Category: Political Science

Managing the Fed’s new balance sheet

by  Tyler Cowen in

James Hamilton writes:

I recommend instead that the Fed should be buying Treasury Inflation-Protected Securities in the current situation. Tim Iacono
says that’s like the Mafia buying “protection” from itself. But my
point is that TIPS represent an asset that would gain in value at a
time the Fed needs to sell them, meaning that the logistical ability of
the Fed to drain reserves quickly in such circumstances is without
question.

Read his whole post, which ranges more broadly than this quotation would indicate.  It’s one of the best blog posts written this year.  Don’t forget this crystal clear passage:

A second concern I have with the new Fed balance sheet is that it has
seriously compromised the independence of the central bank. To my
knowledge, every hyperinflation in history has had two key ingredients:
(1) budget deficits that could not be resolved politically, and (2) a
central bank that assumed the obligations that the fiscal authority
could not.

I certainly would not predict hyperinflation, but we could be in for some serious contractionary monetary policy in the next five years.

Wars, Guns, and Votes

by  Tyler Cowen in

The subtitle is Democracy in Dangerous Places and the author is Paul Collier.  Here are three bits:

Anke and I have estimated the proportion of Africa's private wealth that is held outside the region.  By 2004 it had reached the astounding figure of 36 percent: more than a third of Africa's own wealth is outside the region.

And:

Collectively, the countries of the bottom billion are spending around $9 billion on the military, of which up to 40 percent is being financed by donors.

And:

The history of Britain post-403 makes the post-colonial history of Africa look like a staggering success.

The key point of the book is how and why democracy doesn't work so well for the bottom billion.  The early discussion of the incentives facing quasi-democratic governments is dysfunctional societies is brilliant.  It's the best discussion I've seen of why "produce better government" is not the prevailing incentive in such societies.  You can learn why ethnic diversity lowers the value of public sector activity but raises private sector productivity, why skills for construction are often a binding constraint in very poor societies, why the social returns to peacekeeping are so high, why Kalashnikovs are cheaper in Africa, why there are fewer civil wars in larger countries, and how the Ivory Coast went from development model to disaster.

One main policy recommendation that the West should promise "coup-proof" defensive interventions to any African government which abides by real democratic elections.  Can this work?

The claimed takeaway is that African nations have too much sovereignty, not too little. 

It's not a perfect book.  Collier describes his work frequently, and fairly (he doesn't overclaim), but often I would have liked to hear more about the broader literature as well.

Paul Collier has done it again.  This will be one of the "must buy" books of this year.  Buy it here.

Only in England, part III

by  Tyler Cowen in

From MissMarketCrash, apparently these words have been banned by British local government authorities:

across-the-piece, actioned, advocate, agencies, ambassador, area based,
area focused, autonomous, baseline, beacon, benchmarking, best
practice, blue sky thinking, bottom-up, CAAs, can do culture,
capabilities, capacity, capacity building, cascading, cautiously
welcome, challenge, champion, citizen empowerment, client, cohesive
communities, cohesiveness, collaboration, commissioning, community
engagement, compact, conditionality, consensual, contestability,
contextual, core developments, core message, core principles, core
value, coterminosity, coterminous, cross-cutting, cross-fertilization,
customer, democratic legitimacy, democratic mandate, dialogue,
direction of travel, distorts spending priorities, double devolution,
downstream, early win, edge-fit, embedded, empowerment, enabler,
engagement, engaging users, enhance, evidence base, exemplar, external
challenge, facilitate, fast-track, flex, flexibilities and freedoms,
framework, fulcrum, functionality, funding streams, gateway review,
going forward, good practice, governance, holistic, holistic
governance, horizon scanning, improvement levers, incentivising, income
streams, indicators, initiative, innovative capacity, inspectorates,
interdepartmental, interface, iteration, joined up, joint working,
LAAs, Level playing field, lever, leverage, localities, lowlights,
MAAs, mainstreaming, management capacity, meaningful consultation,
meaningful dialogue, mechanisms, menu of options, multi-agency,
multidisciplinary, municipalities, network model, normalising,
outcomes, output, outsourced, overarching, paradigm, parameter,
participatory, partnership working, partnerships, pathfinder, peer
challenge, performance network, place shaping, pooled budgets, pooled
resources, pooled risk, populace, potentialities, practitioners,
predictors of beaconicity, preventative services, prioritization,
priority, proactive, process driven, procure, procurement, promulgate,
proportionality, protocol, provider vehicles, quantum, quick hit, quick
win, rationalisation, rebaselining, reconfigured, resource allocation,
revenue streams, risk based, robust, scaled-back, scoping, sector wise,
seedbed, self-aggrandizement, service users, shared priority, shell
developments, signpost, single conversations, single point of contact,
situational, slippage, social contracts, social exclusion, spacial,
stakeholder, step change, strategic, strategic priorities, streamlined,
sub-regional, subsidiarity, sustainable, sustainable communities,
symposium, systematics, taxonomy, tested for soundness, thematic,
thinking outside of the box, third sector, toolkit, top-down,
trajectory, tranche, transactional, transformational, transparency,
upstream, upward trend, utilise, value-added, visionary, welcome,
wellbeing, worklessness.

