Secession

by  Alex Tabarrok in

In advance of July 4, Patri Friedman and co-bloggers are discussing secession (remember, we call it the American revolution they call it secession) at Let a Thousand Nations Bloom.  Here is Patri on secession as a startup: 

America did not merely secede and copy the governing documents or style of the United Kingdom. Rather, it innovated, creating a system based on the English Common Law, yet different, one with explicit checks and balances to restrain government, and with no place for a monarch. It was an experiment with a more radical form of democracy than existed anywhere in the 18th-century world.

And it was an incredibly successful experiment, as the combination of that innovative rule-set and the empty frontier resulted in America growing rapidly in population, wealth, and influence. During the open immigration periods of the 19th century, some years saw over a million new immigrants arrive “yearning to breathe free”. As a result, the new American state had influence far beyond its shores.

This influence occured in two major ways. First, America served as a test of the brand-new American Constitution, and the Founding Fathers’ philosophy about the role of government. By showing that it worked well in practice, political philosophers, politicians, voters, and revolutionaries around the world were (slowly) convinced that this was the best government technology to be had. Second, America dramatically outcompeted existing states, based on the simple metric of net migration. Those million+ people a year who went to America can be thought of as customers of government services voting with their feet, which means that other countries were losing market share.

You may not be used to thinking of government in this sort of economic and business framework, but it is a core part of our philosophy here at Let A Thousand Nations Bloom, and we find it provides a unique and refreshing angle on government. In this case, it shows us the invisible, long-term effects of the American Revolution.

They are covering a lot of other related material such as the optimal size and number of nations this week as well.  Here is a guide.  On a related point, I argued earlier for The Great State of Northern Virginia.

Finally, don’t forget: If at first you don’t secede, try, try again.

What is vacation good for?

by  Tyler Cowen in

Drake Bennett writes:

They found that in all three cases, the respondents were least happy about the vacation while they were taking it. Beforehand, they looked forward to it with eager anticipation, and within a few days of returning, they remembered it fondly. But while on it, they found themselves bogged down by the disappointments and logistical headaches of actually going somewhere and doing something, and the pressure they felt to be enjoying themselves.

A recent Dutch study had a more striking finding. Looking not at vacation memories, but measuring general happiness level through a simple three-question questionnaire, the researchers found that going on vacation gave a notable boost to pre-vacation mood but had hardly any effect on post-vacation feelings. Anticipation, it seems, can be a more powerful force than memory.

Here is much more.  I liked this sentence:

The most effective way to inoculate a vacationer against the deadening power of adaptation, however, may be the most counterintuitive – to break it up, to interrupt it with real life.

In other words, bring work.  I call it "taking a work vacation."

For the pointer I thank David Archer.

Barbados vs. Grenada, the demand for own-goals, 1994

by  Tyler Cowen in

There was an unusual match between Barbados and Grenada.

Grenada went into the match with a superior goal difference, meaning that Barbados needed to win by two goals to progress to the finals. The trouble was caused by two things. First, unlike most group stages in football competitions, the organizers had deemed that all games must have a winner. All games drawn over 90 minutes would go to sudden death extra time. Secondly and most importantly, there was an unusual rule which stated that in the event of a game going to sudden death extra time the goal would count double, meaning that the winner would be awarded a two goal victory.

Barbados was leading 2-0 until the 83rd minute, when Grenada scored, making it 2-1. Approaching the dying moments, the Barbadians realized they had no chance of scoring past Grenada's mass defense, so they deliberately scored an own goal to tie the game at 2-2. This would send the game into extra time and give them another half hour to break down the defense. The Grenadians realized what was happening and attempted to score an own goal as well, which would put Barbados back in front by one goal and would eliminate Barbados from the competition.

However, the Barbados players started defending their opposition's goal to prevent them from doing this, and during the game's last five minutes, the fans were treated to the incredible sight of Grenada trying to score in either goal. Barbados also defended both ends of the pitch, and held off Grenada for the final five minutes, sending the game into extra time. In extra time, Barbados notched the game-winner, and, according to the rules, was awarded a 4-2 victory, which put them through to the next round.

The full story is here and I thank Solomon Gold for the pointer.  Angus also blogged this story, with video evidence as well.

How hard is economics?

by  Tyler Cowen in

Brad DeLong discusses a recent short essay by Kartik Athreya; Matt Yglesias chips in, as does Scott Sumner.

My view is a little different than Brad's.  I would say that economics is really, really, really, really, really, really, really hard.  And that's leaving out a few of the "reallys."

