Monday, November 30, 2015

Fixed-income comments

A month ago,  I attended the SF Fed/Bank of Canada conference on fixed income. I had the chance to comment on Michael Bauer and Jim Hamilton's "Robust Bond Risk Premia.My comments here.

As usual when faced with a really nice paper, I used most of my discussion time to survey the field and give my views on current facts and challenges, which is why my comments might be interesting to blog readers.

Some highlights: I reran regressions of bond returns in the style of Joslin, Priebsch, and Singleton, forecasting returns with the first  three principal components of yields, and growth and inflation. Here are the results:

Saturday, November 28, 2015

A wise comment

Scott Sumner passes on a wise comment from his blog:
...the main problem in America is that the public, including its highly educated members, is social-scientifically ignorant. Most people I talk to about policy do not even realize that there is anything non-trivial about policy analysis. They want the government to make sure that four phases of rigorously designed RCTs be performed before drugs are made available to the public, for fear of unintended consequences of intervening on a complex system like the human body, yet they think they understand the consequences of highly complex interventions on human societies by introspection alone. Not only do they think they understand the consequences of alternative policy choices, but they're so confident that their understanding is right and that its truth is so obvious that the only explanation for disagreement is evil intentions.  
When I point out that on virtually every policy issue, at least somewhat compelling arguments for many conflicting points of view have been made by relevant experts, people usually react in disbelief or denial, or immediately retreat to questioning the motives of these experts ("of course they say that, they're on the payroll of Big Business" or whatever). These patterns of speech and behavior are uniformly distributed across the political spectrum, even if intelligence and knowledge of well-established facts is not. Even many experts in particular areas of social science evince no awareness of the lack of expert consensus on almost anything in their field, and give the impression of unanimity to an unknowing public.
(Emphasis in the original.) The rush to bulverism (evil intentions or corruption of people who disagree) is particularly noticeable in economic commentary.  Uncertainty about policy is especially strong in macroeconomics and finance.  That doesn't mean anything goes. Many arguments do violate basic budget constraints or suffer other obvious logical flaws.

How do you know economists have a sense of humor? We use decimal points.

Hounded out of business II

Nathaniel Popper at the New York Times Dealbook, writes "Dream of New Kind of Credit Union Is Extinguished by Bureaucracy" It's a worthy addition to the series of anecdotes on how regulation, especially discretionary actions of regulators, are killing investment and businesses.

Again, we collect anecdotes as a challenge to measurement. There is no data series on numbers of businesses driven away by regulation. Yet.

This is a good anecdote, as it illustrates a too little reported underbelly of financial regulation.
Mr. Kahle saw how hard it was for the employees at his firm to obtain loans, and more broadly, how the existing financial system had helped contribute to the financial crisis. He thought he could do things differently, and he aimed to prove it when he began applying to open a credit union in early 2011.

Since then, the credit union has faced a barrage of regulatory audits and limitations on its operations, ...Now, Mr. Kahle is giving up on his dream of creating a new kind of bank, ...

...the troubles faced by his Internet Archive Federal Credit Union point to how difficult it can be to try out anything new in the heavily regulated industry.

Wednesday, November 25, 2015

Spot insurance markets

Obamacare/ ACA was in the news last week. Some relevant summaries, and comment below.

United Health pulling out of the Obamacare exchange market
UnitedHealth reported one problem after another: An expensive risk pool that lacks the younger and healthier consumers who are supposed to buy overpriced plans to cross-subsidize everyone else....People join the exchanges before they incur large medical expenses—insurers are required under ObamaCare to cover anyone who applies—and then drop out after they receive care. The collapse of the ObamaCare co-ops is recoiling through the market.
... Commercial insurers are being displaced by Medicaid managed-care HMOs, with their ultra-narrow physician networks and closed drug formularies.
From the WSJ blog,
...Health plans say they have had more sick people, and fewer healthy people, sign up under the new rules than they need to keep prices stable. ...It’s also cited as a factor in some insurers’ decisions to withdraw products from the market or offer more limited choices of providers this year. Health Care Service Corp., which owns Blue Cross and Blue Shield plans in five states, already has pulled out in selling through in New Mexico, and yanked its preferred-provider organization offerings in Texas.
From Rising rates pose challenge to health law
Federal officials are pushing people to evaluate their options and consider switching plans to try to keep costs in check, in a message regularly summarized as “shop and save.”

