Sunday, February 16, 2020

Supply and demand in local economics

Act 1: If housing is too expensive, allow the supply curve to operate.

In a surprising bit of excellent economics,  Conor Dougherty  writes "Build Build Build Build..."in Sunday's New York Times.

The story starts with the usual way of doing business (meaning, not doing business) in California:
A developer had proposed putting 315 apartments on a choice parcel along Deer Hill Road — close to a Bay Area Rapid Transit station, and smack in the view of a bunch of high-dollar properties. ... Zoning rules allowed it, but neighbors seemed to feel that if their opposition was vehement enough, it could keep the Terraces unbuilt....
Mr. Falk could see where this was going. There would be years of hearings and design reviews and historical assessments and environmental reports. Voters would protest, the council would deny the project, the developer would sue. ...
Spoiler: Where did this all end up?
Today, after eight years of struggle, his career with the city is over, the Deer Hill Road site is still just a mass of dirt and shrubs, and Mr. Falk has become an outspoken proponent of taking local control away from cities like the one he used to lead.
Mr. Dougherty comes to a most un-Times like view of the problem.
America has a housing crisis. ...One need only look out an airplane window to see that this has nothing to do with a lack of space. It’s the concentration of opportunity and the rising cost of being near it.... There is, simply put, a dire shortage of housing in places where people and companies want to live — and reactionary local politics that fight every effort to add more homes.
Nearly all of the biggest challenges in America are, at some level, a housing problem. Rising home costs are a major driver of segregation, inequality, and racial and generational wealth gaps. You can’t talk about education or the shrinking middle class without talking about how much it costs to live near good schools and high-paying jobs. Transportation accounts for about a third of the nation’s carbon dioxide emissions, so there’s no serious plan for climate change that doesn’t begin with a conversation about how to alter the urban landscape so that people can live closer to work.
We tend to look to laws, edicts, regulations and other top-down solutions to problems. Mr. Dougherty notices we are a democracy, and one that at a local level is quite responsive to the desires of people who show up at town meetings. If this is to change, the attitude of the people in the room has to change.
the real solution will have to be sociological. People have to realize that homelessness is connected to housing prices. They have to accept it’s hypocritical to say that you don’t like density but are worried about climate change. They have to internalize the lesson that if they want their children to have a stable financial future, they have to make space. They are going to have to change.
Along the way, we meet Sonja Trauss, heroine of the YIMBY (yes in my back yard) movement who  "thought the Deer Hill Road project was too small."
Ms. Trauss...made her public debut a couple of years earlier, at a planning meeting at San Francisco City Hall. When it was time for public comment, she stepped to the microphone and addressed the commissioners, speaking in favor of a housing development. She returned to praise another one. And another. And another.
In backing every single project in the development pipeline that day, Ms. Trauss laid out a platform that would make her a celebrity of Bay Area politics: how expensive new housing today would become affordable old housing tomorrow, how San Francisco was blowing its chance to harness the energy of an economic boom to mass-build homes that generations of residents could enjoy. She didn’t care if a proposal was for apartments or condos or how much money its future residents had. It was a universal platform of more. Ms. Trauss was for anything and everything, so long as it was built tall and fast and had people living in it. 
My italics. Ponder how astonishing it is that anyone living in San Francisco or writing in the New York Times could say something like this.

Sonja also understands that ideas have to change.
her goal wasn’t to enact any particular housing policy, but to alter social mores such that neighbors who fought development ceased being regarded as stewards of good taste and instead came to be viewed as selfish hoarders.
Selfish, and intensely hypocritical. My Palo Alto neighbors fight development here, forcing all the people who build our houses, wait on our tables, and staff the businesses who pay our taxes, to drive 50 miles from Gilroy or Tracy. They are also parodies of bleeding heart inequality and climate warriors. 

Ms Trauss and Mr. Dougherty understand not only the mechanics of supply curves, vintage economics of real estate, the responsiveness of local governments to their constituents, but they get deep theorems about political economy: 
Ms. Trauss... argued that the entire notion of public comment on new construction was inherently flawed, because the beneficiaries — the people who would eventually live in the buildings — couldn’t argue their side.
“An ordinary political process like a sales tax — both sides have an opportunity to show up and say whether they’re for or against it,” she said. “But when you have a new project like this, where are the 700-plus people who would initially move in, much less the tens of thousands of people who would live in it over the lifetime of the project? Those people don’t know who they are yet. Some of them are not even born.”
This is a deep issue for land control regulation. "Affordable housing" whether directly by government  or by forcing developers to provide it (i.e. an implicit tax on new housing) is directed to long-time residents who are already here. The crying need is for housing for people who want to move here, to take the great jobs this area has to offer. That is what reduces inequality, enhances opportunity, and reduces carbon. The Bay Area has enacted quite a few museums of poverty to allow long-time residents with little or no income to stay, and to stay that way. 

Mr. Falk took a step that allowed the 300 unit plan to proceed, which he paid for with his job. He didn't dare read aloud the last half of his resignation letter. 
“All cities — even small ones — have a responsibility to address the most significant challenges of our time: climate change, income inequality, and housing affordability,” Mr. Falk had written. “I believe that adding multifamily housing at the BART station is the best way for Lafayette to do its part, and it has therefore become increasingly difficult for me to support, advocate for, or implement policies that would thwart transit density. My conscience won’t allow it.”
Lafayette in general has not yet had the change of ideas.

That California is a one-party state may actually help. If this were partisan, it would be easy to tar pro-development forces as evil Republicans who want to line to pockets of real estate developers. Instead, note how this argument hits all the progressive goals -- inequality, climate, affordability, homelessness, and nobody is talking about economic growth.  Well, it does help both. If an argument can be made inside a party, perhaps common sense has a better chance to emerge. Sensible climate policy disappeared from public debate when climate became a partisan cleavage issue.

Some of my libertarian friends have pushed back, saying that local communities have a right to build walls and drawbridges if they like. But if they want views, they can buy the property and keep it pristine.


Act 2: Uber congestion.

On Saturday, Eliot Brown at Wall Street Journal covered Uber and Traffic 
Five years ago, Travis Kalanick was so confident that Uber ...rides would prompt people to leave their cars at home that he told a tech conference: “If every car in San Francisco was Ubered there would be no traffic.”
Today, a mounting collection of studies shows the opposite: Far from easing traffic, Uber and its main rival Lyft..are adding to congestion in numerous U.S. downtowns.
...Multiple studies show that Uber and Lyft have pulled people away from buses, subways and walking, and that the apps add to the overall amount of driving in the U.S.
Surprise, surprise, if a method of transportation becomes cheaper and better, people use more of it. They substitute out of owner driven cars, yes. But Ubering substitutes away from a parked car, not a driven car!  People  also out of public transit, walking, bicycling and so forth. And they take more trips.

As usual, cities are full of complex regulatory schemes to allocate an underpriced resource -- caps and special fees on Uber and Lyft, for example.
Officials in San Francisco, Chicago and New York have cited congestion as the main rationale for new fees they recently enacted on Lyft and Uber rides in each of the cities.
As usual, the point of regulation here as it is in real estate, is to privilege access to free resources to status quo users -- to existing homeowners who like free views, to drivers of their own cars, to taxicab companies, to money-losing public transit. And a mess results.
Uber and Lyft now emphasize the ways they steer riders toward alternatives to their ride-hail cars, such as by incorporating public-transit options into their apps. 
Hmm. Clutter up the apps with more things people don't want? That's not likely to work.
They have both launched shared scooters and bikes.. 
With their own set of problems

The answer is hiding in plain sight, though not celebrated in this article:
[Uber and Lyft] and have lobbied heavily for congestion pricing in cities including New York, so that all cars on the road—not just theirs—share the penalties for added traffic.
Uber is “determined to continue our work to improve access to shared and active transportation modes, while also doubling down in our efforts to advocate for road pricing,” a spokesman said.
Aha! If the streets are congested with cars, charge all cars for using the streets. Real time electronic tolling is now easy to do. How the car is owed and operated is irrelevant. Every car causes the same congestion.  

How much should the toll cost?
drivers in major cities cruise for fares without passengers an estimated 40% of the time.
The biggest factor by far is the large amount of time Uber and Lyft drivers spend without any passengers, hunting for fares. A December report by the California Air Resources Board found ride-hailing cars are driving with no passengers 39% of the time; New York City estimates such cruising at 41%. 
Well, it surely should cost more to drive than to park. That Uber drivers are cruising around on free city streets, that move at speeds indistinguishable from parking, while awaiting rides is an obvious misuse of a free resource.

It's a win - win. Either we get unclogged streets, or we get a windfall of revenue for bankrupt cities. Or both.

Friday, February 7, 2020

New paper: fiscal theory of monetary policy

A second new paper: "A fiscal theory of monetary policy with partially repaid long-term debt."

By "fiscal theory of monetary policy" I mean a model with standard DSGE ingredients, including inertemporal optimization and market clearing, monetary policy described by interest rate targets, price or other frictions, but closed by fiscal theory, "active" fiscal policy rather than "active" monetary policy.

I aim to build a standard simple but somewhat realistic model of this sort, a parallel to the three equation textbook model that has been part of the new-Keynesian tool kit since the 1990s. I keep the model as simple and standard as possible, so the effect of the innovations one the fiscal side are clearer.

