OCC fights de-banking. Fed moves to climate.

Part 1: The OCC

The OCC issued a refreshing rule proposal, covered in a nice WSJ oped by Brian Brooks and Charles Calomiris. It is as interesting as a compendium of what's going on as it is for a rule to put an end to it, especially since enthusiasm for the rule is likely to change about Jan 20.  

...practices that amount to redlining whole parts of the economy that banks find politically unpalatable, including independent ATM operators, gun manufacturers, coal producers, private correctional facilities, and energy companies. Also under threat of interest-group pressure campaigns are gasoline-powered car manufacturing, large farms and ranches. Many of the targeted industries are those unpopular on the political left. But we’ve also heard allegations of banks being pressured to cut off programs and business disfavored on the right, such as Planned Parenthood.

Their summary of the rule

Banks may not exclude entire parts of the economy for reasons unrelated to objective, quantifiable risks specific to an individual customer. Banks ... cannot deny a service it provides except on the basis of an objective analysis of the riskiness of the client. Banks are not free to refuse credit simply because they don’t agree with a customer’s business.

I think the latter characterization is a bit wrong. Banks are not all doing this because they don't agree with a customer's business. Banks are doing this because they are afraid of pressure from both right and left. They are afraid of ESG pressure from their investors.  

I suspect banks would enjoy a clear rule, in which case they can say to protesters, shareholders, media and others, we'd love to de-fund your latest cause, but the mean old OCC won't let us do it. 

The proposed rule has a long preamble giving the legal and regulatory history. 

Consistent with the Dodd–Frank Act’s mandate of fair access to financial services and since at least 2014, the OCC has repeatedly stated that while banks are not obligated to offer any particular financial service to their customers, they must make the services they do offer available to all customers except to the extent that risk factors particular to an individual customer dictate otherwise. 

It is clearer about banks are often pressured, rather than choosing to discriminate on their own -- though the later is documented as well. (See the rule for footnotes documenting each case) 

banks are often reacting to pressure from advocates from across the political spectrum whose policy objectives are served when banks deny certain categories of customers access to financial services.

The pressure on banks has come from both the for-profit and nonprofit sectors of the economy and targeted a wide and varied range of individuals, companies, organizations, and industries. For example, there have been calls for boycotts of banks that support certain health care and social service providers, including family planning organizations, and some banks have reportedly denied financial services to customers in these industries. Some banks have reportedly ceased to provide financial services to owners of privately owned correctional facilities that operate under contracts with the Federal government and various state governments.

Makers of shotguns and hunting rifles have reportedly been debanked in recent years. Independent, nonbank automated teller machine operators that provide access to cash settlement and other operational accounts, particularly in low-income communities and thinly-populated rural areas, have been affected. Globally, there have been calls to de-bank large farming operations and other agricultural business...

They don't mention pot farmers, presumably because they are still illegal under federal law.  

In June 2020, the Alaska Congressional delegation sent a letter to the OCC discussing decisions by several of the nation’s largest banks to stop lending to new oil and gas projects in the Arctic....The letter also stated that, although the authors believed that the banks’ rationale was political in nature, the banks had ostensibly relied on claims of reputation risk to justify their decisions.

In response to this letter, the OCC requested information from several large banks to better understand their decisionmaking. The responses received indicate that, over the course of 2019 and 2020, these banks had decided to cease providing financial services to one or more major energy industry categories, including coal mining, coal-fired electricity generation, and/or oil exploration in the Arctic region. The terminated services were not limited to lending, where risk factors might justify not serving a particular client (e.g., when a bank lacked the expertise to evaluate the collateral value of mineral rights in a particular region or because of a bank’s concern about commodity price volatility). Instead, certain banks indicated that they were also terminating advisory and other services that are unconnected to credit or operational risk. In several instances, the banks indicated that they intend only to make exceptions when benchmarks unrelated to financial risk are met, such as whether the country in which a project is located has committed to international climate agreements and whether the project controls carbon emissions sufficiently.

