Category: Political Science

Jim Hamilton nails it.  Excerpts:

Please permit me to suggest that intellectual stamina is the most important quality we need in the Federal Reserve Chair right now.

And:

How could there possibly be an alternative whom Barbara Boxer (D-CA) and Jim DeMint (R-SC) would both prefer to Bernanke?

Elsewhere I have to strongly differ with the Johnson-Kwak proposal that Paul Krugman be selected.  I don't intend this as a negative comment on Krugman, if anything I am suggesting he is too dedicated to reading and writing and speaking his mind.  The Fed Chair has to be an expert on building consensus and at maintaining more credibility than Congress; even when the Fed screws up you can't just dump this equilibrium in favor of Fed-bashing.  What lies on the other side of that curtain isn't pretty.  Would Krugman gladly suffer the fools in Congress?  Johnson and Kwak are overrating the technocratic aspects of the job (which largely fall upon the Fed staff anyway) and underrating the public relations and balance of power aspects.  It's unusual that an academic will be the best person for the job.

I also have to put the kibbosh on plans which postulate Bernanke as failing to receive reconfirmation but staying on the Board and letting Donald Kohn slide into the de fact #1 slot and everyone working together as before.  That's just not how things work.  Bernanke would more likely leave, plus outsiders would not know who was in charge or what the default was if the cooperation should break down.  The resulting reputational equilibrium would again prove unworkable or at least highly disadvantageous.

Overall when I read these discussions I realize that my theories of public choice are very, very different from those of some of the other commentators.

That's the title of a famous paper by Stephen Ansolabehere, John de Figueireido, and James Snyder.  The abstract of the non-gated version (other versions here) reads as follows:

The post is here, excerpt:

Contrary to what some have suggested, a charter city in Haiti is simply not an option at this time. A charter city can only be created through voluntary agreement. Under the current conditions, the government and people of Haiti do not have the freedom of choice required for any agreement reached now to be voluntary.

He has another idea:

There are clear limits on the number of Haitian immigrants that nearby jurisdictions are currently prepared to accept. But if nations in the region created just two charter cities, they could accept the entire population of Haiti as residents. There are many locations close to Haiti where these new cities could be built, but for now, Haiti itself is the one place we should not consider.

Here is an offer for repatriation to Senegal:

Presidential spokesman Mamadou Bemba Ndiaye told reporters that Mr Wade had shared his plans with senior aides, and they involved offering voluntary repatriation and plots of land to any Haitian who wanted “to return to their origin”.

“Senegal is ready to offer them parcels of land – even an entire region. It all depends on how many Haitians come. If it’s just a few individuals, then we will likely offer them housing or small pieces of land. If they come en masse we are ready to give them a region,” he said.

Here's a paper by Nejat Anbarci, Monica Escaleras, and Charles Alan Register:

In our theoretical model, we show that as per capita income decreases and the level of inequality increases, different segments of society are less likely to agree on the distribution of the burden of the necessary collective action, causing the relatively-wealthy simply to self-insure against the disaster while leaving the relatively-poor to its mercy. We then evaluate 269 large earthquakes occurring worldwide (1960-2002), taking into account other factors such as an earthquake's magnitude, depth and proximity to population centers. Using a Negative Binomial estimation strategy with both random and fixed estimators, we find strong evidence of the theoretical model’s predictions.

I haven't read it yet but wanted to pass it along; here are varying drafts, go through JSTOR (gated) and Journal of Public Economics for the final version.  By the way, the model predicts bad news for Haiti.

For the pointer I thank the excellent Daniel Sutter, who has done a good deal of work on the economics of natural disasters.  

My original post is here.  In the comments, "some guy" offered this perceptive comment/quotation:

1. For this debate, "levels" are more important than growth rates.
8. Countries have to start from where they're at.
Anybody else see a problem?

I'll add this:

1. Canada is big on the map but most of it is empty and the population is clustered on the border of you-know-where.  Canada also has no legacy of slavery and requires stronger educational and professional credentials from its immigrants.

2. Matt asks me to come right out and say that Manzi was wrong.  TC: "Manzi was wrong."  That said, many of the other debate contributors made false or misleading statements as well.  I deliberately tried to write my post to avoid remarks directed at raising or lowering the relative status of the commentators, a good overall habit (which I don't always follow and which hardly any commentators on other blogs seem to follow).  

3. I would genuinely like to know whether the U.S. or Europe has supported more beneficial immigration over the last twenty years.  The answer is not obvious to me, when you consider the Italians who move to Switzerland, the Greeks who move to Germany, and so on, not to mention the Algerians who move to France and the Turks who move to Germany. 

4. For this debate, "levels" are more important than growth rates.  I'm still not seeing that admission in the secondary commentary and note that "levels" provide an initial advantage to the United States, though Europe might fight back with security and leisure time.  If growth rates mattered more, that would mean China is the place to copy and it isn't.  By the way, in a lot of simple models, the poorer Europe should be enjoying "catch-up" growth and growing at rates higher than that of the United States, as many other countries are doing.

Levels, levels, levels.  Here is the Ducktales moon level song played backwards.

Addendum: If you do wish to look at growth rates, adjusted for the relevant variables, here is one place to start.  Overall it's consistent with my point about levels.

I've been thinking about this question more and I've come up with a speculative possibility.  Right now banks are earning their way back into profitability by playing the spread.  They're paying close to zero on deposits and earning fair sums on long-term loans.  Perhaps this term structure is sustainable because people are expecting little inflation in the short run but moderate inflation in the longer run, plus there is some risk on the loans.  (These inflationary expectations may be changing; if you wish pretend I am writing this six months or a year ago.)

So let's say we move from zero expected short-term inflation to three percent short-term expected inflation.  The nominal short rate rises to three percent and the real short rate remains more or less constant.  Long rates would go up a bit but not much, since beyond the short run there is already an expectation of moderate inflation.  In sum, the spread between short and long rates might narrow.

Here is the key point: from the bank's point of view, what is the correct measure of the real rate of interest?  Is it defined by the nominal rate relative to the expected growth in the CPI?  I doubt it.  When you're near the bankruptcy or nationalization constraint, it's often nominal profits that matter (relative to fixed nominal liabilities, accounting standards, capital standards, etc.), not "real profits" defined relative to the CPI.

In sum, maybe three percent expected inflation conflicts with the desire to rapidly recapitalize banks through maintaining a wide interest rate spread.  Maybe we need that zero nominal short rate or at least the Fed thinks we do.

I don't wish to push too hard on this hypothesis, it is speculative rather than confirmed by evidence.  And propositions about the term structure of interest rates do not always run the way you think they will or should.  I'm aware of other problems.  What kind of zero profit condition is imposed on the banks?  Given the odd objective function of the banks, how exactly does the Fisher effect work in the short run?  Or is it imposed from without by competition from non-bank lenders?  I'm not sure on these questions and they suggest possible holes in the above speculation.

I also regard this as a somewhat gruesome hypothesis.  It means that "Main Street" is paying for "Wall Street" (forgive me the use of those awful terms) in at least two ways: high unemployment and inability to earn much on one's savings.  Risk on the Fed balance sheet is also paying some big part of the bill, since presumably that is helping to maintain the interest rate spread.

The term structure also implies that the market is expecting rising short rates, so if the bank mess isn't cleaned up soon, heaven forbid.  The spread, as a means of restoring bank profitability, won't last forever.