Almost sane housing supply

California, despite being a one-party state, is actively debating SB50 that would over-ride local zoning laws and allow construction of apartment buildings, especially near transit areas.

This is almost a remarkable outbreak of sanity. In a divided government, one can keep touting slogans. But when one party takes over, apparently permanently, they do have to actually govern, and eventually some reality must sink in.

Housing in California is ridiculously expensive. After California tried everything else -- "affordable housing" mandates on developers, subsidies, rent controls, public housing, and so forth -- it is finally facing the fact -- we need to just let people build. Given that California will not allow more land to be devoted to housing -- wisely, in my view -- and given that the first generation housing stock was built cheaply, using a lot of land for little house, the natural place to allow people to build is up: replace small single family houses on large lots with apartments, townhouses, or even single family houses on smaller lots.

The problem here is local zoning laws, building laws and various impeding regulations, which are more or less designed to preserve enormously expensive museums of 1950s suburbia. So SB50 overrides local laws.

The end result, though is saddled by a trip through the progressive sausage factory. I recommend Joe DiStephano's analysis with beautiful maps.

The first stop was rather clever: wrap it in green. "You can build" was never going to fly in California. So the original effort, SB25, restricted the effort to areas near transit. Who can object to allowing apartments near transit, so people can get out of their cars? Moreover, with this twist, SB25 put the kibosh on one standard local trick for restricting construction, requirements for lots of onsite parking.

The transit clause extends to "high quality bus corridors." Now in one sense that's great. Other than nostalgia and cuteness, and outside places like New York City, buses are much better transit options.  But one of the main reasons buses are great is that it is much easier to move a bus line than to move a rail line. You can be on a "high quality bus corridor" tomorrow.

"Jobs rich areas" are now included. Allowing people to live nearer where they work is better than any "transit" idea. That too is a little strange though. If people were allowed to build housing, jobs would locate there quickly. Housing first redevelopment is not too hard an idea.

Alas, the bus and jobs exemption only waive density and parking, and allow cities to keep height limits and other zoning restrictions. Which they will do.  

Then it descends into madness, and an invitation to endless litigation.

"Sensitive communities" are exempt. That means (still quoting Joe), "‘High Segregation & Poverty’ or ‘Low Resource’ in TCAC Opportunity Maps," "Other local areas determined by each regional government through a collaborative process," and "Tenant-Occupied and Rent Controlled parcels."

California will write a law allowing the construction of apartment buildings, and conversion of houses to multifamily units, yet will specifically exempt the areas most obviously in need of redevelopment. Once upon a time governments granted subsidies and tax breaks for redeveloping such places. Minorities and poor people will instead be condemned to live in rotten housing and rotten neighborhoods. Heaven forbid a few apartments get built near transit stops, some yuppies move in, grocery stores and coffee shops grow to serve them, and the rest of the neighborhood. 

Joe's maps tell the story. Where in LA will California allow apartments? Not in the places that need redevelopment! Perhaps if people could build apartments, these might become "jobs rich areas!"   

As its local governments are devoted to maintaining museums of suburbia, the state government is devoted to preserving museums of poverty, racial segregation, and lack of businesses and services. 

(To be fair, the state law only over rides local zoning laws. There is nothing that stops the city of LA from allowing development with or without SB50.)

As a classic example of how we got in to this mess, consider the instant reaction on the Menlo Park nextdoor.com 

Now, if we do a little Bayesian Improved Surname Geocoding -- not perfect, but good enough for the Justice Department to sue auto dealers -- we can conclude that the author is white, wealthy, lives in a house worth at least $3 million dollars, and a reliable progressive Democrat, bleeding hearts over climate change and inequality. Yet this post is worthy of the darkest anti-immigrant keep-the-poor-out    climate-denying right-winger. All the people who rehab the $3 million single family houses to $6 million single-family houses in Menlo Park drive in from 50 miles away, as do those who mow the lawns, wait the tables and so on. The young bright kid from Fresno who might get his break working here has little hope of finding a place to live. I guess there is a lot of hypocrisy going around these days, but this is pretty glaring.

Also echoing the local zeitgeist and how-did-we-get-in-to-this-mess thoughts is the ongoing saga of the Flintstone House. NYT here, and a good article at the Guardian If you've ever driven down 280, you've seen this cool house. It was recently sold, and the new owner took up the Flintstones theme:

Before:

After:

More great pictures at SF Curbed. How utterly cool, you undoubtedly think. What did the city do, make it a historic landmark to preserve it? No, the city is suing Ms. Fang, the owner, for landscaping without permits and "community input."

From the Guardian

... the tastemakers of Hillsborough have not extended their favor to the experimental stylings of William Nicholson, the architect...It was in response to the Nicholson’s construction of the Flintstone house in 1976 that the town first established its Architecture and Design Review Board (ADRB), ... established “so there would never be another home like that built in Hillsborough”.

...Mrs Fang claims that she attempted to work with town of Hillsborough to obtain the proper permits for her landscaping work, ..she says she feels like the town is playing with her like a cat with a mouse – “play, play, play, bite, until I die” – and claims she has interacted with the town 44 times while attempting to comply. At one point, the town lawyer pressured her to paint all the mushrooms a single color, she says. “Every time I complied with their request, they moved the goalpost,” she says.

"Design review," which produces Disneyland replicas of craftsman houses and bland identical French farmhouses, allows its executors to stymie permits with endless arbitrary whimsical requests for esthetic changes.

Bottom line, any residual meaning of "private property" is vanishing in California.

(I received a few comments from fellow libertarians last time I wrote about these issues. Shouldn't communities have the right to pass whatever restrictions they want? If they want to preserve a $5 million per house replica of 1950s suburbia, and wall out the unwashed masses, hypocrisy aside, why should the state stop them? I counter, this is not libertarianism, the defense of private rights, this is untrammeled majoritarianism, by which your neighbors via the city strip you of your right to sell your house to the highest bidder, do what you want with it, and strip the ambitious kid from Fresno who wants to move here of his right to be supplied by a competitive marketplace. It's also a monstrous inefficiency. A neighbor who is hurt by $500 from his dislike of looking at your property can destroy millions of value to you. Anyway, it's a longer discussion which I acknowledge here without getting in to it. )

Rent Control Poem

"kevinsch" posts an remarkable essay on rent control on a  Seattle city council blog (HT Marginal Revolution).

I’m not an economist, not a landlord, nor a renter. But since we’re having this debate, I went to the UW Library and pulled the literature on rent control so I could understand the issues, the studies, and what the experts conclude.  Here’s what I found. 

1. Within the community of economists there is broad consensus that rent control is a bad idea. The consensus is on par with the scientific community on climate change, and the medical community on the safety of vaccinations. 

Given the widespread move to introduce rent controls on the left coast, savor that.

2. There are two documented benefits of rent control: it decreases economic displacement for people living in rent-controlled housing, and it can reduce the volatility of rental pricing in cities where there is sufficient stock of rental housing. 

