## Monday, June 30, 2014

### Slok on Greek Wages

 Source: Torsten Slok
Torsten Slok, prodigious producer of graphs, sends this one along.

A section of macroeconomics holds that nominal wages are sticky, pretty much forever. Hence, countries like Greece need their own currencies so they can depreciate them. Somehow this didn't produce great prosperity the first, oh, 147 times Greece tried it, but anyway, it's common to bemoan how terrible it is for Greece to be part of the euro because wages can't fall and it can't depreciate.

Or not, as the graph shows.

## Friday, June 27, 2014

### Immigration and wages

Following up on my last immigration post, a thought occurred to me.

The most common objection is the claim that letting immigrants in will hurt American wages. Before, I've addressed this on its merits: If labor doesn't move, capital will. Your doctor's lower wages are your lower health costs. Immigrants come for wide open jobs, and to start new businesses. And so on.

What occurs to me this morning is the inconsistency that conservatives make this argument.

Suppose it were true. Would that mean the government should keep out migrants to keep American wages up?

Well, do you believe that the Federal government should mandate a large minimum wage, to raise American’s wages? Do you believe that the Federal Government should ban imports and subsidize exports, to raise American’s wages? Do you believe that the Federal Government should give more power to unions, to raise American’s wages? Do you believe that the Federal Government should pass even more stringent rules in its own contracts to pay higher wages? Do you believe that the government should pass more licensing restrictions, to lessen competition and raise American's wages? Should Illinois restrict people Indianans working in Illinois, to keep up Illinoisans' wages?

These are all the same sorts of steps. At least people who believe all these wrong things believe them together. It makes no sense whatsoever to oppose, correctly, all of these counterproductive economic interventions, but to support exactly the same intervention aimed at immigrants.

As usual in the immigration debate, incoherence is a sign that the real arguments are not the ones people are talking about.  On both sides.

## Wednesday, June 25, 2014

### The optimal number of immigrants

Hoover's Peregrine asked me to write an essay with the title, "What is the optimal number of immigrants to the U.S?"  (Original version and prettier formatting here. Also a related podcast here.)

Two billion, two million, fifty-two thousand and thirty-five (2,002,052,035). Seriously.

The United States is made up of three and a half million square miles, with 84 people per square mile. The United Kingdom has 650 people per square mile. If we let in two billion people, we’ll have no more population density than the UK.

Why the UK? Well, it seems really pretty country and none too crowded on “Masterpiece Theater.” The Netherlands is also attractive with 1,250 people per square mile, so maybe four billion. Okay, maybe more of the US is uninhabitable desert or tundra, so maybe only one billion. However you cut it, the US still looks severely underpopulated relative to many other pleasant advanced countries.

As you can see by my playful calculation, the title of this essay asks the wrong question.

## Tuesday, June 24, 2014

### Summers on Stagnation

Larry Summers has published a very interesting speech, U.S. Economic Prospects: Secular Stagnation, Hysteresis, and the Zero Lower Bound. I heard a version of the same thoughts last October, at the joint Brookings-Hoover conference "The U.S. Financial System—Five Years After the Crisis."

I was struck then, as I am now, at how much consensus there is among macroeconomists. Yes, you heard it here. And Larry expresses it elegantly, as you might expect. While the press talks about recovery, macroeconomists look at output growth and employment and it still looks pretty dismal.

### Revolving Door

 Source: Lucca, Seru and Trebbi
David Lucca, Amit Seru and Francesco Trebbi have an interesting working paper, "The Revolving Door and Worker Flows in Banking Regulation." (NBER working paper here, ungated ssrn link here.

They construct
"a unique dataset of career paths of more than 35,000 former and current regulators across all regulators of commercial banks and thrifts -- the Federal Reserve Banks (Fed), the Federal Depository Insurance Corporation (FDIC), the Office of Comptroller and Currency (OCC), the Office of Thrift Supervision (OTS), and state banking regulators -- that have posted their curricula vitae (CVs) on a major professional networking website."
I found Figure 4, above, pretty interesting. 10% of people in this sample move from regulator to industry or back again each year. And this flow has doubled since the financial crisis and regulatory expansion.

