Stanford Condemns Atlas

On Friday Nov. 20, as reported in the official Stanford News, the Stanford Faculty Senate formally condemned Scott Atlas, Hoover Senior Fellow and a special adviser to the reviled President Trump.  The full resolution is posted here (but only available with a Stanford id).

"Rise up"

The resolution lists a single documented fact.

in a post to his Twitter account,  Atlas called on the people of Michigan  to ‘rise up’  against their Governor in response to new public health measures...

They acknowledge his later correction 

Although he subsequently claimed that his call to rise up had  been misunderstood, we believe that this latest communication is a dangerous provocation

The President of the University himself piled on, 

President Marc Tessier-Lavigne said he was “deeply troubled by the views by Dr. Atlas, including his call to ‘rise up’ in Michigan.” Tessier-Lavigne noted that Atlas later clarified his statements, but he said that the tweet “was widely interpreted as an undermining of local health authorities, and even a call to violence.”

Now, indeed this was a dumb tweet, and I do not defend it. My view of scientific advisers is that they should advise and serve the President and shut up. Most presidents want them to do that, and not become an independent part of political messaging. But this administration is, er, different, and President Trump has not objected to Scott's tweeting habits. None of us know even if tweeting is expected or not in Scott's job. 

I do not here defend any of Scott's opinions, merely his freedom to state them, advise the President as he sees fit, and not be the first person formally condemned by the university for that speech. 

But let us be clear: It may have been dumb, but Atlas did not call for violence. Period. You can call it "interpreted," you can call it "dog whistle," you can put all the words into Scott's mouth you want, but those words are not there. Condemnation for speech is bad enough, condemnation because someone might misinterpret speech is unimaginable. 

You can also interpret it as I did, a call for people whose livelihoods and health are being imperiled by nitwit proclamations to exercise their rights and duties as citizens of this great country to, well, rise up, to protest to their elected officials, to complain in regular and social media, peaceably to assemble (with masks) and to petition the Government for a redress of grievances. 

So, is a tweet calling for the people of Michigan to 'rise up' against a set of widely panned, economically devastating, ineffectual public health measures, at least in Scott's view (more later), an act meriting this unprecedented and unique condemnation? 

Campus news

Three bits of news illustrate the state of things in US academia. 

1. UC and Prop 16

A proposition was placed before the citizens of California, to strike the following words from our state constitution: 

The State shall not discriminate against, or grant preferential treatment to, any individual or group on the basis of race, sex, color, ethnicity, or national origin in the operation of public employment, public education, or public contracting.

The voters soundly rejected the proposition. 

As a Berkely alumnus, I received an email from Chancellor Carol Christ to all alumni

In California, Prop 16, which would have helped reverse the initiative (Prop 209) that banned the consideration of race, ethnicity, and gender in public higher education admissions, did not pass. I share UC President Michael Drake’s disappointment... Here is President Drake’s full statement. 

That statement includes 

The University of California is disappointed that Proposition 16, ... did not pass in this election. ...

... said UC President Michael V. Drake, M.D. “We will continue our unwavering efforts to expand underrepresented groups’ access to a UC education.”

The UC Board of Regents supported the passage of ACA 5, which became Proposition 16,..

In praise of slow democracy

Steve Landsburg wrote a excellent short WSJ oped  adding one more good reason for our apparently cumbersome electoral practices: 

Imagine a future presidential election in which the incumbent refuses to concede and enlists the full power of the federal government to overturn the apparent democratic outcome.

Now imagine that the election in question is actually run by a federal agency or by some nationwide quasigovernmental authority charged with collecting and aggregating the results from all 50 states.

I don’t know about you, but I might worry a bit about the pressure that could be brought to bear on that single authority. I might worry a bit about the objectivity of the attorney general and the federal election commissioners who would be in a position to ramp up that pressure.

Biden vs. Harris preview

I had a long drive Saturday evening which allowed me to listen to the Harris and Biden speeches. Two lines summed up where we may be heading for the next four years. 

Biden:

I'll work as hard for those who didn't vote for me as those who did. Let this grim era of demonization in America begin to end here and now. 

Not quite "with malice toward none, with charity for all," but close. 

Harris:  

protecting our democracy takes struggle. It takes sacrifice...our very democracy was on the ballot in this election, with the very soul of America at stake,..

