Wednesday, October 28, 2020

Podcast with Ed Glaeser

podcast conversation with Harvard's Ed Glaeser, a if not the top economist who does urban affairs.   Does Zoom mean we all work from home? Will cities bounce back? Will San Francisco and New York fade and smaller cities grow? What problems are the policies causing and can cities reverse downward spirals? How to help unfortunate people who live in cities? Join us for a fast paced discussion with a leader in the field.

This is a follow up to a previous podcast on cities

What you believe depends on where you stand, apparently.

Or, talking your book on surveys. 

Political Polarization and Expected Economic Outcomes by Olivier Coibion, Yuriy Gorodnichenko, and Michael Weber is a fascinating working paper on the election. 

...despite wanting different things, voters should be able to broadly agree on the likelihood of different electoral outcomes..

Nope. 

87% of Democrats expect Biden to win while 84% of Republicans expect Trump to win. Importantly, this stark disagreement does not reflect two sets of partisan voters each foreseeing a close election that just barely breaks their way. Among Republicans, the average probability they assign to Trump winning is 76%, with more than one in five saying that Trump will win with 100% probability. Among Democrats, the average probability assigned to Biden winning is 74%, with almost 15% of them saying that Biden will win with 100% probability. 

Less surprising:

Republicans expect a fairly rosy economic scenario if Trump is elected but a very dire one if Biden wins. Democrats ... expect calamity if Trump is re- elected but an economic boom if Biden wins. 

Perhaps of course that economic forecast is why each group votes the way they do, and the conditional distribution should go the other ways -- given which president you think will be a calamity, you vote for the other one. 

Normally I am a bit skeptical about surveys -- they measure what people respond on surveys. Surely people don't mean 100% chance of my candidate wining in the same way they assess the probability of the car breaking down on the way to work. But here measuring what people respond on surveys is quite interesting! If people respond 100% chance of their candidate winning, the same people's response that 100% chance of the stocks they bought going up makes more sense. We learn what "likely" means in casual conversation, compared to "true-measure conditional probability." 

So, I can forecast with 100% probability, the libertarian revolution is coming in 2024! 


Tuesday, October 27, 2020

Virtual finance theory seminar

I'm giving "A fiscal theory of monetary policy with partially-repaid long-term debt" at the virtual finance theory seminar, Wed Oct 28 at 1 PM EDT. Brett Green leads off with "Due Diligence" at 12 PM EDT. If interested, come join. Warning: this is an academic theory paper whose whole point is to look at equations. 

The link has an email address which I don't want to post here, email for a zoom invitation. 

This is an excellent seminar series and one of the first of the new international zooms, which are an exciting development. Thanks to Linda Schilling for organizing.

Monday, October 26, 2020

IMF, BIS, expanded mandates, climate and inequality

Last week I was pretty critical of the ECB's move to expand its mandate to take on climate policy. The ECB is not alone however. The Bank of England started down this direction. The IMF has also been a proponent, and the BIS is nodding assent. 

In short, the move that central banks, financial regulators, and their club of international institutions should to expand to general macroeconomic and financial dirigisme, and then take on climate, inequality, and other social causes far beyond their institutional mandates is widespread. The ECB is not alone, and in this context their wish to join the movement makes more sense. 

I adapt here some comments I made last March at the end of the Homer Jones talk I gave at the Federal Reserve Bank of St. Louis (videowritten version).  For that reason my links and sources stop around then. All of that was quickly overshadowed by covid, but perhaps it's time to revive the question. Let's go: 

From probity to exchange rate, capital, and macro prudential dirigisme. 

For decades the IMF served a valuable function. IMF urged countries to keep trade and capital open. In a crisis, the IMF required a commitment to micro deregulation, cutting subsidies, and getting the fiscal house in order before offering a bridge loan. This is like borrowing from your grumpy uncle: Get a job, stop drinking and gambling, here is some money to tide you over, but I'll be watching.

In 2012, the IMF moved to an "institutional view," advocating that central banks "manage" capital flows and exchange rates, along with extensive macroprudential direction.  For example, explaining the "institutional view,"  the IMF writes in 2018

"CFMs …are designed to limit capital flows. These can include administrative and price-based restrictions on capital flows, for instance bans, limits, taxes, and reserve requirements."

The BIS (2019) Annual Report Chapter II chimes in enthusiastically as well. 

..most EME [Emerging Market Economy] ..inflation targeters have pursued a controlled floating exchange rate regime, using FX intervention to deal with the challenges from excessive capital flow and associated exchange rate volatility. This contrasts with standard textbook prescriptions for inflation targeters, which advocate free floating without recourse to FX intervention.