Two parts of the specification are central. First, long-term debt allows the model to produce a negative response of inflation to interest rates. Long-term debt also allows a fiscal shock to result in a protracted inflation, which slowly devalues long term bonds, rather than a price level jump.

Second, and most important, the paper writes down a process for fiscal surpluses in which today's deficits are partially repaid by tomorrow's surpluses. Look quickly at the surplus response functions in my last post. When the government runs a deficit, it reliably runs subsequent surpluses that partially repay some of the accumulated debt. The surplus is not an AR(1)! It has an s-shaped response function.

So if you want a realistic fiscal theory model, you need a surplus with an s-shaped response function, but you need to keep "active" fiscal policy. This combination is the central innovation of the paper.

Wednesday, February 5, 2020

New Paper -- the fiscal roots of inflation

I recently finished drafts of a few academic papers that blog readers might find interesting. Today, "The Fiscal Roots of Inflation."

The government debt valuation equation says that the real value of nominal debt equals the present value of surpluses. So, when there is inflation, the real value of nominal debt declines. Does that decline come about by lower future surpluses, or by a higher discount rate? You can guess the answer -- a higher discount rate.

Though to me this is interesting for how to construct fiscal theory models in which changes in the present value of government debt cause inflation, the valuation equation is every bit as much a part of  standard new-Keynesian models. So the paper does not take a stand on causality.

Here is an example of the sort of puzzle the paper addresses. Think about 2008. There was a big recession. Deficits zoomed, through bailout, stabilizers, and deliberate stimulus. Yet inflation.. declined. So how does the government debt valuation equation work? Well, maybe today's deficits are bad, but they came with news of better future surpluses. That's hard to stomach. And it isn't true in the data. Well, real interest rates declined and sharply. The discount rate for government debt declined, which raises the value of government debt, even if expected future surpluses are unchanged or declined. With a lower discount rate, government debt is more valuable. If the price level does not change, people want to buy less stuff and more government debt. That's lower aggregate demand, which pushes the price level down. Does this story bear out, quantitatively, in the data? Yes.

If you don't like discount rates and forward looking behavior, you can put the same observation in ex-post terms. When there is a big deficit, the value of debt rises. How, on average, does the debt-GDP ratio come back down on average? Well, the government could run big surpluses -- raise taxes, cut spending to pay off the debt. That turns out not to be the case. There could be a surge of economic growth. Maybe the stimuluses and infrastructure spending all pay off. That turns out not to be the case. Or, the real rate of return on government bonds could go down, so that debt grows at a lower rate. That turns out to be, on average and therefore predictably, the answer.


OK, to work. The paper starts by developing a Cambpell-Shiller type identity for government debt. This works also for arbitrary maturity structures of the debt. Corresponding to the Campbell-Shiller return linearization, $$ \rho v_{t+1}=v_{t}+r_{t+1}^{n}-\pi_{t+1}-g_{t+1}-s_{t+1}. $$ The log debt to GDP ratio at the end of period \(t+1\), \(v_{t+1}\), is equal to its value at the end of period \(t\), \(v_{t}\), increased by the log nominal return on the portfolio of government bonds \(r_{t+1}^{n}\) less inflation \(\pi_{t+1}\), less log GDP growth \(g_{t+1}\), and less the real primary surplus to GDP ratio \(s_{t+1}\). Surpluses, unlike dividends, can be negative, so I don't take the log here. This surplus is scaled to have units of surplus to value, so a 1% change in "surplus" changes the log value of debt by 1%. I use this equation to measure the surplus.

Iterating forward, and imposing the transversality condition, we have a Campbell-Shiller style present value identity, $$ v_{t}=\sum_{j=1}^{\infty}\rho^{j-1}s_{t+j}+\sum_{j=1}^{\infty}\rho^{j-1}g_{t+j} -\sum_{j=1}^{\infty}\rho^{j-1}\left( r_{t+j}^{n}-\pi _{t+j}\right). $$ Take innovations \( \Delta E_{t+1} \equiv E_{t+1}-E_t \) and we have $$ \Delta E_{t+1}\pi_{t+1}-\Delta E_{t+1} r_{t+1}^{n}= -\sum_{j=0}^{\infty} \rho^{j} \Delta E_{t+1}s_{t+1+j} -\sum_{j=0}^{\infty} \rho^{j} \Delta E_{t+1} g_{t+1+j}+\sum_{j=1}^{\infty} \rho^{j} \Delta E_{t+1}\left( r_{t+1+j}^{n}-\pi_{t+1+j}\right) $$ Unexpected inflation devalues bonds. So it must come with a decline in surpluses, a rise in the discount rate, or a decline in bond prices. Notice the value of debt disappeared, which is handy.

The bond return comes from future expected returns or inflation, so it's nice to get rid of that too. With a geometric maturity structure in which the face value of bonds of \(j\) maturity is \(\omega^j\), a high bond return today must come from lower bond returns in the future. $$ \Delta E_{t+1}r_{t+1}^{n} = -\sum_{j=1}^{\infty}\omega^{j}\Delta E_{t+1} r_{t+1+j}^{n} =-\sum_{j=1}^{\infty}\omega^{j}\Delta E_{t+1}\left[ (r_{t+1+j}^{n}-\pi_{t+1+j})+\pi_{t+1+j}\right] $$ Substitute and we have the last and best identity $$ \sum_{j=0}^{\infty}\omega^{j} \Delta E_{t+1}\pi_{t+1+j} = -\sum_{j=0}^{\infty} \rho^{j} \Delta E_{t+1}s_{t+1+j} -\sum_{j=0}^{\infty} \rho^{j} \Delta E_{t+1}g_{t+1+j} +\sum_{j=1}^{\infty} (\rho^{j} -\omega^{j})\Delta E_{t+1}\left( r_{t+1+j}^{n}-\pi_{t+1+j}\right) . $$ With long-term debt a weighted sum of current and future inflation corresponds to changes in expected surpluses and discount rates. A fiscal shock can result in future inflation, thereby falling on today's long term bonds. Equivalently, a surprise deficit today \(s_{t+1}\) must be met by future surpluses, by lower returns, or by devaluing outstanding bonds, so that the debt/GDP ratio is reestablished.


I ran a VAR and computed the responses to various shocks.

Here is the response to an inflation shock - -an unexpected movement \(\Delta E_1 \pi_1\). All other variables may move at the same time as the inflation shock.

Inflation is persistent, so a 1% inflation shock is about a 1.5% cumulative inflation shock, weighted
by the maturity of outstanding debt.

So, where is the 1.5% decline in present value of surpluses? Which terms of the identity matter?
Inflation does come with persistent deficits here. The sample is 1947-2018, so a lot of the inflation shocks come in the 1970s. You might raise three cheers for the fiscal theory, but not so fast. The deficits turn around and become surpluses. The sum of all surpluses term in the identity is a trivial -0.06, effectively zero. These deficits are essentially all paid back by subsequent surpluses.

Growth declines by half a percentage point cumulatively, accounting for 2/3 of the inflation. And the discount rate rises persistently. Two thirds of the devaluation of debt that inflation represents comes from higher real expected returns on government bonds, which in turn means higher interest rates that don't match inflation. (More graphs in the paper.)

Growth here is negatively correlated with inflation, which is true of the overall sample, but not of the story I started out with. What happens in a normal recession, that features lower inflation and lower output? Let's call it an aggregate demand shock. To measure such an event, I simply defined a shock that moves both output and inflation down by 1%. Here are the responses to this "recession shock."
 Inflation and output go down now, by 1%, and by construction. That's how I defined the shock. This is a recession with low growth, low inflation, and deficits. Not shown, interest rates all decline too.

So where does the low inflation come from in the above decomposition. Do today's deficits signal future surpluses? Yes, a bit. But not enough -- the cumulative sum of surpluses is -1.15% On its own, deficits should cause 1% inflation, the fiscal theory puzzle that started me out in this whole business. Growth quickly recovers, but is not positive for a sustained period. Like 2008, we see a basically downward shift in the level of GDP. That contributes another 1% inflationary force. The discount rate falls however,  so strongly as to raise the real value debt by almost 5 percentage points! That overcomes the inflationary forces and accounts for the deflation.

Here is a plot of the interest rates in response to the same shock. i is the three month rate, y is the 10 year rate, and rn is the return on the government bond portfolio. Yes, interest rates at all maturities jump down in this recession. Sharply lower rates mean a one-period windfall for the owners of long term bonds, then expected bond returns fall too.

The point 

Discount rates matter. If you want to understand the fiscal foundations of inflation, you have to understand the government debt valuation equation. Inflation and deflation over the cycle is not driven by changing expected surpluses. If you want to view it "passively," inflation and deflation over the cycle does not result in passive policy accommodation through taxes, as most footnotes presume. The fiscal roots (or consequences) of inflation over the cycle are the strong variation in discount rates -- expected returns.

The fiscal process

Notice that the response of primary surpluses in all these graphs is s-shaped. Primary surpluses do not follow an AR(1) type process. In response to today's deficits, there is eventually a shift to a long string of surpluses that partially repay much though not all of that debt. This seems completely normal, except that so many models specify AR(1) style processes for fiscal surpluses. Surely that is a huge mistake. Stay tuned. The next paper shows how to put an s-shaped surplus process in a model and why it is so important to do so.

