Category: Economics

Monetary theory and crypto

No, I don’t mean money/macro, such as debates over ngdp targeting or transitory inflation.  I mean old-fashioned monetary theory.  Try all these pieces.  Obviously, many of those particular authors are now deceased or retired.  But take the field in general — has it had anything interesting to say about crypto developments?  I don’t expect it to have predicted crypto, or its price, any more than I expect macroeconomists to have predicted recessions (see Scott Sumner on that one).  But surely monetary theory should be able to help us better understand crypto?  And its price.

How much has it succeeded in that endeavor?  (I have read and on MR cited a number of NBER and other academic working papers on crypto, over the years.)  Or are you better off reading “amateur” pieces on Medium and other sources cited on Twitter?

What should we infer from your answer to these questions?

Surely any failings here are restricted to monetary theory alone.

Nellie Bowles interviews me on inflation

So I called someone smart (Tyler Cowen, an economist, author, and professor at George Mason University) to explain the dynamics to me.

“Inflation right now is still transitory in that we can choose to end it,” Cowen told me. The Federal Reserve could disinflate and raise interest rates—mortgage interest rates today remain well below 3%—though that risks starting a recession.

Cowen explained that the reason the inflation-wary are still pretty quiet is that all the anti-Obama Republicans were so wrong in 2008. After the Obama-era bailout during the Great Recession, Republicans were convinced inflation would run rampant. And they said so. A lot. But inflation stayed mostly in control. “They all got egg on their faces after that,” Cowen said. “So the crowd that would complain now, they’re whispering about it but not shouting yet.” (Larry Summers and Steve Rattner have sounded the alarm.)

“I think the inflation will last two to three years, and it will be bad,” Cowen said. But really grim hyper-inflation à la Carter-era, he thinks is unlikely. It could only happen if the Federal Reserve decides it’s too risky to trim the sails of cheap money. “I’d put it at 20% chance that the Fed will think, ‘Trump might run again, and we don’t want Biden to lose . . . history’s in our hands, so we’ll wait to tighten.’ And then it just goes on, and then it’s very bad.”

But a recession is also bad. It’s hard to sort it all out.  “As the saying goes, ‘If you’re not confused, you don’t know what’s going on,’” Cowen told me.

That is from the Bari Weiss Substack, other topics are considerd (not by me) at the link.

Milton Friedman has become underrated, but is being vindicated

That is the topic of my latest Bloomberg column, here is one excerpt of some super-simple (but neglected) arguments:

Education is another area where Friedman’s ideas seem newly relevant. Friedman was a strong supporter of school choice, but over time the movement stalled, as a variety of studies showed scholastic gains from school-voucher programs that were either modest, zero or negative. Advocates for school choice then moved on to the argument that vouchers allow parents to choose the kind of education they want for their children, whether or not test scores go up. That argument, too, went nowhere.

Then came the pandemic, when millions of American parents encountered a public school system that didn’t seem to care too much about educating their children. Schools stayed closed or offered inferior remote instruction, and generally followed their own bureaucratic imperatives. All of a sudden, home schooling, charter schools, private schools, micro-schools — in short, an entire host of “school choice” alternatives — rose in popularity. It remains to be seen how much those trends will stick, but Friedman may yet win this intellectual battle, at least partially.

And it’s not just the bureaucracy, it’s what’s taught in the classroom. Consider critical race theory and other instructional practices affiliated with wokeism. Whatever your views on this movement, it seems clear that it provokes strong and perhaps irresolvable differences among parents, teachers and administrators. Within a single public school district, those matters will probably never be settled to everyone’s satisfaction. Rather than pursuing a polarizing “fight to the death,” perhaps all sides can see that the case for school choice is stronger and more compelling than they had thought.

There are periodic attempts to knock Milton Friedman off his pedestal. For the most part, however, his legacy remains strong.

And who was the guy who predicted the recent problems with the FDA?

Oops….

The Biden administration has rebranded its Build Back Better plan as part of a strategy to fight inflation. By subsidizing essential services like child care, the argument goes, American families and the broader economy will experience relief from the rapidly rising cost of living.

