year in ’93–’94. But this was in ’91. I had gone to Russia about every year since I was a teen to learn Russian. I happened to be there the summer where there was this putsch against Gorbachev. That summer…

And someone gave me that fashizm ne poletit placard and asked me to hold it. And I’m like, “Sure, I’m going to hold it.” So I’m holding my placard. We stayed there for a long time when things were happening. Next time I saw in the evening, my parents called me, “What are you doing?” Because it turned out that that image was on all the TVs in the world. [laughs] And that’s how I very briefly became the face of this revolution.

And:

COWEN: Does child-rearing in France strike you as more sensible than child-rearing in the United States?

DUFLO: Oh very much so, very much so.

COWEN: And why?

DUFLO: You know that book, Bringing Up Bébé?

COWEN: Yes.

DUFLO: I think she picked up on something which rings so true to me, which maybe is a marginal point about the US versus France. In France people are reasonably content to just go with the flow and do what everybody does. Every kid eats the same thing at 4:30, has dinner at the same time, has gone through the same experiences, learned the same songs, and everybody thinks they are totally free. But in fact, they are all on this pretty sensible railroad. And also, they don’t agonize about it.

In the US, child-rearing is one more occasion to make a statement about your identity. You’re the kind of mother that carries the baby, or you’re the kind of mother that puts the baby in a stroller. And somehow it almost can predict what you’re going to think about Donald Trump. That’s crazy. Some people are so concerned about what they do. Not only they feel that they have to invest a ton in their children, and they feel inadequate if they are not able to, but also, exactly what they do creates them as people.

In France that’s not there, and I think that makes everybody so much more laid back, children and adults.

Recommended throughout.

China trade negotiation fact of the day

Brussels has been striving to secure the deal for six years, as it seeks to prove it has the negotiating muscle to broker meaningful agreements with Beijing that can defend European companies from unfair competition.

The European Commission and the bloc’s foreign policy chief signalled a tougher approach to China in March in a landmark document that branded it a “systemic rival” in some areas — an allegation Beijing denies. Ms Weyand, the chief official working for Phil Hogan, the EU’s trade commissioner, said that “we are moving at a snail’s pace on the investment agreement”.

That is from the FT., and of course that hardly counts as much progress.  Elsewhere you will see Paul Krugman suggesting Trump has lost the trade war, but I don’t think he comes close to even seeing what the trade war with China is about.  No matter what Trump says, the trade war is not about lowering the trade deficit.  It is about (for a start) two major considerations: a) ensuring that national security-motivated partial economic decoupling takes place on terms not so unfriendly to America, and b) giving America levers to make sure China does not make such significant inroads into the world’s tech infrastructure, most notably with 5G but not only.

The stipulation of Chinese purchases of American exports, which probably they will not and cannot meet, is in fact a lever to give the United States enforcement power over the less tangible parts of agreement, which is indeed most of the agreement.  We want China to be in default of the agreement terms, so we may threaten them with tariffs to enforce compliance elsewhere, and so that is a better rather than worse outcome for the United States.

On the trade war, agnosticism is still the correct opinion, at least so far, as we are not even sure we know of the full agreement, or if America and China are visualizing signing literally different versions of the “same” agreement.  And even once (or if) the full text(s) is revealed, we still won’t for some while know how either a) or b) are going, much less relative to the relevant counterfactuals.

In general, I am finding that commentary on the trade war is of relatively dubious value, in part for partisan reasons.  The key here is to set aside your political views, and spend a lot of time talking with national security people.

Not quite the end of the global economic order

Rather it is kludgy free trade we are getting these days, as I argue in my latest Bloomberg column.  Here are a few scattered excerpts:

When it comes to China, the WTO structures were already being jerry-rigged. If anything, you could say that the point of the new trade regime is to make the jerry-rigging more transparent.

In fact, it is hard to see how trade relations with China could be anything but jerry-rigged. The Chinese economy is simply too different, and far more statist, than those of the economically developed Western nations or Japan. And yet China is now the world’s No. 2 economy and largest exporter.