It's so hard that experts don't always do it well.  The experts are constantly prone to correction by non-experts, by practitioners, by people who are self-educated economic experts but not professional economists, and by people who know some economics and a lot about some other field(s).  It is very often that we — at least some of us – are wrong and at least some of those other people are right.  Furthermore those other people are often more meta-rational than a lot of professional economists.

Even very simple problems can be quite hard, such as why nominal wages are sometimes sticky or why particular markets don't always clear, in the absence of legal impediment.  Why doesn't the restaurant charge more on a Saturday night?  You can imagine how hard the hard problems are, such as what level of public expenditure is consistent with an ongoing and workable democratic equilibrium.

Putting aside agreement and ideology, and just focusing on how one understands an issue, I'll take my favorite non-Ph.d. bloggers over most professional economists, six out of seven days a week.  Not to estimate a coefficient, but to judge public policy, thereby integrating and evaluating broad bodies of knowledge?  It's not even close.

The economics of Berlin

by  Tyler Cowen in

The city continues to deindustrialize:

Most of the problems date back to the end of World War II when most large companies moved their headquarters to West Germany — for example, Siemens moved to Munich and the banking industry fled to Frankfurt.

After German reunification in 1990, East German industry collapsed when state subsidies were cut. Also, Berlin failed to stop spending at a rate it was used to, especially when federal payments were slashed in 1995 from almost 8 million euros to 2 million euros.

As a result, since 1991, Berlin's debt has risen nearly six-fold, from 10 billion to 61 billion euros, giving it the highest per capita debt level of any state in Germany. The city has lost about 100,000 industrial jobs since 1990.

Here is the full story.  Here is a related article.  This also explains why Berlin finds it so hard to privatize its arts support; the private sponsors simply are not there.

As I've noted before, neither land nor labor are remarkably scarce here, and so most items and apartments are very cheap, especially by European standards but even by south German standards.  Could it be that marginal cost pricing reigns at the retail level?

The cheapness makes Berlin a magnet.  I am told that large numbers of people — especially foreigners — live here part of the year but earn most of their money elsewhere.  Think of a twenty-something writing a novel or a dancer or singer in training.

Did you know that only about forty percent of the German population is employed?  I would be surprised if it were that much in Berlin.  You can view that figure as a realization of (temporary) utopia, the result of screwy anti-work economic policies, or a bit of both.

I thank Sebastian T. for the pointer and also Ines for a useful discussion.

Sensory branding from Singapore Airlines

by  Tyler Cowen in

Singapore airlines is the pinnacle of sensory branding and offers a full scale assault on our brains. Like any other airline, Singapore airlines employs common consistent visual themes. Unlike other airlines the company incorporates the same scent, Stefan Floridian Waters, in the perfume worn by flight attendants, in their hot towels, and other elements of their service. Flight attendants must be physically attractive and wear uniforms made from fine silk which incorporates elements of the cabin decor. The airline strives to make every customer interaction both appealing, and, equally important, consistent from encounter to encounter. It's no wonder the airline is perennially at the top of travelers' preference rankings.

There is more here and I thank Shane for the pointer.

Assorted links

by  Tyler Cowen in

1. The Berlin subway slide, video.

2. I've been saying similar things to Bryan Caplan.

3. Chinese multiple currency names and what they mean.

4. Tim Harford reviews The Age of the Infovore.

5. The tents are falling apart in Haiti.

6. Sumner and Caplan on wage stickiness.  On the same topic, here is another perspective.  Clearly wages are to some extent sticky in nominal terms.  But if people who work on commission and tips are out of work in large numbers, or if truly flex-wage workers are being laid off, why see wage stickiness as the #1 culprit?  (Scott isn't following through the logical implications of his cyclicality point.)  In economies with truly flexible wages, people are forced to retreat into household production in down times and that is perhaps a better parable for America today.  No one will hire them, flexibility or not.  Plus if workers are irrational by focusing on the nominal rather than the real values, it's easy enough to trick them by cutting real benefits and working conditions, thereby saving the employer money.  Real wage flexibility should be enough to keep them at work, yet it isn't.

The new financial regulation bill

by  Tyler Cowen in

NEW REGULATORY AUTHORITY: Gives federal regulators new authority to seize and break up large troubled financial firms without taxpayer bailouts in cases where the firm's collapse could destabilize the financial system. Sets up a liquidation procedure run by the FDIC. Treasury would supply funds to cover the
up-front costs of winding down the failed firm, but the government would have to put a "repayment plan" in place. Regulators would recoup any losses incurred from the wind-down afterwards by assessing fees on financial firms with more than $50 billion in assets.

