Monday, May 22, 2017

YIMBY papers

Two new papers on housing restrictions are noteworthy, Housing Constraints and Spatial Misallocation by Chang-Tai Hsieh and Enrico Moretti, and  The Economic Implications of Housing Supply by Ed Glaeser and Joe Gyourko.

Readers of this blog will not be surprised at the idea that zoning and other restrictions drive up the cost of housing, and that this has many bad consequences on economic growth and inequality. The papers are especially noteworthy for much deeper implications.

Hsieh and Moretti:
...high productivity cities like New York and the San Francisco Bay Area have adopted stringent re- strictions to new housing supply, effectively limiting the number of workers who have access to such high productivity. Using a spatial equilibrium model and data from 220 metropolitan areas we find that these constraints lowered aggregate US growth by more than 50% from 1964 to 2009.
1) The costs of regulation. The biggest problem in economics right now (yes, I mean that) is, How do we measure the growth consequences of regulation? Looking at the Western world's sclerotically slow growth rate, and listening to many anecdotes, it seems at least plausible that productive innovation is being strangled by byzantine bureacracy, captured by rent-seeking and anti-competitive forces. (Your other choices are, we just ran out of ideas, or some sort of endless "lack of demand.")

But how do we move past anecdote? How to we come up with "regulation is costing the economy x percentage points of growth?" Our statistical measurement system, GDP, unemployment, inflation, and so on, was beautifully designed in the 1940s to measure very Keynesian demand concepts. It isn't designed to answer the question of our time, how much growth is regulation costing us? We are flying in the dark. And Europe, perpetually in an Augustinian moment -- Lord,  grant me structural reform, just not yet--is also.

Well, Hsieh and Moretti are doing it, and by doing so showing one path to answering the larger question.

Half of all US growth for a half century is an astounding amount. 1964: $3,734 trillion;   2009: $14,419 Trillion. Growth = 3.05% per year. At 6.1% per year, $3734 x (1.061)^(2009-1964)=$53.6 trillion dollars!

OK, maybe that's too huge. Well, read the paper and see how they came up with the number. If you don't like their assumptions make different ones. More important than this number is how they are coming up with answers to this, the most important question of economics.

2) Models and micro vs. macro

So how do they make the calculation? Roughly, they measure productivity in cities. They assume that people get higher wages in San Francisco because there are some very high productivity activities that have to be done here. They assume that business could expand and form here, and workers could move here and join in those high productivity activities, both earning higher wages and making more and better stuff for the rest of us. But those workers can't move, and businesses can't expand and form, because housing supply is restricted.

You can see grounds for objection.

Thursday, May 18, 2017

Wild health care proposal

I found a lovely post on health care full of wild ideas at You may not agree with all the proposals -- wild even by my standards.  But it is full of interesting detail on what's wrong with the microeconomics of health care delivery, as opposed to the usual focus on health insurance, and who pays, ignoring the vast dysfunction of the underlying market. 

A few choice quotes to whet your appetite
All providers must post, in their offices and on a public web site without any requirement to sign in or otherwise identify oneself to access it, a full and complete price list which shall apply to every person....  
All customers must be billed for actual charges at the same price on a direct basis at the time the service or product is rendered to them.  This immediately and permanently decouples "insurance" from the provision of care.  The current system of an "explanation of benefits" that often features a "negotiated discount" of some 90% is nothing other than an extortion racket and is arguably felonious...

Tuesday, May 16, 2017

A better r*

The Chicago Booth Review published here a much cleaned up and nicely formatted version of my earlier blog post on r*.  If you missed the original and you're curious about r* issues, or just curious what the heck r* is anyway, this version is better.


Long run money

Continuing in the Il Sole series on Italy and the Euro, Alberto Bagnai writes that the euro is a "big defeat for the economics profession'' here in English, here in Italian.  He takes particular issue with my earlier case for a common currency, here in English, in Italian, and blog post.
"John Cochrane’s idea that money is irrelevant for growth (economists say that money is “neutral”) not only clashes with major scientific results, such as Dani Rodrik’s analysis of the role of excessively strong exchange rates in slowing the growth of a country, but also with what the European institutions are finally admitting through clenched teeth: the reforms are causing deflation and failing to promote employment in any decisive way (footnote 23 in the above-mentioned ECB Economic bulletin).
The best economists had also addressed this point: the negative consequences of structural reforms on the productivity of labour were illustrated by Robert Gordon in 2008. For Cochrane, money is like oil in a motor. The metaphor is (unwittingly) correct. Bad management of oil has long-period consequences like bad management of currency: in the first case the head fuses and the motor stops; in the second a continent, and the world economy stops.
If De Grauwe is incoherent with data and Cochrane with theories,..."
I have long been accused of being theoretically pure but incoherent about the "real world." (As if the real world could ever conform to no theory, rather than a better theory). This is the first time I, or the proposition of long-run monetary neutrality, have been accused of theoretical incoherence.

Tuesday, May 9, 2017

Fintech and Shadow Banks

"Fintech, Regulatory Arbitrage, and the Rise of Shadow Banks" is an interesting new paper by  Greg Buchak, Gregor Matvos, Tomasz Piskorski, and Amit Seru

1. Shadow banks and fintech have grown a lot.
the market share of shadow banks in the mortgage market has nearly tripled from 14% to 38% from 2007-2015. In the Federal Housing Administration (FHA) mortgage market, which serves less creditworthy borrowers, the market share of shadow banks increased...from 20% to 75% of the market. In the mortgage market, “fintech” lenders, have increased their market share from about 5% to 15% in conforming mortgages and to 20% in FHA mortgages during the same period

2. Where are they expanding? They seem to be doing particularly well in serving lower income borrowers -- FHA loans.  They also can charge higher rates than conventional lenders, apparently a premium for convenience of not having to sit in the bank for hours and fill out forms,

Monday, May 8, 2017

Trade Haiku

George Shultz and Martin Feldstein, in the Washington Post
If a country consumes more than it produces, it must import more than it exports. That’s not a rip-off; that’s arithmetic. 
If we manage to negotiate a reduction in the Chinese trade surplus with the United States, we will have an increased trade deficit with some other country. 
Federal deficit spending, a massive and continuing act of dissaving, is the culprit. Control that spending and you will control trade deficits.
That's not an excerpt, it's the whole thing. Someday, I will learn to be this concise.

Sunday, May 7, 2017

A Healthy Reform?

Holman Jenkins and Cliff Asness have worthy commentaries on the health insurance reform effort.

Jenkins has quite a few fresh thoughts. He also gets the incurable optimist award for viewing the bill as the "inklings of a salvation" for America’s health-care system. It's possible. Whether it is likely depends on your views of the political process.

Individual insurance:

Jenkins' freshest thought comes last:
We’ll say it again, now for the Senate’s benefit: Apply a few GOP-style fixes and ObamaCare, or something like it, becomes a solution to America’s health-care muddle. You could phase out every other federal program, including Medicare, Medicaid and the giant tax handout to employers, and roll their beneficiaries into ObamaCare.
This wisdom is exactly the opposite of most current commentary, and, here in grumpy-land, where it seems the political process may be heading.

Yes, if any memory of markets remains, the goal should be to get everyone on individual insurance -- functional, portable, individual, lifetime, guaranteed-renewable, competitive health insurance, married to mercilessly competitive innovative and disruptive health care supply. People who need help -- sick and poor -- get it by subsidies to buy that insurance. Period. (Newcomers, some of my many writings on this topic are here.)

I fear we are going in the opposite direction. I fear that the non-subsidized individual market is going to shrink more and more, to become more and more an insignificant, government run, dysfunctional waystation for a handful of unlucky self-employed and young people, on their way to employer care, a government program (medicare, medicaid, VA, etc.) or now to a miserly high-risk pool.