The IMF and BIS reports make clear that they are following emerging common practice at central banks around the world, rather than leading a new agenda. Whether jumping in front of a bandwagon is wise is a good question to ask. If the ambitious but vague dirigisme of these reports drives you batty, I recommend re-reading Lucas (1979) review of a previous OECD report, always a good tonic if you are suffering a deficit of grumpiness.  See also the IMF's 2013 case for macro prudential policy

The IMF's new "integrated policy framework" promises an even more ambitious "integrated" approach to "monetary policy, macroprudential policy, exchange rate interventions, and capital flow measures," tailored to disparate "country circumstances." (Kristalina Georgieva,  Financial Times, February 17, 2020.) 

It is all very tempting. Central bankers like to feel important. Interest rates are either stuck at zero or don't seem to do a heck of a lot. Well, take on broad new powers to run things and do good as you see it. Alphabet soup international institutions are even less directly powerful. Well, cheerlead for the movement. 

But like discretionary monetary policy, central banks have never been able to time credit and asset price cycles, or micromanage dozens of interacting policy levers to offset poorly understood (and country-specific) "frictions" and "imperfections," as the IMF now proposes and recommends.   How do you tell a boom from a bubble in real time? How and why will central banks get it right this time after so many abject failures—2007 being the most recent and screaming example? How will they avoid repeating the endless problems of managed exchange rates and extensive capital controls that finally blew up in the 1970s? Central bankers are only human, just like the rest of us—and just as prey to the fallacy that we're the smart ones and everyone else is behavioral. In the crisis, as monetary policy committees were begging banks to lend, regulators were telling banks to cut back lest the crisis get worse. In the 12th year of the subsequent expansion, the U.S. was been if anything loosening capital and credit standards, despite great increases in credit. So much for macroprudence. 

Rather than try to stop anyone from ever borrowing too much or losing money ex post, we should make the financial system robust so that people can make and lose money without burning down the house. That's the equity-financed banking approach.

Climate. 

The current trend is even more ambitious. Now, the International Monetary Fund, the Bank for International Settlements, and the Financial Stability Board are advocating and the Bank of England is starting to implement climate policies.  Central banks should demand extensive disclosures of "climate risk" and contributions to "sustainable investing." Those lending to, say, fracking companies will have an army of regulators descend on them. The European Central Bank is buying "green" bonds. Fed Chair Jay Powell has so far been a courageous and principled resister to the climate side of this movement, ("Bankers Aren't Climate Scientists, WSJ 2020) but we'll see how long that lone voice of resistance can hold out. 

BIS: See, for example, Bolton et al. (2020) "The Green Swan" at the BIS, whose abstract states central banks should step up to 

"coordinating actions among many players including governments, the private sector, civil society and the international community. … Those include climate mitigation policies such as carbon pricing, the integration of sustainability into financial practices and accounting frameworks …"

In his foreword to this piece, BIS general Manager Augustín Carstens starts reasonably by also advocating carbon taxes—though this has nothing to do with central banks under usual readings of their mandates. But, since carbon taxation "requires consensus building" and is "difficult to implement," central banks should plow forward to 

"raising stakeholders' awareness and facilitating coordination among them. Central banks can coordinate their own actions with a broad set of measures to be implemented by other players (governments, the private sector, civil society and the international community) …there are many practical actions central banks can undertake (and, in some cases, are already undertaking). They include… environmental, social and governance (ESG) criteria in their pension funds; helping to develop and assess the proper taxonomy to define the carbon footprint of assets more precisely (eg "green" versus "brown" assets); working closely with the financial sector on disclosure of carbon-­intensive exposure…; …examining the adequate room to invest surplus FX reserves into green bonds. "

In a separate preface, François Villeroy de Galhau, Governor of the Banque de France, advocates that 

"more holistic perspectives become essential to coordinate central banks', regulators', and supervisors' actions with those of other players, starting with government." 

Bank of England: 

Carney (2019) "fifty shades of green" is a good place to start. The first step is "disclosure." The FSB instigated a "task force on climate-­related financial disclosures" (TCFD): 

"four-fifths of the top 1,100 Group of Twenty companies now disclose climate-related financial risks as some TCFD recommendations advise. "

The next step is to make disclosure mandatory, as the United Kingdom and European Union have already signaled. The third step is regulation and de-financing unpopular industries: 

"Banks …are taking steps to assess exposure to transition risks in anticipation of climate action. This includes exposure to carbon-intensive sectors, consumer loans for diesel vehicles, and mortgages for rental properties, given new energy efficiency requirements."

The message is clear: Nice bank you've got there. It would be a shame if something should happen to it. Sure you want to keep lending to fossil fuel companies? 

"The Bank of England is …setting out our expectations with respect to the following:

Governance: Firms will be expected to embed the consideration of climate risks fully into governance frameworks, including at the board level…

Risk management: Firms must consider climate change in accordance with their board-approved risk appetite…

Appropriate disclosure of climate risks: Firms must develop and maintain methods to evaluate and disclose these risks.

The Bank of England will be the first regulator to stress-test its financial system under various climate pathways…This stress test will.. make the heart of the global financial system more responsive to changes to both the climate and to government climate policies.