3.  There is a very long list of documented harms that rent control causes. It provides a strong disincentive to build more rental housing. It drives landlords to reduce spending on maintaining their units until the quality of the housing has drawn down to the point where it matches the allowed rent. And thus by reducing property values, it reduces property tax revenues. It reduces mobility for renters, causing them to stay in their rent-controlled housing rather than move when a better job or the needs of their family require it. It misallocates the total housing stock by encouraging people to stay in housing that doesn’t match their needs.  It encourages rental property owners to convert apartments to condominiums, thereby reducing the rental housing stock. It inevitably leads to a “cluster” of regulations piled on top to try to legislate away all of rent control’s problems. And it doesn’t help the people with the greatest need, but rather the people most capable of gaming the system. 

It's remarkable that someone who is not an economist could so quickly find all these subtle effects. Yes, most people quickly get that landlords will not keep up apartments, and builders won't build them. But most people don't quickly get the disincentives for renters not to "move when a better job or the needs of their housing require it." Or that it leads not to nirvana for the low income renter, but helps "the people most capable of gaming the system." I would only add that it really hurts the young ambitious person of limited means who wants to move to town to get that upward-mobility job.

4.  In many cities with rent control, tenants see annual rent increases at the maximum amount allowed, because landlords understand that if they skip a year they will never catch up. 

5.  Rent control’s harms can be mitigated in part through an aggressive public/social housing program that creates a large quantity of units using public funds. However, in those places it’s unclear that rent control itself is adding much value beyond the significant value that the public housing program alone delivers. 

OK, Kevinsch is not an economist so I'll let this pass. The history of aggressive public/social housing programs in US cities are an absolute disaster.

More deeply, he missed the underlying cause of the problem -- building, zoning, and land-use restrictions. Supply meets demand. If builders were allowed to build cheap apartments for modest renters, they would do so. If builders were allowed to build expensive apartments for high-income renters, who then would move out of buildings suitable for low rent apartments, they would do so.

6.  As this paper says, rent control “confers its benefits early, and extracts its costs late.” That’s one of the reasons it’s such an attractive policy idea. 

Well, it confers benefits to renters early. The loss of property value to landlords is instant, but apparently nobody cares about them. The "one time" capital tax is always tempting.

7.  As this article puts so well, among rent control advocates there are no rent control failures; there are only bad implementations. 

Ditto, say, Socialism and Venezuela.

8. And finally, as this research paper suggests, economists have been thorough at convincing themselves that rent control is a bad idea, and inept at convincing anyone else.

This is a gem. And so true. Like, say, tariffs. I wish I knew just how to fix that despite the immense effort and millions of dollars going in to better dissemination of economic ideas.

The essay goes on, and it's worth reading the whole thing. 

There is a lesson here. Why do our governments, and especially local governments, so often wander into terrible economic policies? The "education" theory says they just don't know basic economics, and don't have any competent policy advice. If they and their staff could just be "educated" things would get better. (And if we could break through all the competing parties who also want to "educate" politicians.) The "interest" theory, more typical among public choice economists, views political outcomes as the result of power, not ideas. Rent control wins when incumbent renters who want to stay put win the political battle over landlords, mobile renters, and potential newcomers, and invoke whatever ideas butter the toast of their cause.

That the city council of Seattle has available such amazingly good policy advice speaks to the latter, sad to say for those of us in the "education" business.

The third view is that ideas still matter at the larger level.  A bad idea like rent control requires the asset of the general voter. Yes, incumbent renters who know how to work the system may win the political battle over landlords, property owners, people who want to move to the city and rent, and mobile renters or those not good at working the system, who will lose.  But the larger mass of homeowners, condo owners, and non-controlled renters must go along. They don't have a personal interest, other than a general desire to feel good by helping those who face higher rents, so they don't have much reason to study the issue. If the general electorate understood how bad rent control is for their city, and most of the people they want to help, perhaps economic policy would be better. There is hope for ideas. 

Meer On Minimum Wage

David Henderson posts a thoughtful draft op-ed by Jonathan Meer on minimum wages. Two talents of  great economists are to recognize that averages hide big differences among people, and to imagine all the avenues of substitution and unintended effects of a regulation. The oped excels:

Substitution:

when the minimum wage is raised, employers offset increased labor costs by reducing benefits like the generosity of health insurance. Other benefits, like free parking or flexibility in scheduling, are more difficult to measure but are also likely to be cut back. Employers will likely expect more work effort when they are forced to pay more, changing the nature of jobs. And in the longer run, economists have found that employers shift towards automation and expecting customers to do more things themselves– reducing job growth in ways that aren’t always obvious. This damage takes time to be seen, which is one reason minimum wage hikes, like rent control, often seem appealing. 

Who gets jobs?

When debate focuses on the total number of jobs lost or gained, it hides this potentially nasty distribution of the benefits: a recent college graduate with a barista job may get a few more dollars an hour, but the high school dropout finds it harder to get and keep a job. ...

The teenage children of well-off families, earning money to buy video games, are treated the same as single moms struggling to get by. When wages are set at an artificially high rate, why should an employer take a risk on the single mother who needs the occasional shift off to take her kids to the doctor? The kid from a disadvantaged background who needs some direction on how to treat customers appropriately? Or the recently released felon trying to work his way back into the community? Why should employers bother with them when there are plenty of lower-risk people who are willing to work at those artificially high wages? 

Assorted comments, especially to dispel the usual you-just-don't-care-you-want-profits-for-big-business calumnies:

It will get much worse in the next recession...Those at the margins of the workforce will be left further behind. Low-wage jobs aren’t easy, don’t pay well, and are rarely fun. But not being able to find work at all is far worse.

Despite the lowest unemployment rates in decades, only 39% of adults without a high school degree had a full-time job in 2018 – and among young African-Americans dropouts, it’s a shocking 26%. It’s hard to believe that the best way to help them find work and start climbing the job ladder is to put the first rung out of reach, making it difficult for them to find work and driving them to illegal employment with few protections.

 We should never minimize the struggles of low-income families to get ahead. But good intentions are no substitute for good policy. Minimum wage proponents mean well, but the unintended consequences hurt the worst-off the most.

Jonathan isn't just making this up as us bloggers tend to do. He points to "The Minimum Wage, Fringe Benefits, and Worker Welfare, with Jeffrey Clemens and Lisa B. Kahn

...state-level minimum wage changes decreased the likelihood that individuals report having employer-sponsored health insurance. Effects are largest among workers in very low-paying occupations, 

and Dropouts Need Not Apply: The Minimum Wage and Skill Upgrading

workers employed in low-paying jobs are older and less likely to be high school dropouts following a minimum wage hike.... job ads in low-wage occupations are more likely to require a high school diploma following a minimum wage hike,

Related, Zachary S. Fone, Joseph J. Sabia, Resul Cesur find exactly the predicted substitution into criminal activity

find that raising the minimum wage increases property crime arrests among those ages 16-to-24, with an estimated elasticity of 0.2. This result is strongest in counties with over 100,000 residents and persists when we use longitudinal data to isolate workers for whom minimum wages bind. Our estimates suggest that a $15 Federal minimum wage could generate criminal externality costs of nearly $2.4 billion. 

Hat tip to David Henderson, who posted the draft oped and a link to the excellent Jonathan Meer - James Galbraith debate, and to the indefatigable Marginal Revolution. I saw an early draft of the oped, and hoped Meer would be able to publish it, at least somewhere like WSJ. It's not too late!

