Economic links
How finding a Norwegian film about Nazi zombies awesome connects to hostility to free markets. More.
Paper surveying the evidence on minimum wages:
…the studies that focus on the least-skilled groups provide relatively overwhelming evidence of stronger disemployment effects for these groups.
Nice discussion of the real world impact of Smoot-Hawley during the Depression. Comparing current Fed policy to the 1930s.
Study finds that giving aid has a positive effect on happiness but receiving it does not. Thus is much explained. About trying to get recipient feedback on aid.
A TED talk about “patient capital”: the intersection between aid and enterprise. An earlier talk on the same subject.
About the resounding failure of econometrics to find robust determinants of economic growth:
It has taken economists a lot of hard work to attain this level of sublime ignorance. There were three steps in the the great History of Evolving Cluelessness …
The paper (pdf).
About why subsidising (health) insurance is a bad idea:
The problem is that health care costs have increased at an annual rate double, or more than double, the rate of inflation for the last two decades. Right now, our attempts at reform are doomed by a law of accounting physics: Insurance can’t cost less than the health care it insures. That means that subsidizing insurance likely makes the problem worse. ...
The French economist, Frederic Bastiat, diagnosed the problem long ago when he said, “The public option is the conceit that each of us should have free health care at the expense of all of us.” Okay, he didn’t say that, exactly, but it was the same idea.
About the economics of computing. It is worth stopping and thinking about how much computing power is at the service of anyone with internet access.
I remember, years ago, being told that one reason for the coup against Allende was that they were doing exciting stuff with cybernetics in running the Chilean economy (that was before I understood the economic calculation debate). Well, about that project …
Today, our perspective will perhaps be somewhat different when we realize that these behemoths were far less powerful than an iPhone. Run an economy with an iPhone? Sorry, there is no app for that.
Hayek’s classic 1945 essay The Use of Knowledge in Society has some relevance, as does von Mises 1920 monograph Economic Calculation in the Socialist Commonwealth.
Post with lots of links on the Dubai financial crisis.
The problem is not too many people but too many Malthusians:
What this potted history of population scaremongering ought to demonstrate is this: Malthusians are always wrong about everything.
The extent of their wrongness cannot be overstated. They have continually claimed that too many people will lead to increased hunger and destitution, yet the precise opposite has happened: world population has risen exponentially over the past 40 years and in the same period a great many people’s living standards and life expectancies have improved enormously. …
But more fundamentally it is because, while they present their views as fact-based and scientific, in reality they are driven by a deeply held misanthropy that continually overlooks mankind’s ability to overcome problems and create new worlds. …
The fact that the presentational arguments can change so fundamentally over time, while the core belief in ‘too many people’ remains the same, really shows that this is a prejudicial outlook in search of a social or scientific justification …
They make the schoolboy scientific error of imagining that population is the only variable, the only thing that grows and grows, while everything else - including society, progress and discovery - stays roughly the same. …
The second mistake Malthusians always make is to imagine that resources are fixed, finite things that will inevitably run out. They don’t recognise that what we consider to be a resource changes over time, depending on how advanced society is. …
And the third and main mistake Malthusians always make is to underestimate the genius of mankind.
Can anyone nominate a resource we ran out of (other than driving an unfarmed species to extinction)? The US is currently oversupplied with ethanol. About rescuing Malthus from the Malthusians.
John Cochrane on the lessons of the GFC (pdf):
Only one story makes any sense. After the Bear Stearns bailout, markets came to the conclusion that investment banks and bank holding companies were “too big to fail” and would be bailed out. When the government did not bail out Lehman, and in fact said it lacked the legal authority to bail out Lehman, everyone reassessed that expectation. Maybe the government won’t, or can’t bail out Citigroup? Now, it makes perfect sense to run like mad.
Buttressing this story, let’s ask how, by what mechanism, did the equity injections and debt guarantees in October eventually stop the panic? An increasingly common interpretation is that, by putting the government in the way, these steps signaled the government’s determination and legal ability to keep the large banks from failing. That too makes sense in a way that most other stories do not.
In sum, the government was stuck in an awful situation. Once everyone expects a bailout, it has to bail out or chaos results.
Obviously, in this view there is nothing inherently “systemic” about Lehman brothers or other large banks. What’s systemic is the expectation of a bailout. The policy question is simply how to escape this horrible moral‐hazard trap. …
It was a panic induced by the moral hazard that comes from 30 years of too big to fail, and the actions of Government officials. …
Thus the regulatory system ends up encouraging artificial obscurity and fragility. It’s often accused that “free deregulated markets failed.” No, the free, relatively deregulated equities market absorbed massive losses this time, as last time, with relatively little turmoil. It was the regulated, supervised part of the market that failed.