The Bank of England will develop the approach in consultation with …other informed stakeholders, including experts from the Network of Central Banks and Supervisors for Greening the Financial System.…"

(Yes, my quotations are selective, so you can see what's going on in the otherwise sleep-inducing verbiage. Read the originals if you're unhappy about that.)

On to inequality.

The IMF is now advocating, along with climate, a full range of policies including increased "social spending," progressive taxation, income redistribution, and social-justice policies far beyond anything traditionally monetary or financial. 

The IMF is now advocating, along with climate, a full range of policies including increased "social spending," progressive taxation, income redistribution, and social-justice policies far beyond anything traditionally monetary or financial.  For example, IMF Managing Director Kristalina Georgieva (2020) writes in "Reduce Inequality to Create Opportunity,"

Progressive taxation is a key component of effective fiscal policy…Gender budgeting is another valuable fiscal tool in the fight to reduce inequality….The ability to scale up social spending is also essential…Active labor market policies…job search assistance, training programs, and in some instances, wage insurance….Geographically-targeted policies and investments can complement existing social transfers…:

During the implementation of the IMF-supported program, Egypt more than doubled its coverage of cash transfers,…we are working to implement our social spending strategy by weaving it into the fabric of our work…

Note the latter point -- during the implementation of the Egypt program... In the past, when the IMF parachuted in to a bankrupt country, the first thing it would do is to tell the government to rein in useless subsidies and other spending programs. When you look at a typical EME budget, they spend money on a lot of politically popular but ineffective subsidies. Many of them subsidize gasoline, not a great climate policy. Now the IMF is going to reverse that -- on inequality grounds, have a Bloody Mary for that debt hangover. And spend more money on green subsidies too.  [Update: A correspondent inquires what "gender budgeting" means. It is a new euphemism to me.]  

The IMF (2019) "Strategy for Engagement on Social Spending" goes into details. 

…concerns about rising inequality and the need to support vulnerable groups,… a global commitment to continue support for inclusive growth, as expressed in the 2030 Sustainable Development Goals (SDGs).… Social spending is viewed as a key policy lever for addressing these issues. 

The Fund has concomitantly increased its work on social spending. …The growing emphasis on inclusive growth is also reflected in operational activities, including the use of social spending "floors" in IMF-­supported programs. There has been enhanced engagement on inequality issues in surveillance, as well as increased technical assistance to expand fiscal space for social spending. 

Requirements for "sustainable accounting" (see Finley, 2020 WSJ, criticizing a Michael Bloomberg proposal), "disclosure" of environmental, social, and corporate governance (ESG) blessings, "stakeholder capitalism," divestiture, and de-financing more unfavored industries are already being advanced.

The messenger not the message

I emphasize that my objection here is to the messenger, not the message. These institutions are empowered to worry about financial affairs. They are not empowered, nor competent as general purpose do-good agencies. 

There is a reasonable risk that climate change may be, in 50 or 100 years, a big economic problem. There is a larger risk that climate change is an environmental problem with little economic impact. But the risk that unforeseen changes—risk—in climate threatens the financial system with another run is essentially zero on the 5-year-or-so timeline of honest risk assessment. (Except maybe risks induced by the same regulators!) 

Repeating the contrary assertion over and over in speeches does not make it so. That, say, coal company stock investors may lose money when regulators shut down their businesses is not a systemic risk, unless we debase "systemic" to mean anyone ever losing money on anything. 

Likewise, you may regard inequality as a big economic problem. (I regard lack of opportunity as a big economic problem, but I'm more focused on compassion for the unfortunate than hatred of the super-rich.) But no matter how you feel about the issue, bringing inequality into the financial mandate by claiming that inequality causes systemic runs, as the IMF is doing, is a similar flight of fancy. And once you cook the books to advance climate and inequality, the books are cooked for everything else, too. And when the IMF  comes flying in to solve a genuine crisis, everyone knows "here come the book-cookers, everything they say is going to be political.  

As I write, (this was late Feb 2020) the chance of a systemic crisis induced by a pandemic is a strong possibility. That none of this scenario-building and stress-testing even considered pandemic risk, in the wake of SARS, MERS, Ebola, and HIV, exposes just how much groupthink and virtue-signaling and how little quantifiable prescience any of this effort has—and how utterly this whole project for a regulatory elite to foresee risk has failed. The possibility of advanced country sovereign default is similarly absent from these exercises, though it has happened many times before and would be a calamity to our system built on the sanctity of such debt and its ability to bail others out in crisis.

In sum, my objection has nothing to do with the importance or not of climate and inequality or the worthiness or not of these (regulate, de-fund, redistribute) policy approaches to climate and inequality. The main problem is that these are, obviously, highly partisan and deeply political actions on which people disagree rather strongly, at least outside of the bubbles in which international central bankers and NGO staff seem to operate. 