My emphasis. 

The actual rule is mercifully short and clear. After definitions (including  that "person" includes "Any partnership, corporation, or other business or legal entity."

(b) To provide fair access to financial services, a covered bank shall:

(1) Make each financial service it offers available to all persons in the geographic market served by the covered bank on proportionally equal terms;

(2) Not deny any person a financial service the bank offers except to the extent justifiedby such person’s quantified and documented failure to meet quantitative, impartial risk-based standards established in advance by the covered bank;

(3) Not deny any person a financial service the bank offers when the effect of the denial is to prevent, limit, or otherwise disadvantage the person:

(i) From entering or competing in a market or business segment; or

(ii) In such a way that benefits another person or business activity in which the covered bank has a financial interest; and

(4) Not deny, in coordination with others, any person a financial service the bank offers.

Of course, the chance of this rule surviving and being implemented as it stands in the new administration is small. But not all de-banking comes from the left, and perhaps there is hope that keeping funding open to, say, planned parenthood, and seeing the danger that banks can also be pressured by right-wing groups  will encourage them to put climate-based squeezing of fossil fuel companies where it belongs in EPA or elsewhere rather than try to pressure banks to do it. 

***

Part 2: The Fed

The IMF, BIS, ECB, BoE, are embarking on just such de-funding of fossil fuels, this time mandated by regulators. (Previous posts here and here.) I had praised the Fed and its chair Gerome Powell in particular for eschewing this mounting pressure. 

It seems the Fed's resolve is weakening. As reported by Andrew Stuttaford, 

The Federal Reserve on Monday for the first time formally highlighted climate change as a potential threat to the stability of the financial system and said it is working to better understand that danger.

In its semiannual report on financial stability, the Fed said it would be helpful for financial firms to provide more information about how their investments could be affected by frequent and severe weather and could improve the pricing of climate risks, “thereby reducing the probability of sudden changes in asset prices.” 

which is, on account of weather, negligible, and the unknown probabilities of which, due to climate change, are precisely zero. 

It also said it expects banks “to have systems in place that appropriately identify, measure, control, and monitor all of their material risks, which for many banks are likely to extend to climate risks.”...

It always starts with "disclosure." Then the activists and ESG funds know where to go.   

Fed Chair Jerome Powell said last week that the “science and art” of incorporating climate change into financial regulation is new but that the Fed is “very actively in the early stages” of getting up to speed and working with officials around the world....

See previous posts for what those officials are up to.  

If you had asked me then what my test would have been to determine whether the Fed had finally succumbed to the mission creep that he described so well, it would have been the news that it had finally applied to join the Network of Central Banks and Supervisors for Greening the Financial System (NGFS).

"The Federal Reserve expects in coming months to join the Network for Greening the Financial System, a group of 75 central banks set up to combat climate change by better understanding the risks it poses to economies.

“We have requested membership. I expect that it will be granted,” Fed Vice Chair for Supervision Randal Quarles told a hearing before the Senate Banking Committee Tuesday. He said the Fed could probably join before the NGFS’s annual meeting in April."

Especially if you see the climate as a present crisis, and you wish to have a coherent, sustainable, cost-benefit tested policy that actually reduces carbon, I hope you recognize how nutty and absolutely dishonest it is to address climate by having bank regulators force banks to make up  imaginary "climate risks" to the financial system to justify near-term de-funding fossil fuel companies. A policy built on a lie will either require us to descend to Soviet style lie-repetition, or will blow up just as we need a coherent carbon policy. 

***

Part 3: Regulatory competition. 

If the OCC rule goes through, the OCC will forbid what the Fed requires. This will be fun. The OCC will lose, but at least it shines a bright light on what's going on. 