Whenever I step off the plane in the U.K. or Netherlands a tear (or more) comes to my eye as I contemplate those countries as birthplaces of individual liberty.  But this: is it a move for or against liberty?

It's funny, but if you Google "predictors of beaconicity" you get lots and lots.

Markets in everything, until they are cancelled

by  Tyler Cowen in

Is this good or bad for the macroeconomy?:

In Los Angeles County, cities are buying federal stimulus funds from
each other at deep discounts, turning what was supposed to be a
targeted infusion of cash into a huge auction.

In two cases $500,000 in stimulus funding was selling in the range of $310K to $325K.  (What does that tell us?)  But wait, the Los Angeles County MTA has now cancelled these swaps.

I thank Jerry Brito and Todd Myers for the pointer.

How easy is it to fill those Treasury jobs?

by  Tyler Cowen in

In a search for "non-compromised" candidates, Matt writes:

And yet, look, we’re only looking to fill a relatively small number of
positions. Timothy Geithner needs a Deputy Secretary. And then there’s
a need for an Under Secretary of the Treasury for Domestic Finance, an
Assistant Secretary for Financial Institutions, and an Assistant
Secretary for Financial Markets. There are other positions in the
department, but those are the four where you might think that
experience with high finance specifically was vitally necessary. It’s
only three jobs. And you can’t tell me that there aren’t four people
alive in the United States who have experience with finance but lack
compromising relationship[s]. Why not Simon Johnson, for example? Give him
one of the jobs, and a quarter of your problem would be solved. Indeed,
if you even got three non-bankers to fill four of the
positions, I think that would create a lot of piece of mind. Nouriel
Roubini, to give another name well-known to the blogosphere, seems
perfectly well-qualified for a job at Treasury–he’s even worked in the
past as a “senior adviser” to Tim Geithner.

One point is that both Johnson and Roubini were born outside of this country and perhaps neither is an American citizen.  More fundamentally, the job requires close to a 24/7 time commitment, a huge cut in pay (might Roubini earn 50K per talk?, along with enjoying complete personal freedom), an ability to "stick to message" and give up the right to speak one's mind in public, managerial and person-handling skills, a smooth enough temperament, the ability to tolerate a gross imbalance between responsibility and resources, the possible end of an academic career (for some people it's hard to keep on caring), and a very real chance to fail and fall flat on one's face.  Toss in near-perfect tax records and regular payment of Social Security contributions for one's Green Card-holding housekeeper.

That's all without even being in charge.  Is Geithner an easy guy to work with?  You won't know until you say "yes."

I once, by sheer accident, ran into Johnson in the lobby of an NPR studio and he was smiling.

How many brilliant academics even manage to make good deans?

Obama on blogs

by  Tyler Cowen in

Maybe he should be reading MR:

“Part of the reason we don’t spend a lot of time looking at blogs,” he
said, “is because if you haven’t looked at it very carefully, then you
may be under the impression that somehow there’s a clean answer one way
or another – well, you just nationalize all the banks, or you just
leave them alone and they’ll be fine.”

It does seem, however, he has been reading some other blogs, or at least he is told about them.

Addendum: Alan Blinder has a very good column on the topic.

Obamatons speak to David Brooks

by  Tyler Cowen in

You can read their account of what is going on, as filtered through Brooks.  Excerpt:

…they argue…the Obama administration will not usher in an era of big
government. Federal spending over the last generation has been about 20
percent of G.D.P. This year, it has surged to about 27 percent. But
they aim to bring spending down to 22 percent of G.D.P. in a few years.
And most of the increase, they insist, is caused by the aging of the
population and the rise of mandatory entitlement spending. It’s not
caused by big increases in the welfare state.