Maybe climate change and inequality are the existential problems our economies must address. Perhaps green new deal controls, highly progressive taxation, universal basic incomes, and wealth taxes, rather than a carbon tax and a focus on opportunity—my favorites—are necessary means to fight them. But central banks and their supporting alphabet soup institutions should not appoint themselves to coerce financial institutions and governments to these causes, especially by such transparently dishonest means. 

Independence

The concluding part of the essay points out that such blatant politicization will cost the institutions their independence, as well as their reputation for technocratic competence. But I think I said that well enough last time so I'll leave you here. 

Update: International institutions

The real tragedy of this situation only struck me after the fact. I, and I suspect many of you, hold some conservative reverence for the postwar era of strong international institutions, and a rule-based international order, rather than the emerging era of bilateral deals among nations. Yet the evident rot at international institutions is one good reason countries are retreating from international institutions or ignoring them. 

Update: New Zealand

Commenter Coker below points us to the Reserve Bank of New Zealand's climate initiative I read most of it as a pledge that many overpaid RBNZ employees will spend a lot of time churning out reports that nobody will read. But there is a clear statement of intent to implement ECB style policies, i.e. to use bank regulation to channel credit and subsidize 'green' (their scare quotes) investments: 

"Engage with regulated entities to understand how climate related risks are being addressed within the sectors that we regulate. As part of this, the Bank will:

Engage with entities to explore their own internal climate risk strategies to evaluate the New Zealand financial system’s awareness and management of climate risks; and

Seek to identify opportunities to enhance disclosure of climate risks in New Zealand.

Monitor the development and operation of capital markets to identify any impediments to the efficient provision of finance for ‘green’ investments."


Tuesday, October 20, 2020

Challenges for central banks.

On October 20, I was graciously invited to give a talk at the  ECB Conference on Monetary Policy: bridging science and practice. 

I survey six challenges facing central banks: 1. Interest rates and inflation; 2. Policy reviews; 3. Financial reform post 2008 4. New challenges to finance post covid; 5. The many risks ahead; 6. Central banks and climate.  

For the whole thing, go here for a pdf. A video of my presentation is here. (The conference website will have all videso soon.) Items 1-5 are mostly interesting for monetary economists, though general readers might find my summary and distillation of the Fed policy review of some interest. 

Here, I post the section on climate change and conclusion, which are the most novel. And if you like the general approach and want to see it applied to the rest of what central banks are up to, that's another advertisement to read the whole talk pdf. 

In the section leading up to this, I describe risks to the financial system from widespread defaults, sovereign defaults, a US debt and currency crisis, another bigger pandemic, war, political chaos, cyber disaster and a few other unpleasant possibilities. But covid has taught us to prepare for the unexpected.  

....Which brings me to a great puzzle. In this context why are the ECB, BoE, BIS, IMF consumed with one and only one “risk”… climate? 

Challenge 6. Climate, Mission creep, and Politicization risk. 

I think this adventure is a dangerous mistake. 

Disclaimer: I do not argue that climate change is fake or unimportant. None of my comments reflect any argument with scientific fact. (I favor a uniform carbon tax in return for essentially no regulation.) 

The question is whether the ECB, other central banks, and international institutions such as the IMF, BIS, and OECD should appoint themselves to take on climate policy, or other important social, environmental or political causes, without a clear mandate to do so from politically accountable leaders. 

Moreover, the ECB and others are not just embarking on climate policy in general. They are embarking on the enforcement of one particular set of climate policies — policies to force banks and private companies to de-fund fossil fuel industries, even while alternatives are not available at scale, and to provide subsidized funding to an ill-defined set of “green” projects. 

To be concrete, I quote from Executive Board Member Isabel Schnabel’s recent speech. I don’t mean to pick on her, but she expresses the climate agenda very well, and her speech bears the ECB imprimatur. She recommends

"First, as prudential supervisor, we have an obligation to protect the safety and soundness of the banking sector. This includes making sure that banks properly assess the risks from carbon-intensive exposures…"

Let me speak out loud the unclothed emperor fact: Climate change does not pose any financial risk, at the 1, 5 or even 10 year horizon at which one can conceivably assess the risk to bank assets.

“Risk” means variance, unforeseen events. We know exactly where the climate is going in the next 5 to 10 years. Hurricanes and floods, though influenced by climate change, are well modeled for the next 5 to 10 years. Advanced economies and financial systems are remarkably impervious to weather. Relative market demand for fossil vs. alternative energy is as easy or hard to forecast as anything else in the economy. Exxon bonds are factually safer, financially, than Tesla bonds, and easier to value. The main risk to fossil fuel companies is that regulators will destroy them, as the ECB proposes to do, a risk regulators themselves control. And political risk is a standard part of bond valuation. 