And:

The more important technology becomes to the U.S. and global economies, the more issues such as data storage and access will move to the forefront. Can the Chinese government demand that a technology company hand over user data? On whose servers do the data need to be stored? Can national storage be treated as a prerequisite for market entry? Again, the right answers cannot help but be complicated.

Most generally:

It is well-known in economics that exporting services is much more difficult than exporting resources or manufactured goods. It then follows that trade law for services will be messier and kludgier as well. Trade arrangements for services may feel ugly and excessively bureaucratic, but the underlying reality is that the principles of free trade are being extended, not repudiated.

And:

At a larger scale, what to think of the first phase of the U.S.-China trade agreement? It is still difficult to divine the entire agreement, or how much of it will be announced publicly. The real core of the deal may be an impossible demand on the Chinese to buy many additional billions of dollars of goods from the U.S., with the very impossibility of that demand serving as a cudgel for enforcing Chinese compliance with the less tangible, harder-to-measure aspects of trade relations.

To close:

In short, this new era of international trade certainly looks messier. But maybe that’s because the resources of simplicity have been all but exhausted. Free trade isn’t yet dead. It’s just not quite as free as it used to be.

Recommended.

*The Economics Book*

The author is Steven G Medema, and the subtitle is From Xenophon to Cryptocurrency, 250 Milestones in the History of Economics.  It is over 500 pages, one page per idea, with lovely color plates next to each page of text.  Test both your knowledge of economics and of history of economic thought.  For instance, it covers the median voter theorem, linear programming, the socialist calculation debate, and much more.  Very well done, and also a good gift book.

You can order it here.

Growing cooperation and inequality

Didn’t everyone used to wish for more and better cooperation?  The 1960s left in particular, but pretty much everyone.  And isn’t that what we got?  And didn’t that — in fact — lead to rather spectacular rises in income inequality?

Consider one implication of the Garett Jones model, which is that more talented people gain more, in percentage terms, from cooperating and working with each other than do less talented people.  The mere existence of a (non-universal) export sector is enough to establish this conclusion, but you can see why it is true using other arguments as well.  If there are non-linear synergies from bringing together talent, those synergies with be stronger with greater amounts of talent by the very nature of the initial assumptions.

Organizing a high school band brings a modest boost in quality entertainment, but forming the Beatles or Rolling Stones a much much larger gain, again in both absolute and percentage terms.  So if it is easier to organize bands of all sorts, income inequality likely will rise.

You are probably aware of the results that the higher wages in super-firms — clusters of lots of talent — relative to normal firms, account for a major share of income inequality.  In other words, additional cooperation boosted income inequality.

Or maybe you saw the recent stories “90 percent of growth in high-tech jobs happened in just 5 metro areas.”  That too is an instance of greater cooperation, and it has led to more income inequality, with the biggest gains coming in New York City and the Bay Area and a few other places.

More cooperation  → → greater income inequality.  Think about it.

Be careful what you wish for!  Though I very much appreciate the virtues of additional cooperation.

Sex Differences in Personality are Large and Important

Men and women are different. A seemingly obvious fact to most of humanity but a long-time subject of controversy within psychology. New large-scale results using better empirical methods are resolving the debate, however, in favor of the person in the street. The basic story is that at the broadest level (OCEAN) differences are relatively small but that is because there are large offsetting differences between men and women at lower levels of aggregation. Scott Barry Kaufman, writing at Scientific American, has a very good review of the evidence:

At the broad level, we have traits such as extraversion, neuroticism, and agreeableness. But when you look at the specific facets of each of these broad factors, you realize that there are some traits that males score higher on (on average), and some traits that females score higher on (on average), so the differences cancel each other out. This canceling out gives the appearance that sex differences in personality don’t exist when in reality they very much do exist.