Not quite "to you 70 million of Tump voters, you did not just hold your nose and vote to slow down the progressive agenda, no, you voted against democracy, you deplorable fascists, and we will treat you as such," but close.

The battle will be interesting to watch. 

First up, it will be very interesting to see what the voters of Georgia do with Senate races. Now that the Trump issue is off the table, the calculus is entirely different. Whether Republicans encourage or put the brakes on the Biden-Harris-Pelosi-Schumer agenda is a quite different question than the one facing voters a week ago. 

 

Campus still blue

California may be secretly libertarian, but not the Stanford campus.  Several thousand faculty, staff, and students who live in Stanford Campus Housing are registered to vote in Stanford’s exclusive 94305 zip code. Alvin Rabushka puts together their votes: 

                      Biden               Trump          Others 

Stanford     1,860 (94.7%)    68 (3.5%)    37 (1.8%)

California     (65.3%)            (32.9 %)       (1.6%)

I'm actually surprised that it's as high as 68. On proposition 13, raising the property tax for business, 

                              Yes                            No

Stanford          1,664  (86.4%)          262  (13.4%)

California             (48.3%)                   (51.7%)

This is not about Stanford per se, but just a nice hard data point on political diversity in a typical university, relative even to a deep-blue state. 

I note that our employer, Stanford, is a nonprofit which does not pay tax, though it makes voluntary contributions, and that people in Stanford housing not only get houses that cost typically half or less of market value, but most thereby pay less property tax than the rest of us.   

Far-leftism does indeed seem to be a plaything of the very wealthy, government workers, nonprofits and universities. Which are supported, in part, by your taxes, both through explicit federal and state support and via their tax-exempt status. 

Is California secretly libertarian? -- Proposition outcomes

California is a deep blue state when measured by party affiliation, and voting 65% Biden at last count. Yet here is how California's propositions came out, per LA Times and the google search for "California propositions." 

Prop. 14: Bond issue for stem cell research. Wins. 

Prop. 15: Raise property taxes on business. Loses.

Prop. 16: Remove language in the state constitution that "the government and public institutions cannot discriminate against or grant preferential treatment to persons on the basis of race, sex, color, ethnicity, or national origin in public employment, public education, and public contracting." Sold to allow race-based and other preferences in university admissions, contracting, etc. Loses.

Prop. 17: Parolees may vote. Wins.

Prop. 18: 17 year olds may vote. Loses. 

Prop. 19: Property tax reduction. Wins. Note, it allows people who have multi-million dollar houses to keep the low property tax base when they move, and pass it on to heirs. So much for "tax the rich."   

Prop. 20: Complicated. Stricter parole, crime classification. Loses. 

Prop. 21: Allows cities to impose rent control. Loses dramatically. (Per Swedish economist Assar Lindbeck, "...rent control appears to be the most efficient technique presently known to destroy a city—except for bombing.")

Prop. 22: Exempt Uber and Lyft from the employee-vs-independent contractor legislation that was expressly aimed at Uber and Lyft. Wins. (Too bad Uber and Lyft didn't have the guts to just overturn the whole stupid law.) 

Prop. 23: Requires on-site physician at kidney dialysis centers. (Pushed by SEIU union.) Loses. 

Prop. 24: Data privacy regulations. Loses.  Passes. 

Prop. 25: Eliminate cash bail. Loses.

I have rarely had the pleasure of seeing so many of my preferences confirmed by fellow citizens. (To be clear, all of these propositions are highly imperfect, and none is close to how a conservative libertarian would approach these issues. By preferences, I mean just how I chose given the menu at hand.) 

There is a deep lesson here, that Democrats might wish to pay attention to. Their brand and mood affiliation is strong. But even in California, there is little enthusiasm for looney-left policy, or even mainstream-Democrat policy (more taxes, rent controls, stricter labor legislation). Perhaps nationally, Democrats wondering how their candidate is not absolutely trouncing an opponent of such... how shall I put this... singular personal qualities, might wish to contemplate the lesson here.  

Update: Thanks to a commenter and just checked, deep-blue Illinois turns down a progressive state income tax. Will miracles never cease? Maybe Illinoisans are secretly libertarian too. 

The election seems to be heading to a never-Trumper Republican's dream: Biden wins by about 1 electoral vote. Trump rides into the sunset. (Starts a new show on Fox?) The Senate stays Republican. Republicans pick up a good number of seats in the House. The Senate says no no no to anything but reasonable governance for four years. The Supreme Court looks askance at ambitious executive orders. The New York Times editorial page and lots of Very Annoying People fume about the Senate "resistance." Umm, they will have to pick another word. 