In about half of the states using, people in popular plans can pay lower premiums in 2016 than they did in 2015—as long as they are willing to switch to a plan with a different insurer, usually with a narrower network of doctors and a higher deductible. 
A story:
Kimono England...said... Their health plan’s decision to withdraw its “preferred provider organization” product this year tipped her over the edge.

She said she now has only a narrow provider-network option that doesn’t include her local doctors,...she decided to enroll in a Christian health-care sharing ministry, in which members agree to pay each other’s health bills... since the ministry won’t pay for an expensive specialty shot her husband needs four times a year they are thinking of buying a health plan just to cover him.

The move by the England family would mean that five people with relatively low medical costs exit the insurance risk pool, and one person with large expenses remains—bad news for the insurance industry.
Also,  Mary Kissel interview of Holman Jenkins (video)


Let's beyond the standard headlines -- "Millions more covered!" "But they're all medicaid or high subsidy!" (For example here.) "Premiums going up!" "Not if you shop!" and so forth.

Health "insurance" seems to be moving to a spot market, in which large numbers of people change plans, sign up, or leave every year, and in which large numbers of companies change their plans and coverage every year.

The churn on the individual side and its spiraling costs was a predictable (and widely predicted) response to the ACA, which addressed preexisting conditions by mandating insurers to cover anyone at the same price. The joke around the passage of the ACA was that health insurance would consist of a cell phone, which you use to buy coverage on the way to the hospital.

Yes, open enrollment is only once a year, but it's not really a constraint. Most conditions involve years of care, and you can wait six months to ramp up big expenses. A binding non-insurance penalty close to the cost of insurance was never going to pass.

Moreover, the problem is not so much insurance vs. no insurance, it's the right to move around between plans. Buy a bronze high deductible policy one year. If you get sick, move to a gold low deductible big network policy the next year.

The tragedy here is what was lost. Yes, individual insurance had big problems. But before the ACA, there were millions of people who bought insurance when they were healthy; that paid guaranteed-renewable premiums in a large stable health insurance companies, so that when they got sick, they would still have good affordable health insurance. Sure, it didn't work for people who moved across state lines, who got jobs with employer-provided group plans, and many suffered various snafus. But for many self-employed people and small business owners outside the big company - big government nexus, it actually worked ok.

Those relationships are all gone now. If ever we do move back to long-lasting, individual insurance, that you buy when healthy so that it covers you when sick, the millions of people who did the right thing and bought in to the system are now gone.

It's more surprising, at least to me, that annual chaos is breaking out on both sides.  Plans are discontinued, companies leave the market, coops come and go bankrupt, networks change, and many of us have the pleasure of annually sorting through health insurance policies, trying to figure out which ones cover the doctors, hospitals, and medications we are using or might need next year, all likely to do it again in the next year.

Our "federal officials" are not only not bemoaning this chaos -- they're encouraging it! "Shop and save." Shop because your plan got canceled, they changed your network, they vastly raised your premiums, and so forth. Save because they won't pay your claims.

I guess Americans need something to do between Thanksgiving and New Years. Together with shopping for cell phone contracts, cable and internet bundles, and figuring out our frequent flyer programs, this should keep us all plenty busy. Winter in the Republic of Paperwork.

Will the supply churn continue? One view of this is simply that companies need time to adapt. They made optimistic assumptions about their pools, find they're losing money and have to adjust. In time, we will again see stable offerings by stable companies.

Maybe, but I doubt it. If people keep playing games, moving to high cost policies when they get sick, health insurance for those of us not getting subsidies will be astronomically expensive. It ceases being insurance.

A different view is that the supply churn is the industry's way of solving the problem. By changing networks and coverage each year, by canceling policies frequently, by companies forming, dissolving, entering and leaving markets,  they keep us on our toes. A stable wide network plan with reasonable cost will attract too many sick people. So, the answer is, keep it unstable.  The same kind of price discrimination by complexity that pervades airlines, cell phones, and credit card contracts, might pull in healthy people who don't have time to spend three weeks a year finding out what doctors are covered by what plan.