Comments on the paper are most welcome.

Free Market Health Care

There exists a Free Market Medical Association

Some quotes from the website:
.... innovation in healthcare can only happen when a buyer and a seller are able to business transparently and fairly.
The free market movement in healthcare is gaining steam. ...
Matching a willing buyer with a willing seller of valuable healthcare services is the goal of everyone involved in this movement. We help identify patients willing to pay cash, doctors willing to list their prices, businesses attempting to provide affordable quality insurance, and providers/services/and patient advocates that are helping make everything work.
The Free Market works when there is freedom of choice:
Willing buyer
Willing seller
Market clearing price
The association seems to be mostly a marketing platform plus a bit of information and advocacy.

In the words of the inimitable Ron Swanson of Parks and Recreation,
“Whatever happened to “Hey, I have some apples, would you like to buy them?” “Yes, thank you!” That’s as complicated as it should be to open a business in this country.”
I feel like a SETI researcher who finally hears an episode of Gilligan's Island beaming down from Alpha Centauri. I thought I was alone (except Mike Cannon at Cato, John Goodman of the Goodman institute and a few other assorted oddballs like myself -- oh, and the ghost of Milton Friedman of course) to think that a basically free market, including the guaranteed renewable and transferable insurance that a free market would provide, is a practical goal for US health care. Even normally sensible free market economists usually say silly things like "well, the free market is fine for everything else but health is too important to be left to the free market."

There is hope. Common sense people are starting to see the common sense that health care and health insurance need not be the same thing, and that the same cash market by which we pay contractors, tax preparers, lawyers, architects, financial managers, car repairers, plastic surgeons, vets, and other providers of complex services can lie at the basis of health care.  

Tesla Bubble?

Paul Vigna in the Wall Street Journal

Source: Wall Street Journal
"Tesla TSLA -18.51% Inc.’s shares rose 14% Tuesday to $887.06. They have surged 56% in the past week and have nearly quadrupled since early October.  Those outsize gains don’t match Tesla’s more modest fundamentals, which include annual losses."
"They do, however, resemble any number of other assets that have experienced prolonged bubbles, including shares of Qualcomm Inc. and other tech stocks of the dot-com era; oil in 2008 and bitcoin in 2017."
At these prices, Tesla is worth more than Ford and GM combined.

Holman Jenkins:
Tesla can earn a lot more profit per car, and can sell a lot more cars than it does now, and still its stock is priced as if its future profits will be coming from some unnamed something that is not the car-making business.
A correspondent:
I just looked at the minute by minute data for TSLA.  In the last 12 minutes of trading volume was 4.5 million shares, high price was 967, low price (in the last 12 minutes not the day) came 5 minutes later at 860, closed at 887.06.  
Shares outstanding is 180 million so the move from 969 to 860 erased 20 billion of market cap, in five minutes, on no news.  These numbers are so crazy they seem almost meaningless but they make for a good sound byte in a video.
And implicitly (he's more polite)
So Mr. Efficient Market, what do you make of that? 
I can't resist the temptation to plug an old paper, that I have long wanted to return to, "Stocks as Money." I wrote it in response to the internet boom and bust, and the excellent Owen Lamont -Richard Thaler "Can the market add and subtract" in particular. 

This pattern happens over and over (and over and over) again in financial markets. Surely we can do better as an "explanation" than "people are dumb." Or, as Lamont and Thaler put it so nicely,
one needs investors who are (in our specific case) irrational, woefully uninformed, endowed with strange preferences, or for some other reason willing to hold over-priced assets.
Patterns that are repeated over and over again need ether irredeemable human folly -- not much of an "explanation" as it can explain anything -- or economics, a model by which rules of the game produce a strange outcome despite people in the game understanding the game and where it ends. That's what "stocks as money" suggested.

Stocks as money points out these events do not happen in isolation. High prices are only one symptom. They always occur with 1) huge price volatility (check) 2) huge share turnover (check) 3) impediments to short-selling, especially at a longer horizon (check, more below)  4) in an asset where there is a lot of disagreement, a lot of potential news, a lot of different opinions about long run value. Bubbles do not happen in regulated public utility stocks.

"People are dumb and will pay too much for flashy stuff" does not explain why they should, a week later, change their minds and sell. It does not explain why high prices only happen with the other four.

So why would anyone buy Tesla?

Tuesday, February 4, 2020

Wokeademia spreads

In my first and second posts on "diversity statements," I discovered how these political loyalty oaths are now required by the University of California and the National Institutes of Health. 

In a quick look at academicjobsonline I discovered that this cancer has metastasized even further. "Diversity statements," professions of loyalty to the "diversity" cause, and testimonials about one's past commitment to "diversity" efforts pervade academic jobs postings. This is not just a requirement imposed by a nebulous bureaucracy, as I had assumed. It is deeply embedded in each department's recruiting, with therefore the active participation of faculty. 

At the cost of repetition, let me be clear about this sensitive issue. 

Universities started with a desire to hire African Americans, women, and other groups, to address the sadly small numbers of these on their faculties. Racial and gender discrimination being illegal, this was soon labeled a "diversity" effort. But for a long time "diversity" meant only who you hire, not their politics. 

The "diversity statement" is a new effort, in which every potential faculty member must pledge their personal loyalty to the diversity movement, and pledge future activity.  They also must describe their personal experiences advancing "diversity." And they must not mention ideological or other diversity. 

In part, as documented in my first post and references, this has simply been a way to more effectively impose illegal racial and gender quotas. 
The part I object to in these posts is the "diversity statement," and the activity it commands. This statement is a clearly political oath, and squashes ideological diversity. Republicans are a lot rarer on college faculty than any racial or sexual group! 

This post is not about the desirability of seeing more under-represented groups in academia. It is not about the previous "diversity" regime which mostly amounted to spending a lot more time making sure one had examined all potential candidates from under represented groups, and documented such to upper administration. We can discuss those another day. The point here is only about the diversity statement, and the requirement to bend ones research, political support and activity to its cause.

Here is a brief sampling of current job postings (it's a little late in the season, so the pickings are slim. I'll look again in the fall. All emphasis in italics are mine. Major news below, Cornell seems to have the same institution-wide diversity pledge requirement as the UC system. 


Position: Assistant Professor of History  

Required Qualifications:
Ph.D. in History with specialization in Modern World history, with an emphasis in either the African Diaspora, the Islamicate, or South Asia 
Demonstrated commitment to working successfully with a diverse student population 

Preferred Qualifications:
...Evidence of support for and/or experience related to the University’s strong commitment to the academic success of its diverse student body ...

...enthusiastically support the University’s strong commitment to the academic success of all of our students, including students of color, students with disabilities, students who are first generation to college, veterans, students with diverse socio-economic backgrounds, and students of diverse sexual orientations and gender expressions. 

How to Apply - Required Documentation:
An Equity and Diversity Statement about your teaching or other experiences, successes, and challenges in working with a diverse student population (maximum two pages, single-spaced)....

(Cal state Long Beach has lots of job postings at the moment, all with this language, so it does come from upper administration, but with the consent of the departmental faculty.) 


Purdue University, History Department
Position Title: Assistant Professor of History
Position Description: Tenure Track Assistant Professor in Military History / History of the American Civil War Era 

Monday, February 3, 2020

Boot Camp

The Hoover Institution will host another "Policy Boot Camp" August 16-22. See here for details and how to apply. It's a one-week survey of serious policy analysis.

The program includes  economists such as John Taylor, Ed Lazear, Amit Seru, Caroline Hoxby, Erik Hurst, and yours truly. Learn about international affairs from H.R. McMaster, Jim Mattis and  Condoleezza Rice. Niall Ferguson on Nationalism vs. Globalism and Bjorn Lomborg on climate should be worth it all on their own. And many more.

It's designed for "college students and recent graduates," but I think that is a bit elastic. Food and lodging free.

Update: in response to a commenter. Yes, PhD students and even those a year or two out are welcome. 

Online Asset Pricing back again!

My online Asset Pricing course is back again, after one more software/administrative change once again threatened its demise.  It's still on Canvas, but you have to ask to sign on.

The course is here, University of Chicago Canvas course 23303. To log in and use it, you need to email  The course is open to anyone, not just University of Chicago students. If that doesn't work, email me john dot cochrane at stanford dot edu, and I'll see what's wrong.

The videos, notes, and other materials are still available ungated on my website, here, under the "Asset Pricing" tab.

If all goes well you see this:

Economic note: It's interesting how software depreciates so rapidly, though its physical being depreciates not at all. Perfectly good software stops working as operating systems and machines get "upgraded," as IT departments seem to latch on to new "solutions" every three years, and so forth. Most of my email from before the mid 2000s is gone due to an "upgrade." My website is in the midst of an "upgrade" crisis, and I can't seem to keep the online class going for more than two or three years. There is an interesting economics paper in this. As son of a historian, I feel for the historians of a few hundred years from now who, looking back on our interesting era, will find a blank void, as all of our records are unreadable.