Update: 

Jonathan passed on this tidbit from Obenauer & von der Nienburg, “Effect of Minimum-Wage Determinations in Oregon,” July 1915, yes 1915

“The belief was very prevalent among store women that the minimum wage had wrought only harm to them as a whole. The experienced women contended that formerly they had gotten through the day without any hurry or strain. If it was necessary to work a few minutes overtime, they did so willingly. Now, they said, they are under constant pressure from their supervisors to work harder; they are told the sales of their departments must increase to make up for the extra amount the firm must pay in wages.”

Plus ça change...

Overall, it's a shame that economists have bought the popular discourse that all that matters are "jobs," as if it were 1933, not the vast range of the terms of employment -- how hard you have to work, hours, tasks, flexibility, side benefits, overtime, and so forth.

Less listing

Torsten Slok at DB sent along this lovely graph. The underlying paper "Eclipse of the Public Corporation or Eclipse of the Public Markets?" by  Craig Doidge, Kathleen M. Kahle, G. Andrew Karolyi, and René M. Stulz,  has a lot more.

Stocks are fleeing the exchanges in the US. Small and young stocks are disappearing most, with older larger stocks dominating. Less public means more private, not less companies. Companies are more and more financed by private equity, groups of large investors, debt, venture capital and so forth.

This is largely a US phenomenon, which is important for us to figure out what's going on:

What's going on? Doidge,  Kahle, Karolyi, and Stulz have some intriguing hypotheses. US business is more and more invested in intellectual capital rather than physical capital -- software, organizational improvements, know-how, not blast furnaces. These, they speculate, are less well financed by issuing shares on the open market, and better by private owners and debt.

This shift from physical investment to R&D -- investment in intellectual capital -- is an important story for many changes in the US economy.

Improvements in financial technology such as derivatives allow companies to offload risks without the "agency costs" of equity, and then keep a narrower group of equity investors and more debt financing.

"We argue that the importance of intangible investment has grown but that public markets are not well-suited for young, R&D-intensive companies. Since there is abundant capital available to such firms without going public, they have little incentive to do so until they reach the point in their lifecycle where they focus more on payouts than on raising capital."

I.e. the only reason to go public is for the founders to cash out, and to offer a basically bond-like security for investors. But not to raise capital.

They leave out the obvious question -- to what extent is this driven by regulation? Sarbanes Oxley, SEC, and other regulations and political interference make being a public company in the US a more and more costly, and dangerous, proposition.  This helps to answer the question, why in the US.

The move of young, entrepreneurial companies who need financing to grow to private markets, limited to small numbers of qualified investors, has all sorts of downsides. If you worry about inequality, regulations that only rich people may invest in non-traded stocks should look scandalous, however cloaked in consumer protection. But if you can only have 500 investors, they will have to be wealthy. Moving financing from equity to debt and derivatives does not look great from a financial stability point of view.

Our financial system has become remarkably democratized in recent years. Once upon a time only wealthy individuals held stocks, and had access to the superior investment returns they provide. Now index funds, 4501(k) plans are open to everyone, and their pension funds. What will they invest in as listed equity disappears?

A wealth tax, easy to assess on publicly traded stock and much harder to assess on private companies with complex share structures -- especially structures designed to avoid the tax -- will only exacerbate the problem. More moves to regulate the boards and activities of public companies will only exacerbate the problem.

Monopoly in history

Timothy Taylor, the Conversable Economist, tracks down the oft-told story of William Lee and his knitting machine.

...the 2019 World Development Report from the World Bank has a mention near the start of Chapter 1: "In 1589, Queen Elizabeth I of England was alarmed when clergyman William Lee applied for a royal patent for a knitting machine: `Consider thou what the invention would do to my poor subjects,' she pointed out. `It would assuredly bring them to ruin by depriving them of employment.'” 

It's really a lovely story, presaging this fallacy passed down through the ages, to Milton Friedman's famous "let them use spoons" story (on being told a Chinese dam was being made by hand and shovel rather than bulldozers to provide employment) to the current hullabaloo that AI will take all the jobs. (And today. On a KQED (NPR) "forum," show last week, on while I was shaving, a caller expressed just how great it is that Mexico uses people not machines to sweep streets, thereby providing employment, and we should do the same. Fallacies live a long time.)

Lovely as it is, Taylor is "inherently dubious about direct quotations from conversations held in 1589," took a  "journey through libraries and archives," to track down the actual story.  It is an interesting note on the very beginnings of the industrial revolution.

As I read Taylor, it seems the story is actually pretty suspect.

"The underlying source seems to be in an 1831 book, History of the Framework Knitters, written by Gravenor Henson....Henson was an important British trade union leader in the early 19th century. As Stanley D. Chapman notes in his "Introduction" about Henson's purpose in writing the book: "His main theme was that hosiery, lace and all other industries should be regulated by the government so as to maintain a decent living standard for the workers and fair conditions of trade. British industries must be protected from direct foreign competition and, more particularly, from industrial espionage, migration of skilled workmen to other countries, and export of machinery."  

So, as I gather indirectly, the story passed on from a source was definitely trying to make a point, and (again reading only Tim) has precious little primary evidence for the famous conversation.

The first lesson: beware these apocryphal stories passed on through secondary, tertiary and ultimately gossipy sources.  

This lesson was brought home to me by Peter Garber's great "Famous First Bubbles" book (I had a lot of fun reviewing it). Garber went back to look at actual primary sources behind stories that though apocryphal are passed around as true among economists, such as the famous tulip "bubble." They aren't true either. Though they make good stories.

I got a deeper lesson, on just how economies worked in early modern Europe. Early economies were so pervasively regulated, that the only thing to do with an innovation was to run to get a Royal monopoly. 

William Lee invented a stocking-making machine. (Apparently, to put out of employment a woman who spurned his advances while knitting stockings.) So, what does he do with his newfound knowledge?

Having now discovered the method of knitting by machinery, his next effort was directed to obtain the golden harvest which had flattered his imagination. He removed his invention to London for the purpose presenting it to the Queen,...Lee now imagined himself certain of a handsome remuneration,...[but]  she refused to make either a grant of money or secure him a monopoly or patent. 

Here is where the famous quote enters

Her answer is said to have been to the following purport: -- My Lord, I have too much love to my poor people, who obtain their bread by the employment of knitting, to give my money to forward an invention which will tend to their ruin, by depriving them of employment, and thus make them beggars. 

It goes on, interestingly. The Queen was interested in cheaper silk stockings, which she wore:

Had Mr. Lee made a machine that would have made silk stockings, I should, I think, have been somewhat justified in granting him a patent for that monopoly, which would have affected only a small number of my subjects. but to enjoy the exclusive privilege of making stockings for the whole of my subjects is too important to grant to any individual."