Thursday, May 4, 2017

Wonderful Loaf

A charming animated free-market poem by Russ Roberts, on the invisible hand, at

The "read the poem" link includes much interesting annotation.

Mild critique: I would rather the "planner" be a well-meaning economist faced with impossible information problems than a darkly sinister white guy in a suit. It looks like all we need is better  planners. And the bakers seem really happy about all that competition and free entry, whereas real bakers quickly band together to demand regulation, occupational licensing, and other restrictions. But I'm just whining, it's a good romp through the invisible hand in a mythic war-free and Disney-clean 1940s Europe.

Tuesday, May 2, 2017

Douthat and Feldstein on Euro

In case you missed it, this Sunday featured a creditable effort by the NY Times to look out of the groundhog hole. You have likely followed the explosion resulting from Bret Stephens' first column. Likewise, Ross Douthat tried to explain the attraction of Marine LePen.  I'm not a LePen fan, but appreciated his honest effort to explain how the other side say things.

I was interested in Douthat's views on the euro:
But on the other hand, our era’s “enlightened” governance has produced an out-of-touch eurozone elite lashed to a destructive common currency,..
There is no American equivalent to the epic disaster of the euro, a form of German imperialism with the struggling parts of Europe as its subjects... 
And while many of her economic prescriptions are half-baked, her overarching critique of the euro is correct: Her country and her continent would be better off without it.
Douthat does not pretend to be an economist, and I have no beef with his expressing such views. Because such views are commonplace conventional wisdom from our policy elite. And if the euro falls apart, they will bear a lot of blame for its passing. Be careful what you write, people might be listening.  No, when Germany sends Porsches to Greece in return for worthless pieces of paper, it is not Germany who got the better of the deal. And while you're at it, get rid of that silly common meter, and restore proper nationalism of weights and measures too. (Of course perhaps my admiration for the euro is wrong. Then they will deserve credit for the wave of prosperity that flows over Europe once it unleashes the shackles of the common currency dragging it down. )

As a concrete example, consider  Martin Feldstein writing in the Il Sole series on the Euro, (I don't mean to pick on Feldstein. He has been a consistent anti-euro voice, arguing the great benefits for Italy and Greece of periodic inflation and devaluation. But he is just a good sober example of the common view in Cambridge-centered economic policy circles.)


Arnold Kling's Askblog quotes Robert J. Mann
Wal-Mart’s application to form a bank ignited controversy among disparate groups, ranging from union backers to realtor’s groups to charitable organizations. The dominant voice, though, was that of independent bankers complaining that the big-box retailer would drive them out of business. Wal-Mart denied any interest in competing with local banks by opening branches, claiming that it was interested only in payments processing. Distrusting Wal-Mart, the independent bankers urged the FDIC to deny Wal-Mart’s request and lobbied state and federal lawmakers to block Wal-Mart’s plans through legislation. Ultimately, WalMart withdrew its application, concluding that it stood little chance of overcoming the opposition.
Mann also writes
... I argue that permitting Wal-Mart to have a bank would have a salutary effect on the relatively uncompetitive market for payment networks. The dominant position of Visa and MasterCard, in which payments are priced above cost to subsidize credit, inevitably will give way to a world in which payment services are priced at cost, or even below cost as a loss-leader to attract customers to other goods and services.  
As the first quote shows, Walmart was only trying to process payments more efficiently -- because it already saw the chance to offer banking services, lend, and other banking functions would be blocked.

Arnold also points to this by Lawrence J. White.

Arnold sums up,
We are always told that we need regulation to protect consumers and make the financial system safer. That is the theory. The practice is that regulation very often gets used to limit competition. 
Many people in the US still do not have regular bank accounts, and perhaps wisely so as banks notoriously suck money from poor people with pesky fees. Yet cashing a social security check remains a problem. Imagine small town America in which Walmart also offers banking services.

If it's not obvious, Walmart banks would be much safer than traditional banks. A bank tied to a huge retailer would not be financed by astronomical leverage, and if the bank lost money the equity holders of Walmart would pick up the losses.

Walmart has also faced a lot of resistance and restrictions in opening clinics. Imagine small town America in which simple, cheap Walmart clinics can offer a much wider range of services.

It's worth remembering how much opposition Walmart already overcame. It was the Uber of its day. A&P, its predecessor, was widely opposed, as was Walmart. Walmart still faces union opposition -- as I left it was still blocked from operating in the city of Chicago. Imagine the south side of Chicago populated with Walmarts, Walclinics and Walbanks! Thank its legislators and regulators for protecting its citizens from that nightmare.


An excellent blog post by Larry White on Walmart's troubles in starting a bank. A primary obstacle is the rule that bank holding companies can't be engaged in "commerce." Larry also points out just how much the other banks use this to keep out competition.

the Dodd-Frank Act of 2010 placed a three-year moratorium on the granting of deposit insurance to any new (or newly acquired) ILC. Although the moratorium expired in 2013, bank regulators appear to have “gotten the message” that the commerce-finance barrier should remain intact.

Monday, May 1, 2017

93 words, most of them wrong

In the WSJ, The 93 Words That Could Unlock $200 Billion in Bank Capital. This could be a great MBA final exam. Spot the errors: 
"Tucked inside a nearly 600-page legislative proposal to overhaul U.S. financial regulations are 93 words that could provide a windfall for bank investors seeking heftier dividends and share buybacks."
"Bank analysts at Barclays BCS -6.08% PLC estimate $236 billion in capital is tied up in operational risk at the four biggest U.S. banks alone"
"Bankers ... want to free up capital that could be returned to shareholders or used for more lending."
"Mr. Dimon added that U.S. banks now hold about $200 billion in capital against operational risk."
(I made it easier with italics, all mine.)

Wednesday, April 26, 2017

A progressive VAT

A VAT (value added tax) with no other tax — no income, corporate, estate, etc. etc. etc. — is pretty much the economists’ ideal. But how do you make it progressive? A bright — or perhaps lunatic— idea occurred to me.

A progressive VAT

Everyone pays the maximum VAT rate — 40% say, equal to the maximum marginal federal income tax rate. Then, as you spend money over the year, you turn in your receipts — figuratively, we’re going to do al this electronically in a second. So, for the first (say) $10,000 of purchases in each year, you get a refund of all VAT taxes paid. For the next $20,000 of purchases, you get $30 out of every $40 tax payments back, so you pay a 10% rate. And so on. Finally, after (say) $400,000 you don’t get anything back, so you pay the 40% maximum rate.

As you see, I give people an incentive to declare all their consumption.  That incentive completes one of the main advantages of a VAT over an income or sales tax. In a VAT, each business in the production chain pays the VAT on its inputs, and charges the VAT on its sales. It then deducts the VAT payments on its inputs against the VAT it has to pay on its sales. That gives the business a strong incentive to collect the VAT on sales, and for its business customers to demand proof the VAT was paid so they in turn can deduct VAT payments against their VAT collections. Now people will also demand “receipts,” proof of tax payment.

Clearly this works only if everything is electronic. I would not inflict expense reimbursement drudgery on the American taxpayer. But that largely is the case. We have a sales tax reporting mechanism, so adding or substituting VAT tax reporting is not that hard.

Tuesday, April 25, 2017

Long Run Lira?

Luigi Zingales inaugurated a series of essays in Il Sole 24 Ore, an Italian newspaper, on whether Italy should stay in or get out of the Euro, and graciously asked me to contribute. My view, here in English, here in Italian.

To be clear, I kept to Luigi's terms of the debate. This piece is only about whether Italy is better off in the long run, with a common currency. Whether it gets anything out of an exit, a devaluation, a default now is for another day. And this is just about currency, not about leaving the EU, not about debt or austerity, not about whether europe needs a fiscal union, or the rest of it. (Some subsequent correspondence verifies the wisdom, but also the difficulty, of talking about one thing at a time.)

