A survey

My Hoover colleague David Brady put together this lovely graph, using the Gallup poll results from their standard question, "do you think the economy is getting better?"

It has many interesting interpretations -- add your own in comments.

A context that spiked my interest is the use of survey data for expectations in economics. We frequently use such surveys to establish what expectations are, or to question whether expectations are rational.  That partisan feeling so dramatically affects people's views of the economy is  interesting for the interpretation of such survey results.

Most economists don't think that presidential elections have all that much to do with the state of the economy, at least within the bounds of what traditional Republicans and Democrats actually end up doing when in power. The people, apparently, believe quite differently, or at least this time.

Single payer food?

I heard a revealing conversation on NPR Weekend Edition Saturday, featuring Scott Simon, the usually soothing and empathetic Cubs-fan voice of my Saturday mornings, and  Nebraska Congressman Adrian Smith.

SIMON: This budget would also... mean deep cuts to the food stamp program....

After some waffling about farm subsidies,

SIMON: Well, let me ask you this bluntly - is every American entitled to eat? 

SMITH: Well, they - nutrition, obviously, we know is very important. And I would hope that we can look to... 

SIMON: Well, not just important, it's essential for life. Is every American entitled to eat? 

SMITH: It is essential. It is essential. 

SIMON: So is every American entitled to eat, and is food stamps something that ought to be that ultimate guarantor? 

SMITH: I think that we know that, given the necessity of nutrition, there could be a number of ways that we could address that. 

SIMON: So you would vote ..  for a budget that cuts food stamps? 

SMITH: I want to look at an entire budget, look at all of the details. I'm still sifting through the details of the newly released budget. But we know that Congress ultimately has the say. I look for there to be a lot of changes made in the House and the Senate to the president's budget. 

SIMON: Congressman Adrian Smith from Nebraska, thanks so much for being with us, sir. 

SMITH: Thank you. Have a good day.

[My emphasis.]

It really speaks for itself and I should just stop here. But as this is a blog, let me expand on the obvious.

YIMBY papers

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

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

Hsieh and Moretti:

...high productivity cities like New York and the San Francisco Bay Area have adopted stringent re- strictions to new housing supply, effectively limiting the number of workers who have access to such high productivity. Using a spatial equilibrium model and data from 220 metropolitan areas we find that these constraints lowered aggregate US growth by more than 50% from 1964 to 2009.

1) The costs of regulation. The biggest problem in economics right now (yes, I mean that) is, How do we measure the growth consequences of regulation? Looking at the Western world's sclerotically slow growth rate, and listening to many anecdotes, it seems at least plausible that productive innovation is being strangled by byzantine bureacracy, captured by rent-seeking and anti-competitive forces. (Your other choices are, we just ran out of ideas, or some sort of endless "lack of demand.")

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

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

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

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

2) Models and micro vs. macro

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

You can see grounds for objection.

Wild health care proposal

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

A few choice quotes to whet your appetite

All providers must post, in their offices and on a public web site without any requirement to sign in or otherwise identify oneself to access it, a full and complete price list which shall apply to every person....  

All customers must be billed for actual charges at the same price on a direct basis at the time the service or product is rendered to them.  This immediately and permanently decouples "insurance" from the provision of care.  The current system of an "explanation of benefits" that often features a "negotiated discount" of some 90% is nothing other than an extortion racket and is arguably felonious...

A better r*

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

...

Long run money

Continuing in the Il Sole series on Italy and the Euro, Alberto Bagnai writes that the euro is a "big defeat for the economics profession'' here in English, here in Italian.  He takes particular issue with my earlier case for a common currency, here in English, in Italian, and blog post.

"John Cochrane’s idea that money is irrelevant for growth (economists say that money is “neutral”) not only clashes with major scientific results, such as Dani Rodrik’s analysis of the role of excessively strong exchange rates in slowing the growth of a country, but also with what the European institutions are finally admitting through clenched teeth: the reforms are causing deflation and failing to promote employment in any decisive way (footnote 23 in the above-mentioned ECB Economic bulletin).

The best economists had also addressed this point: the negative consequences of structural reforms on the productivity of labour were illustrated by Robert Gordon in 2008. For Cochrane, money is like oil in a motor. The metaphor is (unwittingly) correct. Bad management of oil has long-period consequences like bad management of currency: in the first case the head fuses and the motor stops; in the second a continent, and the world economy stops.

If De Grauwe is incoherent with data and Cochrane with theories,..."

I have long been accused of being theoretically pure but incoherent about the "real world." (As if the real world could ever conform to no theory, rather than a better theory). This is the first time I, or the proposition of long-run monetary neutrality, have been accused of theoretical incoherence.