Friday, January 31, 2020

More wokeademia

An anonymous commenter on my last post points to an article by Jeffrey Mervis in Science Magazine. The National Institutes of Health -- that's the NIH, an arm of the Federal Government, that distributes your and my tax dollars to support research -- will
launch a $241 million initiative called Faculty Institutional Recruitment for Sustainable Transformation (FIRST). The money, over 9 years, would go to help each of roughly a dozen universities and medical schools support a cluster of 10 or more newly hired young faculty members. 
That sounds nice. The catch:
Not all of the 120 new hires would need to belong to groups now underrepresented in academic medicine, which include women, black people, Hispanics, Native Americans, and those with disabilities, says Hannah Valantine, NIH’s chief diversity officer. In fact, she told the Council of Councils at its 24 January meeting, any such restriction would be illegal 
Well, there is a welcome acknowledgment
and also run counter to the program’s goal of attracting world-class talent. But Valantine says every person hired must have a track record of working to change a culture that too often makes scientists from underrepresented groups feel unwelcome on campus and isolated in the laboratory.
(My emphasis) Read that again slowly. "Every. person. hired. must. have. a. track. record"... The minorities too. The NIH is now forcing universities to add a political litmus test for hiring.

This metamorphosis, from quotas, to affirmative action, to diversity, to active political loyalty to the "diversity equity and inclusion" enterprise, is spreading faster than I thought.

Thursday, January 30, 2020


I'm working on an economic view of political polarization. One aspect of that project is the extent to which many institutions in our society have become politicized. Today's post is one little data point in that larger story. It tells a little story of how to politicize an institution and silence dissenters.

Jerry Coyne reports on the "diversity equity and inclusion statement" required of anyone hired by the University of California, or desiring a raise or promotion. This is a required statement each candidate must write "Demonstrating Interest in and Ability to Advance Diversity, Equity, and Inclusion." It's not about whether you are "diverse," meaning belonging to a racial, gender, or sexual-preference group the University wishes to hire. It is a statement, as it says, of your active participation in a  political movement.

Sunday, January 26, 2020

Ferguson and the billionaires at Davos

In my last post, I commented on Joe Stiglitz view, heading to Davos, that billionaires and corporate leaders are anxious to pollute the air.  In my wealth tax series I reported on the popular view on the Warren Sanders Saez Zucman view that corporate leaders and billionaires represent a regressive right wing political force, that must be stopped by any means including expropriation of their wealth, even if that means destroying the businesses that make them rich.

My colleague Niall Ferguson reports from Davos what seems actually to be on billionaires' minds: 
Take the World Economic Forum (WEF), the gathering of billionaires, millionaires, world leaders, do-gooders, busybodies and journalists that takes place each January in the Swiss resort of Davos. The overwhelming majority of people attending this year’s conference would, I have no doubt, affirm their commitment to reducing carbon dioxide emissions to avert catastrophic climate change, even while on board their Gulfstreams and in their Range Rovers.
I doubt if a single chief executive present at the WEF last week would dare publicly to challenge the view that a modern corporation should rigorously measure and regulate its behaviour in terms of its environmental and social impact, as well as its quality of governance (ESG, for short). As the US Business Roundtable declared last August, firms must now be run not only for the benefit of their shareholders but also for all their “stakeholders”: customers, employees, suppliers and communities. Milton Friedman is dead. Long live Klaus Schwab — founder of the WEF — who pioneered this notion of stakeholder capitalism.
“ESG-omania” (or “ESG-apism”) meant Davos 2020 was an orgy of virtue-signalling on climate change and diversity. To walk down Davos Promenade, the main drag, was to run a gauntlet of uplifting corporate slogans: “Sustainable solutions for Earth, for life”; “A cohesive and sustainable world starts with data”; “Let’s bring sea level and C-level together”.
Each year the WEF’s global risks report tells us what the business elite is most worried about. Ten years ago, the top five risks were “Asset price collapse”, “China economic slowdown”, “Chronic disease”, “Fiscal crises” and “Global governance gaps”. This year? “Extreme weather”, “Climate action failure”, “Natural disasters”, “Biodiversity loss” and “Human-made environmental disasters”.
(Related, the Wall Street Journal reported last week that Goldman Sachs will no longer fund fossil fuel development in the Arctic, or any US company that does not have women or "diverse" board members. And Jan 27, quotes "Salesforce chairman and co-CEO Mark Benhoff that "capitalism as we have known it is dead, and this obsession that we have with maximizing profits for shareholders alone has led to incredible inequality and a planetary emergency." ) 

In public, at least. In private, 
In quiet corners of the Davos congress centre you could hear Europeans wishing they could have at least a piece of this American action [Trumpian growth]— and complaining that Greta’s demand for “zero carbon now” was a recipe for zero growth.
... you say one thing in public and another in private. It was once the basis of life in communist systems all over the world. It turns out to be something capitalists can do just as easily, ...
Business people adopt whatever public views are convenient. And their public virtue-signaling means that winds now blow from the left. 
If Davos Man has come around to Trump — enough to expect, if not quite to hope, for his re-election — it is no guarantee that he will win on November 3. If January 2016 is anything to go by, you should probably bet against the Davos consensus and have a flutter on Bernie Sanders.
Niall organizes his thoughts around  "cognitive dissonance." Good old-fashioned "Hypocrisy" might be a more apt word. As in 
Do you give speeches about climate change at international conferences, having flown there by private jet? Do you ever sit in a big black car in a traffic jam, when you could quite easily have walked, despite knowing that this, too, is adding yet more carbon dioxide to the atmosphere?
Exhibit A: 
In this green new world, Davos Man must now prostrate himself before Stockholm Girl: 17-year-old Greta Thunberg, who delivered her latest tirade on Tuesday morning. “We don’t need a ‘low-carbon economy,’ ” she declared. “We don’t need to ‘lower emissions’. Our emissions have to stop. ...
I love Greta Thunberg, because she exposes the immense hypocrisy of the political climate establishment. When she went to school, she received the same alarmist pablum handed out to children around the world -- the climate is a crisis. Civilization is going to end. The world will be a red hot cinder in your lifetime. We have exactly 11 years to stop it. The other children, like those in communist countries including China today, understood the game. Mouth the pieties, get a good grade on the test, don't argue, and go out to play. Greta, who describes herself as neuro-diverse, took it seriously and literally. Well, if the planet is going to fry in exactly 11 years we darn well had better do something about it, and not just virtue-signal in our PR statements and buy some phony carbon offsets when we fly the Gulfstream back from Davos.

Niall's last point is excellent:
In the same way, if it’s climate change the WEF-ers are most worried about, you should probably brace yourself for a coronavirus pandemic. Talking of cognitive dissonance, what the hell were we all doing at a massive global conference last week? Fact: at least three of the WEF attendees were from — you guessed it — Wuhan.
What are the really big risks in the next 10 years? Pandemic, nuclear war, civil war, government collapse. The ones very few people are paying any attention to. The big ones are never the ones conventional wisdom sees coming a hundred years away.


On reflection, hypocrisy is not a good word either. What do you call the behavior, of mouthing platitudes that you know to be meaningless or false, from good old self interest? You know a Warren or Sanders presidency is a good possibility, and they will use the regulatory and judicial machinery ruthlessly. So let's get those public statements and virtue signals out fast -- support for "stakeholder" capitalism, climate crisis, "ESG" metrics or whatever it takes. You know that social climbing at Davos, your nonprofit boards,  (your hope to become dean someday, in academia) or just avoiding the twitter mob demand conformity. So you mouth the harder and harder to pronounce words, or even convince yourself of the worthiness of it all.  There must be a good word in  Russian, the art of getting along under a communist regime.  We say "virtue-signaling" but that does not cover the self-interest of going along with the crowd. I welcome suggestions for a good word.

Friday, January 24, 2020

The best of times, or the worst of times?

So how is the economy doing? A good friend passed along for comment a recent project syndicate essay by Nobel Prize winning economist Joe Stiglitz. For an alternative view, I found interesting commentary on the CEA website,  "The Impact of the Trump Labor market on historically disadvantaged Americans" and "The blue-collar boom reduces inequality"

A fact that cannot be missed is that overall GDP is growing. In terms of the overall economy, 2019 was the best year in all of human history. The 3.5% unemployment rate has not been this low since December 1969. So, if we wish to complain, it must be that this prosperity is not evenly shared. (I would also complain that things could be much better, but neither of our essays today is really about that point. Free-market paradise will have to wait.)

As the world’s business elites trek to Davos for their annual gathering, people should be asking a simple question: Have they overcome their infatuation with US President Donald Trump?
Two years ago, a few rare corporate leaders were concerned about climate change, or upset at Trump’s misogyny and bigotry. Most, however, were celebrating the president’s tax cuts for billionaires and corporations and looking forward to his efforts to deregulate the economy. That would allow businesses to pollute the air more, get more Americans hooked on opioids, entice more children to eat their diabetes-inducing foods, and engage in the sort of financial shenanigans that brought on the 2008 crisis.

Goodman on health insurance

John Goodman and Devon Herrick have a good essay on where we are with health insurance.

The central impetus of Obamacare was not to insure more people.
...About 95% of those who vote already have insurance, Schumer noted. So Obamacare was promising to spend a great deal of money on people who don’t vote.
Instead, their message focused on protecting sick people from abuses by insurance companies. More often than not, that meant protecting people who migrated from an employer plan to the individual market with a preexisting condition.
Virtually every Republican proposal to reform Obamacare has been attacked by opponents as weakening protections for those with preexisting conditions.
And Republicans from the President on down have, so far and in public, committed that they will continue to address this problem with the sledgehammer of forcing insurance companies to charge the same premium to everyone who shows up, sick or not. From this Adam and Eve apple the rest of the mess follows. For now insurance is outrageously expensive for healthy people.  And both the government and insurance companies work hard to ration and limit how well they serve sick people.