That banks are risky because of exposure to carbon-emitting companies, that carbon-emitting company debt is financially risky because of unexpected changes in climate, in ways that conventional risk measures do not capture, that banks need to be regulated away from that exposure because of risk to the financial system is nonsense. (And if it were not nonsense, regulating bank liabilities away from short term debt and towards more equity would be a more effective solution to the financial problem.) 

Tuesday, October 13, 2020

Understanding the Left

(Updated) This is an essay on politics. Some of my most valued readers have expressed they don't enjoy my posts on politics. Fair enough, I'll be back soon with commentary on monetary policy. See you later. 

This essay is part of a larger project from last fall, to understand what's going on with the Woke movement in the far left of American politics. This is an economic analysis -- I analyze behavior from incentives. I don't try to examine the content of ideology, but I watch its uses. I look for objectives and rules of the game that make sense of behavior. I think in terms of strategies and payoffs, in simple game-theory terms not moralistic terms. But the point of the essay is to understand a political movement. 

What about Trump? I hear this comment all the time, even when my posts don't have anything to do with Trump. As the essay explains, I think I have an insight here into what is going on with the left. What's going on with Trump is a different question. When I have insights about that, I'll write about it. Not everything has to be about Trump. 

More deeply, though, I see that Wokeism has permeated all the institutions of civil society, and is a rising force that will be around for a while. In my view, Trumpism consists largely of the tweets of one man, with very little institutional force, and I suspect Trumpism will be gone November 4 if current polls bear out. If not, in 4 years. The Republican Party will rebuild on other lines. Ross Douthat's "there will be no Trump Coup" expresses this view beautifully. Perhaps I'm wrong, but one does not have to cover everything in one essay. 

Really, the battle lines that are likely to matter for the next 4 years is the Woke millennials vs. the conservative democrats of the Woodstock generation. Understanding the left will be the task of all my moderate Democrat friends, which describes most of economics. This is dedicated to you, not to Trump supporters. 

Why now? I worked on this project for a good deal of last year, producing this essay in January. I hoped to come back to it and produce a longer and better piece, but that's not happening, and events and ideas are moving fast. So, until I get back to it in a few months, perhaps it has useful insights. I think I was early to the point, now common, to see in Wokeism a secular religion with political force, perhaps analogous to the reformation (let's not forget what a bloodbath that was) or the Russian Revolution. This essay was written before George Floyd, Antifa riots, and before the whole issue became tinged with race. Perhaps that is for the best too. 

This was a speech given for Mt Pelerin in January 2020, organized by John Taylor.  Original source and context here

With that preamble, here it is: 

******

Understanding the left. 

Comments for Mt Pelerin society meetings, “How to deal with the resurgence of socialism” January 2020, Hoover Intistution

John H. Cochrane

Senior Fellow, Hoover Institution

A new wave of government expansion is cresting. It poses a threat not just to our economic well being, but to our freedom — social, political and economic.

1. A will to power

Consider the economic agenda proposed by the Democratic presidential candidates:

  • A government takeover of health care. 
  • Taxpayer bailout of student loans. Necessarily, after that, government funded and administered college.
  • An immense industrial-planning and regulation effort in the name of climate. 
  • Government jobs for all. “Basic income” transfers on top of social programs.
  • Confiscatory wealth, income, estate and corporate taxation. 
  • Government and “stakeholder” control of corporate boards. 
  • Rent controls and subsidies. Expanded, politically-allocated “affordable” housing. 
  • Expanded regulation of wages, hiring and firing.
  • Extensive speech and content regulation on the internet. 

And this is the center of the movement, not its fringe that talks of banning air travel. Though the fringe becomes the center quickly here.

Free-market economists, the few of us who remain, respond in the usual way. “I share your empathy, but consider all the disincentives and unintended consequences will doom these projects now, just as they have a hundred times before, and end up hurting the people we  want to help. Here is a set of free-market reforms that will actually achieve our common goals…"

But why say this for the 1001th time? Nobody’s listening.  We’re making a big mistake: We are presuming a common goal to produce a free and prosperous society, and somehow this crowd missed the lessons of history and logic of how to achieve it. Let’s not be so patronizing. 

If their answers are so different, it must be that they have a different question in mind. What is the question to which all this is a sensible, inevitable answer? 

Ask that, and only one question makes sense. Power.  All these measures gives great power those who control the government. 

The Philadelphia Statement

 While we're at it, The Philadelphia Statement is another effort to broadcast the value of free speech and open inquiry, with 15163 signatories so far.  A few choice quotes: 

Our liberty and our happiness depend upon the maintenance of a public culture in which freedom and civility coexist—where people can disagree robustly, even fiercely, yet treat each other as human beings—and, indeed, as fellow citizens—not mortal enemies. 

And not just as morally deplorable by virtue of disagreement. We need to listen, not silence.  

... As Americans, we desire a flourishing, open marketplace of ideas, knowing that it is the fairest and most effective way to separate falsehood from truth.