OVERALL A GOOD PROVISION, ALTHOUGH THE ACTUAL INCIDENCE OF THESE FEES IS TRICKIER THAN THE DESCRIPTION INDICATES.

FINANCIAL STABILITY COUNCIL: Would establish a new, 10-member Financial Stability Oversight Council, comprising existing regulators charged with monitoring and addressing system-wide risks to the nation's financial stability. Among its duties, the council would recommend to the Fed stricter capital, leverage and other rules for large, complex financial firms that are judged to threaten the financial system. In extreme cases, it would have the power to break up financial firms.

I'M NOT ENTHUSIASTIC, THOUGH PERHAPS IT WILL JUST BE A WASH.  NONETHELESS IT REFLECTS A BAD AND DANGEROUS ATTITUDE ABOUT WHAT REGULATORS ARE CAPABLE OF.

VOLCKER RULE: Would curb propriety trading by the largest financial firms, though banks could make de minimus investments in hedge and private-equity funds. Those investments would be limited to 3% or less of a bank's Tier 1 capital. Banks would be prohibited from bailing out a fund in which they are invested.

IT'S HARD TO TELL WHAT ACTUAL RESTRICTIONS WILL BE IN PLACE AND MOST LIKELY THERE WILL BE MAJOR LOOPHOLES.  YOU DON'T HAVE TO HATE THIS PROPOSAL — RECALL THE POPULARITY OF "NARROW BANKING" PROPOSALS IN THE 1990S AS A KIND OF SECOND-BEST REFORM, CONSIDERED BY MANY MARKET-ORIENTED ECONOMISTS.  FURTHERMORE IF MARKETS ARE PRETTY LIQUID, KEEPING THE BANKS OUT OF THESE MARKETS MAY NOT HARM MUCH AT ALL.  STILL, I'LL PREDICT THIS DOESN'T DO ANY GOOD.

DERIVATIVES: Would for the first time extend comprehensive regulation to the over-the-counter derivatives market, including the trading of the products and the companies that sell them. Would require many routine derivatives to be traded on exchanges and routed through clearinghouses. Customized swaps could still be traded over-the-counter, but they would have to be reported to central repositories so regulators could get a broader picture of what's going on in the market. Would impose new capital, margin, reporting, record-keeping and business conduct rules on firms that deal in derivatives.

I WAS AN EARLY PROPONENT OF THIS IDEA MYSELF, BUT LATELY I'VE STARTED TO WORRY ABOUT HOW WELL CAPITALIZED THIS CLEARINGHOUSE WILL NEED TO BE.  I'LL STILL COUNT IT AS A NET PLUS, BUT I DON'T THINK WE'VE THOUGHT IT THROUGH VERY WELL.

SWAPS SPIN-OFF: Would require banks to spin off only their riskiest derivatives trading operations into affiliates, in a late-night compromise struck to scale back a controversial provision championed by Sen. Blanche Lincoln (D., Ark.). Banks would be able to retain operations for interest-rate swaps, foreign-exchange swaps, and gold and silver swaps among others. Firms would be required to push trading in agriculture, uncleared commodities, most metals, and energy swaps to their affiliates.

THE DEVIL IS IN THE DETAILS.  MAYBE THE AFFILIATES ARE NOT "TOO BIG TO FAIL" BUT WHAT REALLY MATTERS ARE THE COUNTERPARTIES ON THE OTHER SIDE OF THE TRANSACTION.  WE STILL BAILED OUT LTCM, REMEMBER THAT?

CONSUMER AGENCY: Would create a new Consumer Financial Protection Bureau within the Federal Reserve, with rulemaking and some enforcement power over banks and non-banks that offer consumer financial products or services such as credit cards, mortgages and other loans. The new watchdog would have authority to examine and enforce regulations for all mortgage-related businesses; banks and credit unions with assets of more than $10 billion in assets; pay day lenders, check cashers and certain other non-bank financial firms. Auto dealers won a hard-fought exemption from the Bureau's reach.

WE'LL SEE.

PRE-EMPTION: Would allow states to impose their own stricter consumer protection laws on national banks. National banks could seek exemption from state laws on a case-by-case, state-by-state basis if a state law "prevents or significantly interferes" with the bank's ability to do business – a higher bar than federal regulators currently must meet to pre-empt state rules. State attorneys-general would have power to enforce certain rules issued by the new consumer financial protection bureau.