Return to the Lira? A long-run view (Not very good English title)
The euro isn't perfect, but it isn't bad. (Much better Italian title)

Should Italy have her own currency, and run her own monetary policy? For today, let's focus on the long-run question, leaving out for now the transition and any immediate benefits and costs. When contemplating a divorce, it is wise to focus on what life will be like when everything is settled, not just who will have to wash today's stack of dirty dishes.

Remember first that monetary policy cannot substantially improve long-run growth. Long-run growth comes from people and productivity, how much each person can produce per hour of work. In turn, productivity comes from innovation, new companies, new ways doing business, and new products. Like Uber, consumers benefit and existing producers are disrupted. Improvements in long-run growth come only from structural reform, not monetary machination. Money is like oil in a car. Bad monetary policy, like too little oil, can drag an economy down. But after a point more oil will not help you to go faster — you need a bigger engine.

Monday, April 24, 2017

Inflating our troubles away?

These are comments I gave on "Inflating away the public debt? An empirical assessment" by Jens Hilscher, Alon Aviv, and Ricardo Reis at the Becker-Friedman Institute Government Debt: Constraints and Choices conference, April 22 2017, along with generic comments on the conference in general. This post contains mathjax equations.

Long Term Debt

Consider the government debt valuation equation, which states that the real value of nominal government debt equals the present value of primary surpluses.

My first equation expresses this idea with one-period debt, discounted either by marginal utility or by the ex-post return on government debt.
$$\frac{B_{t-1}}{P_t} = E_t \sum_{j=0}^\infty \beta^j \frac{u'(c_{t+j})}{u'(c_t)} s_{t+j} = E_t \sum_{j=0}^\infty \frac{1}{R_{t,t+j}} s_{t+j}$$
(\( P \) is the price level, \( B \) is the face value of nominal debt coming due at \( t \) , \( s \) are real primary surpluses, \( R \) is the real ex-post return on government debt.)

This paper's question is, to what extent can inflation on the left reduce the value of the debt, and hence needed fiscal surpluses on the right. The answer is, not much.

Friday, April 14, 2017

Capital Cause and Effect

Òscar Jordà, Björn Richter, Moritz Schularick, and Alan Taylor wrote a provocative What has bank capital ever done for us? at VoxEu, advertising the underlying paper Bank Capital Redux  (NBER, CEPR link here, google if you can't access either of those)

It starts with a blast:
"Higher capital ratios are unlikely to prevent a financial crisis."
Wow! How do they reach this dramatic conclusion? The post and underlying paper are empirical, collecting a very useful dataset on bank structure across countries and a long period of time. They show, for example, that
bank leverage rose dramatically between 1870 and the second half of the 20th century. In our sample, the average country’s capital ratio decreased from around 30% capital-to-assets to less than 10% in the post-WW2 period (as shown in Figure 1 below) before fluctuating in a range between 5% and 10% in the past decades. 
Here is the very nice Figure 1. (It shows not just how capital has declined, but how reliance on more run-prone wholesale funding has increased.  The fact that capital used to be 30% is one that we need to reiterate over and over again to the crowd that says 30% capital would bring the world to an end.)
With the facts and regressions,
We find that the capital ratio provides virtually no information about the probability of a systemic financial crisis.
Whether used singly or along with credit, higher capital ratios are associated, if anything, with a higher probability of a crisis.
There used to be a lot more capital, and there used to be a lot more financial crises.

Wow. Now, (this is a good quiz question for a class), before you click the "more" button: Do the facts justify the conclusion? And if not why not?

Wednesday, April 12, 2017


Commentators seem to have noticed a lot of the economics  of the United fiasco: Yes, don't stop auctions at $800. (WSJ review and outlook.) Yes, if you need employees at Louisville so badly, call up American and buy a first class ticket. Book a private jet. Or, heck, you're an airline. Bring up another plane. Don't drag people off planes to save a measly $500.

The one economic point that I haven't seen:  the whole issue also comes down to airlines' use of personalized tickets to price discriminate. (And most of the TSA's job is to enforce that price discrimination by making sure you are the name on the ticket.) If you could resell tickets, the problem would go away. Then the airline must sell only as many tickets as there are seats on the plane, as concerts do. If people aren't going to show, they put their tickets on ebay -- or another quick peer to peer ticket trade platform -- and someone else buys them. Including the airline, if it wants to send employees around. Standby disappears -- want to get on the plane? Bid for a ticket. We still get efficiently full planes -- fuller, even -- nobody ever gets bumped, and the auction for the last seat is going on constantly.

Yes, one of the hardest lessons in economics is that price discrimination can be efficient. Business class cross subsidizes leisure and pays for fixed costs. But the airlines could speculate in their own tickets as well, so its' not clear in a data mining race that scalpers would reap the price discrimination profits better than the airlines themselves.

Holman Jenkins adds, in a brilliant column,
While we’re at it, what’s wrong with Chicago airport security? Did not a single officer say, “I’m having no part of this. If United can’t deal with its overbooking mistakes in a civilized, non-cheapskate way, how is it my job to manhandle innocent customers?” This also smacks of our national malaise—police who need an armored personnel carrier before they’ll roll up and serve a warrant, who wait outside Columbine High until they’re sure the shooting has stopped.
And do not the other passengers rebel at seeing such treatment? Well, maybe not the first time, but I suspect the next time they try to drag a customer off an overbooked plane, there will be a riot.

Update: More at the always excellent Marginal Revolution.  One negative reaction, already on display at United -- the crush to get on the plane first will increase.

Getting on United vs. Southwest is a study in bad incentives. Southwest: you get a number. People peacefully line up when called, and quickly get on the plane. Southwest also gives free (bundled in the ticket price) bags, so people aren't hauling trunkolads of junk for the overheads. United: Board by groups, and now everyone with a credit card is in group 1. They charge for bags. Midway through the scramble for overhead space, the bins fill up, then people have to start swimming upstream with their huge bags to gate check. If ever there was a way to make an airplane board slower, having people swimming against traffic with huge bags is it. The result, you line up like it's the New Delhi airport (or Southwest, circa 1995) and 100 million dollars of United plane plus crew sits on the ground.  I do it too (I'm a rational consumer!) Quite a few times I have had someone show up with a boarding pass with my seat number in it, and being there first makes a big difference.   Another fully rational response -- you really want to be a high mileage customer. The love/hate relationship with United will get deeper.

Wednesday, April 5, 2017

The second original sin of healthcare regulation

Whenever I advance one or another view of how a relatively free health care and insurance market could work a lot better than the mess we have now, the obvious question comes up: Well, what about the homeless person with a heart attack? You won't let him die in the gutter will you?

No. Of course not. We are a compassionate society. We will provide for poor people, very sick people, those with diminished mental capacity, the unfortunate, the incompetent, or the merely improvident. People don't die in the gutter.  Any half-reasonable health care reform proposal, including mine, provides some system of charity care; whether via medicaid, government run hospitals (VA for everyone, county hospitals), premium subsidies or vouchers, support for charity hospitals, and so forth; and in our society the government will have a big part in this; I do not appeal to private charity alone.  Such systems will also always be a thorn in our public side; as the tension between cost, effectiveness, quality, moral hazard will not magically disappear no matter how nice the promises of their architects, and the fraud, inefficiency, and bureaucracy of anything run by governments will not disappear as well.

But the great puzzle of health care policy: Just why is it, to accommodate this worthy goal, must your and my health care and insurance be so deeply regulated and so thoroughly dysfunctional? As one small example, why does a 20 minute skin check with the resident of my dermatologist generate a phoney baloney bill for over $1000, meaning a cash and carry market for such a simple, elastically demanded, and perfectly predictable service is impossible?

Why, in order to provide for the unfortunate, do we not simply levy taxes, and pay for charity care, and leave the rest of us alone?