Not an army of censors at internet companies. Concrete objections: 

Monday, October 12, 2020

Open letter on campus culture

Adam Ellwanger, Professor of English at the University of Houston, has organized an important open letter on campus culture. It has hundreds of signatories. You can sign too if you wish.  

Campuses have been drifting left for a long time. But, as the letter notes, there is a new qualitative difference, that the bureaucratic machinery now compounds what was just social and to some extent professional (don't hire conservatives) pressure among the faculty. 

... campus groupthink ...  is enshrined and encoded in the protocols and procedures of university governance. ... administrative structures now investigate and prosecute deviations from orthodoxy through formal and informal exercises of institutional power.

Sunday, October 11, 2020

Nobel guess

Covid has really hurt the annual Nobel Prize gossip in economics circles. Here's my guess: Claudia Goldin and Tom Sowell. 

The last several decades have been amazingly productive in economics. There are dozens of economists who have made Nobel-worthy contributions, and the committee has a hard job sorting through just who should get it and when. 

Among these, who has superb, scholarly, innovative research, on issues that everyone cares about at the moment  (as well as on other important issues), demonstrating the power of economics to address important problems, and happens to embody some of the diversity everyone recognizes is missing in our profession? Claudia Goldin and Tom Sowell. 

Sure, their research comes up with uncomfortable answers. That's what good research should do. 

I will surely be wrong. I have yet to correctly predict a Nobel!    

Update:

Saturday, October 10, 2020

Should Stanford cancel Stanford? Many questions.

Stanford just announced that it will change the name of (David Starr) Jordan Hall, and remove the statue of Louis Agassiz that adorns it. See the link if you do not know who these people are. 

The announcement brings to mind an obvious question: How long can Stanford remain Stanford? Read paragraphs 4 and 9 of Leland Stanford's inaugural address as governor of California. Trigger/trauma warning: I do not post them here, as Stanford's words would likely cause this blog to be blocked. 

Friday, October 9, 2020

Video, talks, podcasts update

I have been remiss in posting links to videos, talks, and podcasts, for those of you who enjoy them.  Perhaps you have a long boring drive this weekend and NPR is driving you nuts. 

OECD talk -- rebuilding institutions in the wake of Covid-19

Friday morning I had the pleasure of participating in a session at the OECD, as part of their program on Confronting Planetary Emergencies - Solving Human Problems. I had the tough job of following brilliant remarks by Acting CEA chair Tyler Goodspeed and Ken Rogoff, and discussing great questions all starting at 5 AM. 

FYI here is the text of my prepared remarks. My focus is how to rebuild the competence of our institutions, which failed dismally in this crisis. 

(Update: Video of the event including Tyler Goodspeed's amazing critique,  plus Ken Rogoff's insightful talk. Thanks to Fahim M. from the comment below. Unknown says the audio is available on the main page, but I couldn't find it. )  

Covid and Beyond

John H. Cochrane

Remarks at the OECD, October 9, 2020

I very much appreciate the opportunity to speak today. Looking at some of the background documents, and listening to Tyler, I recognize that our panel is decidedly contrarian to the main views the OECD is pursuing, and those of the stars that you invited for previous panels. It says good things about the OECD that you want to listen to and understand heretical views.

I will try to answer to your question — what lessons should we take from the Covid experience? Many people say that “Covid changes everything.” I do not think the lesson is so radical. But the Covid  experience does, I think, bring to the fore and make urgent underlying problems that we need to address sooner rather than later. My “we” is global, and international institutions such as the OECD have a key role to play in this institutional regeneration. 

My theme is that we witnessed an outcome of grand institutional failure. We must reform our institutions, restore their basic competence, and thereby trust in that competence. We must de-politicize our institutions and insist that they return to the narrow focus of their competence. Trust must be earned. 

This erosion of our institutions has been going on for a long time now. in my view, the populist eruption, as well perhaps as much of the left-wing authoritarian woke eruption, stems from the view that elites don’t know why they are doing. That was laid bare in financial crisis, in many foreign policy misadventures, and laid bare by covid once again.

We are in a "planetary emergency." It is an emergency coming from the decay, or decadence if you will, of our governing institutions. They need to restore basic competence, not to embark on grand new adventures.  

The disease will pass, likely sooner rather than later due to the extraordinary inventiveness of our pharmaceutical and scientific institutions. The heroic efforts of doctors, and the speed with which they have learned to treat covid is remarkable. Diseases always have passed. And economies and societies returned to normal.

Covid -19 is, however, a fire drill, a wakeup call, a warning sign. It is almost perfectly designed to that purpose. It is just serious enough to get our attention, in a way that H1N1, SARS, and Ebola, were not.  But compared to plague, smallpox, typhus, cholera, 1918 influenza, the death rate is tiny.  

There is a virus out there, natural or engineered, that spreads like this one and kills 20% or more of the population. It will come sooner than we think. And we are wildly unprepared.  Ken Rogoff rightly points to a range of other tail events that we are wildly unprepared for. Antibiotic resistant bacteria.   Massive computer failure. Even a small nuclear war. 