## Monday, June 23, 2014

### Shakman Decree

A piece of local news in Chicago is worthy of wider attention. As reported on the front page of the Chicago Tribune June 16, A federal judge lifted the 42 year-old "Shakman decree" covering city hiring.

Back in the day, city employees from garbage collectors on up were hired and promoted for political work. Literally, garbage collectors had to bring in campaign cash or get fired.  Mike Shakman and a group of other lawyers sued the city in 1969, and doggedly stayed after the city in scandal after scandal since.

Why do you care? An enduring puzzle to me, as a macroeconomist, and hence not particularly expert on political questions, is how do governments ever become clean and competent, or stay that way? We economists tend to throw up our hands, say "public choice" or "rent-seeking" and then assume regulators will always be captured and governments always corrupt. But that's empirically not true. Some governments and government institutions are remarkably honest and efficient, at least by libertarian economists' cynical expectations. How do they do it? What's the machinery? How do you fight corruption? This is one concrete example worth studying of just such machinery.

### FERC Follies

The Monday lead editorial in the Wall Street Journal on a FERC (Federal Energy Regulatory Commission) story is revealing on the increasingly politicized nature of the American Regulatory State. Pulling the FERC story out of the editorial's larger point,
For 10 years Mr. Van Scotter has run a paper mill in the northern Maine town of Lincoln, population 3,000. [FERC Director] Mr. Bay accuses Lincoln Paper and Tissue of having manipulated in 2007-08 a federal program meant to promote energy conservation.... Lincoln Paper may be liable for a $5 million civil penalty and$379,016.03 in disgorgement, plus interest.

... Yet Lincoln Paper broke no known law....
Lincoln Paper chose to participate in "demand response" on the New England electric grid, where large power users were paid for the electricity they didn't use...Lincoln Paper had an aging steam-powered generator on site that supplied a minority of the mill's energy needs and took the remainder from the regular grid. Mr. Bay claims that Mr. Van Scotter intentionally ran this generator less than he normally would when the baseline was being created. Then he ramped the generator back up to make it seem as if he was drawing less energy off the meter and thus stealing the demand payments. ...

But...FERC never defined "baseline" and made no rules about the right way to set one or how equipment should be operated during the measurement period.

## Sunday, June 22, 2014

### Are we saving too much for retirement?

Another graphic novel in the Booth Capital Ideas magazine. This is just page one, click on the link to see all four pages. It's an interesting conversation between an economist (Matt), who thinks about intertemporal choice, and a psychologist (Dan), who thinks about how you imagine your future self. It really works best as a four page spread so you can follow all the arrows as they jump around.

## Saturday, June 7, 2014

### Geithner Review

I found quite interesting Matt Stoller's review of Treasury Secretary Tim Geithner's book at vice.com.  Matt read between the lines of the personal part of the book, and the glimpse it offers into the lives and career paths of well-connected people in our Eastern finance-government-academia establishment. There still is such a thing.

I haven't read the book, as I find Geithner's all-bailout, all-the-time view of finance rather simplistic. And I don't endorse all the review's contrary economic ideas either. The review is also bit personal, a tone I don't endorse. Cronyism is a disease of a government and polity which elects it, not supposed moral failings of specific individuals. We will not build a better government by hoping that good-looking well-mannered Dartmouth grads will voluntarily turn down opportunities for power, priviledege and wealth that land in their laps through family and school connections.

## Thursday, June 5, 2014

### The Economist on Narrow Banks

The Economists Free Exchange blog covers narrow banks, and parts of my "run free" paper in a post somewhat mean-spiritedly -- or perhaps unintentionally self-descriptively --  titled "Narrow Minded." I always appreciate publicity, but a few parts seem wrong enough to address.

After nicely covering the history of the idea, the Economist writes,
such a plan raises huge practical questions. The first is implementation: how to get from today’s system of highly indebted banks to one in which they are financed chiefly by equity.
That's not hard. We're slowly raising capital requirements, and all we have to do is to keep raising them. My Pigouvian tax on debt would help a lot -- I think banks screaming how hard it is to issue equity or how terrible not to pay dividends for a while would suddenly find it much easier if paying 5 cents for each dollar of debt issued. Announcing that institutions above 50% equity and with less than 20% short-term debt are exempt from Basel and Dodd-Frank asset regulation might cause a rush for the exits.
Politically, there would be formidable opposition from vested interests.
And this is, somehow, an argument against the plan rather than for it? There is formidable opposition from vested interests against abolishing agricultural subsidies, trade protection, occupational licensing, and taxicab monopolies. Dear Economist, when did feeding the cronies become an argument for keeping bad policy in place, not a main indicator of needed change?