THIS SHIFTS THE WORDING OF THE LAW, BUT DOES IT CHANGE THE POLITICAL EQUILIBRIUM?  AGAIN, "WE;LL SEE."

FEDERAL RESERVE OVERSIGHT: Would mandate a one-time audit of all of the Fed's emergency lending programs from the financial crisis. The Fed also would disclose, with a two-year lag, details of loans it makes to banks through its discount window as well as open market transactions – activity the Fed currently doesn't disclose. Would eliminate the role of bankers in picking presidents at the Fed's 12 regional banks. Would also limit the Fed's 13(3) emergency lending authority by barring the central bank from using it to aid an
individual firm, requiring the Treasury Secretary to approve any lending program and prohibiting the participation of insolvent firms.

A MISTAKE, BUT THIS COULD HAVE BEEN MUCH WORSE.

OVERSIGHT CHANGES: Would eliminate the Office of Thrift Supervision, but after a fight, the Fed retained oversight of thousands of community banks. Would empower the Fed to supervise the largest, most complex financial companies to ensure that the government understands the risks and complexities of firms that could pose a risk to the broader economy.

OVERALL I AM PRO-FED AND SO THIS PLANK COULD HAVE BEEN MUCH WORSE, FORTUNATELY WE HAVE NOT REALLOCATED FED POWERS IN A MAJOR WAY TO LESSER REGULATORS.

BANK CAPITAL STANDARDS: Would set new size- and risk-based capital standards, including a prohibition on large bank holding companies treating trust-preferred securities as Tier 1 capital, a key measure of a bank's strength. Would grandfather trust-preferred securities for banks with less than $15 billion in assets, enabling them to continue treating the securities as Tier 1 capital. Larger banks would have five years to phase-out trust-preferred securities as Tier 1 capital.

IT'S BASEL III WHICH WILL REALLY MATTER AND WE SHOULDN'T EXPECT MUCH FROM THAT FORUM.  WE'RE DROPPING THE BALL ON A MAJOR ISSUE.

BANK FEE: Would mandate the Oversight Council to impose a special assessment on the nation's largest financial firms to raise up to $19 billion to offset the cost of the bill. The fee would apply to financial institutions with more than $50 billion in assets and hedge funds with more than $10 billion in assets, with entities deemed high risk paying more than safer ones. The fee would be collected by the FDIC over five years, with the funds placed in separate fund in the Treasury and would not be usable for any other purpose for 25 years, after which any left-over funds would go to pay down the national debt.

THIS IS FOR PR, SO THE POLITICIANS CAN CLAIM TAXPAYERS WON'T BE ON THE HOOK AGAIN.  RIGHT.  ALSO, STUDY TAX INCIDENCE THEORY AND GET BACK TO ME.

DEPOSIT INSURANCE: Would permanently increase the level of federal deposit insurance for banks, thrifts and credit unions to $250,000, retroactive to January 1, 2008.

ALREADY DONE, SO TO SPEAK.

MORTGAGES: Would establish new national minimum underwriting standards for home mortgages. Lenders would be required for the first time to ensure that a borrower is able to repay a home loan by verifying the borrower's income, credit history and job status. Would ban payments to brokers for steering borrowers to high-priced loans. 

DEVIL IS IN THE DETAILS.

SECURITIZATION: Banks that package loans would, broadly, be required to keep 5% of the credit risk on their balance sheets. Would direct bank regulators to exempt from the rules a class of low-risk mortgages that meet certain minimum standards. Regulators could permit alternative risk-retention arrangements for
the commercial mortgage-backed securities market.

WASTE OF TIME.  YOU CAN JUST AS EASILY ARGUE THE PROBLEM WAS INSUFFICIENT SECURITIZATION.  AND HOW HAVE SIMILAR RULES WORKED OUT FOR THE SPANISH?

CREDIT RATING AGENCIES: Would revamp the credit-rating industry, establishing a new quasi-government entity designed to address conflicts of interest inherent in the credit-rating business after the SEC studies the matter. Would also allow investors to sue credit-rating firms for a "knowing or reckless" failure to conduct a reasonable investigation, a lower liability standard than the firms were lobbying to get. Would establish a new oversight office within the SEC with the ability to fine ratings agencies and empowers the SEC to
deregister a firm that gives too many bad ratings over time.

THE BEST EQUILIBRIUM IS TO HAVE DISCREDITED RATINGS AGENCIES, NOT REVAMPED AND REREGULATED AGENCIES.