Related, I suspect the industry is finding a way to segment the market. There are really four separate health insurance systems: 1) Expanded Medicaid. 2) Highly subsidized premiums based on income. 3) Non-subsidized individual policies. 4) Employer provided insurance for high income people with full time jobs. The first three were supposed to be parts of the same market, but it's fragmenting, with medicaid and subsidized plans giving out low cost low quality care.

This is not a grand conspiracy theory. Like most outcomes in economics, it's not obvious any of the participants understand what's going on, and an evolutionary process settles on outcomes that "work" in the regulatory environment and don't lose catastrophic amounts of money.

Health insurance really does not work as a spot market, of course.

The answer? For those who haven't been reading this blog very long (collections here and here), it is straightforward: Lifelong, deregulated, guaranteed-renewable, individual insurance, bought when you're healthy, carried along from state to state and job to job, with employers contributing premiums rather than setting up group plans. Deregulation of supply, so that for most procedures you can just pay cash and not be rooked by made up prices.

Tuesday, November 24, 2015

Early Fisherism

John Taylor has an interesting blog post with a great title, "Staggering Neo-Fisherian Ideas and Staggered Contracts." John goes back to a paper he wrote in 1982 for the Jackson Hole conference, on the issue of that time, how to lower inflation. He presented simulations of a model with staggered wage setting, which I reproduce below.

So as far back as 1982, here is a model in which lower interest rates correspond with lower inflation, both in the short run and the long run.  John's model has money in it, so the mechanics are a pre-announced monetary contraction.

Sargent's famous "Ends of four big inflations"  tells an even more radical story.

Monday, November 23, 2015

Hounded out of business

The Wall Street Journal had a nice oped, "Hounded out of business by regulators" by Dan Epstein who was, well, hounded out of business by regulators. Excerpts:
Last Friday, the FTC’s chief administrative-law judge dismissed the agency’s complaint. But it was too late. The reputational damage and expense of a six-year federal investigation forced LabMD to close last year.

...the commission opened an investigation into LabMD in January 2010. ...the FTC refused to detail LabMD’s data-security deficiencies.... Eventually, the FTC demanded that LabMD sign an onerous consent order admitting wrongdoing and agreeing to 20 years of compliance reporting.

Unlike many other companies in similar situations, however, LabMD refused to cave and in 2012 went public with the ordeal. In what appeared to be retaliation, the FTC sued LabMD in 2013, alleging that the company engaged in “unreasonable” data-security practices that amounted to an “unfair” trade practice.... FTC officials publicly attacked LabMD and imposed arduous demands on the doctors who used the company’s diagnostic services. In just one example, the FTC subpoenaed a Florida oncology lab to produce documents and appear for depositions before government lawyers—all at the doctors’ expense.

Inflation Drumbeat

Noah Smith has an interesting Bloomberg View piece on Japanese inflation. Three crucial paragraph struck me
... Japanese unemployment is very low, and the economy is expanding at or above its long-term potential growth rate of around 0.5 percent to 1 percent. So according to mainstream theory, inflation would be an unnecessary and pointless negative for Japan’s economy. Why, then, are there always voices calling for Japan to raise its inflation rate?
Actually, there are several reasons. The main one is that inflation reduces the burden of debt. Japan’s enormous government debt represents the government’s promise to transfer resources from young people (who work and pay taxes) to old people (who own government bonds). Since Japan is an aging society, there are more old people than young people. That makes the burden especially difficult to bear. Young people also tend to have mortgages, the repayment of which is another burden.
Sustained higher inflation would represent a net transfer of resources from the old to the young. That would increase optimism, and hopefully raise the fertility rate, helping with demographic stabilization. It would also decrease the risk that the Japanese government will eventually have to take extreme measures to stabilize the debt.
I like these paragraphs because they so neatly distill the language used by the standard policy establishment to advocate inflation. Noah clearly separates the usual "stimulus" arguments from the new "debt" argument, which helps greatly.

Debt is a "burden." Sort of like snow on your roof, debt appears from the sky somehow and then represents a "burden" requiring "lifting," which would be beneficial to all.