Once upon a time in America there was good, relatively expensive, individual health insurance. It was "guaranteed renewable." If you bought it when you were healthy, and then got sick, they could neither cancel your policy or raise your premiums. People with part time jobs or self employed bought it. It wasn't perfect, but then again nothing is.

There is a market-based answer to pre-existing conditions, which I've been plugging for 25 years now: improve that guaranteed renewable structure. Most of all, then doctors and hospitals compete to serve sick people, rather than shun them. Only in medicine does a business try to get rid of its most faithful customers. (Thanks to John and Devon for the plug.)

As John and Devon put it,
Before Obamacare, the customers for individual market insurance were either self-employed or buying coverage between jobs. They were mainly seeking financial protection against potential future medical expenses.
Especially the right to stay insured if they got sick.

In the meantime what happened to Obamacare? It has largely expanded medicaid and subsidized exchange policies for low income people. And it has destroyed the market for individual health insurance. If you make more than the qualifying income, and are not affiliated with some large business that runs an employer-based group, you are screwed.

Friday, January 17, 2020

Great Society Review

I just finished Amity Shlaes' Great Society. It's a great book. I warmly recommend it.

The US is debating a fourth great wave of US government expansion. Theodore Roosevelt to Wilson the original progressive era and WWI; Frankin Roosevelt's new deal; and the Kennedy-Johnson-Nixon "great society" of this book came before us.

Plus ça change, plus c'est la même chose, is in many ways the theme of the book. The Great Society offers lots of parallels to our time, and a cautionary tale that it will all end badly once again. But not all is the same, and the many ways our time is different from the 1960s is also good to ponder -- for better and for worse.

Amity is a gifted writer and storyteller. Pay attention to her books also for how they are written. How do you tell the story of an era in a way that is comprehensible and memorable? Amity picks a few central (and now often overlooked) people, a few programs, and a few benchmarks (the Dow, the price of gold), and tells the story of the era through their eyes. It's the Game of Thrones approach to the Great Society.  Do not expect even a comprehensive list of all great society programs, diff in diff regression discontinuity estimates of their causal effects, or even charts and graphs (all curiously packed in an appendix and never referred to in the text) or the customary eyeball-glazing recitations of statistics. This was her approach to the Great Depression in Forgotten Man, equally effective. It complements, but does not substitute for that more structural work.


In case you don't get the point, Amity starts right off in the introduction with Michael Harrington who wrote "a then-famous bestseller called The Other America" and who worked for Sargent Shriver, which is one of the main characters of the book (Daenerys Targaryen?)
Why not socialism? The president had been in office three months, and he wanted new ideas to distinguish himself from his predecessor. Could the author bring up socialism at the lunch? The very word “socialism” had been toxic until recently. ... The taboo was weakening, though.
..“socialism” might sound too controversial for the White House. The writer could, however, pitch ideas that took the country toward socialism. ... Laws that backed up organized labor so it might represent a greater portion of the American workforce... Higher minimum wages... Minimum wages that covered more workers, even those who did not work in an office or full-time. A dramatic change in the training of bigoted policemen in the big cities. ... The money was simply in the wrong hands. ... a tax system that captured the elusive wealth of the superrich. The moment had come to level incomes in a systematic fashion. 
..The story sounds like something that could happen today."
The 1960s and early 1970s included a huge expansion of programs. And the results were in the end mostly abject failure.

progressive proposals that bear a strong resemblance to Michael Harrington’s, from redistribution via taxation to student debt relief to a universal guaranteed income, are becoming popular again. Once again, many Americans rate socialism as the generous philosophy. But the results of our socialism were not generous. May this book serve as a cautionary tale of lovable people who, despite themselves, hurt those they loved. Nothing is new. It is just forgotten.
It is also a refreshing reminder of just how old most of the "new" ideas we are being bombarded from on the left are -- and a warning of how long they will pester us, at least as long as we are unwilling to learn.

From an SDS (students for democratic society) manifesto:
"The wealthiest 1 percent of Americans own more than 80 percent of all personal shares of stock"
The capsule stories of the 1960s focus on the civil rights triumph, the remaining politically successul programs such as medicare and medicaid, the vietnam war, and a vague hippy nostalgia. Shales' story, and the central roles of the forgotten (largely)  men she tracks are a novel tonic.


Walter Reuther, head of United Auto Workers, is a central figure, and the fight between the old-left unions and the new-left students epitomized by Tom Hayden, for the soul of the Democratic party.

Sargent Shriver, and the Office of Economic Opportunity are the stand-in for many ill fated programs. It starts with the predictable story of chaos that results from a flood of federal money.   The flood of federal money  did not stop the cities from burning.  The OEO is the beginning of Federal support for "community action" programs, including political activity.
"Community action programs, the authors [of the Community Action Program Workbook—262 pages on how to apply for and run a federally funded program] wrote, should provide the “stimulation of change.” One marker of a successful community action group was that it “increased competence in protest activities.” The OEO ... welcomed experiments, including those where community action organizers paid by Washington were “facilitating the opportunities for the poor to participate in protest actions.”
That kind of language was enough to send mayors like Dick Daley through the roof.
In the end, the cities went up in flames. The OEO morphed in many ways. One interesting almost afterthought of the original program, legal aid to the poor -- who can obect to that, helping poor people who can't afford lawyers? -- ballooned the way all such programs do,
"the governor [Reagan] was after the lawyers again, assailing California Rural Legal Assistance. The nonprofit should have stuck to individual legal aid cases for rural indigents, Reagan said, but instead had “converted itself into a vehicle for class action lawsuits against various government agencies.” Reagan told the crowd that his staff had reckoned that if the CRLA won all its suits in California, the cost of welfare there would increase by $1 billion—the same amount Johnson and Shriver had first set as the budget for the entire War on Poverty."
Here was where the government started paying lawyers to sue the government for more government.

Amity tracks disastrous housing policies through the life of the Pruitt-Igoe housing project in St. Louis, begun in earnest but remote social-planner hope, though destroying the community where it sat, and ending in controlled demolition.
"In some cases, only welfare families were entitled to the lowest rents at Pruitt-Igoe. And to receive welfare under Missouri’s rules, a family could have only one parent—the mother. So families considering life in the towers had to make a terrible choice: stay together or take the apartment. ..Families who moved into Pruitt-Igoe often lost a father. ...The social workers even policed apartments at night, checking to see if fathers had secretly returned, grounds for eviction. "
The consequences of which are predictable.
"Pruitt-Igoe elevators, which stopped only every few floors, were muggers’ traps. Poor maintenance meant the elevators often jammed, leaving gangs’ victims in with them for long extra minutes. The gangs lurked in the halls and made tenants “run the gantlet” to get to their doors. Young men threw bricks and rocks at windows and streetlamps; the activity was a regular sport..... Because there were no toilets on the ground floor, children had accidents there and in the elevators, and the elevators gradually became public toilets. The community area was a sorry joke... No one seemed able to stop the decay. "
I love this:
"Social scientists were descending on the complex to conduct multiyear investigations, and that irritated the tenants further."
we've been at it a long time, missing the ends of our noses.
"At Pruitt-Igoe, rents were scaled to income. Every time the Straughters’ wages went up, their rent went up, a tax on striving"
Income-capped rent subsidies are with us today.
"After tens of millions and decades of urban renewal spending, Detroit did not look renewed. Detroit looked, Mayor Cavanagh said, like a city that now did need a Marshall Plan, like “Berlin in 1945.” Almost three thousand businesses had been sacked, with damage many times greater than in Watts just two years before. "
In the end
"There was hypocrisy [and I would say a great deal of paternalistic disdain] in the  different treatment of the middle class and poor. For the middle class, the government had aimed to re-create and sustain the world of Alexis de Tocqueville, subsidizing home purchasers for suburban settlers. For the poor, however, the government had operated in the world of Karl Marx: government-sponsored housing blocks with tenants, not owners. Black citizens—Pruitt-Igoe was now all black—had been ripped from their roots when they moved North, uprooted again when they were moved for urban renewal, and then placed in high-rise rentals where putting down new roots was impossible."
"How might neighborhoods like this one have turned out if local companies, local authorities, and local individuals had led in the 1950s and 1960s, building their own Great Society? How might St. Louis have looked if the jobs had stayed? No one knew.  But here in the shadow of
Pruitt-Igoe, Father Shocklee and Pruitt-Igoe tenants had discovered one possibility. With his small housing program, Father Shocklee had shown that “the poor” were more like the middle class than people supposed. They gained from something only when they had a chance to own it."