Yet something doesn’t add up. Consider that the current proposal would also dramatically shift the cost structure of child care upward with regulations mandating higher salaries, greater credentials and compliance with federal “quality standards.” Having made child care more expensive, it then proposes socializing over 90 percent of the cost for a subset of middle- and lower-income households. This won’t reduce rising prices so much as mask them. And with informal child care providers, including religious organizations, at risk of being crowded-out, the true availability of low-cost child care could even contract.

This is an extreme example of what we call “Cost Disease Socialism” — addressing the increasing costs of supply-constrained goods and services by spreading the price among American taxpayers while leaving the cause of the underlying costs unaddressed.

That is from an excellent piece by Sam Hammond, Daniel Takash, and Steve Teles (NYT).

Greg Caskey, GMU job candidate

Greg Caskey is my student and a Ph.D. Candidate in his 4th year. He focuses on applied microeconomics, economic development, and political economy, particularly regarding the role of China in the developing world. His job market paper, “Chinese Development Lending & the Amplification Effect”, examines the effects of Chinese official lending and foreign aid upon the political institutions of 100+ developing nations. Using a variety of estimators on panel data over the period of 2002-2017, he finds an “amplification effect” with respect to Chinese development flows. While Chinese aid amplifies the existing institutional orientation of both autocratic and democratic recipient nations, this effect exhibits a greater magnitude in autocracies, as sampled autocratic recipients become more autocratic in their institutional orientation, relative to sampled democratic recipients becoming more democratic.

His dissertation is Three Essays on the Role of China in the Developing World, and one chapter considers Chinese policy toward the Uighurs. Greg has several publications and also revise-and-resubmits at good journals, please let me know if you would like my letter of recommendation for him! He is a great teacher too with lots of experience.

My Conversation with David Rubinstein

Here is the audio, video, and transcript — David has a studio in his home!  Here is part of the CWT summary:

He joined Tyler to discuss what makes someone good at private equity, why 20 percent performance fees have withstood the test of time, why he passed on a young Mark Zuckerberg, why SPACs probably won’t transform the IPO process, gambling on cryptocurrency, whether the Brooklyn Nets are overrated, what Wall Street and Washington get wrong about each other, why he wasn’t a good lawyer, why the rise of China is the greatest threat to American prosperity, how he would invest in Baltimore, his advice to aging philanthropists, the four standards he uses to evaluate requests for money, why we still need art museums, the unusual habit he and Tyler share, why even now he wants more money, why he’s not worried about an imbalance of ideologies on college campuses, how he prepares to interview someone, what appealed to him about owning the Magna Carta, the change he’d make to the US Constitution, why you shouldn’t obsess about finding a mentor, and more.

Here is an excerpt from the dialogue:

And:

And please note that David has a new book out, The American Experiment: Dialogues on a Dream.

Why is inflation so bad?

That is the theme of my latest Bloomberg column, here is part of the final bit:

I am left with two major worries. First, higher rates of inflation redistribute wealth in a disruptive manner. For better or worse, more and more Americans are employed in the relatively bureaucratic service sector, which includes education, health care and government. If price inflation spikes as high as 6%, most of those workers do not rapidly receive an offsetting wage hike to restore their previous standards of living.

They might get higher pay by getting a new job, or by credibly threatening to leave. But that’s often a tense and unsettling position, from both a personal and professional standpoint. People might even have received stimulus dollars earlier in the pandemic, either directly or indirectly, and thus broken even or come out ahead. Still, with inflation, they will experience a loss of purchasing power, and they will hate it.

The second major worry is that inflation tends to require a subsequent disinflation, if only because people hate inflation so much. And we macroeconomists know that disinflations (or outright deflations) tend to bring recessions. When the U.S. Federal Reserve tightens monetary policy by a significant amount, aggregate demand in the economy falls, leading to losses in output and employment.

Of course, that’s a funny way of explaining why higher rates of price inflation are bad: Essentially, inflation is bad because it has to end. A subtler version of this theory is that workers and voters have only a limited tolerance for disruptions — and when they occur, we end up making blunders in our efforts to get out of them.