The White House
has produced a chart showing nondefense discretionary spending as a
share of G.D.P. That’s spending for education, welfare and all the
stuff that Democrats love. Since 1985, this spending has hovered around
3.7 percent of G.D.P. This year, it’s about 4.6 percent. The White
House claims that it is going to reduce this spending to 3.1 percent by
2019, lower than at any time in any recent Republican administration. I
was invited to hang this chart on my wall and judge them by how well
they meet these targets. (I have.)

What if all the smart people are in one party?

by  Tyler Cowen in

Ross Douthat thinks through liberaltarianism and the new spatial equilibrium has him worried:

What could happen, instead, is a bigger-tent liberalism – somewhat
chastened, perhaps, by some big-government failures in the Obama era –
that makes libertarian intellectuals feel welcome, engages them in
conversations about smarter regulations and more efficient tax policy,
and generally woos them away from their culturally-dissonant alliance
with people who attend megachurches and Sarah Palin rallies. This would
make for a smarter left-of-center in the short run, but I think in the
long run it would be pernicious. It would further the Democratic
Party's transformation into a closed circle of brainy meritocrats, and
push the Republican Party in a yet more anti-intellectual direction.
And it would produce an elite consensus more impervious to structural
critiques, and a right-wing populism more incapable of providing them.
The Democratic Party would hold power more often, and become more
sclerotic as a result; the GOP would take office less often, and behave
more recklessly on those rare occasions when it did manage to seize the
reins of state.

Put aside your views on the R, D, and L people and think in terms of an abstract argument.  There is an optimal distribution of smart people across political parties and it need not be all in the same party.  For one thing, the marginal product of a smart person in a stupid party might be very high.  For another, being in power all the time may corrupt the thinking processes of smart people and we want to have some smart people insulated from this corruption.

So should a smart person attempt to move the world toward an optimal distribution of smart people across parties?  Or should a smart person join the party he or she most wishes to belong to?  Should a smart person advise others according to the same standard she uses to regulate herself?  In general does the world "cluster" smart people too much or too little?

You'll notice that many of these questions apply to fun parties and not just political parties. 

The excellent Arnold Kling adds insightful comment.

Canada fest

by  Tyler Cowen in
It’s true that the U.S. has in many ways a more libertarian culture
and political tradition than does Canada. But then isn’t it all the
more interesting to note that, despite America’s unique “land of the
free” self-conception, we’re no more free than Canadians? I feel
strongly that American culture is more varied, alive, weirder,
synthetic, and creative than probably any other. This is in part
because of, and not despite, the odd conservative and religious strands
in American culture.  And it is a culture especially amenable to all
sorts of entrepreneurial experiments, which gives American culture a
level of innovation and vitality (including countless varieties of
religious weirdness) that I think partly explains why it is the world’s
dominant exporter of culture. And I think the U.S.’s wealth relative to
other countries is actually underestimated. We are astoundingly rich
(recession or no recession) and this is a place of crazy opportunity.
So I think the U.S. does better in positive liberty terms than it
sometimes gets credit for.

But that doesn’t begin to mean that we live up to our reputation for
the kind of liberty classical liberals tend to care about. My sense is
that some American libertarians have a vague sense that if Canada
really was more free, then they should want to move there. But they
emphatically don’t want to move to Canada. My diagnosis is that many
libertarians prefer to live in a place where it easy to find others who
share their individualistic and libertarian values over living in a
place where they would actually be more free, but would feel more culturally alienated.

Via Megan McArdle, here's talk of safe Canadian banks and yet Canadian is still seeing the same downturn as the United States.  One can preach the virtues of Canadian banking regulation as much as one wants, but the Fischer Black-like question remains: how much real net risk exposure did Canadian industry accept vis-a-vis all external sources of risk, U.S. financial institutions included?  Lots.  A decision not to economically decouple from a large, leveraged economy is a small bit like a decision to leverage oneself, though many people do not welcome this perspective.  The bottom line is that risk mistakes have been made by just about everybody, not just the obvious culprits.

Addendum: Arnold Kling is not Canadian but Megan McArdle defends him aptly; he wasn't guilty of anything in the first place, except perhaps having exaggerated the coercive nature of taxation,

Good sentences

by  Tyler Cowen in
Giving up being liked is the ultimate public sacrifice.

Here is more, interesting throughout.  Shakespeare, in his Henriad, understood that citizens do not allow their leaders to be nice, reasonable, likable guys who admit when they are wrong.  I am still glad — for eggheady, "merit good," and self-aggrandizing of my own relative status reasons — that Obama is trying to be reasonable, but I am not naive as to what lies at the end of the process.