But it gets much more s economically interesting

Apparently Lee ran into a different problem: Queen Elizabeth has been granting lots of monopolies to court favorites, and there was a widespread sense that it had gotten out of hand. Thus, the granting of unwarranted monopolies became a reason to deny Lee a monopoly as well. Henson writes:

"The time which Mr. Lee had chosen to make an application to the government, though to his sanguine mind very propitious for remuneration. was in reality the reverse; the treasury of Elizabeth was extremely low, owing to the enormous expenses which she had incurred in preparations to meet the Spanish armada in the preceding year. Already had the Parliament begun to express their decided umbrage at the grant of the privileges of patents for monopolies; which, as they were then conducted, were justly considered national evils, and the most odious means of rewarding court favorites, by an excessively tyrannical mode of private taxation. Nearly all the nobles enjoyed a patent for the most useful and general articles of consumption, such as iron, lead, saltpetre, salt, oil, glasses, &c. &c., to the amount of more than one hundred articles, which were sold, imported, or exported by virtue of letters patent. These patent rights, were sold to persons who farmed the profits, and thus demanded what prices they thought prudent for their commodities. [my emphasis] When the general list was read over in the House of Commons in 1601, a member, indignant at the the extortions, exclaimed, " Is bread amongst the number?" "Bread?" cried the house, with astonishment, "Yes I assure you," he sarcastically replied, "if we go on at this rate, we shall have a monopoly of bread before next Parliament." 

Actually, I believe they did. Most trades were restricted to guild members and you couldn't just bake bread and sell it. (Historians, let me know if I'm confusing place and time here.)  "Patent" in 16th century England also seems to mean more a general monopoly right than our current understanding, as in a "patent" to sell iron. Lee went on to the French court, to try to get a patent and monopoly there too.

Lee never, apparently, made a bundle actually making stockings. He died unhappily in France, though his machine did get adopted. Just how long it took a simple stocking machine to be adopted may tell us something interesting about why economic growth was so slow to break out.

The interesting observation here: it's 1589, and you invent a cool new machine, say for making stockings. What do you do with it? You and I might answer, "start making stockings." You can undersell the competition and make a bundle. Or, we might answer, "start selling stocking-making machines." Sure, others will follow, but you have a big first-mover advantage. Yes, if a modern patent system were up and running it might be useful to get a patent and try to slow down competitors. But first and foremost, get the business going.

That Lee did not do this -- that it seems not even to have occurred to him - is telling about just how controlled and regulated economies apparently were at the time.

It brings to mind two other recent histories I read, Dava Sobel's Longitude and Charles Coulston Gillispies' book on the  Montgolfier Brothers.

Longitude: In the 1700s, it was a major problem to know how far east or west a ship was. After painstaking work, John Harrison came up with a solution: a clock that could tell time accurately, even at sea. What did he do with it? Start selling clocks to ship captains, you might say! And you would be wrong. He spent his life trying to get the prize established for that purpose, mostly unsuccessfully.

Balloons: The Montgolfier Brothers invent the balloon. What do they do with it? Start selling balloons? Start selling balloon rides? No, immediately off to Paris to get royal dispensation.

I don't know enough about these early economies, but that running off to get a Royal monopoly seems to be the only thing anyone even considers to do with a new invention seems interesting evidence on just how rigidly controlled economic affairs were.

Guilds, patents, monopolies, and the primary function of economic regulation being to create rents in return for political support, seems a pattern with deep roots.

Competitive deposits?

In its death note to narrow banks (link to Federal Register where you can post comments; previous post),  the Fed claimed charmingly that retail deposit rates are fully competitive, so we don't need a narrow bank option to help spread the interest on reserves to deposit rates. In the Fed's view, the fact that banks pay so little compared to reserves just reflects the costs (many of them regulatory!) of servicing retail accounts.

"Some have argued that the presence of PTIEs could play an important role in raising deposit rates offered by banks to their retail depositors. The potential for rates offered by PTIEs to have a meaningful impact on retail deposit rates, however, seems very low...retail deposit accounts have long paid rates of interest far below those offered on money market investments, reflecting factors such as bank costs in managing such retail accounts and the willingness of retail customers to forgo some interest on deposits for the perceived convenience or safety of maintaining balances at a bank rather than in a money market investment. 

Here is some data. From "The Deposits Channel of Monetary Policy"  by Itamar Drechsler  Alexi Savov  and Philipp Schnabl, The Quarterly Journal of Economics, 132 (2017)1819–1876:

When the Fed Funds rate rises, checking  account rates do not. (It's interesting that savings and time deposits do move more quickly, indicating banks face more competition there.) The Fed's story that the spread between checking account rates and federal funds (now IOER) rates reflects costs is very hard to square with this graph -- why should costs and benefits of checking accounts change over time so much, and coincidentally rise exactly one for one with the Federal Funds rate?

Pablo Kurlat, Deposit Spreads and the Welfare Cost of Inflation plots similar data cross sectionally, which lets you estimate the pass through rate better at the expense of the time pattern:

Pablo puts the spread between deposit and federal funds rate on the vertical axis. So, if banks passed through interest rates one for one, the line would be flat. If there were a constant cost, it would be flat but at a higher level. If banks pay the same lousy rate no matter what interest rates are, the curve lies on the 45 degree line. You can see the same general picture.

(Pablo's paper is very nice. He concludes that therefore the "Friedman rule" that interest rates should perpetually be zero, with slight deflation making real rates positive, has yet another thing going for it, that banks are not able to use their market power against us so much.)

Pablo also plots data from different countries:

It's interesting that Sweden and Italy have flatter (more competitive lines). It's really interesting that Argentina lies on the 45 degree line, with no pass through, despite huge inflation-induced interest rates. I would guess that Argentina has a law against paying interest rate on deposits, as the US used to have.

No, it strikes me we have exactly what it seems to be, looking out the window, a heavily regulated not very competitive oligopoly, sort of like airlines 1972.

Fed vs. Narrow Banks

Suppose an entrepreneur came up with a plan for a financial institution that is completely safe -- it can never fail, it can never suffer a run, it offers depositors perfect safety with no need for deposit insurance, asset risk regulation, capital requirements, or the rest, and it pays depositors more interest than they can get elsewhere.

Narrow banks are such institutions.  They take deposits and invest the proceeds in interest-bearing reserves at the Fed. They pay depositors that interest, less a small profit margin. Pure and simple. Economists have been calling for narrow banks since at least the 1930s.

You would think that the Fed would welcome narrow banks with open arms.

You would be wrong.

The latest chapter in the Fed's determined effort to quash The Narrow Bank (TNB) and at least one other effort to start a narrow bank is unfolding. (Previous posts here and here.)

Last year, TNB sued the Fed for refusing to allow TNB an account at the Fed at all. The Fed has just now filed a motion to dismiss the suit. The Fed has also issued an advance notice of proposed rule making, basically announcing that it would, on a discretionary basis, refuse to pay interest on reserves to any narrow bank. In case anyone gets a bright idea to take a small bank that already has a master account and turn it in to a narrow bank, thereby avoiding TNB's legal imbroglio, take note, the Fed will pull the rug out from under you.

I find both documents outrageous. The Fed is acting as a classic captured regulator, defending the oligopoly position of big banks against unwelcome competition, its ability to thereby coerce banks to do its bidding, and to run a grand regulatory bureaucracy, against competitive upstarts that will provide better products for the economy, threaten the systemically dangerous big bank oligopoly, and reduce the need for a large staff of Fed regulators.