It is common to bemoan America's fractured and overlapping regulatory system, with an alphabet soup of agencies all trying to do the same thing. Centralization and uniformity always sound great. Here is a case where regulatory competition looks like a very good thing. At a minimum one regulator can shine a light on what the other is doing, and at best competing regulators can limit regulatory damage. 

Update: I am informed that the OCC rule may in fact be final before Jan 20, which would make it much harder to overturn. It doesn't have to be enforced, of course. 

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? 

A Neo-Fisherian Challenge and Reconciliation

 Lars Svensson has a very interesting challenge to the Neo-Fisherian view. (See link for slides.) 

What happens to inflation and unemployment when the central bank (for no good reason) raises the policy rate by 175 bp?...

Sweden did, which provides  

..a natural experiment of the neo-Fisherian view: Does inflation really increase after a policy-rate increase? 

Despite roughly the same circumstances as many other countries, including the US, Sweden in 2010 raised rates 175 bp. (Top left graph). The result: Inflation fell, the exchange rate appreciated. Unemployment also rose (not shown).  

Budish Covid-19 update

Eric Budish has an update to his excellent Covid-19 paper. Eric has a few deep central insights about pandemic management, which necessarily joins economics and epidemiology. 

Keep your eyes on R<1. 

The reproduction rate R -- how many people the average person who gets the disease passes it on to -- is really the only thing that matters. When R>1 the disease grows, initially exponentially, then only tailing off when a large (half or more) of the population is either immune or dead. When R<1, the disease tails off. The costs of the disease grow enormously when R>1. Once R<1, further reductions in R don't really do much good. 

From a public health perspective, you don't have to stop all transmission. Just get R less than one.  

Thus, The goal of pandemic policy must be to maximize the economy (maximize utility, if you're an economies) while keeping R<1. 

The costs of changing R are so smooth, and the benefits so nonlinear, we might as well treat R<1 as a constraint. 

..the formulation provides economics language for a policy middle ground between society-wide lockdown and ignore-the-virus, and a new infectious threat response paradigm alongside “eradicate” and “minimize”.

Important simple insights: 

the R ≤ 1 constraint imposes a disease- transmission budget on society. Society should optimally spend this budget on the activities with the highest ratio of utility to disease-transmission risk, dropping activities with too low a ratio of utility to risk. 

Contra most epidemiologists, you don't shut down everything. You accept risk, and even some transmission, where it is important. From my priorities, keeping business and school open is more important than bars nightclubs and parties, but gustibus do matter here. Market value is a good test however.    

Second, masks, tests, and other simple interventions increase activities’ utility-to-risk ratios, and hence expand how much activity society can engage in and utility society can achieve while staying within the R ≤ 1 budget. 

This is a deeply important point, which I really had not grasped: 

Do not evaluate the value of mask-wearing by how much it can reduce the spread of disease. Evaluate the value of mask-wearing by the vale of activities we can open up, while keeping the disease spread constant.  

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,..

Cell phone covid test?

"Artificial intelligence model detects asymptomatic Covid-19 infections through cellphone-recorded coughs" reports MIT News. Well, maybe. But what struck me was this: 

The team is working on incorporating the model into a user-friendly app, which if FDA-approved and adopted on a large scale could potentially be a free, convenient, noninvasive prescreening tool to identify people who are likely to be asymptomatic for Covid-19.  

FDA approved? So now the FDA must approve an AI app that says "nasty cough you've got there?" I'm already outraged that the FDA can stop a company from analyzing a bit of spit I send them and telling me what's in it. What has happened to us that the FDA must approve a cell phone app that listens to your cough? What, sometime in mid 2025? 

Debt still matters

Debt still matters  is an essay on debt at the Chicago Booth Review. It is a cleaned up and edited version of previous blog posts here and here, but a better essay.  

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.

1933 lessons for today

Nov 11, Eric Leeper presented "Recovery of 1933" with Margaret  Jacobson and  Bruce Preston, at the Hoover "Road Ahead for Central Banks" series, and it was my pleasure to discuss it. This is a really important and insightful paper.  