Fintech and Shadow Banks

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

1. Shadow banks and fintech have grown a lot.

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

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

Trade Haiku

George Shultz and Martin Feldstein, in the Washington Post

If a country consumes more than it produces, it must import more than it exports. That’s not a rip-off; that’s arithmetic. 

If we manage to negotiate a reduction in the Chinese trade surplus with the United States, we will have an increased trade deficit with some other country. 

Federal deficit spending, a massive and continuing act of dissaving, is the culprit. Control that spending and you will control trade deficits.

That's not an excerpt, it's the whole thing. Someday, I will learn to be this concise.

A Healthy Reform?

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

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

Individual insurance:

Jenkins' freshest thought comes last:

We’ll say it again, now for the Senate’s benefit: Apply a few GOP-style fixes and ObamaCare, or something like it, becomes a solution to America’s health-care muddle. You could phase out every other federal program, including Medicare, Medicaid and the giant tax handout to employers, and roll their beneficiaries into ObamaCare.

This wisdom is exactly the opposite of most current commentary, and, here in grumpy-land, where it seems the political process may be heading.

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

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

Wonderful Loaf

A charming animated free-market poem by Russ Roberts, on the invisible hand, at http://wonderfulloaf.org

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

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

Douthat and Feldstein on Euro

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

I was interested in Douthat's views on the euro:

But on the other hand, our era’s “enlightened” governance has produced an out-of-touch eurozone elite lashed to a destructive common currency,..

There is no American equivalent to the epic disaster of the euro, a form of German imperialism with the struggling parts of Europe as its subjects... 

And while many of her economic prescriptions are half-baked, her overarching critique of the euro is correct: Her country and her continent would be better off without it.

Douthat does not pretend to be an economist, and I have no beef with his expressing such views. Because such views are commonplace conventional wisdom from our policy elite. And if the euro falls apart, they will bear a lot of blame for its passing. Be careful what you write, people might be listening.  No, when Germany sends Porsches to Greece in return for worthless pieces of paper, it is not Germany who got the better of the deal. And while you're at it, get rid of that silly common meter, and restore proper nationalism of weights and measures too. (Of course perhaps my admiration for the euro is wrong. Then they will deserve credit for the wave of prosperity that flows over Europe once it unleashes the shackles of the common currency dragging it down. )

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

WalBank

Arnold Kling's Askblog quotes Robert J. Mann

Wal-Mart’s application to form a bank ignited controversy among disparate groups, ranging from union backers to realtor’s groups to charitable organizations. The dominant voice, though, was that of independent bankers complaining that the big-box retailer would drive them out of business. Wal-Mart denied any interest in competing with local banks by opening branches, claiming that it was interested only in payments processing. Distrusting Wal-Mart, the independent bankers urged the FDIC to deny Wal-Mart’s request and lobbied state and federal lawmakers to block Wal-Mart’s plans through legislation. Ultimately, WalMart withdrew its application, concluding that it stood little chance of overcoming the opposition.

Mann also writes

... I argue that permitting Wal-Mart to have a bank would have a salutary effect on the relatively uncompetitive market for payment networks. The dominant position of Visa and MasterCard, in which payments are priced above cost to subsidize credit, inevitably will give way to a world in which payment services are priced at cost, or even below cost as a loss-leader to attract customers to other goods and services.  

As the first quote shows, Walmart was only trying to process payments more efficiently -- because it already saw the chance to offer banking services, lend, and other banking functions would be blocked.

Arnold also points to this by Lawrence J. White.

Arnold sums up,

We are always told that we need regulation to protect consumers and make the financial system safer. That is the theory. The practice is that regulation very often gets used to limit competition. 

Many people in the US still do not have regular bank accounts, and perhaps wisely so as banks notoriously suck money from poor people with pesky fees. Yet cashing a social security check remains a problem. Imagine small town America in which Walmart also offers banking services.

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

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

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

Update:

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

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

93 words, most of them wrong

In the WSJ, The 93 Words That Could Unlock $200 Billion in Bank Capital. This could be a great MBA final exam. Spot the errors: 

"Tucked inside a nearly 600-page legislative proposal to overhaul U.S. financial regulations are 93 words that could provide a windfall for bank investors seeking heftier dividends and share buybacks."

"Bank analysts at Barclays BCS -6.08% PLC estimate $236 billion in capital is tied up in operational risk at the four biggest U.S. banks alone"

"Bankers ... want to free up capital that could be returned to shareholders or used for more lending."

"Mr. Dimon added that U.S. banks now hold about $200 billion in capital against operational risk."

(I made it easier with italics, all mine.)