Tuesday, April 4, 2017


Jon Hartley, writing in Forbes, offers a great graph of the overnight Federal Funds rate,

This graph  mirrors nicely the graph I posted last week, from "Deviations from Covered Interest Rate Parity" by Wenxin Du, Alexander Tepper, and Adrien Verdelhan:

What's going on with these quarter-end spikes?

Floating rates?

I was interested to read in the Financial Times, "Iceland weighs plan to peg krona to another currency":
Iceland’s finance minister has admitted it is untenable for the country to maintain its own freely floating currency....Benedikt Johannesson told the Financial Times that the Nordic island of just 330,000 people would look at options to link Iceland’s krona to another currency, most likely the euro or pound.
“Is the status quo untenable? Yes. Everybody agrees on that. We’d like to have a policy that would stabilise the currency. It’s really not good when a currency fluctuates by 10 per cent in the two months since we took over,” said Mr Johannesson, who became finance minister in January. 
The main thing is if you want to peg against a currency, do it against a currency where you do business. Once you decide on a currency, that will also change the future. You will do more business with that area,” he added, pointing to Denmark’s experience of doing more business with Germany after pegging its currency first to the Deutschmark and then the euro.
This is interesting in the context of Conventional Wisdom, which says the euro is a bad idea, and every tiny country needs its own currency, to devalue any time there is a "shock." In this view, Iceland is a great success because it did devalue after its banking crisis. I am a skeptic, largely favoring a common standard of value. Greece did not become a growth tiger from its previous umpteen devaluations. I'm interested that even the supposed success story for devaluation does not see it that way.

Update (via marginal revolution) here at Bloomberg. The idea is controversial.

Everyone wants a float after the fact, to devalue their way out of trouble. But everyone should also want a peg before the fact; the firm commitment that you will not devalue your way out of trouble makes international investment and trade flow much better. 

Sunday, April 2, 2017

Consumption vs. GDP

Random Critical Analysis has a really interesting blog post from a while ago, on the difference between consumption and income as measures of well being.  The level of data analysis and detail on that blog is really impressive.

The narrow question is whether the US spends "too much" on healthcare. A counterargument has always been, what else should we spend money on? As a society gets wealthier, it's natural to spend more on health care, just as we spend more on art, travel, and so forth.

(The counterargument to that is, whether we spend more or less is beside the point. The point is a dysfunctional regulated oligopoly is charging way too much for what we get. It's not so bad to spend this much, it's bad to get such a bad deal.)

So, the question is not whether the US spends more on health care, the question is whether we spend more on health care relative to a measure of our standard of wealth.  Using GDP as a rough proxy, we spend a lot more on health care relative to GDP than other countries.

But, the larger point of the blog post, on which I'll focus -- consumption is not GDP (income). Americans are far better off relative to other countries than we think we are. See the graph:

Saturday, April 1, 2017

The Obamacare Unraveling

I usually leave Brad DeLong and Paul Krugman alone. If you haven't figured them out by now, you are beyond my help.

In particular, Brad a few years ago made fun of me for "predicting" in 2013 that Obamacare exchanges would unravel due to adverse selection. I have so far  resisted the temptation to needle Brad about that as, well... the Obamacare exchanges unraveled due to adverse selection!

But, unbelievably, Brad is doubling down. While recommending again a snarky 2015 Krugman piece, in which even Krugman was not naming his snarks, DeLong writes:

Thursday, March 30, 2017

More covered interest parity

Several correspondents were kind enough to send me additional work on covered interest parity.

There are two big questions (and a third at the end): 1) what force pushes prices out of line? 2) what force stops arbitrageurs from taking advantage of it, and thereby pushing prices back in line?

Covered Interest Parity Lost: Understanding the Cross-Currency Basis by Claudio Borio, Robert McCauley, Patrick McGuire, and Vladyslav Sushko (also "The Failure of Covered Interest Parity") 
point out that the price whose variation drives arbitrage is the forward rate.  
Interest rates in the cash market and the spot exchange rate can be taken as given – these markets are much larger than those for FX derivatives. Hence, it is primarily shifts in the demand for FX swaps or currency swaps that drive forward exchange rates away from CIP and result in a non-zero basis 
So who is putting pressure on forward markets?

Friday, March 24, 2017

More good finance articles

The February Issue of the Journal of Finance made it to the top of my stack, and it has a lot of good articles. The first two especially caught my attention, Who Are the Value and Growth Investors? by Sebastien Bertermeier, Larent Calvet, and Paolo Sodini, and Asset Pricing Without Garbage by Tim Kroencke. A review, followed by more philosophical thoughts.

I  Bertermeier, Calvet, and Sodini. 

Background: Value stocks (low price to book value) outperform growth stocks (high price to book value). Value stocks all move together -- if they fall, they all fall togther -- so this is a "factor risk" not an arbitrage opportunity. But who would not want to take advantage of the value factor? This is an enduring puzzle.

Monday, March 20, 2017

Covered Interest Parity

Here's how covered interest parity works. Think of two ways to invest money, risklessly, for a year. Option 1: buy a one-year CD (conceptually. If you are a bank, or large corporation you do this by a repurchase agreement). Option 2: Buy euros, buy a one-year European CD, and enter a forward contract by which you get dollars back for your euros one year from now, at a predetermined rate. Both are entirely risk free. They should therefore give exactly the same rate of return, by arbitrage. If european interest rates are higher than US interest rates, then the forward price of the euro should be lower, enough to exactly offset the apparent higher return.  If not, then banks can (say), borrow in the US, go through the european option, pay back the US loan and receive an absolutely sure profit.

Of course there are transactions costs, and the borrowing rate is different from the lending rate. But there are also lots of smart long-only investors who will chase a few tenths of a percent of completely riskless yield. So, traditionally, covered interest parity held very well.

An update, thanks to "Deviations from Covered Interest Rate Parity" by Wenxin Du, Alexander Tepper, and Adrien Verdelhan. (Wenxin presented the paper at Stanford GSB recently, hence this blog post.)

The covered interest rate parity relationship fell apart in the financial crisis. And that's understandable. To take advantage of it, you first have to ... borrow dollars. Good luck with that in fall 2008. Long-only investors had more important things on their minds than some cockamaime scheme to invest abroad and use forward markets to gain a half percent per year or so on their abundant (ha!) cash balances.

The amazing thing is, the arbitrage spread has not really closed down since the crisis. See the first graph. [graph follows]

Source: Du, Tepper, and Verhdelhan

What is going on?

Saturday, March 18, 2017

Trade insight

Daniel Hannan, a (soon to be unemployed?) UK member of the European Parliament, writes insightfully about trade in the Saturday Wall Street Journal.
It is telling that neither of the Obama administration’s flagship trade deals—the Transatlantic Trade and Investment Partnership, or TTIP, and the Trans-Pacific Partnership—even had “free trade” in the title. Although they had liberalizing elements, they also contained a great deal of corporatism.
Monitoring TTIP as a member of the European Parliament, I saw plainly enough what was going on: Big multinationals in Europe were getting together with big multinationals in the U.S. and lobbying for more regulation. By combining the most restrictive rules in the EU and the U.S., they aimed to raise barriers to entry and to give themselves an effective monopoly.
There is a deep point here. Our trade treaties have strong elements of managed mercantilism, not free trade, and can serve the interests of global corporations. There is a "better" trade that is also freer trade, and may address some of the political unpopularity of trade deals. Hannan has in mind a very open US-UK bilateral deal, but more deeply states clearly and concisely how better trade deals could work in general
A British-American deal should avoid that danger. How? By focusing on mutual product recognition rather than on common standards. If a drug is approved by the U.S. Food and Drug Administration, it should automatically be approved for sale in the U.K. If a trader can practice in the City of London, he should automatically be licensed to practice on Wall Street. And so on.
A commercial deal, in this case as in any other, should have nothing to do with human rights or child labor or climate change. Important as those issues are, they are separate from the free exchange of products.
... Once Britain no longer has to worry about the protectionism of French filmmakers, Italian textile manufacturers and the rest, we should reach a comprehensive agreement covering services as well as goods. If we make sure that the resulting deal is in the interest of consumers rather than producers, we could revive the whole notion of free trade, which is something the world very much needs just now.