Since Japan hit the zero bound more than 25 years ago, economists have been thinking about how to avoid deflation. The answer seems obvious -- "helicopter money," or "unbacked fiscal expansion." But this has proved remarkably hard to do. Jacobson, Leeper and Preston show us how the Roosevelt Administration managed a credible unbacked fiscal expansion, and it bears important lessons today. 

Virus over? Not quite

The news of a vaccine seems to be sparking an its-all-over sigh of relief. Not so fast.  Interesting and challenging corona virus policy remains on the front burner. 

Holman Jenkins makes a few good points in WSJ. The media and many governments (mine) are focused on new case counts, now 100,000 per day. But 

Brown University’s Dr. Ashish Jha estimated while we are identifying 100,000 new cases a day, “we’re probably missing 70%, 80% of all the cases out there.”

He mentions other guesses that say 90%. 

Why does this matter? Well, 100,000 cases per day x (say) 2 weeks of infectiousness means that 1.4 million people are infectious, or 0.5% of the population. Not bad odds for a dinner party, maybe not a rave. But if we really have 500,000 or 1,000,000 cases per day, that means 2.5% to 5% of the people you are going to run in to may be infectious. Yikes.  

If Americans knew they were being laughably misled, that the virus is far more widespread and their chances of encountering it are much greater than the confirmed case count (currently 10 million) implies, their behavior might be different. Especially we might get more mask-wearing by unwitting carriers to curb unwitting spread.

And a lot less partying. 

More intriguing, 

Covid cycles

Theory: (From An SIR model with behavior)

Fact: (from Scott Gottlieb via Marginal Revolution)

I do not mean to toot my horn, as many other graphs from the model did not look like that. This particular graph did, and really offers a sad interpretation of what's going on. In the model that produced the graph, people and policymakers react to the current death rate in deciding how much risk to take by going out. 

It is entirely individually rational for people to go out and party when very few around them are infected. Sadly, that means the disease collectively ramps up. Then it is individually rational for people to cut back, and the disease slows down. Cycles can result.  

Public policy is supposed to get on top of these cycles, by stamping out disease when it is low, the same way you keep taking antibiotics even when you feel better. It is the policy that has failed rational expectations here, not people. (No, that does not mean lockdown business and print money so we all can stay home and order stuff that comes by magic from Amazon. Ambitious testing would have done the trick. Or at least containing the summer's wave of super spreading parties.) 

Sherwin Rosen, Kevin Murphy and José Scheinkman have a beautiful JPE paper Cattle Cycles describing a related phenomenon. But our governments are supposed to be smarter than cows. 

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. 

Sumner review of Strategies for Monetary Policy

Scott Sumner posted an excellent  Review of Strategies for Monetary Policy (Book information and, yes free pdfs here). By "excellent," I don't mean he agrees with everything, especially that I wrote! He read the whole thing, including comments, and provides a concise summary along with insightful critique. I won't try to summarize his summary -- it's all good. 

The book summarizes last year's conference on monetary policy at Hoover, which focused on the Fed and ECB policy reviews. This year's analogue is unfolding via zoom,  and has had a really interesting set of papers and discussions. More coverage will follow.  

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. 

Podcast with Ed Glaeser

A podcast conversation with Harvard's Ed Glaeser, a if not the top economist who does urban affairs.   Does Zoom mean we all work from home? Will cities bounce back? Will San Francisco and New York fade and smaller cities grow? What problems are the policies causing and can cities reverse downward spirals? How to help unfortunate people who live in cities? Join us for a fast paced discussion with a leader in the field.

This is a follow up to a previous podcast on cities. 

Update: Courtesy Marginal Revolution the SF Chronicle on "rampant brazen shoplifting," (solve for the equilibrium, as MR likes to say) 

a man wearing a virus mask walked in, emptied two shelves of snacks into a bag, then headed back for the door. As he walked past the checkout line, a customer called out, “Sure you don’t want a drink with that?”