Debt "represents the government’s promise to transfer resources from young people ... to old people.." Apparently, the government woke up one morning, and said "we promise to grab about two and a half years worth of income from young people and give it to old people." Undoing such an ill-advised promise does indeed sound worthy.

But, lest these soothing words lull you into idiocy, let us remember where debt actually comes from. The Japanese government borrowed a lot of money from people who are now old, when they were young. Those people consumed less -- they lived in small houses, made do with fewer and smaller cars, ate simply, lived frugally -- to give the government this money. The promise they received was that their money would be returned, with interest, to fund their retirements, and to fund their estates which young people will inherit.

Noah is advocating nothing more or less than a massive government default on this promise, engineered by inflation. The words "default,"  "theft," "seizure of life savings," apply as well as the anodyne "transfer." I guess Stalin just "transferred resources."

Wednesday, November 18, 2015

Open Letter on Economic Data

I joined a large number of economists signing an open letter supporting funding for economic data. The letter is here, twitter #SaveTheData, Financial Times story here, press release here.

Few public goods are as cheap or important as good economic data.  Much of our national policy discussion is based on government-collected data. Changes in inequality, wage growth or stagnation, employment and unemployment, growth, inflation... none of these are readily visible walking down the street.

Free, openly accessible, well-documented data, allowing comparisons over long periods of time, such as provided by the Bureau of Labor Statistics, is especially valuable.

Already, much of the data we get is based on decades-old measurement concepts. Perhaps someday internet big data will bring us alternatives. But that day is a long way away. Let's not fly blind in the meantime.

Thursday, November 12, 2015


St. Louis Fed President Jim Bullard gave a very interesting paper at the Cato monetary conference, with this great title.

Jim starts with this great picture. It's a simulation of the standard three equation new Keynesian model as we go from 2% interest rate to zero. This is an upside down version of the first graph in my "Do higher interest rates raise or lower inflation." (Blog post) But Jim makes a new and insightful point with it, that had not occurred to me.

Jim reads this as an account of what happened in 2008, not (my) tentative prediction for what might happen in 2016 in the other direction. It's compelling: The Fed lowers rates. This boosts output (black line) over what it would otherwise be, overcoming the horrendous negative shocks to the economy from a financial crisis. Inflation gently declines, which is also what inflation did after a one time shock in 2009, related to the output shock which the Fed was offsetting.

Tuesday, November 10, 2015

Taylor Truman Medal Speech

John Taylor's speech  on receiving the Truman medal for economic policy is noteworthy. John thinks about the institutions that govern monetary and financial policy. We spend too much time on the will-she-raise-rates-or-won't-she sort of decisions that we forget how important this institutional structure is to good, predictable and (as John might put it) rule-based policy.

John reflects on the institutions of postwar policy:
Seventy years ago Harry Truman signed the Bretton Woods Agreements Act of 1945. It officially created two new economic institutions: the International Monetary Fund and the World Bank. A year later he signed the Employment Act of 1946. It created two more new institutions: the President’s Council of Economic Advisers (CEA) and the Congress’s Joint Economic Committee (JEC). And in 1947 came the General Agreement on Tariffs and Trade (GATT) and the Truman Doctrine, and in 1948 the Marshall Plan.

Sunday, November 8, 2015

The 13 Trillion Dollar Question

On Tuesday Nov 10 there will be a conference in Chicago on "The $13 Trillion Question: Managing the U.S. Government’s Debt" hosted by the Initiative on Global Markets at Chicago Booth, and the Hutchins Center on Fiscal and Monetary Policy at Brookings. (The Brookings announcement here.)

Robin Greenwood will present "The Optimal Maturity of Government Debt and Debt Management Conflicts between the U.S. Treasury and the Federal Reserve" arguing that the Fed and Treasury are working to cross-purposes -- the Fed buys what the Treasury sells -- and that the government  should go after low rates on long term bonds rather than the budget insurance of issuing long term bonds.

(The government faces the same decision a homeowner does: borrow at near-zero floating rates,  but maybe rates shoot up and so do your payments, or borrow long at 2% rates, and pay more if rates don't go up. Robin and Larry favor the former. I'm more risk averse. Maybe living in California has sensitized me  that just because you haven't seen an earthquake recently doesn't mean you shouldn't buy earthquake insurance. But it's a good argument to have qualitatively -- what's the risk, and what's the reward.)