For instance, males and females on average don’t differ much on extraversion. However, at the narrow level, you can see that males on average are more assertive (an aspect of extraversion) whereas females on average are more sociable and friendly (another aspect of extraversion). So what does the overall picture look like for males and females on average when going deeper than the broad level of personality?

On average, males tend to be more dominant, assertive, risk-prone, thrill-seeking, tough-minded, emotionally stable, utilitarian, and open to abstract ideas. Males also tend to score higher on self-estimates of intelligence, even though sex differences in general intelligence measured as an ability are negligible [2]. Men also tend to form larger, competitive groups in which hierarchies tend to be stable and in which individual relationships tend to require little emotional investment. In terms of communication style, males tend to use more assertive speech and are more likely to interrupt people (both men and women) more often– especially intrusive interruptions– which can be interpreted as a form of dominant behavior.

…In contrast, females, on average, tend to be more sociable, sensitive, warm, compassionate, polite, anxious, self-doubting, and more open to aesthetics. On average, women are more interested in intimate, cooperative dyadic relationships that are more emotion-focused and characterized by unstable hierarchies and strong egalitarian norms. Where aggression does arise, it tends to be more indirect and less openly confrontational. Females also tend to display better communication skills, displaying higher verbal ability and the ability to decode other people’s nonverbal behavior. Women also tend to use more affiliative and tentative speech in their language, and tend to be more expressive in both their facial expressions and bodily language (although men tend to adopt a more expansive, open posture). On average, women also tend to smile and cry more frequently than men, although these effects are very contextual and the differences are substantially larger when males and females believe they are being observed than when they believe they are alone.

Moreover, the differences in the subcategories are all correlated so while one might argue that even among the subcategories the differences are small on any single category when you put them all together the differences in male and female personalities are large and systematic.

Relatively small differences across multiple traits can add up to substantial differences when considered as a whole profile of traits. Take the human face, for example. If you were to just take a particular feature of the face– such as mouth width, forehead height, or eye size– you would have difficult differentiating between a male face and a female face. You simply can’t tell a male eyeball from a female eyeball, for instance. However, a look at the combination of facial features produces two very distinct clusters of male vs. female faces. In fact, observers can correctly determine sex from pictures with greater than 95% accuracy [4]. Here’s an interesting question: does the same apply to the domain of personality?

…There now exists four large-scale studies that use this multivariate methodology (see here, here, here, and here). All four studies are conducted cross-culturally and report on an analysis of narrow personality traits (which, as you may recall, is where most of the action is when it comes to sex differences). Critically, all four studies converge on the same basic finding: when looking at the overall gestalt of human personality, there is a truly striking difference between the typical male and female personality profiles.

Just how striking? Well, actually, really striking. In one recent study, Tim Kaiser, Marco Del Giudice, and Tom Booth analyzed personality data from 31,637 people across a number of English-speaking countries. The size of global sex differences was D = 2.10 (it was D = 2.06 for just the United States). To put this number in context, a D= 2.10 means a classification accuracy of 85%. In other words, their data suggests that the probability that a randomly picked individual will be correctly classified as male or female based on knowledge of their global personality profile is 85% (after correcting for the unreliability of the personality tests).

In other words, you can predict whether a person is male of female from their personality traits almost as well as by looking at their face. Overall, the big differences are as follows:

Consistent with prior research, the researchers found that the following traits are most exaggerated among females when considered separately from the rest of the gestalt: sensitivity, tender-mindedness, warmth, anxiety, appreciation of beauty, and openness to change. For males, the most exaggerated traits were emotional stability, assertiveness/dominance, dutifulness, conservatism, and conformity to social hierarchy and traditional structure.

I have also pointed out that gender equality magnifies differences in gender choices and behavior which is probably one reason why fewer women enter STEM fields in societies with greater equality. Consistent with this, personality differences between the sexes are large in all cultures but “for all of these personality effects the sex differences tend to be larger– not smaller– in more individualistic, gender-egalitarian countries.”

Addendum: See John Nye and co-authors on testosterone and finger length for some biological correlations.