Let us look somewhat chronologically at the list of failures in the last year.

Wednesday, October 7, 2020

Contract enforcement with costly verification -- Van Halen edition

From the Wall Street Journal Obituary 

A legacy of the band includes its contract riders—requests set as criteria for performance at a venue—particularly power and stage-construction requirements. Van Halen required a bowl of M&M’s to be placed in the band’s dressing room, with the brown candies removed—a test to make sure the contract was honored.

Economists may not be rock stars, but some rock stars are economists!  

RIP

Tuesday, October 6, 2020

On Re-Education Programs

On Sept 22,  the White House put out an "Executive Order on Combating Race and Sex Stereotyping." Media coverage has been curiously spotty. Reading the primary source is revealing.  

One expects an executive order to consist of a short list of things that can and cannot be done, like a regulation. This one is more of an investigative report, with a philosophical preamble. 

What's in the training programs?

Federal agencies are already implementing programs, on a wide scale. The order tells us a lot about what's in them. No, it is not an unbiased evaluation. But its selection of facts are nonetheless facts. No critic that I have seen has claimed otherwise. 

... the Department of the Treasury recently held a seminar that promoted arguments that “virtually all White people, regardless of how ‘woke’ they are, contribute to racism,” and that instructed small group leaders to encourage employees to avoid “narratives” that Americans should “be more color-blind” or “let people’s skills and personalities be what differentiates them.”..

Training materials from Argonne National Laboratories, a Federal entity, stated that racism “is interwoven into every fabric of America” and described statements like “color blindness” and the “meritocracy” as “actions of bias.”

Materials from Sandia National Laboratories, also a Federal entity, for non-minority males stated that an emphasis on “rationality over emotionality” was a characteristic of “white male[s],” and asked those present to “acknowledge” their “privilege” to each other.

A Smithsonian Institution museum graphic recently claimed that concepts like “[o]bjective, rational linear thinking,” “[h]ard work” being “the key to success,” the “nuclear family,” and belief in a single god are not values that unite Americans of all races but are instead “aspects and assumptions of whiteness.” The museum also stated that “[f]acing your whiteness is hard and can result in feelings of guilt, sadness, confusion, defensiveness, or fear.”

The  regulation, which only comes at the end of the document, is likewise enlightening. Referring to federal contractors, 

The contractor shall not use any workplace training that inculcates in its employees any form of race or sex stereotyping or any form of race or sex scapegoating, including the concepts that (a) one race or sex is inherently superior to another race or sex; (b) an individual, by virtue of his or her race or sex, is inherently racist, sexist, or oppressive, whether consciously or unconsciously; (c) an individual should be discriminated against or receive adverse treatment solely or partly because of his or her race or sex; (d) members of one race or sex cannot and should not attempt to treat others without respect to race or sex; (e) an individual’s moral character is necessarily determined by his or her race or sex; (f) an individual, by virtue of his or her race or sex, bears responsibility for actions committed in the past by other members of the same race or sex; (g) any individual should feel discomfort, guilt, anguish, or any other form of psychological distress on account of his or her race or sex; or (h) meritocracy or traits such as a hard work ethic are racist or sexist, or were created by a particular race to oppress another race. The term “race or sex stereotyping” means ascribing character traits, values, moral and ethical codes, privileges, status, or beliefs to a race or sex, or to an individual because of his or her race or sex, and the term “race or sex scapegoating” means assigning fault, blame, or bias to a race or sex, or to members of a race or sex because of their race or sex.

Similar language applies to federal agencies, and recipients of federal grants. Watch out universities. I am also told by friends that the Federal Reserve Board is implementing such training.

On a lake near Chicago I once saw a sign that said  "no radioactive dumping." Well, that's comforting you might say. On second thought, why did they have to put up the sign? 

Monday, October 5, 2020

Artistic representation of government waste

Man Controlling Trade


"...the man‐and‐horse statue outside the FTC, which signifies the government’s heroic battle to strangle trade. " 

Link from Chris Edwards proposed museum of government failures. (The actual title, "Man controlling trade," is almost as good in an unintentional, new-Deal sort of way, but I like Chris' better. )

I was chatting with Chris and nominated the California high speed railway, which will soon be a massive Christo-scale installation, dedicated to the same cause. Imagine arching viaducts looming over the freeways, connected to nothing, like the ruins of Roman aqueducts, but unlike those never used. Like this one.   

San Joaquin River Viaduct

All it needs is a great set of plaques, installed by the new Libertarian governor of the state of Jefferson after secession, and title. "Ruins of the progressive state?" The Pont du Gard it's not, but perhaps the brutalist functionality is better for my artistic purpose. 

(Yes, California really has built expensive overpasses and viaducts before building the roadbed to which they connect, which it will likely never build.  