Wednesday, March 15, 2017

The Real Fed Issues

The media are usually fixated on the angels on heads of pins question, will she or won't she raise rates 0.25%? As such Fed discussion misses many of the really important issues. Fed’s Challenge, After Raising Rates, May Be Existential by Eduardo Porter in the New York Times is an excellent counterexample and a nice primer on some of the really big issues facing the Federal Reserve -- and the nation -- going forward.

Tuesday, March 14, 2017

Capital Illogic

More Bank Capital Could Kill the Economy write Tim Congdon and the usually sensible Steve Hanke in today's Wall Street Journal.

I was expecting a quantitative disagreement on plausible channels -- some explicit violation of the Modigliani Miller theorem, some reason that splitting the pizza into 8 slices rather than 4 will help your diet, some argument that relationship lending is inherently tied to short-term funding, and so forth. Instead, we got treated to one of the most illogical conclusions I've seen on the WSJ pages for a long time.

Tuesday, March 7, 2017

Target the spread

What should the Federal Reserve do, to control inflation, given that

nominal interest rate = real interest rate + expected inflation,

and that real interest rates vary over time in ways that the Fed cannot directly observe? In this post I  explore an idea I've been tossing around for a while: target the spread between nominal and indexed bonds, leaving the level of interest rates to float freely in response to market forces. (It follows Long Run Fed Targets and Michelson Morley and Occam.)

Indexed bonds like TIPS (Treasury Inflation Protected Securities) pay an interest rate adjusted for inflation. In simple terms, if a one-year indexed bond offers 1%, you actually get 1% + the rate of CPI inflation at the end of the year. So, with some qualifications (below), markets settle down to

nominal interest rate = indexed rate + expected inflation  

The Fed already uses this fact extensively to read market expectations of inflation from the difference between long-term nominal and indexed rates. 

My modest proposal is that the Fed should (perhaps, see below) target the spread, and thereby force expected inflation to conform to its will. 

Friday, March 3, 2017

Russ Roberts on Economic Humility

Russ Roberts has an excellent essay, What do economists know? on economic humility. (HT Marginal Revolution)
A journalist once asked me how many jobs NAFTA had created or destroyed. I told him I had no reliable idea. ... 
The journalist got annoyed. “You’re a professional economist. You’re ducking my question.” I disgreed. I am answering your question, I told him. You just don’t like the answer. 
A lot of professional economists have a different attitude. They will tell you how many jobs will be lost because of an increase in the minimum wage or that an increase in the minimum wage will create jobs. They will tell you how many jobs have been lost because of increased trade with China and the amount that wages fell for workers with a particular level of education because of that trade. They will tell you that inequality lowers health or that trade with China reduces the marriage rate or encourages suicide among manufacturing workers. They will tell you whether smaller classrooms improve test scores and by how much. And they will tell you things that are much more complex — what caused the financial crisis and why its aftermath led to a lower level of employment and by how much.
And Russ continues, with great clarity, to explain just how uncertain all those estimates are.

So what do economists know? As Russ points out, much of these kind of estimates are not really produced by economics

Tuesday, February 21, 2017

Long Run Fed Targets

What should the Fed's long-run interest rate target be? The traditional view is that the glide path should aim at 4% -- 2% real plus 2% inflation.


One big question being debated right now is whether the "natural'' real rate of interest -- r* or "r-star" in econspeak -- has declined below 2%.

Over the long run, the Fed cannot control the real rate of interest -- that comes from how much people want to save and what opportunities there are for investment, i.e. the marginal product of capital. So, if the real rate of interest is now permanently lower, say 1%, then one might argue that the glide path should aim for 3% long-run interest rate -- 1% real plus 2% inflation target -- not 4%.

Janet Yellen recently came to Stanford and gave a very interesting speech that talked in part about a lower r-star, and seemed to be heading to something like this view. See the picture:

Source: Federal Reserve. 

(She also talked a lot about Taylor Rules, seeming to move much closer to John Taylor's view of how to implement monetary policy. See interesting coverage on John Taylor's blog. On r*, see Measuring the Natural Rate of Interest Redux by Thomas Laubach and John C. Williams for a central paper on r*. Henrike Michaelis and Volker Wieland have an interesting post on r* and Taylor rules, also commenting on Ms. Yellen's speech.)

Of course, cynics will say that it's just the latest excuse not to raise rates. But these are serious arguments which should be considered on their merits.


Should the glidepath head to 3% interest rates? Maybe not. How about zero?

Monday, February 20, 2017

Miserable 21st Century

Nicholas Eberstadt in Commentary, (HT Marginal Revolution) offers a revealing look at what's wrong with "middle" America's stagnation. Read the whole thing, but the following snapshot jumped out at me.

He starts with a review, probably familiar to readers of this blog, of the sharp decline in work rates, even among prime-age men and women.
As of late 2016, the adult work rate in America was still at its lowest level in more than 30 years. To put things another way: If our nation’s work rate today were back up to its start-of-the-century highs, well over 10 million more Americans would currently have paying jobs.
Why are so many not working, not studying for work, and not even looking for work? What is going on in their lives? One answer:
The opioid epidemic of pain pills and heroin that has been ravaging and shortening lives from coast to coast is a new plague for our new century...
According to [Alan Krueger's] work, nearly half of all prime working-age male labor-force dropouts—an army now totaling roughly 7 million men—currently take pain medication on a daily basis.
I think Krueger had a different idea in mind: that they are in pain, indicated by medication, so can't be expected to work. How the explosion in disability jibes with a much safer workplace is an interesting puzzle to that view. Eberstadt has a different interpretation, and the lovely thing about facts is they are facts, not interpretations.
We already knew from other sources (such as BLS “time use” surveys) that the overwhelming majority of the prime-age men in this un-working army generally don’t “do civil society” (charitable work, religious activities, volunteering), or for that matter much in the way of child care or help for others in the home either, despite the abundance of time on their hands. Their routine, instead, typically centers on watching—watching TV, DVDs, Internet, hand-held devices, etc.—and indeed watching for an average of 2,000 hours a year, as if it were a full-time job. But Krueger’s study adds a poignant and immensely sad detail to this portrait of daily life in 21st-century America: In our mind’s eye we can now picture many millions of un-working men in the prime of life, out of work and not looking for jobs, sitting in front of screens—stoned.

Trump Derangement Syndrome

On Sundays it has been my habit to read the New York Times Sunday Review. I like to peer in the bubble. On view, the old lady is still full-on foaming at the mouth with Trump Derangement Syndrome. Sunday's Review:

  1. Our Putin
  2. Bring Back Hypocrisy ("The American President and the American Way of Lying") 
  3. Donald Trump Will Numb you
  4. When it's time to blow the whistle (why leaking Flynn's private phone conversations is ok)
  5. Are Liberals Helping Trump?
  6. The Secret Service of the Skies (Trump flying is closing down airports.) 
  7. New Yalta (Trump, Putin and Xi photoshpped on to Roosevelt, Stalin and Churchill at Yalta) 
  8. Being First Lady is a Job (OK, MDS not TDS, but I still count it. ) 
  9. Unnamed Sources, Happy Readers (more it's ok to leak private phone calls in service of TDS) 
  10. Where in the world can we find hope? "In Canda and Denmark creative strategists fight right-wing populism. "
  11. Breaking the Anti-Immigrant fever ("Americans have been watching the Trump Administration unfold for almost a month now, in all its malevolent incompetence...." ) 
  12. Trapped in Trump's Brain.
  13. How can we get rid of Trump? 
  14. Beltway panic, Wall Street Zero? 
  15. Diagnosing the President (Is he mentally ill?)
  16. Trump's Wall Won't Keep out Heroin.
  17. A Muslim Bank is Unscientific.