Another take on q-factors and investment CAPM

Standard consumption CAPM applies a constant discount rate across all stocks, but surely that is odd if different companies face different costs of capital, as indeed they do.  Take the companies with a higher cost of capital — in equilibrium they also should have higher rates of return as an offset.  And those are (usually) the small stocks, and indeed we know there is a small stock premium (sometimes better expressed as a lower market to book premium) in the finance literature.

But that premium comes from the supply side arbitrage conditions, not from some odd properties of portfolio risk.

You will note that “the investment CAPM says that controlling for a few characteristics is sufficient to explain the cross section of expected returns.”  Theory advocates claim that investment CAPM indeed passes that test: “…most anomalies turn out to be different manifestations of the investment and profitability effects.”

That is all from this Lu Zhang paper.  Here is my earlier post on q-factors and investment CAPM, still not sure I understand it!

q-Factors and Investment CAPM

The new paper by Lu Zhang with that title strikes me as potentially important, though I am just starting to grasp the main argument.  So far I understand it as such.  The great weakness of finance theory has been that it assumes asset pricing and the production side of the economy, and production adjustments, are entirely separable. But maybe they are not, and in a way that matters for asset pricing anomalies.

Let’s say that an asset price rises too high, above its fundamental value.  The old story was that arbitrageurs sell short and force the price back down.  The new story is that investment (sometimes) pours into the overpriced firm, increasing the number of shares and thereby pushing the price of those shares back down.  (The opposite may hold for underpricing.)

But sometimes the new investment does not pour in, the overpricing remains, and that can give rise to eventual asset pricing anomalies.  Such anomalies in fact arise from imperfections on the investment side, and that explains why asset price anomalies a) tend to cluster around stocks of a common kind in common sectors, and b) do not last forever, because the investment inflexibilities are not forever either.  In any case, the Q-factor approach, unlike consumption CAPM, explains where the anomalies come from (and why they might end).  Consumption CAPM is sadly quite deficient when it comes to explaining cross-sectional variation in returns across stocks.

Most generally, this “investment CAPM” theory is pricing assets from the perspective of their suppliers — firms — rather than their demanders.  Doesn’t this sentence make some sense to you?: “Tim Cook most likely has more impact on Apple Inc.’s market value via his operating, investing, and financing decisions than many Apple Inc. shareholders like me via portfolio decisions in their retirement accounts.”

You will note that when expected investment is high/strong relative to current investment, the model predicts “momentum and Roe premiums.”

I still don’t understand most of this!  And apologies to the author for any misstatements.  In any case I am intrigued.  Here are further papers by Zhang on this topic.

The macro frontier (not your grandpa’s Keynesian economics, or is it?)

We argue that the input-output network of investment goods across sectors is an important propagation mechanism for understanding business cycles. First, we show that the empirical network is dominated by a few “investment hubs” that produce the majority of investment goods, are highly volatile, and are strongly correlated with the cycle. Second, we embed this network into a multisector model and show that shocks to investment hubs have large aggregate effects while shocks to non-hubs do not. Finally, we measure realized sector-level productivity shocks in the data, feed them into our model, and find that hub shocks account for a large and increasing share of aggregate fluctuations. This fact allows the model to match the decline in the cyclicality of labor productivity and other business cycle changes since the 1980s. Our model also implies that investment stimulus policies increase employment throughout the economy but have unequal effects across sectors.

That is from a new NBER working paper by Christian vom Lehn and Thomas Winberry.

A Symposium for John Perry Barlow

John Perry Barlow, who passed away in 2018, penned two influential essays early in the web’s evolution A Declaration of the Independence of Cyberspace and Selling Wine Without Bottles: The Economy of Mind on the Global Net. It’s easy in retrospect to make fun of some of Barlow’s claims:

Governments of the Industrial World, you weary giants of flesh and steel, I come from Cyberspace, the new home of Mind. On behalf of the future, I ask you of the past to leave us alone. You are not welcome among us. You have no sovereignty where we gather.

or how about this painfully wrong prediction?