I state that carefully, "acting as." It is my firm practice never to allege motives, a habit I find particularly annoying among a few other economics bloggers. Everyone I know at the Fed is a thoughtful and devoted public servant and I have never witnessed a whiff of such overt motives among them. Yet institutions can act in ways that people in them do not perceive. And certainly if one had such an impression of the Fed, which a wide swath of observers from the Elizabeth Warren left to  Cato Institute anti-crony capitalism libertarians do, nothing in these documents will dissuade them from such a malign view of the institution's motives, and much will reinforce it.  

On the outrage scale, the first paragraph of the Fed's motion to dismiss takes the cake:

The death of the healthcare market

People really do not need health insurance for regular small expenses, as they do not need car insurance to "pay for" oil changes. And any insurance system relies on an underlying cash market to find what the right prices are. Collision insurance works reasonably well because there is a supply and demand market for auto repair in which people pay their own money and there are competitive suppliers and free entry, offering services along a wide quality-price spectrum.

The underlying cash market has disappeared in health care. If you try to just pay for service, you face the ridiculous sticker prices. Everyone needs to go through some sort of middleman. We have, collectively, fallen for the fallacy that "negotiation" can lower everyone's price, rather than (try to) lower my price by raising yours. It is widely recognized that catastrophic insurance plus health savings plans are a much better structure than current pay for everything structures. But you can't do that if people showing up on their own to buy things are faced with fictitious "list prices." 

These thoughts come to mind reading an excellent explanation of the price of insulin posted by Novo Nordisk via Charles Sauer in the Washington Examiner (and thanks to a correspondent who sent the link) 

".. the drug pricing system, .. is incredibly complex and has resulted in a lot of confusion around what patients pay for medicines...."

"As the manufacturer, we do set the “list price” ... However, after we set the list price, we negotiate with the companies that actually pay for the medicines, which we call payers. This is necessary in order for our medicines to stay on their preferred drug list or formulary. The price or profit we receive after rebates, fees and other price concessions we provide to the payer is the “net price.”... "

Perhaps it's clearest right there: "the companies that actually pay for the medicines, which we call payers." What happened to people?

Notice also the graph. If you think it's been getting a lot worse in a short time, you're right.

Right out in the open, and clear as a bell:

...those price increases were our response to changes in the healthcare system, including a greater focus on cost savings, and trying to keep up with inflation. PBMs and payers have been asking for greater savings – as they should. However, as the rebates, discounts and price concessions got steeper, we were losing considerable revenue... So, we would continue to increase the list in an attempt to offset the increased rebates, discounts and price concessions to maintain a profitable and sustainable business. ...

Privatize TSA and ATC!

In the aftermath of 9/11, there was some debate whether TSA should be federal employees, or run privately, and paid for by airlines. Government does not have to actually employ people in order to regulate, supervise, and make sure standards are followed.

Similarly, there has been a longstanding debate whether air traffic control should continue to be run by the federal government rather than privatized, as it is in Canada.

Now that TSA and ATC turn out to be the straws that break the camel's back on federal government shutdowns, perhaps it would be wise to revisit both decisions!

Deregulation

Many of us free-market types bemoan how poorly designed regulation hurts economic growth. But unlike "stimulus," regulation is a death by a thousand knives. Each one seems innocuous, but they add up. It's hard to tell the story without details. There is no handy government statistic on "impact of regulations." We tend to talk about what we can easily measure. Likewise, there is a general sense that the current deregulation effort may be helping, but again without details it's hard to know if this is truth or spin.

In this context, I just learned of an interesting new website at the Brookings Institution that tracks Trump Administration deregulation efforts (HT Daniel Henninger at WSJ).  I get the general sense that Brookings isn't too happy with it and wants to expose removal of useful regulations. But they've done a nice job, so you can read it both ways.

Yes, the big ones you've heard of are there. The Waters of The US Rule, The Coal Fired Powerplants Rule, Title IX, Asylum Seeker restrictions, Fuel Economy standards, lots of rules pecking away at capital standards for financial institutions (so much for procyclical capital!)  and so forth.

It's interesting quite how many are not really Administration deregulations, but compliance with the Supreme court throwing out Obama era regulations. This really is what the Supreme Court battle is about.

It's also interesting actually how short this list is. For all the talk of "deregulation," you would think thousands of individual rules would be on the chopping block.

But I enjoyed this mostly for details for all the little ones you don't read about every day, a little peek into the bowels of the regulatory state.

Affordable Housing Program Amendments 

The Federal Home Loan Bank Act requires each Federal Home Loan Bank to establish an affordable housing program to enable members to provide subsidies for long-term, low- and moderate-income, owner-occupied, and affordable rental housing. 

What? You might have thought Trump officials were going to stage a book burning of that one, but no, it's modest

This proposed rule invites comment on several amendments to the regulations governing Federal Home Loan Banks, among others, giving Federal Home Loan Banks additional authority to allocate their Affordable Housing Program funds and relaxing or streamlining certain regulatory requirements.

Baby steps, baby steps

Imagine what we could cure -- full oped

A WSJ oped with J J Plecs, formerly of Roam Analytics, which does a lot of health related data work. This is the full oped now that 30 days have passed. The previous blog post has a lot of interesting updates and commentary.


The discovery that cigarettes cause cancer greatly improved human health. But that discovery didn’t happen in a lab or spring from clinical trials. It came from careful analysis of mounds of data.

Imagine what we could learn today from big-data analysis of everyone’s health records: our conditions, treatments and outcomes. Then throw in genetic data, information on local environmental conditions, exercise and lifestyle habits and even the treasure troves accumulated by Google and Facebook .

The gains would be tremendous. We could learn which treatments and dosages work best for which people; how treatments interact; which genetic markers are associated with treatment success and failure; and which life choices keep us healthy. Integrating payment and other data could transform medical pricing and care provision. And all this information is sitting around, waiting to be used.

So why isn’t it already happening? It’s not just technology: Tech companies are overcoming the obstacles to uniting dispersed, poorly organized and incompatible databases. Rather, the full potential of health-care data analysis is blocked by regulation—and for a good reason: protecting privacy. Obviously, personal medical records can’t be open for all to see. But medical-data regulations go far beyond what’s needed to prevent concrete harm to consumers, and underestimate the data’s enormous value.

Most of us have seen how regulations kept medicine in the fax-machine era for decades, and how electronic medical records are still mired in complexity. It’s tough enough for patients to access their own data, or transfer it to a new doctor. Researchers face more burdensome restrictions.

“Open Data” initiatives in medical research, which make medical data freely available to researchers, are hobbled by Health Insurance Portability and Accountability Act (HIPAA) regulations and data-management procedures that reduce the data’s value and add long lead times. For example, regulations mandate the deletion of much data to ensure individual privacy. But if the data are de-identified to the point that patients can’t possibly be distinguished, nobody will be able to tell why a given patient experienced a better or worse result.

HIPAA “safe harbor” guidelines require removing specific dates from patient data. Only the year when symptoms emerged or treatments were tried can be shown. So which treatment was tried first? And for how long? Was the patient hospitalized before the treatment or three months later? All of a sudden, the data aren’t so helpful.