All TDS, all the time. There were only 5 pieces that were not, directly, foaming at the mouth about Trump. The old pretense of "balance" with one or two token opposing opinions is completely gone.  There were none -- none -- that offered an inking as to how people in the Administration see things, how Republicans cooperating with the Administration see things, or how the nearly half of the country that voted for Trump sees things. I don't agree with much of what's going on either, but I like to try to understand how they articulate their views. 

And then we wring our hands about polarization. 

Dear Times, get a grip.  America needs a thoughtful opposition, especially now. 

Sunday, February 19, 2017

Good Review

Frank Diebold, on Mostly Harmless Econometrics:
All told, Mostly Harmless Econometrics: An Empiricist's Companion is neither "mostly harmless" nor an "empiricist's companion." Rather, it's a companion for a highly-specialized group of applied non-structural micro-econometricians hoping to estimate causal effects using non-experimental data and largely-static, linear, regression-based methods. It's a novel treatment of that sub-sub-sub-area of applied econometrics, but pretending to be anything more is most definitely harmful, particularly to students, who have no way to recognize the charade as a charade.
Disclaimer, I haven't read the book. The  quote does summarize feelings I have had in many seminars involving difference in difference in difference regressions with 100 fixed effects and controls. But mostly I post it as a lovely quote.

Monday, February 13, 2017

Economies in reverse

How can economies forget? How is it that once we have learned to do something better, that knowledge can be lost and economies move backward? How can productivity decline? Viewing productivity as knowledge, it would seem almost impossible for it to do so -- and real business cycle theory was often derided on that point. Yet middle ages eurpoeans lost the recipe for concrete, and time after time we have seen economies get worse. How can our own productivity be growing so slowly overall when so much we see around us is progressing so fast?

Scott Alexander at Slate Star Codex has an intriguing blog post that illuminates these questions (HT marginal revolution). I'll offer my thoughts on the answers at the end.

Scott starts with education:

Inputs triple, output unchanged. Productivity dropped to a third of its previous level.

Friday, February 10, 2017

Healthcare repair on "The Hill"

On repeal and replace, a healthcare oped on "The Hill", here.  

Republicans replacing Obamacare, beware. It has a certain logic. Much of it patches up unintended consequences of previous regulations. If we just roll back and patch once again, we will end up right back where we started.

It’s wiser to start with a vision of the destination. In an ideal America, health insurance is individual, portable, and guaranteed renewable — it includes the right to continue coverage, with no increase in cost. It even includes the right to transfer to a comparable plan at any other insurer. Insurance companies pay each other for these transfers, and then compete for sick as well as healthy patients. The right to continue coverage is separate from the coverage itself. You can get the right to buy gold coverage with a silver plan.

Most Americans sign up as they graduate from high school, get a drivers’ license, register to vote, or start a first job. Young healthy people might choose bare-bones catastrophic coverage, but the right to step up to a more generous plan later. Nobody’s premiums subsidize others, so such insurance is cheap.

People keep their individual plans as they go to school, get and change jobs or move around.  Employers may contribute to these individual plans. If employers offer group coverage, people keep the right to individual plans later.

Health insurance then follows people  from job to job, state to state, in and out of marriage, just like car, home and life insurance, and 401(k) savings.

But health insurance is not a payment plan for small expenses, as home insurance does not “pay for” lightbulbs. Insurance protects your wallet against large, unexpected expenses. People pay for most regular care the same way they pay for cars, homes, and TVs — though likewise helped to do so with health savings and health credit accounts to smooth large expenses over time. Doctors don’t spend half their time filling out forms, and there are no longer two and a half claims processors for every doctor.

Big cost control comes from the only reliable source — rigorous supply competition. The minute someone tries to charge too much, new doctors, clinics, hospitals, and models of care spring up competing for the customer’s dollar. “Access” to health care comes like anything else, from your checkbook and intensely competitive businesses jockeying for it.

What about those who can’t afford even this much?  Nobody dies in the street. There is also a robust system of government and charity care for the poor, indigent, those who have fallen between the cracks, and victims of rare expensive diseases. For most, this simply means a voucher or tax credit to buy private insurance.

But — a central principle — the government no longer massively screws up the health insurance and health care arrangements of the majority of Americans, who can afford houses, cars, and smartphones, and therefore health care, in order to help the unfortunate. We help people forthrightly, with taxes and on-budget spending.

Why do we not have this world? Because it was regulated out of existence, and now is simply illegal.

The original sin of American health insurance is the tax deduction for employer-provided group plans — but not, to this day, for employer contributions to portable individual insurance.  “Insurance” then became a payment plan, to maximize the tax deduction, and then horrendously inefficient as people were no longer spending their own money.

Worse, nobody who hopes to get a job with benefits then buys long-term individual insurance. This provision alone pretty much created the preexisting conditions problem.

Patch, patch. To address preexisting conditions, the government mandated that insurers must sell insurance to everyone at the same price. Insurance companies will then try to avoid sick people, so coverage must be highly regulated.  Healthy people won’t buy it, so it must be nearly impossible for people to just pay out of pocket. Obamacare added the individual mandate.

Cross-subsidies are a second original sin. Our government doesn’t like taxing and spending on budget where we can see it. So it forces others to pay: It forces employers to provide health insurance. It forces hospitals to provide free care. It low-balls Medicare and Medicaid reimbursement.

The big problem: These patches and cross-subsidies cannot stand competition. Yet without supply competition, costs increase, the number of people needing subsidized care rises, and around we go.

The Republican plans now circulating make progress. Rep. Tom Price’s plan ties protection from preexisting conditions to continuous coverage. His and Speaker Paul Ryan’s “Better Way” plan move toward premium support for private insurance, and greater portability.

So far, though, the announced plans do not really overturn the original sins. But those plans were crafted in a different political landscape. We can now  go big, and really fix the government-induced health care mess in a durable way.

I visited my dermatologist last month. I spent 20 minutes with a resident, and 5 minutes with the dermatologist. The bill was $1335. An “insurance adjustment”  knocked off  $779. Insurance paid $438. I paid $118.  The game goes on. We start with a fake sticker price to negotiate with the uninsured and to declare uncompensated care. But you cannot just walk in and pay as you can for anything else. Even $438 includes a huge cross-subsidy.

We’ll know we’ve fixed health care when we don’t get bills like this.

Mr. Cochrane is a Senior Fellow of the Hoover Institution at Stanford University and an Adjunct Scholar of the Cato Institute.

Wednesday, February 8, 2017

Carbon compromise?

In a remarkable and clear oped "A Conservative Answer to Climate Change" James Baker and George Shultz lay out the case for a carbon tax in place of the complex, cronyist and ineffective regulatory approach to controlling carbon emissions.

A plea to commenters. Don't fall in to the trap of arguing whether climate change is real or whether carbon (and methane) contribute to it. That's 5% of the debate. The real debate is how much economic damage does climate change actually do. Science might tell us that the temperature will warm 2 degrees in a century, with a band of uncertainty. But the band of uncertainty of the economic, social and political consequences of 2 degrees is much bigger. Moreover, the band of relative uncertainty is bigger still. Does "science," as the IPCC claims, really tell us that climate change is the greatest danger facing us -- above nuclear war, pandemic, state failure, and so on?

And most of all, given that our governments are going to do something about climate change, how can we do something much more efficient, and (plea to environmentalists) much more effective? That's the question worth debating.