The proper critique of inflation is thus quite general. A pandemic is also a disruption, and we’ve made many mistakes in our efforts to end that as well. One of those mistakes, in fact, has been excess inflation. It will not be our last mistake, as we are still building our ever-widening circle of errors.

Recommended.

What price the Blue Plaque?

In many places commemorative plaques are erected on buildings to serve as historical markers of notable men and women who lived in them – London has a Blue Plaque scheme for this purpose. We investigated the influence of commemorative Blue Plaques on the selling prices of London real estate. We identified properties which sold both before and after a Blue Plaque was installed indexing prices relative to the median prevailing sales prices of properties sold in the same neighborhood. Relative prices increased by 27% (US$165,000 as of July 2020) after a Blue Plaque was installed but not in a control set of properties without Blue Plaques, sold both before and after a Blue Plaque was installed in close proximity. We discuss these findings in relation to the theory of magical contagion and claims from previous research suggesting that people are less likely to acknowledge magical effects when decisions involve money.

Here is the full article by Peter Ayton, Leonardo Weiss-Cohen, and Matthew Barson, via the excellent Kevin Lewis.

Economics job market observations

As you may recall, each year I scour the job market websites to see what new job candidates are working on and presenting.  Unlike many years, this year I did not find the top or most interesting papers at Harvard and MIT.  Northwestern and UC Davis seem to be producing notable students.  More broadly, interest in economic history continues to grow, and the same is true for urban, regional, and health care economics.  There were fewer papers on macro than five or ten years ago, and very few on monetary economics or crypto.  Theory papers are rare.  Overall, the women seem to be doing more interesting work than the men.  Many schools seem to be putting out fewer students than usual.  University of Wisconsin at Madison was the website with (by far) the most “pronouns” listed.  I fear that this year’s search was more boring than usual, at least for my tastes, due to hyperspecialization of the candidates and their research topics.  Perhaps the worst offender was papers based on balkanized, non-generalizable data sources.  I’ll be continuing to look at a few more sites.

How the crypto skeptics changed their minds

That is a Walter Frick feature story at Quartz, the other answers are interesting throughout, here is my contribution:

What was your original reaction to cryptocurrencies and blockchain?

Just for a bit of background, I wrote a series of papers on monetary economics, and then a book (Explorations in the New Monetary Economics, with Randall Kroszner) which argued that technological changes were going to fundamentally revolutionize monetary institutions and finance over the next few decades. Those papers start in the mid-1980s and the book comes in the early 90s. So I was primed to see this coming, but in fact utterly failed.

I just wasn’t expecting crypto!

When bitcoin first came out, someone sent me the link and I put it on my blog Marginal Revolution —we were one of the first places to report on it.

But after that, the thing seemed to sour. It looked like a bubble. I didn’t see the use cases for bitcoin. So I became pretty crypto negative. Perhaps I was also turned off by the dogmatism shown by many crypto advocates.

What changed your perspective on blockchain’s potential?

A few things. First, in decentralized finance (DeFi) I began to see viable and important use cases. Superior returns for depositors might now drive broader crypto adoption

Second, after a market price crash, prices came back. That suggested to me this was not just a bubble. Crypto had its chance to go away and never come back, but it didn’t. Third, I have seen incredible energy and vitality in the crypto community. Many of the best discussions are held there, it attracts amazing talent, and the conversations are overwhelmingly positive. All big pluses and signs of a movement that is going somewhere. I am still broadly agnostic, but now see the positive scenarios as more likely than the negative scenarios.

What projects or trends in crypto are you most excited about right now?

DeFi, or Decentralized Finance.

NFTs, not only for the art world but also as a new system of property rights for the metaverse, and as a new method of fundraising.

Use of crypto to lower the costs of sending remittances abroad to poorer countries.

What would you recommend our readers watch / listen to / read / follow to better understand crypto’s potential?

I am learning the most through conversations, meetings, and WhatsApp chatter—I am not sure how that easily can be replicated!

Books and most articles on this topic are simply too out of date, even if they are factually accurate, which is not always the case. The fact that the field is moving so fast is another reason for optimism.

The symposium is a good way to catch up quickly on many different views.