INVESTMENT ADVICE: Would give the SEC the authority to raise standards for broker dealers who give investment advice after the agency studies the issue. Would permit, but not require, the SEC to hold broker dealers to a fiduciary duty similar to the standard to which investment advisers are held.

COULD EASILY END UP MEANING NOTHING.

CORPORATE GOVERNANCE: Would give shareholders of public corporations a non-binding vote on executive pay and "golden parachutes," and would give the SEC the authority to grant shareholders proxy access to nominate directors.

COULD EASILY END UP MEANING NOTHING.

HEDGE FUNDS: Would require hedge funds and private equity funds to register with the SEC as investment advisers and to provide information on trades to help regulators monitor systemic risk.

COULD EASILY END UP MEANING NOTHING.

INSURANCE: Would create a new Federal Insurance Office within the Treasury Department to monitor the insurance industry, recommending to the systemic risk council insurers that should be treated as systemically important. Would require the new office to report to Congress on ways to modernize insurance
regulation.

I AGREE WE SHOULD NOT TRUST STATE-LEVEL REGULATORS WITH FIRMS SUCH AS AIG, BUT LET'S HAVE MODEST EXPECTATIONS ABOUT WHAT THIS OFFICE WILL ACHIEVE.  IT PROBABLY WOULDN'T HAVE STOPPED THE AIG DEBACLE EITHER.

  -By Victoria McGrane, Dow Jones Newswires

THE BOTTOM LINE: THE GOOD PARTS OF THE BILL AREN'T NEARLY AS GOOD AS THEY SHOULD BE, AND THE BAD PARTS BECAME MUCH BETTER WITH TIME.  THE BIGGEST OMISSIONS ARE SIMPLE AND TOUGHER RESTRICTIONS ON LEVERAGE AND REFORM OF THE MORTGAGE AGENCIES.  OVERALL CONSIDER THIS A VICTORY FOR THE STATUS QUO AND YOU SHOULD REALIZE THAT THE UNDERLYING PROBLEMS HAVE NOT BEEN SOLVED.

The Road to Medicare, not The Road to Serfdom

by  Tyler Cowen in

Here is my latest NYT column, which they titled "The Pendulum Swings Back to Austerity."  Excerpt:

The unfolding of the financial crisis has also changed the public’s sense of where change is needed, both in the United States and Europe. The tragedies of 2008 were represented by Bear Stearns and Lehman Brothers – both private-sector institutions. In 2010, the financial crisis has spread to sovereign debt, with Greece as the most obvious example.

All of these developments are part of one broader story of overreach and complacency. Yet the 2008 crises were attached more directly to market institutions, while the 2010 crises are more closely linked to governments. Because politicians and voters are more influenced by the latest developments than by news from two or three years earlier, a cautious attitude toward public-sector spending has been further cemented.

And this:

Democracies, like markets, have some self-correcting mechanisms, and we are now seeing those at work in the United States and many European countries. (Spain and Britain, for example, are pursuing fiscal austerity aggressively.)

The lessons are straightforward. First, to paraphrase the French moralist La Rochefoucauld, things are never as good, or as bad, as they seem. Second, the Obama reforms, like the Reagan revolution, are turning out to be radically incomplete, which should come as no surprise.

Finally, effective political ideas are those that can still do good in half-baked form. We have neglected this insight in designing financial reform, and it remains to be seen if we can apply it successfully to climate change.

Overall, I believe we are headed toward slower growth and a larger public sector, but I do not believe we are headed down the road to serfdom.  At the same time, I am aiming at a different target.  Critics of incrementalism are usually too focused on the single issue at hand — where they are sure they know best — and not sufficiently aware of the efficiency properties of the broader system, which introduces self-correction mechanisms to counter or limit most major changes.

If I had to stress one sentence from the piece, it would be this one:

Finally, effective political ideas are those that can still do good in half-baked form.

Profile of David Mitchell

by  Tyler Cowen in

Here is one good bit of many:

“I can’t bear living in this huge beautiful world,” Mitchell said, gesturing to the rolling green hills and the glittering calm sea, “and not try to imitate it as best I can. That’s the desire and the drive. But it’s maybe closer to hunger or thirst. The only way I can quench it is to try to duplicate it on as huge a scale as I can possibly do. I want to capture that,” he said, turning in a circle on the sand and gesturing beyond the beach and the hills, “all the way around the world and all the way to your home and all the way around and back. I want to do all of that here and transmit it through ink.”