Nothing in this fragility is specific to mortgages or mortgage backed securities. If we tried to hold equity or corporate debt in highly leveraged entities funded by short term debt, we’d have the same problems. Actually, we did, back in the 1930s. …
First, a lot of policy seems aimed at stopping anyone from ever again losing money in the first place. …
This is hopeless. We can’t pin the stability of the financial system on the idea that nobody will ever lose money, without strangling the economy and financial innovation. It also requires a hopeless level of wisdom by our regulators. Keep in mind that they didn’t see it coming any more than the rest of us, and have a tendency tighten standards at the bottom and loosening them at the top too. They’re only human. …
Banks want to be as global, interconnected, “systemic”, opaque and chaotic in bankruptcy as possible, to make sure they get bailed out. They want to evade the next round of tighter regulation as much as the last round, and devices like the SPVs they used last time seem like child’s play in retrospect. Well, at least my MBAs will be employed gaming the new round of regulations. …
First of all, the central problem is how to escape the bailout expectations trap. To do this, we have to finally define what “systemic” means. And then, we must define clearly what is not systemic, and can really fail, we mean it this time.
This limit must be written, in law or regulation. We can’t rely on the good intentions of powerful administrators. Odysseus knew he had to tie himself to the mast. The only way to limit expectations of a bailout is to not have the legal authority to do it. …
To put this question at the discretion of any official, especially a political appointee, is practically to guarantee a bailout. In a crisis, everything looks systemic. …
This is not a small issue, and it’s important to get it right, now. This was not an isolated event. We are in an ever‐increasing cycle of risk‐taking and TBTF bailouts, going back decades. Now we know that bank holding companies and investment banks are too big to fail, and their activities are not going to be fundamentally restricted in size and scope. This crisis strained the fiscal limits of the United States to make good on bailout expectations. The next one will be bigger. Where will it come from? State and local government defaults? Defined benefit pension funds? Commercial real estate? A new “Asian bubble?” Default by Greece Italy and Ireland? Who knows? We do know this: when the government no longer has the fiscal resources to bail out its financial institutions, the crisis will be much, much worse. Iceland can happen in the US if we don’t get this right.
RBA Governor on capital markets, regulation issues and “too big to fail” (pdf):
In the meantime, enormous moral hazard, perhaps greater than ever before, exists in the global financial system as a result of the actions - albeit essential ones in the circumstances - of 2008.
Republican senators having fun with wasteful stimulus spending. I am sure the American taxpayer is happy to go into debt to finance puppet shows.
Paper surveying the evidence on minimum wages:
…the studies that focus on the least-skilled groups provide relatively overwhelming evidence of stronger disemployment effects for these groups.
Nice discussion of the real world impact of Smoot-Hawley during the Depression. Comparing current Fed policy to the 1930s.
Study finds that giving aid has a positive effect on happiness but receiving it does not. Thus is much explained. About trying to get recipient feedback on aid.
A TED talk about “patient capital”: the intersection between aid and enterprise. An earlier talk on the same subject.
About the resounding failure of econometrics to find robust determinants of economic growth:
It has taken economists a lot of hard work to attain this level of sublime ignorance. There were three steps in the the great History of Evolving Cluelessness …
The paper (pdf).
About why subsidising (health) insurance is a bad idea:
The problem is that health care costs have increased at an annual rate double, or more than double, the rate of inflation for the last two decades. Right now, our attempts at reform are doomed by a law of accounting physics: Insurance can’t cost less than the health care it insures. That means that subsidizing insurance likely makes the problem worse. ...
The French economist, Frederic Bastiat, diagnosed the problem long ago when he said, “The public option is the conceit that each of us should have free health care at the expense of all of us.” Okay, he didn’t say that, exactly, but it was the same idea.
About the economics of computing. It is worth stopping and thinking about how much computing power is at the service of anyone with internet access.
I remember, years ago, being told that one reason for the coup against Allende was that they were doing exciting stuff with cybernetics in running the Chilean economy (that was before I understood the economic calculation debate). Well, about that project …
Today, our perspective will perhaps be somewhat different when we realize that these behemoths were far less powerful than an iPhone. Run an economy with an iPhone? Sorry, there is no app for that.
Hayek’s classic 1945 essay The Use of Knowledge in Society has some relevance, as does von Mises 1920 monograph Economic Calculation in the Socialist Commonwealth.
Post with lots of links on the Dubai financial crisis.
The problem is not too many people but too many Malthusians:
What this potted history of population scaremongering ought to demonstrate is this: Malthusians are always wrong about everything.