Health-care data released for public use are also closely hemmed in. For instance, Medicare prescription data are censored if a doctor wrote 10 or fewer prescriptions for a particular drug. That means whole categories of usage and prescribers are systematically missing from the publicly available data.

Regulators need to place greater weight on the social value of data for research. Data use can be limited to research purposes. Specific dangers, rather than amorphous privacy concerns, can be enumerated and addressed. The Internal Revenue Service seems to have figured out how to keep individual-level tax data private while allowing economic researchers to study it. Similar exploration is needed for health data; the opportunity cost of medical discoveries not made is too high to ignore.

Research consortia or governmental agencies can release patient-level data sets, including high resolution on symptoms, treatments, lab test-results and medical outcomes, but with names and identifying details anonymized. It should be freely available to researchers first for conditions with the most serious need for new insights, such as Alzheimer’s, ALS or pancreatic cancer. These can be the leading edge for which regulators develop data-control systems they can trust.

Laws and regulations can stipulate that patients’ medical data can’t be used for nonmedical and nonresearch purposes such as advertising. Patients can be explicitly protected against any harms related to being identified by their data. Data couldn’t be used to deny access to insurance, set the cost of insurance, or for employment decisions. Patients should opt-in by default to share their medical records for research purposes, but always be able to decline to share if they’d like.

Free societies have long benefited from a wise balance between the open exchange of ideas and information, and individuals’ rights and sensitivities. We need to get that balance right for medical data. Otherwise, societies less concerned with individual rights and privacy may seize the opportunities we’re giving up.

Mr. Plecs is a consultant for the pharmaceutical and biotechnology industries. Mr. Cochrane is a senior fellow of the Hoover Institution and an adjunct scholar of the Cato Institute.

More updates. In addition to  to  Roam, Tafi, Datavant and the  FDA sentinel initiative mentioned in the previous blog post, a colleague points out Project Data Sphere which aims to "share, integrate, and analyze our collective historical cancer research data in a single location." It also mixes a wide variety of data sources, and makes data available to academics.

Series on recession and financial crisis

Over the last few weeks we have had a series of discussions at Hoover on the 10th anniversary of the financial crisis and recession. This all happened mostly due to the energy of John Taylor.

The final event on Friday Dec 7 was a Panel Discussion Summary, including Taylor, Shultz, Ferguson, Hoxby, Duffie, and myself, with question and answer. Click the above video.

This was preceded by four smaller discussions. We did not video them, but there are transcripts and presentation materials.

October 19, The causes.  (Follow links to a transcript and to the presentation slides.)  John Taylor and Monika Piazzesi present and learn discussion on the causes of the financial crisis, emphasizing monetary policy, regulation, and housing.

November 9 The Panic What happened on in the panic of August through November (or so) 2018? Did the actions of government officials help or hurt? Or both? George Shultz and Niall Ferguson present their views and lead the discussion.

December 7 The Recession. Why was the recession so deep? Why wasn't it deeper, repeating the Great Recession? Why did it last so long? Did fiscal stimulus help or hurt? Caroline Hoxby and John Taylor led, focusing on labor markets and stimulus. I added some comments on QE and the lessons of the long zero bound for monetary economics; Bob Hall comments on labor markets and unemployment, Mike Boskin comments on stimulus, and much more

December 7 also, Lessons for Financial Regulation. Darrell Duffie and me. Darrell summarizes his excellent "Prone to Fail." I expound on the need for more capital.

What's distinctive about this series, given all the other conferences and retrospectives?

First, we decided not to have retrospectives from people in power at the time. Many other such meetings are descending into memoirs of how we saved the world. Maybe they did, maybe they didn't. And maybe that's not so interesting, except of course to the parties involved who would like to go down nicely in history.

Second, you will find an effort to trace the intellectual lessons of the last 10 years of thought, not just whether certain actions were right or wrong in context of some eternal truth. We all have learned a great deal in the last 10 years, and opinions are shifting. For example, I discuss how capital, once thought immensely costly and regulation much prefereable, has slowly emerged as not at all costly and the best salve for financial crises. Similar lessons have emerged throughout.

Third, and perhaps most importantly, you will find here many disagreements with the standard narrative and what is becoming the first draft of history, as Ferguson nicely described. No, maybe it wasn't just "greed" and "deregulation." No, maybe our officials contributed to panic as much as they helped to stop it. No, maybe fiscal stimulus and QE did not save the world. No, maybe our super-confident regulators armed with an immensely larger rule book are not ready to save the world again next time. And in each case you will hear contrary views buttressed with facts and thoughtful analysis. Perhaps when the second draft of history is ready to be written this will be a starting place.

Canadian non-QE

Friday at Hoover we will have a series of events reexamining the lessons of the financial crisis and recession. (There is a public event here, in case you're interested. Presenters include George Schultz, John Taylor, Niall Ferguson, Caroline Hoxby and Darrell Duffie.)

In preparing a presentation on QE, I stumbled across the following fact.

1) Canada did not do QE, quantitative easing. (Kjell Nyborg showed us this fact in a very interesting finance seminar on a different topic -- European banks are borrowing from the ECB using rotten collateral)

2) Use vs. Canadian 10 year government bond rates were nearly identical in the QE period.

Conventional wisdom states that US QE lowered interest rates by 1%. I am a skeptic, and this graph reinforces my skepticism.

One might say that the US exports its monetary policy effects to Canada. But the Canadian Dollar is its own currency, so exchange rates, not interest rates should soak up that difference.

One can complain in many ways, but this seems to me to add to the view that QE didn't even change interest rates.

Financial reform video

Capital, more capital. I did a video interview for the Chicago Booth Review, summarizing a few talks I'm giving this fall. At some point I'll put the talks together in useful form for the blog. In the meantime, the Booth team did a nice job of cutting and splicing to make me sound coherent. 

Imagine what we could cure

A WSJ oped with J J Plecs, formerly of Roam Analytics, which does a lot of health related data work.

The discovery that cigarettes cause cancer greatly improved human health. But that discovery didn’t happen in a lab or spring from clinical trials. It came from careful analysis of mounds of data.

Imagine what we could learn today from big-data analysis of everyone’s health records: our conditions, treatments and outcomes. Then throw in genetic data, information on local environmental conditions, exercise and lifestyle habits and even the treasure troves accumulated by Google and Facebook...

So why isn’t it already happening?..., the full potential of health-care data analysis is blocked by regulation... medical-data regulations go far beyond what’s needed to prevent concrete harm to consumers, and underestimate the data’s enormous value.... 

I'll post whole thing in 30 days. In addition to  Roam, Tafi and Datavant are two other companies I'm aware of working on this issue.

Update: 

Bob Borek, Head of Marketing, Datavant wrote to describe their effort to keep lots of data while protecting privacy:

We connect de-identified patient data. In short, as part of the process of de-identification, we create encrypted tokens that are built from the underlying PHI. The encrypted tokens allow patient records to be joined across data sets on a de-identified basis, without ever revealing the underlying PHI. In contrast to the Safe Harbor method, which - as you correctly point out - removes much of the information that would make data analytically valuable, our approach can be certified under HIPAA's Expert Determination method, allowing our clients to both join data for analysis and respect patient privacy. We're already seeing exciting new use cases, from rare disease patient finding to designing real-world evidence trials; from payers and providers building targeted intervention programs to life sciences companies forming go-to-market strategies around intelligent physician targeting.   