More broadly, the big news of the election seems a clear rejection of the far-left agenda. (Big news. We know all about Mr. Trump, good and bad.) 

Damon Liker expresses the view well, in "the left just got crushed." Read Sergeiu Kleinerman in Newsweek, or listen to Jodi Shaw from Smith College (A link. I can no longer find the original via Google, a bad sign.) There is no love for Trump here (Liker is savage), but they're not swallowing the kool-aid, nor, apparently, is the average voter. 

Rhetoric of economic policy -- Biden plan analysis

Last week saw four interesting statements by economists regarding the economic effects of Biden economic plans. 

My focus will be "An Analysis of Vice President Biden’s Economic Agenda: The Long Run Impacts of Its Regulation, Taxes, and Spending" by  Timothy Fitzgerald, Kevin Hassett, Cody Kallen and Casey Mulligan, a 50 page report. (Yes, hosted by the Hoover Institution, my employer). The Wall Street Journal gave it major coverage in its editorial page, offering a thoughtful summary.   

I  contrast that piece with  a letter  signed by 13 Nobel-Prize winning economists  endorsing Biden's economic policies. A separate open letter  signed by 1072 regular economists wrote, and a similar Economists for Trump letter.   

I am a bit late to the game, as it took me a while to read the weighty Hoover report. However, unlike letter writers, I have no illusions that my opinions will sway the election. 

And, if the polls are right and Biden wins, the question of just what Biden's policies will be, and their economic effects, will have perhaps greater resonance after the election than in the Biden vs. Trump choice of the election.  As they formalize, debate, and institutionalize the plans, surely quantitative analysis of the likely outcomes will matter.  

I highlight this report not because of its contribution to the issue of the day. This report marks a dramatic innovation in rhetoric, how economists analyze political plans. The authors really have started a revolution in policy analysis. This was evident in their previous work at the CEA, but the report highlights it. 

*****

The report. 

The deep innovation: This is entirely, and appropriately, a neoclassical analysis. This report shows you how to do serious, quantitive, applied, large-scale detailed and transparent incentive-based analysis. 

(I use "incentive-based" as a clearer and less charged word than "neoclassical" these days. It gets to the central point.) 

This report puts the neoclassical growth model at the center of policy analysis, rather than the simple Keynesian ISLM model. And that's exactly appropriate for permanent long-run policies, not short-run get out of a depression policies. 

What you believe depends on where you stand, apparently.

Or, talking your book on surveys. 

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

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

Nope. 

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

Less surprising:

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

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

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

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

Update: 

It would be interesting to document the same pattern with media and pollsters. Informally they seem to confuse "is likely to win" with "who I want to win." 

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: 

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.

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.

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? 

Artistic representation of government waste

"...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.)

 

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. 

"You're hired" Mulligan review

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

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

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

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

Storm coming

I am very worried about how the next election will play out. I am more worried than most commenters, hence this post, because as an economist I predict people's behavior by asking what is natural given their incentives and the rules of the game as they are. That thinking leads to a dark place.  

Our democracy has one essential function: a peaceful transfer of power. There are rules of the game. A winner is determined even in a close race. Both sides agree who won, and that the winner is a legitimate office holder. 

We seem inexorably headed to the most divisive election since 1860, in which this mantle of legitimacy is sure to vanish, to horrendous result. 

Ruth Bader Gisberg's death adds both distraction from the task of fixing election machinery -- really, agreement by both sides what the rules of the game will be, and to abide by the results -- and one more pathway to disaster. 

Imagine, as seems quite possible, that  Trump scores an early lead in the days after the election, with a narrow electoral college majority, though losing the popular vote, with 90% - 10% losses in the deep blue cities. Trump declares victory. Blue cities erupt in  protest. 

As mail in votes come in and are tabulated, Biden gets closer and closer and by his party's count has won.

Muni haircuts

"Municipal bond investors have to share the burden in state bailouts" writes my colleague Josh Rauh, and he is exactly right.

Background: State and local governments borrowed a lot of money and blew it. They borrowed further by not funding their pensions. Now covid comes along, people are fleeing cities, and they don't have tax revenue to fund ongoing expenses. 