### Hall on Supply vs. Demand

I'm reading Bob Hall's Macro Annual paper (ungated here). The burning question is, how much of our low GDP relative to the pre-2007 trend and forecasts corresponds to "supply" (really "equilibrium") which monetary and fiscal "stimulus" can't help, and how much is "demand" that they might. (I live in a more model-based and equilibrium tradition, so I don't want to fully endorse these words and the concepts behind them, but they'll have to do for now.) Bob's paper is a really nice quantitative exercise aimed at answering the question, rather than just bloviating as us bloggers tend to do.

 Before politicians were telegenic. Source: Wall Street Journal
I enjoyed very much last weekend's WSJ Oped, "In Search of Gladstonian Republicans" by By John Micklethwait and Adrian Wooldrige. Some highlights and then comments.
"Imagine that the world's superpower reduces the size of government by a quarter over the next 30 years, even as its population grows by 50%. Imagine further that the superpower performs this miracle while dramatically increasing both the quality of public services and the nation's diplomatic clout. And imagine that the Republican Party leads this great revolution while uniting its manifold factions behind one of its favorite words: liberty.
Impossible? That is exactly what Britain, then the world's superpower and pioneer of the new economy, did in the 19th century. Gross revenue from taxation fell from just under £80 million in 1816 to well under £60 million in 1846, even as the population surged and the government helped build schools, hospitals, sewers and the world's first police force. The Victorians paid for these useful new services by getting rid of what they called "Old Corruption" (and we would call cronyism) and by exploiting the new technology of the day, like the railway. For these liberal reformers were the allies of the new commercial classes who were creating the industries that were transforming the world ...
Gladstonian liberalism provides a remarkable template....

## Wednesday, June 4, 2014

### Sugar Mountain

Last Saturday I got to go to the biannual meeting of the Macro-Finance Society. This is a great new effort spearheaded by outstanding young macro-finance researchers.

(The society is limited to people with PhDs after 1990, occasioning the title of this post, a reference to a song about a bar limited to people under 21, a reference you will not get unless your PhD was granted well before 1990.)

I can't blog all the great papers and discussions, so I'll pick one of particular interest, Itamar Drechsler, Alexi Savov, and Philipp Schnabl's "Model of Monetary Policy and Risk Premia"

This paper addresses a very important issue. The policy and commentary community keeps saying that the Federal Reserve has a big effect on risk premiums by its control of short-term rates. Low interest rates are said to spark a "reach for yield," and encourage investors, and too big to fail banks especially, to take on unwise risks. This story has become a central argument for hawkishness at the moment. The causal channel is just stated as fact. But one should not accept an argument just because one likes the policy result.

Nice story. Except there is about zero economic logic to it. The level of nominal interest rates and the risk premium are two totally different phenomena. Borrowing at 5% and making a risky investment at 8%, or borrowing at 1% and making a risky investment at 4% is exactly the same risk-reward tradeoff.

### Taylor rules

Last week I attended a conference at Hoover, "Frameworks for Central Banking in the Next Century." It was very interesting for its mix of academics, Fed people, and media. The Wall Street Journal had an interesting article Monday morning, "BOE's Carney may need to play a fourth card" on BOE governor Mark Carney's struggles with rules. I am left with more questions than answers, which is good.

Rules

What do we really  mean by "rules?" The clearest version would be mechanical, the Federal Funds rate shall be $i_t = 2\% + 1.5 \times (\pi_t - 2\%) + 0.5 \times (y_t-y^*_t )$ say, with $$i$$ = interest rate, $$\pi$$ = inflation $$y - y^*$$ = output gap. The numbers come in,  the Fed mechanically borrows and lends at that rate. This is something like an idealized gold standard.

That is not what anybody has in mind, obviously.  So what do we really mean by "rules?"