Question of the day: If California is going to ban internal combustion cars and trucks, just what is the point of the train? It must now be a net carbon producer.)


 

Friday, October 2, 2020

Beat Covid Without a Vaccine

Beat Covid Without a Vaccine, with "frequent rapid at-home testing" write Larry Kotlikoff and Michael Mina in the Oct 2 WSJ. I've made this point many times before, as have Larry, Michael, and many others (Paul Romer especially) but this one is well written and concise, and the issue is so important it bears a bit of repetition and efforts to package the message. 

How would you like the recession to be over in a month? Here's the ticket. A vaccine is a technology for stopping the spread of a virus.  Frequent rapid at-home testing is a technology for stopping the spread of a  virus. And it is one we have now, if only the government will let us use it. 

"At least one such test, Abbott Labs ’ BinaxNOW, is already being produced for the government....

... each is simple enough to be self-administered. With the BinaxNow test, you swab the front of your nose, insert the swab into one side of a small card, add saline to the other side, close the card, and see if the reader on the front lights up green or red. A phone app records a negative result for use as a digital passport."

No doctor visit, no referral, no insurance, no lab, no do you fit the criteria. Just test and see if you're sick. 

"Asking those presumed to be infectious to stay home would cut transmission chains, ending Covid outbreaks within weeks. Each transmission stopped may prevent hundreds more. .... Like vaccines, the tests don’t have to be perfect. It’s enough to drop the virus’s reproductive number (the average number of people each infected person infects) below 1."

Thursday, October 1, 2020

Political diversity at the AEA

Mitchell Langbert, writing in Econ Journal Watch documents the ratio of Democrat/Republican Party affiliation and campaign contributions in the American Economic Association. Here is the bottom line


The most interesting part of the paper that the AEA skews more and more Democrat as you look higher up the hierarchy to who has more influence in the organization. 

Tuesday, September 29, 2020

Belgian Doctors' open letter on covid-19

A correspondent sent me a link to the Belgian Doctors' open letter on covid-19. I found it original, documented, and worth reading and thinking about. It is at least an important contribution to a debate -- and one of its big points, we should be having a debate. Science is still quite uncertain about much regarding this disease, and science never did know much about economic and public policy. I'm not totally convinced, but it has several interesting ideas that I had not considered before. 

The headline

We ask for an open debate, where all experts are represented without any form of censorship. After the initial panic surrounding covid-19, the objective facts now show a completely different picture – there is no medical justification for any emergency policy anymore.

The current crisis management has become totally disproportionate and causes more damage than it does any good.

We call for an end to all measures and ask for an immediate restoration of our normal democratic governance and legal structures and of all our civil liberties.

A history 

Monday, September 28, 2020

Fifty shades of QE. Research in the bubble.

It always struck me that research inside the Fed seems to produce answers closer to the views of Fed officials than does research outside of the Fed. Perhaps my experience of reading a speech by Ben Bernanke one morning and attending a workshop by a Fed economist that found exactly his guess of the (implausibly large, to me) effects of QE that afternoon colored my views. 

In "Fifty Shades of QE:" Brian Fabo, Martina Jančoková, Elisabeth Kempf,  and Luboš Pástor quantify this tendency:

...central bank papers report larger effects of QE on output and inflation. Central bankers are also more likely to report significant effects of QE on output and to use more positive language in the abstract. Central bankers who report larger QE effects on output experience more favorable career outcomes. A survey of central banks reveals substantial involvement of bank management in research production.

Figure 5 gives some sense of the result:

Saturday, September 26, 2020

"You're hired" Mulligan review

"You're Hired!" is Casey Mulligan's memoir of a year spent as Chief Economist of the Council of Economic Advisers. 

The book is pitched as an analysis of President Trump, "riveting first-hand accounts of President Trump’s engagement with policy and politics." I read it in part for that reason. Opinions on the current occupant generally reflect either kool-aid drinking, never-Trump disdain, or foaming-at-the-mouth derangement. Casey, one of the few remaining true-blue Chicago School economists, and an outstanding one who combines analysis and policy, is none of the above. I know him as a clear thinker and a straight talker.  With an election coming,  I wanted to see what he had to say. 

Casey delivers some important insights about this President. But the book is really not that much about Trump. It is much more about how the CEA works, how policy is formed in the Trump administration, which is much more like other administrations than you'd think, and a record of some great successes of the Trump-era CEA. (Kevin Hassett, the CEA chair, really deserves more pride of place in this story.) Trump shows up to make the big decisions, but usually on issues the CEA has spearheaded. 

For this story, and all the 90% that is not about Trump,  I strongly recommend the book to economists, of all political leanings. If you are an academic, interested in economic policy and in serving your country but without joining the permanent federal bureaucracy, the CEA is the most likely place you will land. If you want a voice for serious economic analysis in the government, the CEA is it. Casey also tells you how the CEA relies on academic research.