The extent of their wrongness cannot be overstated. They have continually claimed that too many people will lead to increased hunger and destitution, yet the precise opposite has happened: world population has risen exponentially over the past 40 years and in the same period a great many people’s living standards and life expectancies have improved enormously. …
But more fundamentally it is because, while they present their views as fact-based and scientific, in reality they are driven by a deeply held misanthropy that continually overlooks mankind’s ability to overcome problems and create new worlds. …
The fact that the presentational arguments can change so fundamentally over time, while the core belief in ‘too many people’ remains the same, really shows that this is a prejudicial outlook in search of a social or scientific justification …
They make the schoolboy scientific error of imagining that population is the only variable, the only thing that grows and grows, while everything else - including society, progress and discovery - stays roughly the same. …
The second mistake Malthusians always make is to imagine that resources are fixed, finite things that will inevitably run out. They don’t recognise that what we consider to be a resource changes over time, depending on how advanced society is. …
And the third and main mistake Malthusians always make is to underestimate the genius of mankind.
Can anyone nominate a resource we ran out of (other than driving an unfarmed species to extinction)? The US is currently oversupplied with ethanol. About rescuing Malthus from the Malthusians.
John Cochrane on the lessons of the GFC (pdf):
Only one story makes any sense. After the Bear Stearns bailout, markets came to the conclusion that investment banks and bank holding companies were “too big to fail” and would be bailed out. When the government did not bail out Lehman, and in fact said it lacked the legal authority to bail out Lehman, everyone reassessed that expectation. Maybe the government won’t, or can’t bail out Citigroup? Now, it makes perfect sense to run like mad.
Buttressing this story, let’s ask how, by what mechanism, did the equity injections and debt guarantees in October eventually stop the panic? An increasingly common interpretation is that, by putting the government in the way, these steps signaled the government’s determination and legal ability to keep the large banks from failing. That too makes sense in a way that most other stories do not.
In sum, the government was stuck in an awful situation. Once everyone expects a bailout, it has to bail out or chaos results.
Obviously, in this view there is nothing inherently “systemic” about Lehman brothers or other large banks. What’s systemic is the expectation of a bailout. The policy question is simply how to escape this horrible moral‐hazard trap. …
It was a panic induced by the moral hazard that comes from 30 years of too big to fail, and the actions of Government officials. …
Thus the regulatory system ends up encouraging artificial obscurity and fragility. It’s often accused that “free deregulated markets failed.” No, the free, relatively deregulated equities market absorbed massive losses this time, as last time, with relatively little turmoil. It was the regulated, supervised part of the market that failed.
Nothing in this fragility is specific to mortgages or mortgage backed securities. If we tried to hold equity or corporate debt in highly leveraged entities funded by short term debt, we’d have the same problems. Actually, we did, back in the 1930s. …
First, a lot of policy seems aimed at stopping anyone from ever again losing money in the first place. …
This is hopeless. We can’t pin the stability of the financial system on the idea that nobody will ever lose money, without strangling the economy and financial innovation. It also requires a hopeless level of wisdom by our regulators. Keep in mind that they didn’t see it coming any more than the rest of us, and have a tendency tighten standards at the bottom and loosening them at the top too. They’re only human. …
Banks want to be as global, interconnected, “systemic”, opaque and chaotic in bankruptcy as possible, to make sure they get bailed out. They want to evade the next round of tighter regulation as much as the last round, and devices like the SPVs they used last time seem like child’s play in retrospect. Well, at least my MBAs will be employed gaming the new round of regulations. …
First of all, the central problem is how to escape the bailout expectations trap. To do this, we have to finally define what “systemic” means. And then, we must define clearly what is not systemic, and can really fail, we mean it this time.
This limit must be written, in law or regulation. We can’t rely on the good intentions of powerful administrators. Odysseus knew he had to tie himself to the mast. The only way to limit expectations of a bailout is to not have the legal authority to do it. …
To put this question at the discretion of any official, especially a political appointee, is practically to guarantee a bailout. In a crisis, everything looks systemic. …
This is not a small issue, and it’s important to get it right, now. This was not an isolated event. We are in an ever‐increasing cycle of risk‐taking and TBTF bailouts, going back decades. Now we know that bank holding companies and investment banks are too big to fail, and their activities are not going to be fundamentally restricted in size and scope. This crisis strained the fiscal limits of the United States to make good on bailout expectations. The next one will be bigger. Where will it come from? State and local government defaults? Defined benefit pension funds? Commercial real estate? A new “Asian bubble?” Default by Greece Italy and Ireland? Who knows? We do know this: when the government no longer has the fiscal resources to bail out its financial institutions, the crisis will be much, much worse. Iceland can happen in the US if we don’t get this right.
RBA Governor on capital markets, regulation issues and “too big to fail” (pdf):
In the meantime, enormous moral hazard, perhaps greater than ever before, exists in the global financial system as a result of the actions - albeit essential ones in the circumstances - of 2008.
Republican senators having fun with wasteful stimulus spending. I am sure the American taxpayer is happy to go into debt to finance puppet shows.