Daniel Patrick Moynihan is a second central character in Amity's story (Tyrion Lannister?) Moynihan was a Democrat, but wrote the important and controversial "The Negro Family: The Case For National Action," pointing out, among many other things, the perverse incentives of welfare.
"From his work at Harvard and in Washington, Moynihan thought he had learned what was wrong with American welfare. The first trouble was that poverty funding tended to flow to bureaucrats—social workers, not poor people. “Feeding the horses to feed the sparrows,” Moynihan called it.  In many states, those social workers spent their time in perverse endeavors: inspecting apartments at Pruitt-Igoe to make sure no fathers were present, for example. Taxes hit people when they entered the workforce, reducing the appeal of working just as Eartha Kitt said. ...In some states, for example, a welfare mother working at the same job as a family father not on welfare took in 50 percent more than the man, because she was entitled to keep a portion of her welfare. Why not bypass the bureaucrats and send the money to families, regardless of whether fathers were present?"
And then he took a job with Nixon, and became one of Nixon's main advisers. He nearly got passed a negative income tax, the equivalent of today's universal basic income. In his grudging New York Times review, Binyamin Applebaum finds this story "curious," because it did not pass in the end. But it nearly did, which makes it important. Amity covers well the failed attempt to over rule right to work laws, which also nearly passed. Near failures good and bad are equally instructive to our current situation, no matter the flap of butterfly wings that determines their fate.  (The quick review of the UK's longer experience starting p. 335 is well worth it too.)

I found this amusing
"The crowd at Harvard had held even Hubert Humphrey, and at times Robert Kennedy, in contempt. Any interest in Nixon Harvard rated worse than reprehensible
The schoolmates of Moynihan’s children stopped talking to them. Alan Rabinowitz, a fellow academic, wrote a satirical poem chiding Moynihan for his betrayal, “The Knight Before Nixon.”
Plus ça change in academia, and much Trump-deranged society.

Fairchild semiconductor plays a small but significant role. It's good to remember how different the US economy of the 1950s was. There really were a few very large companies in most industries, and most technology came out of defense. The emergence of an innovative private tech sector is one of those many ways we are not replaying exactly the same song. The slow emergence of Toyota and VW, selling better cars and forcing change in Detroit is another.

Money and gold

A minor story for the book caught my eye, and I pass it on first as many blog readers are interested in monetary issues. One of the themes of the book --  the snow level on the great white wall -- is the price of gold, and the US continuing problems of gold outflow, the emergence of inflation, and the eventual collapse of the Bretton Woods system. This is an event much too little studied by macroeconomists, though my international and economic history friends tell me that shows just how parochial we are and we should start reading their papers.

In macroeconomics perhaps we are too influenced by Milton Friedman's great called home run, the 1968 presidential address, where he forecast inflation would emerge along with unemployment. But Friedman's story was told entirely in terms of the money supply and to a lesser extent interest rate targets, the one too large and the other too low. And that is how the stylized history has come down to us: Fiscal deficits from the Great Society and Vietnam war, combined with too loose monetary policy, set off inflation.

That story leads to the puzzle of our age: If the (by current standards) comparatively minor Johnson-Nixon deficits set off a grand inflation why do our huge deficits have no such effect now, despite many officials stated desire for more inflation?

The story of the book reminds us that the mechanics were quite different then, and leads me to the speculative thought that the gold standard mechanism brought on inflation much more quickly than our current arrangements. In part, it may have been designed to do so -- to force governments to make fiscal adjustments quickly rather than let the problem get so big the fiscal adjustment will be immense, much as Doug Diamond and Raghu Rajan model short term debt and its runs as a disciplining device to managers.

The world was different then. We had fixed exchange rates, and it was difficult to move capital from country to country -- to buy foreign stocks, for example. Bretton Woods was not really set up to handle today's large trade deficits financed by large capital account surpluses. When the US started running trade deficits, other countries piled up dollars, and the main thing they could do with those dollars was to turn them in to their central banks, who in turn used them to drain gold from the Fed. So, it strikes me that open capital markets that allow us to finance large trade deficits are an important reason our system has held up so long.

Amity tells the sad tale of stopgap measures -- bans on using dollars for foreign travel, half-hearted interest rate increases, looney schemes for the Federal Government to mine gold, and of course the tragedy of price controls.

In any case, the remaining gold standard between central banks, not very open capital markets, not very open currency markets and fixed exchange rates were a crucial part of the inflation dynamics in this period, not just bad money supply or interest rate rules.

The episode also raises the counterfactual question why the US did not use the many devices used to defend the gold standard through the centuries. Borrow gold. Temporarily suspend convertibility.


At the end of a review that had to be negative, though he had to admit the quality of the book, New York Times review, Binyamin Applebaum writes
"Half a century later, in the midst of a revival of interest in ideas like Moynihan’s basic income proposal, readers may find themselves wondering whether the nation’s problem is really too much government — or, perhaps, not enough."
One wonders just what it would take to ever change his mind on that one. Were the 60s riots, the 70s economy, and the evident pathologies of the welfare system not bad enough, or do we have to go full Venezuela first? After all these years, and with the same policies on agenda, with the same predictable disincentives and unintended consequences, could not his call be at least for smarter government, not just more? For a larger government that learns from rather than repeats this sad history?

Thursday, January 16, 2020

Housing hope

There is a tendency in grumpy land to view the world as heading in the wrong direction. But a believer in our system must be optimistic that it is eventually capable of reform, that we will do the right thing in the end if only after we try everything else, as the saying goes.

This thought comes to mind in reading the Horrible Housing blunder in the Economist. The Economist calls housing "The west's biggest policy mistake." And, the ray of hope, even the progressive left in California is beginning to wake up and think about somewhat sensible reform.
 ...just as pernicious is the creeping dysfunction that housing has created over decades: vibrant cities without space to grow; ageing homeowners sitting in half-empty homes who are keen to protect their view; and a generation of young people who cannot easily afford to rent or buy and think capitalism has let them down. ... much of the blame lies with warped housing policies that date back to the second world war and which are intertwined with an infatuation with home ownership. They have caused one of the rich world’s most serious and longest-running economic failures. A fresh architecture is urgently needed.
At the root of that failure is a lack of building, especially near the thriving cities in which jobs are plentiful. From Sydney to Sydenham, fiddly regulations protect an elite of existing homeowners and prevent developers from building the skyscrapers and flats that the modern economy demands. The resulting high rents and house prices make it hard for workers to move to where the most productive jobs are, and have slowed growth. Overall housing costs in America absorb 11% of gdp, up from 8% in the 1970s. If just three big cities—New York, San Francisco and San Jose—relaxed planning rules, America’s gdp could be 4% higher. That is an enormous prize.
To put that into perspective, the worst-case scenarios from climate change, now called the "climate crisis" are 10% of GDP in the year 2100. 4% is a lot!

The economist places much blame on subsidies for (highly leveraged) homeownership, and points out the lack of evidence that it has the civic and political benefits alleged. It does not go on, that highly leveraged homeownership is likely a part of reduced dynamism. People do not get up and move from bad areas, because they own an underwater house there. Renting is a fine contract for mobile people, who change jobs more than in the 1950s, and an economy with shifting opportunities. Landlords also have incentives to keep up property, and often do a better job than indebted homeowners who can send the keys to the bank.
s it possible to escape the home-ownership fetish? Few governments today can ignore the anger over housing shortages and intergenerational unfairness. Some have responded with bad ideas like rent controls or even more mortgage subsidies. Yet there has been some progress. America has capped its tax break for mortgage-interest payments. Britain has banned murky upfront fees from rental contracts and curbed risky mortgage lending. A fledgling yimby—“yes in my backyard”—movement has sprung up in many successful cities to promote construction. 
Yes, even in San Francisco. Of course we are also the land of rent control, subsidized housing, impossible zoning and permitting. But there are cracks in the wall. That the Economist, generally center-left consensus, has caught on is good news.

A chilly Chilean lesson

I have been interested in following the news from Chile.

Most recently, I found this very interesting essay by Avel Kaiser in the Jan 1 Wall Street Journal. An excerpt:
Latin America’s freest, most stable and richest nation—is in free fall. Public order has collapsed, violence is rampant, and populism is the new creed of the political class. 
There is a recession, characterized by capital flight and rising unemployment...
It took a mere 40 days for the Latin American “oasis”—as President Sebastián Piñera called Chile not long ago—to vanish. How a stable and prosperous Chile fell so dramatically in such a short period is a lesson for every Western democracy. 
Coordinated protest groups destroyed almost 80 subway stations, bringing Santiago’s public transportation to a halt. Rioters attacked public and private property. 
...The economic pain started with the antimarket reforms of the previous government under Socialist President Michelle Bachelet, 
The policies result from a profoundly false narrative Chilean elites tell themselves about the country. Over the past 20 years, intellectuals, media personalities, business leaders, politicians and celebrities in this Latin American nation have marketed the myth that Chile is an extreme case of injustice and abuse. It began at the universities, where progressive ideologues spread the idea that there was nothing to feel proud about when it came to Chile’s social and economic record...“neoliberalism” had created a society of winners and losers in which neither group deserved the position in which it found itself. 
... Even Mr. Piñera, a billionaire, accepted the basic premises of the progressive elites’ narrative. In his first term he raised taxes to address what he called one of Chile’s main problems: inequality.  
Chilean elites are waging a sustained war against law enforcement. Many police officers don’t dare act for fear of sensationalist media coverage and punishments by courts under the sway of progressive elites. The same is true for the military. 
The free market didn’t fail Chile, whatever its politicians might say, and the state doesn’t lack the means to restore the rule of law. The central problem is that a large proportion of the elites who run key institutions—especially the media, the National Congress and the judiciary—no longer believe in the principles that made the country successful. The result is a full-blown economic and political crisis. Other nations should take note: This is what elite self-hatred can do for you.
My emphasis, and the central point for today. Societies fall apart when the people who run its central institutions no longer believe them worth defending. Sometimes they're right about that -- Soviet Union. Sometimes they're not. The lessons for the rest of us are obvious. 