I will present "A new structure for Federal Debt," arguing for an overhaul of which instruments the Treasury issues, to make them more useful for financial markets and financial stability as well as for government borrowing and risk management. (Earlier blog post about this paper here.)

There will be extensive discussion and broader issues, and (the big draw) a panel of Seth  Carpenter, Charles Evans, and Sara Sprung, moderated by David Wessel.

The conference is by invitation, but you can still sign up here until they run out of room, or email Jennifer (dot) Williams at chicagobooth (dot) edu. It will also be viewable by live webcast, link here, starting 1:30 central.

Update: Video of the event here.

Inequality and Economic Policy Published

The Hoover Press put up for free the chapters of Inequality and Economic Policy: Essays In Memory of Gary Becker, edited by Tom Church, John Taylor, and Christopher Miller. You can of course still buy the book for a reasonable $14.95.

This includes the published version of my essay Why and How We Care about Inequality, also available on my webpage.  Bryan Caplan was kind enough to cover it positively last week, now you can read the original. I put a draft up on this blog last year, so I won't repeat it all today. As usual, the published version is better.

The rest of the contents:

Chapter 1: Background Facts By James Piereson

Chapter 2: The Broad-Based Rise in the Return to Top Talent By Joshua D. Rauh

Chapter 3: The Economic Determinants of Top Income Inequality By Charles I. Jones

Chapter 4: Intergenerational Mobility and Income Inequality By Jörg L. Spenkuch

Chapter 5: The Effects of Redistribution Policies on Growth and Employment By Casey B. Mulligan

Chapter 6: Income and Wealth in America By Kevin M. Murphy and Emmanuel Saez

Chapter 7: Conclusions and Solutions By John H. Cochrane, Lee E. Ohanian, and George P. Shultz

Chapter 8: Contents by Edward P. Lazear adn George P. Shultz

Wednesday, October 28, 2015

Davis on Regulation and More

Steve Davis has a thoughtful speech on regulation, policy uncertainty, and above all the need for simplicity.  (On the policy uncertainty website).  A few excerpts:
... the Code of Federal Regulations (CFR), which compiles all federal regulations in effect each year...grew nearly eight-fold over the past 55 years, reflecting tremendous growth in the scale and complexity of federal regulations. At 175,000 pages, the CFR contains as many words as 130 copies of the King James Bible.  While Ten Commandments sufficed for the Hebrew God of the Old Testament, the CFR contains about one million commandments in the form of “shall,” “must,” “may not,” “prohibited,” and “required.”...
The size and complexity of the U.S. tax code also grew dramatically in recent decades. As of 2011, it takes 70,000 pages of instructions to explain the federal tax code (McCaherty, 2014). The code has about four million words and 67,000 sections, subsections and cross-references. It’s all crystal clear if you read the instructions carefully. ...
And the best paragraph:
The good Catholic Sisters who saw to my moral instruction in primary school devoted many hours to the Ten Commandments. They wanted my classmates and me to avoid sins. Their success in that regard is in doubt. But at least the Sisters could be confident that we did not sin out of ignorance or uncertainty. How they would have instructed us on one million commandments, I do not know. The delinquents in my school found it hard to absorb a mere ten....

Monday, October 26, 2015

Economic Growth

An essay. It's an overview of what a growth-oriented policy program might look like. Regulation, finance, health, energy and environment, taxes, debt social security and medicare, social programs, labor law, immigration, education, and more. There is a more permanent version here and pdf version here. This version shows on blogger, but if your reader mangles it, the version on my blog or one of the above will work better.

I wrote it the Focusing the presidential debates initiative. The freedom of authors in that initiative to disagree is clear.

Economic Growth

Growth is central

Sclerotic growth is the overriding economic issue of our time. From 1950 to 2000 the US economy grew at an average rate of 3.5% per year. Since 2000, it has grown at half that rate, 1.7%. From the bottom of the great recession in 2009, usually a time of super-fast catch-up growth, it has only grown at two percent per year.2 Two percent, or less, is starting to look like the new normal.