The Walgreens is shutting down -- which hardly matters as the shelves were bare anyway

Also in the Chronicle, Burglars switch to homes in S.F. as tourists, and their cars, stay away  on a spike in residential burglary, even while people are in their homes. 

Ed and I talked about a spiral, crime, high taxes, people leave, businesses leave, amenities leave, which can be irreversible. 

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." 

Virtual finance theory seminar

I'm giving "A fiscal theory of monetary policy with partially-repaid long-term debt" at the virtual finance theory seminar, Wed Oct 28 at 1 PM EDT. Brett Green leads off with "Due Diligence" at 12 PM EDT. If interested, come join. Warning: this is an academic theory paper whose whole point is to look at equations. 

The link has an email address which I don't want to post here, email for a zoom invitation. 

This is an excellent seminar series and one of the first of the new international zooms, which are an exciting development. Thanks to Linda Schilling for organizing.

IMF, BIS, expanded mandates, climate and inequality

Last week I was pretty critical of the ECB's move to expand its mandate to take on climate policy. The ECB is not alone however. The Bank of England started down this direction. The IMF has also been a proponent, and the BIS is nodding assent. 

In short, the move that central banks, financial regulators, and their club of international institutions should to expand to general macroeconomic and financial dirigisme, and then take on climate, inequality, and other social causes far beyond their institutional mandates is widespread. The ECB is not alone, and in this context their wish to join the movement makes more sense. 

I adapt here some comments I made last March at the end of the Homer Jones talk I gave at the Federal Reserve Bank of St. Louis (video, written version).  For that reason my links and sources stop around then. All of that was quickly overshadowed by covid, but perhaps it's time to revive the question. Let's go: 

From probity to exchange rate, capital, and macro prudential dirigisme. 

For decades the IMF served a valuable function. IMF urged countries to keep trade and capital open. In a crisis, the IMF required a commitment to micro deregulation, cutting subsidies, and getting the fiscal house in order before offering a bridge loan. This is like borrowing from your grumpy uncle: Get a job, stop drinking and gambling, here is some money to tide you over, but I'll be watching.

In 2012, the IMF moved to an "institutional view," advocating that central banks "manage" capital flows and exchange rates, along with extensive macroprudential direction.  For example, explaining the "institutional view,"  the IMF writes in 2018

"CFMs …are designed to limit capital flows. These can include administrative and price-based restrictions on capital flows, for instance bans, limits, taxes, and reserve requirements."

The BIS (2019) Annual Report Chapter II chimes in enthusiastically as well. 

..most EME [Emerging Market Economy] ..inflation targeters have pursued a controlled floating exchange rate regime, using FX intervention to deal with the challenges from excessive capital flow and associated exchange rate volatility. This contrasts with standard textbook prescriptions for inflation targeters, which advocate free floating without recourse to FX intervention.

The IMF and BIS reports make clear that they are following emerging common practice at central banks around the world, rather than leading a new agenda. Whether jumping in front of a bandwagon is wise is a good question to ask. If the ambitious but vague dirigisme of these reports drives you batty, I recommend re-reading Lucas (1979) review of a previous OECD report, always a good tonic if you are suffering a deficit of grumpiness.  See also the IMF's 2013 case for macro prudential policy

The IMF's new "integrated policy framework" promises an even more ambitious "integrated" approach to "monetary policy, macroprudential policy, exchange rate interventions, and capital flow measures," tailored to disparate "country circumstances." (Kristalina Georgieva,  Financial Times, February 17, 2020.) 

It is all very tempting. Central bankers like to feel important. Interest rates are either stuck at zero or don't seem to do a heck of a lot. Well, take on broad new powers to run things and do good as you see it. Alphabet soup international institutions are even less directly powerful. Well, cheerlead for the movement. 