We are creating a world where anyone, anywhere may express his or her beliefs, no matter how singular, without fear of being coerced into silence or conformity.

But as Cindy Cohn notes in Inventing the Future: Barlow and Beyond:

In talking about the Declaration at Electronic Frontier Foundation (EFF) many years later, Barlow admitted that when he stepped out of a party at Davos to write it, he was both a little drunk and trying desperately to channel Thomas Jefferson. So maybe some of the sweeping rebukes are just trying to match his original bravado.

Moreover, Barlow was not nearly as utopian as one might imagine. He was, after all, one of the founders (in 1990!) of the Electronic Frontier Foundation which has worked to make the words true.

The symposium is of mixed quality. Cory Doctorow’s contribution is quarrelsome and weak. James Boyle’s overview and description of the WWW, however, is excellent:

Berners-Lee imagined a republic of ideas built on a vision of language.The whole thing had a whiff of Harry Potter magic.To click on the hyperlink was to summon its referent.The name was the magical command for the presence of the resource, as though every footnote animated itself, went to the library and brought you back the relevant book. To write a web page was to build a transporter of the mind. The link was a reference to the resource, a map to the place where the resource was held and a vehicle to take you there. Each new document wove the network a little wider and tighter. That’s why they called it the world wide web. And its architecture was “distributed.” Anyone could build the web—as if we could all wander outside our houses and build the Eisenhower freeways of the mind ourselves, draw the maps that chronicled those freeways, assemble the cars that traveled along them and then construct the libraries, bookstores, shops, coffee houses and red light districts to which they journeyed. All done through a decentralized process that required neither governmental permission, nor authentication of your content—for better or worse. Better and worse.

I’d also point to Imaginary Bottles on copyright by Jessica Litman and Yochai Benkler’s A Political Economy of Utopia? as excellent. Here’s Benkler:

What the past quarter century has taught us is that there are five basic failure modes of commons-based strategies to construct more attractive forms of social relations.

  1. Companies and countries can usually sustain focused strategic efforts for longer and more actively than distributed networks of users…
  2. Distributed social relations can themselves develop internal hierarchies and inequities (the Iron Law of Oligarchy)…
  3. Distributed open communications have provided enormous play for genuinely hateful and harmful behavior, such that we find ourselves seeking some power to control the worst abuses—the power of the platforms we want to hold democratically accountable, or the power of countries to regulate those platforms for us…
  4. More fundamentally, as long as we live in a society where people have to make money to eat and keep a roof over their heads, markets produce stuff we really like and want. For all the broad complaints about Amazon, it has produced enormous consumer welfare. More directly, for all the romanticization of fan videos and remix, the emergence of subscription streaming services like Netflix and Amazon Prime has been a boon to professional video creators and underwritten a golden age of professional video entertainment and narrative, both fiction and non-fiction.
  5. States are still necessary to counter market power, provide public goods on a sustained and large-scale basis by using coercive taxing and spending powers, redistribute wealth,and provide basic social and economic security for the majority of the population.

The symposium is here.

From the comments — on Paul Volcker

I worked at the Fed in the Volcker years. I am not a fan.

(1) He tightened far too much to get inflation down. A more moderate tightening and a more gradual reduction in inflation — which was the original agreement with the Reagan team — would have been better. The long 1980-82 recession was longer and deeper than it needed to be.

(2) He got the support of Democrats by blaming large deficits for the high interest rates rather than blaming his own excessively tight monetary policy. Of course, high interest rates caused federal interest rates to surge and boost the deficit.

(3) At the NY Fed and then as Chairman, what did he do to rein in reckless bank lending to Latin America? It is not like the banks had nothing to do with the Fed.

(4) Latam debt was floating rate debt. Volcker blew up those countries’ debt service. But the super strong dollar and collapse of commodity prices, connected to tight Fed policy, also damaged Latam.