Both sides have fallen in to the trap of arguing about climate change itself, as if it follows inexorably that our governments must respond to "yes" with the current system of controls and interventions. The range of economic and environmental effects from the "how" question are much, much larger than the range of the effects of the "is climate change real" question.

So, Baker and Shultz lay out in gorgeous clarity the kind of compromise we all hope our governments can still occasionally achieve: Given that we're going to do something, trade a carbon tax for the removal of intrusive regulation. You get more economy and less carbon.

The oped refers to a report from the Climate Leadership Council, which is here and worth reading. The Niskanen Center has also been championing the case, and reaching out to environmental groups.

There is a natural bargain, if our political system can get around its current habit of take-no-prisoners maximalism.

Tuesday, February 7, 2017

Summers on Trade

Larry Summers has an excellent FT column, "Revoking trade deals will not help American middle classes." (If you can't access FT, these usually show up eventually on Larry's blog)

The key point: whatever you think of the impact of trade and globalization, trade deals are not responsible for stagnating "middle class" wages.
...the idea that past trade agreements have damaged the American middle class and that the prospective Trans-Pacific Partnership would do further damage is now widely accepted in both major US political parties. 
... the idea that the US trade agreements of the past generation have impoverished to any significant extent is absurd. 
There is a debate to be had about the impact of globalisation on middle class wages and inequality. Increased imports have displaced jobs...
My judgment is that these effects are considerably smaller than the impacts of technological progress... 
But an assessment of the impact of trade on wages is very different than an assessment of trade agreements. It is inconceivable that multilateral trade agreements, such as the North American Free Trade Agreement, have had a meaningful impact on US wages and jobs for the simple reason that the US market was almost completely open 40 years ago before entering into any of the controversial agreements. 
...The irrelevance of trade agreements to import competition becomes obvious when one listens to the main arguments against trade agreements. They rarely, if ever, take the form of saying we are inappropriately taking down US trade barriers. 
Rather the naysayers argue that different demands should be made on other countries during negotiations - on issues including intellectual property, labour standards, dispute resolution or exchange rate manipulation....
In other words, the US was open already in the postwar period. Trade deals ask other countries to take down trade barriers in specific markets, and also to make internal changes, for the US to remain open.
The reason for the rise in US imports is not reduced trade barriers. Rather it is that emerging markets are indeed emerging. They are growing in their economic potential because of successful economic reforms and greater global integration. 
These developments would have occurred with or without US trade pacts, though the agreements have usually been an impetus to reform. Indeed, since the US does very little to reduce trade barriers in our agreements, the impetus to reform is most of what foreign policymakers value in them along with political connection to the US. 
Trade deals are very useful for many countries, including the U.S. When politicians get demands for subsidies, protection, stifling regulation, or lack of needed regulation, they can point to the trade agreement. That's a good argument for multilateral agreements as well -- look at the broad range of countries that has agreed to behave, not just look at our special deal with one country.
The truth too often denied by both sides in this debate is that incremental agreements like TPP have been largely irrelevant to the fate of middle class workers. The real strategic choice Americans face is whether the objective of their policies is to see the economies of the rest of the world grow and prosper. Or, does the US want to keep the rest of the world from threatening it by slowing global growth and walling off products and people?
Framed this way the solution appears obvious. A strategy of returning to the protectionism of the past and seeking to thwart the growth of other nations is untenable and would likely lead to a downward spiral in the global economy. The right approach is to maintain openness while finding ways to help workers at home who are displaced by technical progress, trade or other challenges.
If it works, protection only enriches some Americans at the expense of foreigners and other Americans.  It is a negative-sum game. If you do not think America's role in the world is to try to send a billion Chinese and Indians back to grinding poverty, to benefit a bit selected American workers and businesses, then you ought not to be a fan.

Larry focuses on the TPP, but the trade agenda is now much larger -- a substantial increase in US trade restrictions, including a return to tariffs, industry - by - industry quantative restrictions, even in violation of trade agreements, and so on.

Larry mentions protectionism in the past, but don't get all nostalgic. That was in the far past, last seen in the universally reviled Smoot-Hawley tariff of the Great Depression. Nobody looks back to that nostalgically as part of "Great" America.

Do read the whole essay.

Monday, February 6, 2017

Dodd-Frank Reform

Dodd-Frank reform seems to be back on the front burner, according to the latest Presidential executive order. At last.

But let us hope it can be done right. Simply pulling down regulations in ways demanded by big banks will lead, I am afraid, to lower capital standards, more debt implicitly guaranteed by the government, and just enough regulation to keep the big end of the banking industry protected from competition and disruptive innovation.

As with much reform, there is a rather detailed and clearheaded effort coming out of Congress, which gets much less attention than it should relative to the Administration's preliminary thoughts. Watch Rep Jeb Heainsarling's Choice Act for Dodd Frank reform. (Speaker Paul Ryan's "Better Way" plan is the one to watch on everything else. Though corporate taxes are getting a lot of news, the personal tax plan is more important.)

The core of the Choice act offers a clever carrot: Much less regulation in return for much more capital.

A reader asked me a while ago how I would deal with the extraordinary complexity of the Dodd-Frank act. I answered that fixing it was easy  -- a trained parrot could do it. Just teach the parrot to say "More capital. More Capital. More capital."  

Which is all to introduce a little essay I wrote that was serendipitously published last week in the Chicago Booth Review, "A way to fight bank runs—and regulatory complexity" It's a much edited version of an earlier blog post, and offers some suggestions on how even the Choice act might be improved. I'd copy it here, but the Booth Review team did such a nice job of formatting it that I'll hope to get you to click the link instead.

(I've been doing this for a while with the Chicago Booth Review, and they now have a page with all my essays.)

Wednesday, February 1, 2017

Corporate tax (or is it?) reading list

On the house and administration plans to reform the corporate tax, and my struggles to figure it out.

Larry Kotlikoff, "With Some Tweaks, The Democrats Can Love The House Tax Plan."
..the corporate tax reform, which is the most significant part of the House plan and represents a major and long overdue shift toward consumption taxation.  ...  there are two ways to tax consumption, C. You can either tax it directly (e.g., via a retail sales tax or a personal consumption tax) or indirectly by taxing everything available for consumption, namely output plus imports, less investment plus exports.
Greg Mankiw, "A Three-Point Tax Reform"
Consider the following tax reform:
1. Impose a retail sales tax on consumer goods and services, both domestic and imported.
2. Use some of the proceeds from the tax to repeal the corporate income tax.
3. Use the rest of the proceeds from the tax to significantly cut the payroll tax.
As I understand it, this plan is, in effect, what the Republicans in Congress are proposing.
William G. Gale, "Understanding the Republicans’ corporate tax reform"
The DBCFT is essentially a value-added tax (VAT), but with a deduction for wages.  ...The deduction for wages makes the DBCFT progressive, relative to a VAT. It only taxes consumption financed out of holdings of capital, whereas a VAT burdens all consumption. 
..A final concern is that the corporate reform proposals described above, ... would reduce federal tax revenue..Rough estimates suggest that setting the DBCFT rate at around 30 percent for all businesses would eliminate the revenue shortfall. 

Monday, January 30, 2017

Immigration and trade

Question: What is an easy way to reduce immigration in to the US (if you want to do that)?

Answer: Buy what they have to sell. If they can make good money at home, they are less likely to want to come here.

Question: Won't we lose jobs?

Answer: What do you think people do with the dollars we send them in return for foreign goods? There is only one thing to do with dollars -- buy American goods,  invest in American companies, or buy US government debt, and the government spends it.

Question: But what about those jobs moving overseas?

Answer: Some jobs do move overseas. But those dollars, flowing back, create new jobs in the US. There are losers. It is true. There are also winners. That is also undeniable. Trade restrictions basically transfer jobs from some people in the US -- new jobs in export-oriented industries or industries fueled by foreign investment demand --  to other people in the US -- old jobs. And they do so inefficiently, making Americans buy more expensive goods overall.