Small percentages hide a large reality. The average American is more than three times better off than his or her counterpart in 1950. Real GDP per person has risen from $16,000 in 1952 to over $50,000 today, both measured in 2009 dollars. Many pundits seem to remember the 1950s fondly, but $16,000 per person is a lot less than $50,000!

If the US economy had grown at 2% rather than 3.5% since 1950, income per person by 2000 would have been $23,000 not $50,000. That’s a huge difference. Nowhere in economic policy are we even talking about events that will double, or halve, the average American’s living standards in the next generation.

Even these large numbers understate reality.

Thursday, October 22, 2015

Open-Mouth Operations

(Note: This post uses mathjax and has embedded pictures. When posts are reposted elsewhere these often get mangled. If it's not displaying well, come to the original at

Our central banks have done nothing but talk for several years now. Interest rates are stuck at zero, and even QE has stopped in its tracks. Yet, people still ascribe big powers to these statements. Ms. Yellen sneezes, someone thinks they hear "December" and markets move.

Buried deep in the paper I posted earlier this week is a potential model of "open mouth" operations, that might of interest to blog readers.

Use the standard "new-Keynesian" model \[ x_{t} = E_{t}x_{t+1}-\sigma(i_{t}-E_{t}\pi_{t+1}) \] \[ \pi_{t} = \beta E_{t}\pi_{t+1}+\kappa x_{t} \] Add a Taylor rule, and suppose the Fed follows an inflation-target shock with no interest rate change \[ i_t = i^\ast_t + \phi_\pi ( \pi_t - \pi^\ast_t). \] \[ i^\ast_t = 0 \] \[ \pi^\ast_t = \delta_0 \lambda_1^{-t} \] Equivalently express the Taylor rule with a ``Wicksellian'' shock, \[ i_t = \hat{i}_t + \phi_\pi \pi_t \] \[ \hat{i}_t = - \delta_0 \phi_\pi \lambda_1^{-t}. \] In both cases, \[ \lambda_{1} =\frac{\left( 1+\beta+\kappa\sigma\right) +\sqrt{\left( 1+\beta+\kappa\sigma\right) ^{2}-4\beta}}{2} \gt 1 \] Yes, this is a special case. The persistence of the shocks is just equal to one of the roots of the model. Here \(\delta_0\) is just a parameter describing how big the monetary policy shock is.

Now, solve the model by any standard method for the unique locally bounded solution. The answer is \[ \pi_{t} = \delta_0 \lambda_1^{-t}, \] \[ \kappa x_{t} = \delta_0 (1-\beta \lambda_1^{-1}) \lambda_1^{-t} \] \[ i_t = 0 \]

Here is the equilibrium path of inflation and interest rates (flat red line at zero).

Tuesday, October 20, 2015

Swiss Deflation

The Wall Street Journal Monday Oct 19 offers a reflection on deflation in Switzerland.

"It’s as close to an economic consensus as you can get: Deflation is bad for an economy, and central bankers should avoid it at all costs."

I differ, as does Milton Friedman's "Optimum quantity of money." And my "who's afraid of a little deflation" in... The Wall Street Journal.

"Then there’s Switzerland, whose steady growth and rock-bottom unemployment is chipping away at that wisdom."

"At a time of lively global debate about low inflation and its ill effects, tiny Switzerland—with an economy 4% the size of the U.S.—offers a fascinating counterpoint, with some even pointing to what they call 'good deflation.' ”

Indeed. The 1970s had stagflation. Now we have the opposite, "good deflation."  The Phillips curve lives on in "consensus."

Switzerland also is a good case for just how powerless central banks are to do much about it.

Monday, October 19, 2015

Do higher interest rates raise or lower inflation?

A new working paper by that title (pdf).  Some of the main ideas are in a longish post from last August.

The fact that inflation is so stable when interest rates are stuck at zero has profound implications. If inflation is stable at a zero peg, it must be stable at a higher peg as well, which means raising interest rates must sooner or later raise inflation. The open question, which this paper goes after, is whether inflation can temporarily decline when interest rates rise. (Graphs from an earlier blog post here.)