The big question hanging over Washington: If we are going to help state and local governments weather the storm of their current expenses, does that mean federal taxpayers bail out the bondholders who lent state and local governments all this money? 

As in the Greek crisis, bond investors and their allies like to clam "contagion," that any losses will spark a financial crisis.  

Whether that argument has any merit in other cases, as Josh points out it does not hold for municipal bonds in the current financial environment. Municipal bonds are illiquid and tax-exempt and thus well targeted at very wealthy high-income individuals who face high tax rates, and whose saving is thus beyond IRA, 401(k) and other tax-free investment possibilities. And we are not in a systemic financial crisis.  

...as of this spring, around 12 percent of municipal bonds were owned by banks. This implies only about $130 billion of total exposure to all general obligation municipal debt by the banking sector, compared to well above $1 trillion of tier one bank capital. Similar amounts of general obligation municipal debt reside on the balance sheets of the insurance companies, where municipal bonds are 7 percent of assets.

The remaining municipal bonds are directly owned by individuals, or in mutual funds and exchange traded funds largely owned by individuals. Municipal bond defaults would primarily affect individual investors, and especially individuals who buy tax exempt municipal debt because they are looking for tax free income.

Of a piece with the effort to restore the state and local tax deduction, the effort to bail largely blue states and cities out of their debts to largely blue high income taxpayers is just a little bit inconsistent with tax the rich and tax their wealth rhetoric.  

Daniel Bergstresser and Randolph Cohen presented a paper a while ago at a Brookings conference, measuring that 42% of municipal bond value was held by the top 0.5% of the income distribution. Now that so many including the Fed are interested in racial justice, similar breakdowns of who holds municipal bonds would be interesting. Given the racial disparity in wealth, it would be astounding if the disparity in municipal bond holding were not very large as well.   

Josh's solution is straightforward: 

Congress has to therefore condition any further bailout funds on shared losses by municipal bond investors. For instance, the law can mandate that state governments pass legislation that would write off a dollar of municipal bond debt for every dollar of additional grants given to a state or local government.

If we ever are to have any sort of market discipline, if a Fed put is not going to protect all large and politically potent issuers and all large and politically potent investors, who got outsized returns for many years by holding risky assets,  from actually taking those losses when it counts, rather than one more taxpayer bailout, this seems like the time and place. 

Municipal bonds are already highly subsidized, by their tax deduction. State and local governments have responded predictably by borrowing a lot. (Universities also get to borrow at municipal bond rates, and effectively use the money to invest in their hedge-fund endowments.) If municipal bonds now enter the too big to fail regime, the subsidy and incentive to over borrow explodes. 

This situation is part of a general conundrum. The government and the Fed has taken on forestalling bankruptcies of large businesses and governments in the covid recession. (Restaurants, small landlords, and other small businesses no. But AAA bond issuers, and municipal bond issuers yes.) 

To forestall a bankruptcy, you do not just lend money for current operations -- you end up taking on past debts.  

Fortunately the recession seems to be ending quickly, because the magnitude of debt that might end up in federal hands under the no-bondholder-may-lose-money regime is pretty frightening. 

Update

French Translation at Vox-fi

Fintech in chains

"Fintech can come out of the shadows" is the title that Wall Street Journal editors gave to  Brian Brooks and Charles Calomiris' oped last week. I have not in a long time seen a title that more utterly contradicts the content of the essay.  For what they advocate is exactly the opposite: Fintech in chains, hemmed in by  the sort of regulatory stranglehold that fintech was created to escape. 

What is fintech? Basically companies that offer  

services—consumer loans, credit cards or payment processing—that banks have traditionally offered.

but, crucially, fintech does not accept deposits. 

The issue? 

The Office of the Comptroller of the Currency determines which companies qualify for charters as national banks or federal savings associations and supervises the activities of those banks.

But not fintech companies, because fintech companies don't take deposits. And that is the legal issue prompting the oped -- Brooks and Calomiris, coincidentally acting comptroller of the currency and chief economist of the OCC, want the OCC to regulate fintech just like banks. (Calomiris is a topnotch economist who normally writes very good papers. ) 

So what's so awful about fintech? 

Latest Goodfellows

The latest Goodfellows discussion. Embedded, hopefully, here: 

or direct link here. (Try that if the embed fails. Youtube has started censoring Hoover.) 

Podcast: