Tuesday, October 20, 2020

Challenges for central banks.

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

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

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

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

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

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

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

I think this adventure is a dangerous mistake. 

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

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

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

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

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

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

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

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

Tuesday, October 13, 2020

Understanding the Left

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

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

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

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

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

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

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

With that preamble, here it is: 


Understanding the left. 

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

John H. Cochrane

Senior Fellow, Hoover Institution

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

1. A will to power

Consider the economic agenda proposed by the Democratic presidential candidates:

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

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

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

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

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

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

The Philadelphia Statement

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

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

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

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

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

Monday, October 12, 2020

Open letter on campus culture

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

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

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

Sunday, October 11, 2020

Nobel guess

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

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

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

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

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


Saturday, October 10, 2020

Should Stanford cancel Stanford? Many questions.

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

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

Friday, October 9, 2020

Video, talks, podcasts update

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

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

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

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

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

Covid and Beyond

John H. Cochrane

Remarks at the OECD, October 9, 2020

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

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

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

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

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

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

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

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

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

Wednesday, October 7, 2020

Contract enforcement with costly verification -- Van Halen edition

From the Wall Street Journal Obituary 

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

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


Tuesday, October 6, 2020

On Re-Education Programs

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

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

What's in the training programs?

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

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

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

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

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

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

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

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

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

Monday, October 5, 2020

Artistic representation of government waste

Man Controlling Trade

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

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

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

San Joaquin River Viaduct

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

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

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


Friday, October 2, 2020

Beat Covid Without a Vaccine

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

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

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

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

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

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

Thursday, October 1, 2020

Political diversity at the AEA

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

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