Classical "Keynesian" or "Monetarist" models say that inflation is unstable in a peg. They must be wrong. "New-Keynesian" models say that inflation is stable in a peg, a good point in their favor. The important difference is rational expectations. If people drive a car looking in the rear view mirror, cars are unstable and veer off the road. If people look forward, then cars are stable and get back on the road on their own.

But the standard new-Keynesian model also predicts that inflation goes up if interest rates rise, as shown in the graph.  Interest rates are blue, inflation is red, output is black. The dashed line is when people know the rise is coming, the solid line for when it's a surprise.  Raising rates does lower output, just as you thought.

The paper tries everything to revive the idea that higher interest rates lower inflation, without luck.

The standard new-Keynesian model accounts well for the fact that inflation has been stable at a zero interest rate peg. However, If the Fed raises nominal interest rates, the same model model predicts that inflation will smoothly rise, both in the short run and long run. This paper presents a series of failed attempts to escape this prediction. Sticky prices, money, backward-looking Phillips curves, alternative equilibrium selection rules, and active Taylor rules do not convincingly overturn the result. The evidence for lower inflation is weak. Perhaps both theory and data are trying to tell us that, when conditions including adequate fiscal-monetary coordination operate, pegs can be stable and inflation responds positively to nominal interest rate increases.

Tuesday, October 13, 2015

Open Borders

Alex Tabarrok has a very nice and very short piece at the Atlantic, The Case for Getting Rid of Borders—Completely. (HT Marginal Revolution)

In the Soviet era, there were walls and guards with guns, and we deplored that people were not allowed to cross the border. Is it that different that the guards with guns are on the other side of the walls?

If you're a liberal, you should cheer the policy with the greatest chance of elevating the world's poor and reducing global inequality. If you're a conservative, believe in the rights of individuals and freedom, don't like minimum wages, unions, protectionism, and government control, it makes little sense to switch sides on this one issue.

Tuesday, October 6, 2015

Lazear on Dodd-Frank and Capital

Ed Lazear has a nice WSJ oped, "How not to prevent the next financial meltdown." (Also available here via Hoover.) The main points will not be new to readers of this blog, or my much longer essay but the piece is admirable for putting the basic points so clearly and concisely.

The core problem of focusing on institutions not activities:
The theory behind so-called systemically important financial institutions, or SIFIs, is fundamentally flawed. Financial crises are pathologies of an entire system, not of a few key firms. Reducing the likelihood of another panic requires treating the system as a whole, which will provide greater safety than having the government micromanage a number of private companies.
A crisis is a run:
The risks to a system are most pronounced when financial institutions borrow heavily to finance investments. If the value of the assets falls or becomes highly uncertain, creditors—who include depositors—will rush to pull out their money. The institution fails when it is unable to find a new source of funds to meet these obligations.

Thursday, October 1, 2015

Uncle Sam Spam

I talked a bit to Binyamin Applebaum about his article in the New York Times, Behaviorists Show the U.S. How to Improve Government Operations. As preparation, I read the Social and Behavioral sciences team annual report which he was covering.

Applebaum's article reflects much of the usual New York Times cheerleading for behaviorism and nudge/nanny programs.

Reading the report, I came away more approving of some aspects than blog readers might think, but a little more skeptical of some aspects than Applebaum's article.

  • The bottom line is spam. The government wants to send you letters, email, and text messages to sell its programs.  The limits and objections to the program are pretty obvious once you recognize that fact. Spam gets ineffective pretty quickly, and once we start getting spam from 150 different programs nudging us to do different things, spam will get even more ineffective even more quickly. 
  • If it's a good idea for the government to send us spam email and text messages, why are academic behavioral scientists the ones to do it, not professional spammers (sorry, "direct marketers")? The actual end result of this is more employment and consulting contracts for academic behavioral economics. 
  • The numbers in the report are surprisingly small. Sending spam raises the number of people taking advantage of some program from 2% to 2.2%, which can be sold as a 10 percent increase.  Even I, somewhat of a skeptic to start, am amazed how low the effects are. And both before and after numbers are incredibly small. The big news in this report is that we're full of government programs that only a few percent of the available people are taking advantage of! That might be great news for the budget, but shocking news of effectiveness.