Saturday, January 11, 2020

Wealth and taxes -- Overview

I thought that "wealth and taxes" would be a short blog post. It turned in to a 5 part series. Here's an overview, or table of contents in case the whole thing looks a bit indimidating. The most important one, really I think is Part V, "it's all political." The others build bit by bit, well, this can't be the answer and that can't be the answer, so what is the answer, and Part V finds it.

In Part I we met the fact that "wealth" is measured as "capitalized income," Y/r. But only some kinds of income Y and with discount rate choices r that blew up measured wealth inequality. I review the  Smith, Zidar and Zwick paper that finds huge overstatements of inequality because wealthy people have a higher r than you and me.

In Part II we learned that a big reason wealth inequality widened is that interest rates fell and asset prices rose.  If r falls, Y/r rises, but it's the same Y.

In Part III  we noted the distinction between consumption, income and wealth inequality. Wealth is beyond badly measured as a measure of lifestyle. The computations ignore taxes and transfers, wildly blowing up measured inequality and rendering it a "problem" that ipso facto cannot be solved. Why concern ourselves with pre-tax wealth inequality, especially given that most wealth is reinvested in businesses that produce things and employ people?

In Part IV, we met the wealth tax. If the question is, how do we raise revenue for the government, either to spend or to transfer it, the wealth tax is a terrible idea, as it distorts the economy and leads to an evasion industry. A consumption tax is a much better idea.

In  Part V I read Saez and Zucman's opeds, which finally tell us what the question is to which the wealth tax is the answer. Saez and Zucman want to confiscate billionaires' wealth, because they think billionaires have too much political power, billionaires all got their money unjustly, and somehow though big government cronyism is the problem, bigger government is the answer.  The wealth tax is not designed to raise revenue -- it succeeds if it raises no revenue (after perhaps a one-time wealth grab) because the wealth it taxes has vanished. Well, at least it is a consistent view, decide if you buy the premises. 

Friday, January 10, 2020

Wealth and Taxes, Part V

Wealth and Taxes Part V -- it's all about politics

(This is Part V of a series. See the overview for a summary of the other four)

So if wealth is not the answer to "how big is inequality," by any sensible measure, and if the wealth tax is not the answer to "what's the best way to raise money, or to redistribute income,"  if in fact wealth and wealth taxes are terrible answers to these questions, what is the question to which the wealth tax is the answer, and alarmist measures of wealth inequality to buttress it the pathway?

It's right there clear as day in Saez and Zucman's  Jan 22 2019 New York Times Oped
Their [high marginal tax rates] root justification is not about collecting revenue...high tax rates for sky-high incomes do not aim at funding Medicare for All. They aim at preventing an oligarchic drift that, if left unaddressed, will continue undermining the social compact and risk killing democracy.
An extreme concentration of wealth means an extreme concentration of economic and political power… Democracy or plutocracy: That is, fundamentally, what top tax rates are about. 
Well, now we have at least an honest question to which confiscatory taxation is the answer.
  • The point of the wealth tax is to destroy the supposed political power of billionaires by destroying their wealth. 
We could have saved a lot of time and effort if we had just started there and not wasted time on phony economic arguments!

Economic distortions are a feature not a bug. In optimal taxation theory we try to find taxes that raise revenue and don't kill the golden goose that lays eggs. The whole point here is to kill the golden goose.
  • The wealth tax is successful when it raises no revenue, when it destroys the wealth subject to tax.  
Even more clearly:
That few people [in the 1960s] faced the 90 percent top tax rates was not a bug; it was the feature that caused sky-high incomes to largely disappear. 
Is your jaw dropping yet?

(The quote is also a... misleading statement. 90 percent tax rates made reported incomes disappear and tax shelters explode.)

In optimal tax theory, the point is to get resources without disincentives -- to tax the rich without discouraging people from becoming rich, so they can get rich and pay the taxes. Here the point is exactly the opposite. They want to tax billionaires to the point that there are no billionaires.

  • The point of the wealth tax is to destroy the incentive to become rich. 

Why? If you view all wealth as ill-gotten, basically criminal, as perversions of democracy then you want to destroy the incentive to engage in those nefarious activities.

Well, no wonder we've been arguing and getting nowhere! As usual we're starting from different premises.

Saez and Zucman are not particularly consistent, arguing in many other places that the wealth tax will raise lots of revenue rather than just destroy wealth. They advise Senator Warren who has made big revenues a central part of her policy agenda. She wants the wealth tax precisely to fund Medicare for all, which Saez and Zucman just said is not the point. I find that sort of inconsistency very annoying, and telling of a political agenda which they're not willing to state honestly in many circles.
  • Will the real wealth tax please stand up? Is it supposed to raise a lot of revenue, or is it supposed to get rid of billionaires, after which it will raise no revenue? Make up your minds, please.  
An amusing aside
"The view that excessive income concentration corrodes the social contract has deep roots in America — a country founded, in part, in reaction against the highly unequal, aristocratic Europe of the 18th century." 
I guess I can forgive two Frenchmen for being a little foggy on American history. Our revolution had a lot to do with paying British taxes, not guillotining the aristocracy. In modern language, Americans wanted opportunity, not redistribution. The Boston Tea Party was not a demand that Britain tax its aristocrats, either to send money instead of tea, or just to tax them out of existence because "inequality" was galling the Americans.  The American Revolution was run by the wealthiest in this country, and was if anything about keeping property, including slaves.

Do billionaires really run the country?

We have left economics long ago, but does this idea make any sense? This is a mantra of the extreme left. John Cassidy, writing in the New Yorker to cheer these ideas
Meanwhile, the Citizens United ruling, the rise of super pacs, and the lurch to the right of the Republican Party and, of course, the Trump Presidency have demonstrated the growing political power of the billionaire class. 
I'm scratching my head here. Just what billionaires are they worried about? Tom Steyer? Michael Bloomberg? George Soros? Bill Gates, devoting his billions to global charities? The Business Roundtable CEOs who endorsed "stakeholder capitalism" as fast as you can say "Warren just passed Biden in the polls?" The readers of the New Yorker? (Look at their ads and the NYT Style section. They don't run ads like that on Fox News!) Pete Buttigieg's wine-cave buddies? It strikes me that the billionaires in this country are by and large achingly progressive coastal elites. (see Ryan Bourne at Cato "Has Wealth Inequality Eroded U.S. Democracy" for numbers showing political preferences of the very rich.)

That billionaires bought Trump the election is simply untrue. Chris Edwards and Ryan Bourne:
not one CEO in the Fortune 100 had donated to Trump’s election campaign by September 2016. His victory did not stem from influence by the wealthy but more from grassroots opposition to wealthy coastal elites. 
The money was on Hilary Clinton, who spent nearly double what Trump did. I perceived Clinton, famous for Goldman-Sachs speeches, as just the kind of candidate one who dislike cronyism should worry about.

Well, dark conspiracy theories are hard to disprove. But at least now you know what worldview leads, logically (at last) from its premises to a wealth tax. You can decide if you buy these premises. It has, by admission, nothing to do with revenue, and little to do with economics.

The argument goes on that billionaires have too much "economic power." Progressives are great with language, and you usually see wealth "controlled" by the 1% not just "owned," or heaven forbid "earned" by the 1%. I will leave to your imaginations just what that means.  If you have a billion dollars in treasury bills and the Vanguard index fund, just what "power" does that give you?

A wealth tax would also be a dandy way to bring billionaires in, with their tax lawyers, accountants, lobbyists, and favorite congresspeople for a once-a-year trip to the confessional, to discuss how the IRS will value various complex entities, along with their twitter accounts, charitable and campaign contributions, and just how their businesses are doing on advancing the green new deal and diversity and equity programs. As long as we are scratching our heads trying to find the question to which the wealth tax is the answer, this is a pretty good one.

Off with their heads!

The world-view is expressed even more clearly by Bernie Sanders:

or perhaps George Bernard Shaw
“The more I see of the moneyed classes, the more I understand the guillotine.”
The point really is decapitation. "Inequality"  is (Saez and Zucman) such a "crisis" that we are better off just getting rid of billionaires, even if that means throwing all their wealth and the businesses that provide their income in the ocean. While it is often pointed out that any concern with inequality means are better off if a rich person loses $100 and a poor person loses $1, this is a pretty extreme version of that view.

Ill-gotten wealth 

A second argument lies behind the wealth tax: it's all ill-gotten money, or luck. Zucman and Saez again
progressive income taxation... restrains all exorbitant incomes equally, whether they derive from exploiting monopoly power, new financial products, sheer luck or anything else…
Can you think of a few anything elses' that are missing here?

Robert Reich opines that there are only five ways to make a billion dollars
" exploit a monopoly;...get insider information unavailable to other investors,... buy off politicians,...extort big investors,...get the money from rich parents or relatives."
Just who made their iPhones, I'd like to know?

Edwards and Bourne document much more extensively a view more consistent with my reading of the facts,
Most of today’s wealthy are business people who built their fortunes by adding to economic growth, and some have created major innovations that benefit all of us. The share of the wealthy who inherited their fortunes has sharply declined in recent decades
In particular, the Piketty story of centuries old inherited wealth growing at r>g is a fable. The rich are not getting richer. All of today's rich are nouveau. At best, this generation's self-made internet gazilloinaires and hedge fund managers made more money than the last generation's Waltons and bond traders.

There is an element of truth, as in all fables. Edwards and Bourne go on,
...cronyism, which refers to insiders and businesses securing narrow tax, spending, and regulatory advantages. Cronyism is one cause of wealth inequality, and it has likely increased over time as the government has grown.
The really big billionaires -- google, Facebook, apple, etc. -- unquestionably built tremendous products, and pocketed a tiny fraction of the resulting benefit. But there is a lot of cronyism and exploiting government-granted monopolies in the US economy for sure. The epi-pen story is not isolated. Banking, courtesy of Dodd-Frank barriers to entry. Health care. We can grant that Vladimir Putin did not get wealthy from an innovative tech startup.

But to the extent that wealth is amassed by exploiting regulations, regulatory barriers to entry, special favors from the government, tax deals, is more government really the answer? How is it that the politically connected super wealthy can get massive breaks from corporate taxes (how Reich thinks the Koch brothers made their money), but they won't get, well, massive breaks from the wealth tax? If too much government is the problem, inviting cronies to lobby for government to use its power on their behalf, just how is more government the answer? Bloody Marys don't work for a hangover.

Well, at least now we know what we're talking about. If you live on the Saez, Zucman, Reich planet, and you think destroying billionaires' wealth won't ruin your business too or deny you the benefits of economic growth, and you think that their politicians can operate a confiscatory tax regime without opening the same crony Pandora's box that they claim cause the problem in the first place, you like the wealth tax.

At least they should stop the pretense this has anything to do with revenue, economics,  optimal taxation, expanding economic opportunity for the lower end of America, and so forth. As Warren advisers, they might want to inform her before the next debate, ah, this is not about raising revenue. And we should stop falling for this trap as well, and wasting our time on part I-IV arguments.

Bottom line

I want to end on  two positive notes. I started all this with a discussion of  Smith, Owen, and Zwick. As we saw in part I it cleans up some of the egregious thumbs on scale in Saez and Zucman, and taught me just how fraught the whole "capitalization" idea to measure wealth is. It's a good example of an industry of papers that quickly tore apart the Saez Zucman numbers.

But I fault Smith, Owen and Zwick, and most of their fellows, for meekly taking the questions at face value. Their paper  "builds on the pioneering work of Saez and Zucman (2016)." They "follow Saez and Zucman (2016) in defining wealth." They calculate static revenues from a wealth tax. But we just found out that this was all a red herring as the point is to destroy wealth not tax it. They offer nothing to question the idea that if this definition of "wealth" has become more unequal, "policy" should do something about it.   One can at least point to a literature, such as Edwards and Ryan, that do question the question, or Saez and Zucman's own opeds that suggest a very different set of questions.

Thus, I fault this paper, and its companions, for taking the questions at face value. You see the  agenda.  You’re being suckered into a rope-a-dope. The right response is that this is the wrong question, an utterly silly question, and one can at least say that.

This series is really about conciliation. Unlike other economists, I don't want to presume we're all asking the same question and Saez and Zucman are dummies. I want to respect that they are smart, so if they are coming to a different answer, it must be because they have a different question. In today's post, we now have a set of world views that does at last have some logic, which one can debate. In that spirit, I close with a Saez quote which which I agree completely:
"My sense is really that the public will favor more progressive taxation only if it is convinced that top income gains are detrimental to economic growth of the 99%, and that taxation can ameliorate this. In America, people do not have a strong view against inequality per se, as long as inequality is fair. And what does fair mean? As an economist, you would say fair means that individual income and wealth reflect the value of what people produce or otherwise contribute to the economic system. This is why distinguishing between the standard supply side scenario versus the rent-seeking scenario is so important." 
Amen, brother Saez. And, if rent-seeking is the problem, explain to us how an enormous wealth tax will not attract the same rent-seekers who game the obscene income, corporate, and estate taxes today.

In the end, this is all about power. Sure, let's call it "economic power" as well as political power. Saez and Zucman want to transfer power from private hands to the government, and eliminate a potential source of power, a source of competition to the incumbent government.

Whether that is a good idea depends essentially on your view of just how bad private vs. government power is. I'm a (many adjectives) libertarian, and I see even in the worst excesses of private power some discipline of competition or potential competition restraining it. I see most private power as given to the powerful by government in exchange for political support, which is really an expression of government power to suppress that competition.  The defining character of government power is lack of competition and a monopoly of force. The essence of Saez and Zucman is to reduce the competition for power faced by whoever runs the government.  Historically, I see the damage of extreme government power -- Soviet and Chinese Communism, German Nazism -- as orders of magnitude worse than even the worst caricatures of private power, especially of private power that does not derive ultimately from or require support from state power -- perhaps the Victorian dark satanic mills?

I presume Saez and Zucman agree they don't want to hand massive power to this administration, or a Republican Congress, or maybe even to the branch of the Democratic Party that handed out the cronyist goodies to billionaires they decry. So the argument must be that the "good politicians" will take over, will stay in power, will arrange never to hand the reins to a future Trump, and this time they will not misuse a monopoly of power, made ever stronger by lack of private economic or political power to challenge it.  Just put us bien-pesants in charge and all will be well.

I'm dubious of anyone making that claim, made so often in the past. I don't favor a libertarian dictatorship either.

They claim to worry about "inequality." Many government-run states -- Cuba, say, or Soviet Russia -- had much less measured income inequality. But if this is really all about "power," we should not fail to note that those states had much more inequality of power. Stalin may not have reported a lot on his income taxes, but he essentially owned a whole country.


Chris Edwards and Ryan Bourne at Cato have a nice series on inequality issues here (study, also pdf)  here (blog post). Ryan also takes on the final question that this series builds to, Has wealth inequality eroded democracy?

The Saez Summers Mankiw debate is informative.  See also Summers and Natasha Sarin on the wealth tax. If you're following politics, this really is about the soul of the Democratic Party and its economic views, Summers vs. Saez-Zucman as it is about Biden vs. Warren, Sanders, AOC.

My Hoover colleague David Henderson wrote a nice blog post on the topic, including coverage of the  debate.
"Emmanuel Saez... made his case for a tax on wealth and claimed that the wealthy have disproportionate influence on economic policy. In a segment that is beautiful to see (from about the 1:07:00 point to the 1:09:30  in this forum), Larry Summers challenged Saez to give an example where reducing wealthy people’s wealth by 20 percent would produce better political, social, or cultural decisions. Summers to Saez: “You’ve been making this argument for years. Do you have one example?” Saez didn’t. Summers went on to make the point that very wealthy people can have large influence by spending a trivial percentage of their wealth. Even heavy taxes on wealth would leave them quite wealthy."
"In his earlier presentation on the panel, Summers made another important point. He considered three activities that wealthy people engage in.  Activity A is continuing to invest it productively. Activity B is consuming it—for  example, by hiring a big jet and taking their friends to a nice resort. Activity C is donating it to causes and, if the causes are political, having even larger influence on political causes than they have now. Both B and C are ways to avoid a tax on wealth; A is not."
Interestingly, in the above oped, Saez did have examples, like the interesting claim that Russia became oligarchic and Japan did not (?) because Russia wasn't taxing enough. I would have been interested to hear Larry's response to that one.

From Nihai Krishan in the Washington Examiner
Larry Summers... has called Saez and Zucman’s estimates for the revenues generated by the wealth tax “naively high.” One possibility is that, instead of paying the tax, the über-wealthy would strategically give their money away to charities, reducing the tax base. "It seems important to account for the fact that the wealthy (and their tax planners) will inevitably be motivated to limit tax liability," Summers and another professor argued in an opinion piece in the Washington Post
Larry and the rest of us need to read the NYT oped and understand that low revenue is the point. Of course, Saez and Zucman could be more consistent about that.

The prevalence of non-profits as a tax-avoidance device, and their increasingly political nature, is a topic worth exploring. There is a reason every billionaire and sports star has a charity, that among other things employs his or her relatives and associates.

Gerald Auten and David Spilinter's analysis is an important recent piece in the data discussion.
"Top income share estimates based only on individual tax returns, such as Piketty and Saez (2003), are biased by tax-base changes, major social changes, and missing income sources.... Our results suggest that top income shares are lower than other tax-based estimates, and since the early 1960s, increasing government transfers and tax progressivity resulted in little change in after-tax top income shares."
Chris Edwards passed along a number of good links. Like me, Chris is worried about cronyism, and has good opeds  here and here  acknowledging that "the democrats are partially right." He points to the logical fallacy though -- just because some people earned money this way does not mean that all rich people did. And, we can agree on the disease but disagree on the treatment. If a government running a complex tax system open to cronyism is the problem, it does not follow that more government running an even more complex tax system is the answer. Chris also has a nice analysis of the wealth and capital income taxes and Alan Reynolds on tax elasticities

Update: Thanks to commenters and correspondents who fixed some little errors.

A good friend passes on a lovely quip:  "If ever there was an example of policy-based evidence-making, the case for the wealth tax is it."