(5) Volcker had modern leftists attitudes. The Fed has become quite transparent and communicates with the public and Congress. It may amaze younger readers that the Fed would adjourn FOMC meetings with no press statement or public policy announcement. Volcker figured you would find out what the Fed was up to when it did something. The Republican Greenspan and Bernanke started to let the sunshine into the Fed. The paranoid closeted quality of the old Fed generated resentment and conspiracy theories.

(6) Volcker had an authoritarian streak. He suppressed dissent within the Fed system, going after researchers at Fed banks who contradicted Fed dogma. The St. Louis Fed was particularly attacked, but others also.

(7) You might connect the death of Marvin Goodfriend with the death of Paul Volcker. Goodfriend was a critic of Volcker in the Fed. He said Volcker’s tight policy pushed inflation down, but Volcker would not deliver an inflation target. His Fed had no credibility, no one was wiling to believe that the Fed would keep inflation low. One result was a high long bond yield and a steep yield curve. It was fine that Volcker wanted to reduce inflation, but it was the Fed that needed credibility, not its temporary chairman.

(8) I found the recent Volcker Rule worthless. Prop trading played no role in creating the crisis of 2008. The Volcker Rule has simply made markets less liquid. After 2008, as after 1932, the federal government imposes useless regulations just for fun.

That is all from B.B.

Paul Volcker’s Latin American legacy

That is the topic of my latest Bloomberg column, the history with Latin America is also a big part of the Volcker story, here is one bit:

Global banks raised their interest rates for lending and shortened their repayment periods. In the mid-’70s real lending rates to Latin America hovered in the range of zero, but by the early ’80s they were between 8% and 10%. Liquidity was cut off, and the underlying growth potential of the region’s economies was not strong enough to sustain the debt. This affected other parts of the world as well and became known as “the third world debt crisis.”

The crisis came to a head in 1982, when Mexico announced it would no longer be able to service its debt, sparking a financial crisis and currency collapse. Ultimately, 16 Latin American countries also were forced to reschedule their debt payments. This created problems for the banks too, since by 1982 the nine largest U.S. money-center banks had Latin American debts equal to 176% of their capital, a figure which rose to 290% when lesser developed countries elsewhere in the world were included. Eventually the U.S. led a bailout and debt-reduction program, with the participation of the International Monetary Fund.

But for Latin America, things would never be the same. Governments had to cut spending, which in turn led to further adjustment problems, akin to the eurozone crisis of more recent times. Poverty rates rose sharply, and the general mood turned pessimistic. By the end of the 1980s, Latin American per capita GDP had fallen from 112% of the world’s average to 98%, a stunning plunge and by some measures the worst financial disaster the world had ever seen, albeit a regionalized one.

And this:

Repercussions in the U.S. were more modest. The potential insolvency of some major U.S. banks, such as Citibank, was ignored amid forbearance and hope about their return to profitability. They did, eventually, but in retrospect one has to wonder if allowing so much non-transparent bank accounting — with the blessing of regulators, including Volcker’s Fed — was such a good idea.

That all said, I do not think Volcker had much operative choice on most of these matters, and the excess Latin American borrowing certainly was not his fault.  Note: the inspiration for this column came from a tweet by Pseudoerasmus.

The Old Boys’ Club

It is real, at least in one Asian data set, as these new NBER working paper results are brought to us by Zoë Cullen and Ricardo Perez-Truglia:

We use an event study analysis of manager rotation to estimate the causal effect of managers’ gender on their employees’ career progression. We find that when male employees are assigned to male managers, they are promoted faster in the following years than they would have been if they were assigned to female managers. Female employees, on the contrary, have the same career progression regardless of the manager’s gender. These differences in career progression cannot be explained by differences in effort or output. This male-to-male advantage can explain a third of the gender gap in promotions. Moreover, we provide suggestive evidence that these manager effects are due to socialization between male employees and male managers.

There is more to the abstract, including a discussion of the benefits of smoking together.  Here is an ungated copy.