Question: What's another way to reduce immigration in to the US (if you want to do that)?

Answer: Help their homes to be peaceful as well as prosperous. The costs of feckless foreign policy are not just lives and countries ruined, refugees washing up on our and europe's shores, but electoral and political responses.

(Economists. Forgive me for using the misleading "create jobs" rhetoric, in the interest of connecting with non economists. You know what I mean -- create wages, opportunities, businesses, etc.)

Thursday, January 26, 2017

Corporate Tax

My view: the corporate tax should be zero. Not just a zero rate, but the tax should be abolished. Lowering a rate is just an invitation to renegotiation, and a quick raise when the next party takes over. Lowering a rate keeps all the lobbyists around to keep all the exemptions going. To reduce a tax, you must follow the advice of a zombie movie -- kill it, and drive a stake through its heart. Burn the code, delete it from the hard drive.

In my best guess, the tax is entirely really paid by consumers in higher prices and workers in lower wages. However, it works best only with a shift to a consumption tax (progressive if you wish) on individuals.

In the news, Marginal Revoultion has a short piece on eliminating the corporate tax, linking to Utah Senator  Mike Lee and to Matt Yglesias, Scrap the Corporate Income Tax. When I agree with Matt on something, a rare event, I like to celebrate. Matt:
"Closing loopholes while lowering rates would still leave the basic structure in place, with well-connected companies ferociously lobbying for their tax breaks. We need something much bigger and tougher that corporate income tax reform: an alternative source of revenue that will let us do away with the corporate income tax entirely. 
.. Just give up. Though the corporate income tax as presently constructed supports a small army of accountants, tax lawyers, lobbyists, and CNBC talking heads, it doesn’t raise very much revenue.
Rather than trying to mend the tax, we ought to end it and replace it with something else.
Pick who or what we want to tax, and tax it deliberately."
Lee writes
"..what would a tax system that puts American workers first look like? It would start with a cut in the federal corporate tax rate. Not to 25 percent or 15 percent, but to zero. Eliminate it altogether."
Issue 1 Incidence 

What, shouldn't corporations "pay their fair share?" As both authors recognize, corporations bear no tax burden. Every cent of corporate tax comes from people -- from higher prices for products, lower wages for workers, or lower profits for investors. A corporation is just a shell, money goes in and money goes out.

Tuesday, January 24, 2017

Uncommon Knowledge Interview

A broad-ranging interview on economics and policy by Peter Robinson as part of the Hoover "Uncommmon Knowledge" series. Click above for youtube, or

· Hoover Institution:

· Twitter:

· Facebook:

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· Youtube:

· Bitly Link:

The full transcript is available on the episode page at

Monday, January 23, 2017

Chinese Tidbit

From the WSJ moneybeat blog:
China’s central bank extended support on Friday to a group of unnamed but large banks...  the People’s Bank of China extended a longer-term but temporary liquidity facility... Details on the facility were typically vague. In recent weeks it has also injected record amounts of cash. 
The move gives banks some breathing room for now, just as interbank liquidity stresses escalate. The new facility, analysts from ANZ say, doesn’t require banks to post collateral like other facilities typically do. And it makes it easier for them to reach a key regulatory barometer that monitors banks’ liquidity risk in cases of stress in the short term. A helping hand can lighten another burden–but not for long.
"Interbank liquidity stresses" and central bank long term "loans" without collateral are not a good sign. An escalating war on capital flight is not a good sign either.

Tuesday, January 10, 2017

Bruni on Rule of Law in Regulation

I found Frank Bruni's opinion piece in the Sunday New York Times noteworthy on the whole question of rule of law in regulation:
Hillary Clinton as New York City mayor?

Imagine the fun:  City building inspectors start to show up daily at Trump Tower, where they find a wobbly beam here, a missing smoke detector there, outdated wiring all over the place. City health inspectors fan out through Trump’s hotels, writing citations for clogged drains in the kitchens and expired milk in the minibars. 
The potholes near his properties go unfilled. Those neighborhoods are the last to be plowed. There’s a problem with the flow of water to his Bronx golf course, whose greens are suddenly brown. And the Russian Consulate keeps experiencing power failures. It’s the darnedest thing. Clinton vows to look into it, just as soon as she returns from the Hamptons.

..His [Trump's] hometown is her fief. She’s the boss of him whenever he’s in the Big Apple, and he’s in the Big Apple a whole lot.

...I’m fantasizing, yes, but with a glimmer of encouragement....there are so many scores she could settle, so many ways she could meddle. ...above all there’d be the torturing of Trump...The city’s Mexican Day Parade would be rerouted, from Madison Avenue over to Fifth, right past Trump Tower. A new city zoning experiment would locate detention centers in the strangest places. And in the city’s libraries, “The Art of the Deal” would be impossible to find, while upfront, on vivid display, there’d be copies galore of “It Takes a Village” and “Hard Choices.”
There is no indication that Bruni is kidding, that any of this would be both monstrously illegal, unethical, and a disaster for New York, and no disclaimer from his editors.

As far as I can tell, Bruni is a middle of the road Democrat, and a fan of large-government regulation.  (Like the rest of the Times, Bruni seems currently in full-tilt Trump Derangement Syndrome, with 11 out of his 14 columns since the election criticizing Trump, rather than policy, so if he's really a free-market deregulator, let me know.)

So how fascinating that Bruni -- and his Times editors -- seem to think it so natural that regulation and public services they admire -- building inspectors, muncipal water and power, zoning, even the public library -- should naturally be bent, far beyond legal limits, to partisan political service. Building inspections are used to punish political enemies, but we're supposed to trust that the IRS, Obamacare, EPA, FDA, NLRB, and Dodd-Frank are not?  Or is it just that illegal abuse of power is just fine and normal in the hands of their friends?

And how deeply naive. Really?

Monday, January 9, 2017

Leaders vs followers?

The Jan 9 Wall Street Journal had this nice graph, accompanying an article by Josh Zumbrun, "Top Economists Grapple with Public Disdain for Initiatives they Championed"

The question is this: Should we understand politicians as assembling coalitions of voters with fixed policy preferences? Or should we instead regard politicians as leaders, who give voice to general dissatisfaction, and their followers picking up ideas?

Most political analysis takes the former view. People are mad about China, the TPP, immigrants, or whatever, and Trump comes along, listens, and represents these preferences, and wins. Easy models of political preference put preexisting policy views on a line, and then think about where leaders choose to place themselves.

The article echoed the common view too
Surveys from the Pew Research Center have documented dwindling support for free trade. In 2014, 60% of Democratic voters and 55% of Republican voters supported such trade agreements. In an October survey, however, support among Democrats had fallen to 56% and support among Republicans had nose-dived to 24%.
I'm coming to a different view. Yes, people are unhappy. But the average American is busy with a real life, and doesn't think a whole lot about cause and effect in public policy. How many have read NAFTA or the TPP, or have any idea what's inside?  How many have thought about automation vs. regulation vs. trade as the source of industrial decline?

It seems to me the ideas come from the leader, giving voice to their voter's frustrations. Policy views then become general signals of team allegiance. Witness how many Trump supporters, interviewed, supported him despite not because of policy stances.

And witness the graph. How could it possibly be that in two years, opinions on the value of free trade among Republicans dropped by half, while virtually unchanged among Democrats? Surely, this is not a change of view independent of candidates, that Mr. Trump was just quicker to recognize. Surely, this represents the opposite -- candidates, especially Mr. Trump but also many of the others, denounce trade, and followers follow.

The good news is that ideas held lightly and as a badge of support can more easily change.   And other leaders can channel the same discontents to more profitable analysis of our country's problems.