Update 2 the FDA sentinel initiative implements one approach to these issues. The data stays secure, but you're allowed to make queries, i.e. basically to run regressions on the FDA server.  

Regulatory cost disease

A post on Marginal Revolution is so good, I have to quote in its entirety before commenting.

From my time in both the military and healthcare I can say that the biggest problem are the compliance costs.

For example, I have a phone app that allows me to send texts. We pay very good money to have said app. It does nothing that my phone cannot innately do – except be HIPAA compliant. EMR software is clunky, an active time suck, and adds little or no value … but we are required by law to use it. In each case there are scads of less specific programs out there which are insanely cheaper and more functional, but those programs cannot justify the costs of becoming compliant for a small niche of their business.

In the military we had similar difficulties. If you want systems to be secure, you need to pay extra as the marketplace does not do real security for consumer goods. Likewise, if you worry about logistical tails, building in assured access drastically increases costs.

And I fully suspect that prices will continue to diverge. As ever more of the internet ends up in a giant interconnected mess there will be fewer people able to code in a secure fashion. There will be fewer parts of the ecosystem that can be used by security conscious actors.

Then we get to actual procurement itself. People worry that arcane institutions will somehow make off with lots of money and spend it either poorly or nefariously. Absent easily observed price and cost data in both sectors we began developing rules. These rules drive firms out of the market (e.g. we needed some light interior remodeling to comply with a regulation that specified inches between things, the contractor who has been most affordable and highest quality refused to bid because the hassle on his side was too great). Eventually the rules become too complicated and you start needing specialists to interpret them. Costs skyrocket and firms abuse rules to pad profits. Then the lawyers get involved and things get more expensive. Again, medical and military consumers become a captive market facing greater monopoly as fewer firms can navigate the thicket of rules to even try to make money.

Then we have the problem that people look at these sectors and say that it is public money. All public money should help with goal X (e.g. going “green”, affirmative action, boycotting South Africa/Israel, patriotism, “America first”) and then we become even more overly constrained. Find vendors who meet one hurdle is hard, finding ones that meet 30 is nigh unto impossible unless the vendor is engineering the firm to market solely to this niche – and charging monopoly rates as his reward.

Any single thing would not be too bad for prices, but the marketplace in general is diverging from military and healthcare. Even education is diverging with mandates in FERPA and political business constraints. We have pretty effectively restricted supply, why exactly would we not expect an increase in cost?

This story seems much broader than just healthcare and military procurement. The story also clarifies a bit why it's going to be hard to fix. The thicket of regulations often have a purpose -- security, to protect patent privacy, or more importantly, for military applications. But we do not often ask properly what the cost of extra regulations is. Even well done cost benefit analyses tend to take the supplier network as given, and ask what it will cost them to add just one more step. That the network will shrink and the number of potential entrants shrink more -- the best protection against monopoly power -- is really not part of any cost benefit analysis. The note also points slightly to the public choice problem. The few companies who become specialists at meeting regulations become advocates for the regulations, which puts them in fine position with the army of bureaucrats who promulgate and enforce regulations.  Yes, military text messages probably need high security. Does every doctor's text message to a patient need the same?

It doesn't take long to see in this post a reading of many contemporary economic ills. The perception of increasing monopoly power fits well. The decrease of small business formation and increasing size of businesses fits. And we can think of a number of industries that have the same problem. Banking is obvious.

General aviation is a tiny, but clear example.  Go to your local airport, and contrast the ramp (where planes park) to the parking lot. The ramp is typically an excellent example of a Cuban used car lot. Lovingly maintained aircraft either from the 1950s or designed in the 1950s predominate.  Beautiful, yes, to nostalgic eyes, but not exactly practical. Small aircraft engines are much less reliable than automobile engines. Why? Well, they all must be FAA certified, and it's not worth the cost to certify, say, a new model of spark plug. The parking lot is full of Teslas. Well, in Palo Alto. BMWs elsewhere. But stuffed with the latest technology. Planes are not inherently more durable than cars. They're just regulated differently.

The HIPAA regulations, making electronic medical records every doctor's nightmare, and adding billions to costs, are actually an improvement. We can all remember the not too distant past, and sometimes still present, that doctors needed us to fax things around, because of the same regulations.

The central point of the story is the interplay of new technology and regulation. Our technology has huge fixed costs.  Commercial off the shelf technology, usually "pretty darn good" is amazingly cheap and effective. Specialized technology written to constantly evolving regulation is nightmarishly expensive, and usually not very good. And leads to cronyism and monopoly. The cost of regulation is higher than you think. Make sure the benefits are appropriate.

Carbon Tax

Source: Seattle Times

"The carbon tax is dead; long live the carbon tax" is the headline of Tyler Cowen's Bloomberg column on the failed (again) Washington State carbon tax.  And rather decisively, per the picture on the left.

"Maybe its failure on the ballot in Washington state will inspire economists to come up with better arguments" challenges the subhead. I can't resist.

The key question for a carbon tax is, what do you get in return? What do you do with the money? Washington's carbon tax would have, according to the Seattle Times,

It would have taken effect in 2020, rising year after year to finance a multibillion-dollar spending surge intended to cut Washington greenhouse-gas emissions. The initiative reflected proponents’ faith that an activist government can play a key role in speeding up a transition to cleaner fuels.

The fee would have raised more than $1 billion annually by 2023, with spending decisions to be made by a governor-appointed board as well as the state’s utilities

Well, perhaps the voters of Washington State were not so much against a carbon tax per se, but had less than full faith that a large increase in green boondoggle spending by Washington State government was a good idea. They need only to look south at California's high speed train to see cost-benefit analysis at work in dollars per ton of carbon saved.

And in fact it violates the whole idea of a carbon tax. The point of a carbon tax is to give people and businesses an incentive to figure out their own ways to cut carbon emissions. The whole point is not to fund big government projects. If you want to fund big government projects, you do it out of the broadest based and fairest tax you can find.

As Tyler suggested,

But maybe it’s time for a change in tactics. These new approaches might start with the notion that we can address climate change without transferring more money from voters to politicians.

Here are three ideas:

Idea 1: One answer is obvious: a revenue-neutral carbon tax. Use the carbon tax to offset other taxes. Tyler anticipates this with

The economist can respond, correctly, that a carbon tax will ease the path to greener outcomes, and that other taxes can be cut as recompense if necessary. But it seems right now there is not enough trust for such a grand bargain to be struck. 

Perhaps. But if the carbon tax were coupled with an explicit reduction in other taxes, it might help to convince people. If carbon taxes were coupled with elimination of other taxes, it would help more. Taxes are like zombies. If you just lower the rates they tend to come back. If you eliminate them entirely, perhaps requiring referendum for their reinstatement, there can be more trust. Couple the carbon tax with elimination of, say, state property taxes, income taxes, or sales taxes.

And in the end we all know taxes must equal spending. You can convince voters there won't be more taxes if there isn't more spending. Advertising the carbon tax as a substitute for carbon spending; simultaneously eliminating green boondoggles, would help to seal the deal.

