Category: Law
Arnold Kling, on a roll
Old consensus: we need Freddie and Fannie in order to make housing "affordable."
New consensus: we need them in order to "prevent further house price delclines," in other words, to make housing less affordable.
It's the Goldilocks theory of home mortgage intervention. Most of all, I am curious what is the underlying theory why few private investors would not, without the mortgage agencies, fund mortgages at the right price. I would gladly write a series of blog posts examining those theories, as many of those same investors buy riskier assets, such as some equities. Or is it simply an attempt to hold a finger in the dike?
Our either real or supposed inability to do away with the mortgage agencies over a five-year time horizon is one of the major reasons to be a pessimist about the American economy today. None of the underlying theories about these agencies, and why they are needed, are very good news for any of us. And that is perhaps why those theories are not articulated very often.
I suppose this is good news, sort of
A court in Tanzania has sentenced a Kenyan accused of trying to sell an albino to 17 years in jail and a fine of more than $50,000 (£41,200).
Albino body parts are valued highly in parts of East Africa and many albinos have been enslaved and/or murdered as a result. It is believed that since 2007 there have been 53 albino killings in Tanzania. The full story is here and I thank Ashok Hariharan for the pointer.
File under "Thwarted Markets in Everything."
Yglesias on Occupational Licensing
I am outsourcing this post entirely to Matt Yglesias because it's awesome and it made me very happy to see how public choice has moved out in the world:
A number of people, including many commenters here and even alleged
conservative James Joyner think you should need a professional license to become
a barber because you might hurt
someone with a straight razor. Uh huh. At best this would be an argument for
regulating people who do shaves with a straight razor, which would be
considerably narrower than current comprehensive regulation of hair
stylists.Meanwhile, though “torts and the free market will take care of it” isn’t the
answer to everything, it’s surely the answer to some things. Getting
some kind of training before you shave a dude with a straight razor is obviously
desirable in terms of strict self-interest. If you screw it up in a serious way,
you’ll face serious personal consequences and the only way to make money doing
it–and we’re talking about a very modest sum of money–is to do it properly.
People also ought to try to think twice about whether their views are being
driven by pure status quo bias. Barbers are totally unregulated in
the United Kingdom, is there some social crisis resulting
from this? Barber regulations differ from state to state, are the stricter
states experiencing some kind of important public health gains?Last you really do need to look at how these things play out in practice. If
you just assume optimal implementation of regulation, then regulation always
looks good. But as I noted
in the initial post the way this works in practice is the boards are
dominated by incumbent practitioners looking to limit supply. One result is that
in Michigan (and perhaps elsewhere) it’s hard for
ex-convicts to get barber licenses which harms the public interest not only
by raising the cost of haircuts, but by preventing people from making a
legitimate living. States generally don’t grant reciprocity to other states’
licensing boards, which limits supply even though no rational person worries
about state-to-state variance in barber licensing when they move to a New Place.
In New Jersey, you need to take the
straight razor shaving test to cut women’s hair because they’re thinking up
arbitrary ways to incrementally raise the barrier to entry.In principle, you could deal with all these problems piecemeal. But
realistically this sort of problem is inevitably going to arise when you pit the
concentrated interest of incumbent haircutters against the diffuse interest of
consumers. It’s hard enough to make sure that really important regulatory
functions related to environmental protection, public safety, and financial
stability are done properly.
Afternoon at the Treasury
Yesterday, Tyler, myself and a handful of other economics bloggers had a chance to discuss the economy with Treasury Secretary Geithner and other treasury officials. Here are a few random notes.
There was deep skepticism about the financial industry and about reform from some of the bloggers. More let’s say “radical” approaches such as Treasury taking an equity stake in underwater homes or giving everyone a guaranteed income were brought up. I was surprised to find myself on the side of the more conservative Treasury officials who cogently argued that such reforms were neither politically viable nor likely to work. Treasury gave a good argument that reform had been deep and meaningful.
A few good lines from a senior treasury official as I recall the gist:
- “Markets believe we can borrow. The public doesn’t. We need both to move forward on the fiscal front."
- “Businesses are investing in a way that shows more confidence than they are talking.” (graph here, see the last year or so AT)
There was a recognition that the Fed could do “dramatic” things but a sense that the theory here was uncertain and untested.
The best question of the day came from Tyler. The discussion was on the financial reform bill and how it changed the incentives of players in the financial industry by creating more risk for them. Tyler interrupted with “What I really want to know is how your incentives have been changed! What is to say that next time the decision will not be made to again bailout the bondholders?”
As Tyler said after an earlier visit, Geithner is smart and deep. Geithner took questions on any topic. Bear in mind that taking questions from people like Mike Konczal, Tyler, or Interfluidity is not like taking questions from the press. Geithner quickly identified the heart of every question and responded in a way that showed a command of both theory and fact. We went way over scheduled time. He seemed to be having fun.
Google and Verizon and net neutrality
I found this excerpt from Reihan to be persuasive:
I’ll just note that Google official line on wireless net neutrality, as stated by Richard Whitt, sounds fairly persuasive. Why insist on net neutrality regulations for wireline but not for wireless services?
First, the wireless market is more competitive than the wireline market, given that consumers typically have more than just two providers to choose from. Second, because wireless networks employ airwaves, rather than wires, and share constrained capacity among many users, these carriers need to manage their networks more actively. Third, network and device openness is now beginning to take off as a significant business model in this space.In our proposal, we agreed that the best first step is for wireless providers to be fully transparent with users about how network traffic is managed to avoid congestion, or prioritized for certain applications and content.
I believe in legally mandated net neutrality when monopoly is present, as with many cable providers, but not with wireless. Here is my previous post on net neutrality. Here are Robert Litan and Hal Singer, defending the Google-Verizon arrangement.
Russian gypsy fortune teller loops
A man was jailed by a Kemerovo region court on Thursday for assaulting a Gypsy fortune teller who predicted that he would be jailed, the Investigative Committee said.
Gennady Osipovich tried to kill the unidentified female fortune teller, who told him she saw a “state-owned house” – a Russian euphemism for jail – in his future, the committee said in a statement on its web site.
The woman managed to escape, but Osipovich stabbed to death two unidentified witnesses of the assault, which took place in October. He was sentenced to 22 years in a maximum-security prison.
The link is here and hat tip goes to The Browser.
Insurance markets in everything?
http://www.ticketfree.ca/, or try this site.
Like insurance for the very tickets that jack up your actual insurance, TF’ll cover the cost of nearly any violation you incur while driving (for a reasonable annual fee), so you can finally go too fast without getting all too furious. Current plans consist of the Mini, which exclusively covers speeding offenses; the Classic, which adds everyday scofflaw activities like light running and illegal u-turns; and the Enthusiast, which picks up the tab on parking tickets, plus miscellany like window tinting and noise violations, a necessary prophylactic for anyone playing the whistle tip game. Whoo WHOO! To recoup expenses, members simply enter their ticket info within 10 days of the court date and TF handles the rest, supplying an email confirmation when their payment goes through; if you choose to contest, they'll pay the fine in the event you lose, but should you actually win they'll cut you a check for the original ticket amount anyways (if crime truly doesn't pay, then speed drifting through the median must not be illegal, Dad).
Thrillist says it is real; is it? For the pointer I thank Joseph Calucci.
Robert Shiller on direct government employment
Big new programs to create jobs need not be expensive. Suppose the cost of hiring a single employee were as high as $30,000 a year, several times typical AmeriCorps living allowances. Hiring a million people would cost $30 billion a year. That’s only 4 percent of the entire federal stimulus program, and 0.2 percent of the national debt.
There is more here. Do any of you know of a policy paper on whether any labor market deregulation (e.g., Davis-Bacon?) would be required for this to happen? Davis-Bacon did precede some of the major Roosevelt jobs programs, so I've never understood how this fits together. How was it ruled that the relatively low-paying jobs of the WPA satisfied the Davis-Bacon requirement?
Ross Douthat’s case against cap-and-trade
I prefer to call it a carbon tax, while admitting the two are sometimes equivalent. Here is Ross's key passage:
Spending 1 percent of our G.D.P. as a hedge against catastrophe might make sense; spending the same amount without any prospect of actually getting that insurance policy seems like idealistic folly. And so far, when it comes to actual mechanisms whereby Waxman-Markey becomes a model for the developing world, all I’ve heard from the left are neoconservative-style arguments about how “if the world’s leading power leads, everyone else will follow,” and visions of a carbon trade war between the West and China. Neither seems persuasive.
That's a strong argument, but the case for a carbon tax remains threefold:
1. Even if we cut government spending a lot, some taxes will have to go up. This seems like the least bad tax to raise or create, since it has some chance of producing a better outcome. It's hard to say that about most of the other potential tax boosts. I'd also cut the tax deduction for mortgage interest, of course. That too could improve the quality of outcomes.
2. Given that American policies are contributing to a (probabilistic) climate-based "attack" on Bangladesh and numerous other countries, there is a deontological case for trying to stop that attack. It is a libertarian rights violation issue, driven by all of us in our role as consumers.
It is a practical response — but to me a morally weak one — to argue "We Americans are the wealthiest country in the world but we're not competent enough to stop our contribution to the problem, so we're not going to try." I get the logic, and I even agree with the predictive pessimism, but I'm not comfortable staying put with that as my final position.
3. A carbon tax might lead to a new green technology, with high upfront costs and low marginal costs. Some of the rest of the world might then adopt the technology, even if those countries don't ever adopt a carbon tax. In the short run this seems a little pie-in-the-sky, but in the longer run is it so crazy? Haven't the Chinese adopted most of our other technological innovations?
That all said, I still don't like Waxman-Markey and in that regard I agree with Ross. The bill seems to bureaucratize the energy sector, forgo most of the revenue opportunities, produce massive time consistency problems (postpone real adjustment and then give out more permits over time), and all without getting public buy-in to the idea of higher carbon prices.
I'll also stress — again — that a carbon tax needs to be combined with the strong deregulation of the energy sector, and the weakening of NIMBY, in particular for wind power.
p.s. I hear less often these days about the "global cooling trend."
Privatizing local government
Calling state mandates "entangling intrusions" in an open letter posted on the borough website in December, Mayor Paul Anzano proposed an apparently unprecedented solution: Dissolve the community's municipal charter and establish the borough as a nonprofit entity.
That's from Hopewell, New Jersey, and the odds are against that happening or even receiving serious deliberation. For the pointer I thank Igor Pleskov.
Credit Scores, Criminal Background Checks and Hiding the Bad Apples
A number of people (Slacktivist, Kevin Drum, Matt Yglesias, Megan Mcardle) are debating the use of credit scores in employment. Credit scores are useful at predicting all kinds of things including, for example, car accidents so there is good reason to believe that they are useful in employment. The above commentators tend to focus on the potential for scores to hurt the poor but that is not obvious. Consider a similar issue: Should employers be allowed to use background criminal checks when hiring?
One argument against is that black men are more likely to have criminal backgrounds and thus these criminal background checks discriminate against black men. Let's put aside the normative issues. What’s surprising is that under plausible circumstances criminal background checks can lead to an increase in the employment of black men. The reason is that without the background check employers face a risk that their employees are ex-cons. If employers are very averse to hiring ex-cons then they will seek to reduce this risk and one way of doing so is by not hiring any black men. As a result, a background check allows non ex-cons to distinguish themselves from the pack and to be hired. Furthermore, when background checks exist, non ex-cons know that they will not face statistical discrimination and thus have an increased incentive to invest in skills.
Consistent with this reasoning, although not demonstrative of the net effect, Holzer, Raphael and Stoll find that:
…employers who check criminal backgrounds are more likely to hire
African American workers, especially men. This effect is stronger among
those employers who report an aversion to hiring those with criminal
records than among those who do not.
My view is actually that criminals face too many post-crime impediments to reintegrating themselves within the workforce. Private incentives not to take a risk on an ex-con do not cohere with social incentives to reintegrate workers into society and thus we get too little hiring of ex-cons. As a result, ex-cons face a low opportunity cost of recidivism.
Nevertheless, banning criminal background checks or credit scores is probably not the best way to combat these types of problem. Banning criminal background checks increases the incentive to rely on less accurate statistical discrimination which discriminates against the innocent and reduces the incentive to invest in skills. In short, hiding the bad apples among the good comes at the expense of the good.
The economics of privacy bleg
What are some good books, articles, or blog posts to read on the economics of privacy? In particular this includes analyses of "privacy torts" for revealing true information about people, or CDA 230, which gives you as an internet intermediary legal protection against hosting or transmitting information by third parties.
I thank you in advance for your recommendations and ideas.
Incentive schemes in Delhi
Bloodstained uniforms are now the path to reward for the Delhi Police. The police chief, to encourage his men to rush injured people to hospitals instead of waiting for ambulances, will give awards to those whose uniforms have blood stains. The order, which came into effect a fortnight ago, was taken after it was found that some policemen posted in police control room (PCR) vans avoid handling bleeding victims because they don’t want to soil their uniforms. Now, not only will this be rewarded, Delhi Police will also pick up the cleaning tab to incentivise saving lives.
“Policemen who will have bloodstains on their uniforms while transporting the injured to hospitals will be suitably rewarded…."
The full story is here and I thank Siddhartha for the pointer.
The History and Future of Private Space Exploration
In The Rational Optimist Matt Ridley asks:
Can you doubt that if NASA had not existed some rich man would by now have spent his fortune on a man-on-the-moon programme for the prestige alone?
In fact, we have some pretty good historical data on this issue. Bearing in mind that observatories are an early form of space exploration, Alex MacDonald, a NASA research economist, notes:
For the majority of its history, space exploration in America has been funded privately. The trend
of wealthy individuals, such as Paul Allen, Jeff Bezos, Robert Bigelow, and Elon Musk,
devoting some of their resources to the exploration of space is not an emerging one, it is the
long-run, dominant trend which is now re-emerging.
MacDonald gives the following list of major observatories and their costs (click to enlarge). Privately funded observatories are in bold.
Private spending on space exploration is even more impressive when we scale by personal wealth.
…rather than scaling the expenditure as a share of the total resources of the U.S. economy, the expenditure can be scaled as a share of the resources of the individuals who undertook the projects. James Lick was the richest man in California and the Lick Observatory expenditure represented 17.5% of his entire estate. The equivalent share of the wealth of the richest man in California today, Larry Ellison, is $3.9 billion dollars, approximately four times higher than the GDP equivalent share.
Private space exploration and commercialization are likely to increase substantially in this century and, perhaps surprisingly, President Obama is pushing NASA in this direction. Here, for example, is a headline you don't see very often, "Obama defends privatization of space travel."
What is really going on is contracting-out rather than privatization per se and as such there is significant room for abuse. Nevertheless, if done carefully, I think Obama's efforts to encourage private efforts in space are a step in the right direction. What would be much more welcome and useful, however, would be a titling system for establishing property rights in space (see also here). Homesteading the highest frontier is our best bet for moving humanity off planet.
ICE Trust and CDS swaps
Created in its current form in 2009, this institution has become the central clearinghouse for CDS swaps. Just about everyone has favored the clearinghouse reform, but the more I read the more I find the course of affairs to be slightly unsettling:
1. The major banks play a strong role in ownership and governance of ICE Trust. There's nothing necessarily wrong with that, but does the clearinghouse have the incentive to check excess risk-taking behavior and demand adequate collateral? (The clearinghouse does seem to have optimal incentives when it comes to netting.) And might the clearinghouse might help banks "game" the new regulatory system? Keep in mind these same banks were not disciplining each other adequately as creditors, so why should they adopt a more socially optimal set of dealings through a clearinghouse?
2. As of the spring, ICE had a market capitalization of $9 billion; relative to the size of the outstanding exposures in the CDS market, is that a lot or a little? Remember that the A.I.G. bailout had an upfront cost of about $70 billion. Is it possible that the Fed still ends up holding the bag here? In fairness, note that both clearinghouse regulation, and CFTC/SEC regulation of the clearinghouse, may help prevent such a recurrence. Better netting and position limits may go a long way.
3. "Robert Litan, an economist at the Brookings Institution, says he worries that the broker-dealer members could use ICE Trust to “blunt the competition” from competing clearinghouses and will keep it a dealers-only club with high margin requirements. ICE Trust currently requires all clearing members to have at least $5 billion in capital to join.
Another concern is ICE Trust’s 11-member board of directors, of which five members are either ICE managers or are broker-dealer representatives. Litan says ICE Trust should have a wholly independent board of directors. In a recent interview with the Center, Litan said he hopes that regulators, under the financial reform bill will begin to push for the governance issues he has championed, Litan said." Source here.
4. "Darrell Duffie, a professor of finance at the Stanford Graduate School of Business, and a member of the Financial Advisory Roundtable of the New York Federal Reserve, supports using a clearinghouse for credit default swaps. But he cautions that segregating the CDS market from the rest of the $500 trillion market for over-the-counter (off-exchange) derivatives runs counter to the risk-reducing purpose of using such an exchange." Same source as #2. The underlying research is here.
5. ICE's parent institution is located in the Cayman Islands. It seems this is for tax reasons, is fully legal, and it has been approved by the Fed. MR readers will have different views on this set-up, I expect, but you can see why financial critics might feel leery. It also has been suggested that the Cayman Islands locale helps banks repatriate profits untaxed; it is not clear (to me at least) whether the new FinReg bill changes this arrangement. Is this all a reason why the clearing isn't going through the better-established Chicago Mercantile Exchange?
6. The Fed was regulating ICE but in the new FinReg bill the SEC and CFTC have joint authority over the institution, with overall the CFTC having the lead role for what is currently, or has been, OTC derivatives. Standards for regulation do not yet appear well fleshed out, here is one set of comments.
Here is a good article by Lucy Komisar on ICE. I don't want to sound too alarmist, I don't want to go back to non-clearinghouse days, and I wish to stress that these matters are hard to judge. Still, what I'm reading isn't reassuring me as much as I would have liked.