Idea 2: The Baker-Shultz plan, or Americans for Carbon Dividends, (previous blog post here) has another bright idea: Send the proceeds back to the voters. Write everyone a nice check. This ensures that the money doesn't go to boondoggles, and gives every voter a stake in keeping the scheme going. It is highly progressive, which Democrats should like.

I had a similar idea a while ago: Rather than a tax, give each American a right to, say x tons of carbon emissions that they can sell on a carbon market. That also gives everyone an incentive to vote for the system. And it states the issue squarely. You, a voter, are having your air polluted. You have a right to collect on that damage. It makes it clear that carbon is a fee, a penalty, not a "tax." The point is to disincentivize the use of carbon, not to raise revenue for the government to spend. "Tax" is a loaded word in American culture and politics. Carbon rights takes the whole discussion away from "tax."

Idea 3: Lastly, one could pair the carbon tax and fee with a trade: A hefty fee, in return for elimination of all the other carbon subsidies and regulations. To those who don't believe in climate change: ok, but our government is going to do all sorts of crazy stuff. Let's cut out the rot and just pay a simple fee instead. No more electric car subsidies -- $15 k from taxpayers to each Tesla owner in Palo Alto -- HOV lanes, windmill subsidies, rooftop solar mandates, washing machines that don't wash clothes anymore (hint: do NOT buy any washing machine built since Jan 1 2018), and so on and so forth.

I think on the left the strategy has been to ramp up climate hysteria: if we just yell louder and demonize opponents more, the voters will buy it. No matter how much of a problem you think climate is, let's admit that's not working. In part the claims are now so over the top that everyone can tell it's gone too far. No, the way to put out fires in California is not to build a high speed train.

When, in the name of science the IPCC writes things like this -- right up front in the executive summary --

D3.2. ...For example, if poorly designed or implemented, adaptation projects in a range of sectors can increase... increase gender and social inequality... adaptations that include attention to poverty and sustainable development (high confidence).  

D6. Sustainable development supports, and often enables, the fundamental societal and systems transitions and transformations that help limit global warming to 1.5°C. ... in conjunction with poverty eradication and efforts to reduce inequalities (high confidence).... 

D6.1. Social justice and equity are core aspects of climate-resilient development pathways that aim to limit global warming to 1.5°C... 

D7.2. Cooperation on strengthened accountable multilevel governance that includes non-state actors such as industry, civil society and scientific institutions, coordinated sectoral and cross-sectoral policies at various governance levels, gender-sensitive policies.... (high confidence). 

D7.4. Collective efforts at all levels, ... taking into account equity as well as effectiveness, can facilitate strengthening the global response to climate change, achieving sustainable development and eradicating poverty (high confidence)

You can't blame the suspicious Washington State voter from wondering if perhaps a larger agenda isn't being financed here.

There is a sensible middle. Voters who want to do something about carbon, but not finance massive boondoggles or a collectivist progressive agenda. Environmentalists who want to do something about carbon that actually will work. Skeptics who understand, as long as we're going to so something, let's do it efficiently via a carbon fee rather than at massive cost as we are doing now.

Europe's Banks

My visit to Europe resulted in many interesting conversations. There was a stark contrast between the complex regulatory vision of formal presentations and papers, and the lunch and coffee discussion reflecting experience of people involved in actually regulating banks. They seemed to be quite frustrated by the state of things. Disclaimer: this is all completely unverified gossip, and remembered through a fog of jet lag. If commenters have better facts, I'm hungry to hear them.

Risk weights are ungodly complex, and not many people actually understand them, or the layers of buffers and how they are applied.

Risk weights are suspiciously low. Big banks are allowed to use their own models, calibrated on 10 years of data. That means the data have, now, 10 years of stable growth and very low default. Look, say the banks, our investments are nearly risk free.

"Micro" regulators who look at the specifics of an individual bank are prone to offset the "systemic" and "macro-prudential" efforts. Look, say the banks, we have to fulfill all these macro-prudential rules, give us a break. Regulators do.

The financial regulatory community has been preoccupied with writing reports about one thing after another. Meanwhile, the elephant remains in the room:  Italy may default or leave the euro.

Italian banks remain stuffed with Italian government bonds. I learned some new words for this: a "doom loop." If the government defaults, the banks go with it.  Some smaller foreign banks still have large investments in Italian bonds. Another new word: "Moral suasion," governments encouraging banks to buy a lot of their bonds.  I imagine the Godfather had more colorful words for it. On the other hand, Italian banks are reportedly happy for the moment, since as long as Italy doesn't actually default, they make a bundle from high interest rates. Government debt is still treated with low or no risk weights.

State of thought on financial regulation

I'm at a conference on "Financial cycles and regulation" at the Deutsche Bundesbank. Beyond the individual papers, I find the conversation interesting.

Groups of researchers develop a common language and a common set of assumptions. This is productive -- to push a research frontier we have to agree on a few basic ideas, rather than argue about basics all the time. I, as an outsider, parachute in, and learn as much what the shared assumptions are, as I do about particular points in elaboration of the program.

Here,  it is pretty much taken for granted that there is such a thing as a "financial cycle." It's in the conference title, after all! That means a "cycle" of credit expansion, usually "unwarranted," "excessive," or an "imbalanced," followed by a bust. It is also agreed that it is the job of financial regulators to manage this "cycle."

Kotlikoff on the Big Con

In preparing some talks on the financial crisis, 10 years later, I ran across a very nice article, The Big Con -- Reassessing the "Great" Recession and its "Fix" by Larry Kotlikoff. (Here, if the first link doesn't work.) 

Larry is also the author of Jimmy Stewart is Dead – Ending the World's Ongoing Financial Plague with Limited Purpose Banking, from 2010, which along with Anat Admati and Martin Hellwig's The Bankers' New Clothes is one of the central works outlining the possibility of equity-financed banking and narrow deposit-taking, and how it could end financial crises forever at essentially no cost.

Larry points out that the crisis was, centrally a run. He calls it a "multiple equilibrium."  Financial institutions have promised people they can have their money back in full, at any time, but they have invested that money in illiquid and risky assets. When people all do that at the same time, the system fails. Such a run is inherently unpredictable. If you know it's happening tomorrow, you run to get your money out and it happens today.

This is a common view echoed by many others, including Ben Bernanke. What's distinctive about Larry's essay is that he pursues the logical conclusion of this view. If the crisis was, centrally, a run, all the other things that are alluded to as causes of the crisis are not really central.  Short-term debt, run-prone liabilities are gas in the basement. Just what causes the spark, how big the firehouse is, are not central, as without gas in the basement the spark would not cause a fire.

Larry puts it all together nicely by starting with the 2011 Financial Crisis Inquiry Commission report:

"There was an explosion in risky subprime lending and securitization, an unsustainable rise in housing prices, widespread reports of egregious and predatory lending practices, dramatic increases in household mortgage debt, and exponential growth in financial firms’ trading activities, unregulated derivatives, and short-term “repo” lending markets, among many other red flags. Yet there was pervasive permissiveness; little meaningful action was taken to quell the threats in a timely manner. "

Larry then takes apart each of these non-culprits, as below.