But like discretionary monetary policy, central banks have never been able to time credit and asset price cycles, or micromanage dozens of interacting policy levers to offset poorly understood (and country-specific) "frictions" and "imperfections," as the IMF now proposes and recommends.   How do you tell a boom from a bubble in real time? How and why will central banks get it right this time after so many abject failures—2007 being the most recent and screaming example? How will they avoid repeating the endless problems of managed exchange rates and extensive capital controls that finally blew up in the 1970s? Central bankers are only human, just like the rest of us—and just as prey to the fallacy that we're the smart ones and everyone else is behavioral. In the crisis, as monetary policy committees were begging banks to lend, regulators were telling banks to cut back lest the crisis get worse. In the 12th year of the subsequent expansion, the U.S. was been if anything loosening capital and credit standards, despite great increases in credit. So much for macroprudence. 

Rather than try to stop anyone from ever borrowing too much or losing money ex post, we should make the financial system robust so that people can make and lose money without burning down the house. That's the equity-financed banking approach.

Climate. 

The current trend is even more ambitious. Now, the International Monetary Fund, the Bank for International Settlements, and the Financial Stability Board are advocating and the Bank of England is starting to implement climate policies.  Central banks should demand extensive disclosures of "climate risk" and contributions to "sustainable investing." Those lending to, say, fracking companies will have an army of regulators descend on them. The European Central Bank is buying "green" bonds. Fed Chair Jay Powell has so far been a courageous and principled resister to the climate side of this movement, ("Bankers Aren't Climate Scientists, WSJ 2020) but we'll see how long that lone voice of resistance can hold out. 

BIS: See, for example, Bolton et al. (2020) "The Green Swan" at the BIS, whose abstract states central banks should step up to 

"coordinating actions among many players including governments, the private sector, civil society and the international community. … Those include climate mitigation policies such as carbon pricing, the integration of sustainability into financial practices and accounting frameworks …"

In his foreword to this piece, BIS general Manager Augustín Carstens starts reasonably by also advocating carbon taxes—though this has nothing to do with central banks under usual readings of their mandates. But, since carbon taxation "requires consensus building" and is "difficult to implement," central banks should plow forward to 

"raising stakeholders' awareness and facilitating coordination among them. Central banks can coordinate their own actions with a broad set of measures to be implemented by other players (governments, the private sector, civil society and the international community) …there are many practical actions central banks can undertake (and, in some cases, are already undertaking). They include… environmental, social and governance (ESG) criteria in their pension funds; helping to develop and assess the proper taxonomy to define the carbon footprint of assets more precisely (eg "green" versus "brown" assets); working closely with the financial sector on disclosure of carbon-­intensive exposure…; …examining the adequate room to invest surplus FX reserves into green bonds. "

In a separate preface, François Villeroy de Galhau, Governor of the Banque de France, advocates that 

"more holistic perspectives become essential to coordinate central banks', regulators', and supervisors' actions with those of other players, starting with government." 

Bank of England: 

Carney (2019) "fifty shades of green" is a good place to start. The first step is "disclosure." The FSB instigated a "task force on climate-­related financial disclosures" (TCFD): 

"four-fifths of the top 1,100 Group of Twenty companies now disclose climate-related financial risks as some TCFD recommendations advise. "

The next step is to make disclosure mandatory, as the United Kingdom and European Union have already signaled. The third step is regulation and de-financing unpopular industries: 

"Banks …are taking steps to assess exposure to transition risks in anticipation of climate action. This includes exposure to carbon-intensive sectors, consumer loans for diesel vehicles, and mortgages for rental properties, given new energy efficiency requirements."

The message is clear: Nice bank you've got there. It would be a shame if something should happen to it. Sure you want to keep lending to fossil fuel companies? 

"The Bank of England is …setting out our expectations with respect to the following:

Governance: Firms will be expected to embed the consideration of climate risks fully into governance frameworks, including at the board level…

Risk management: Firms must consider climate change in accordance with their board-approved risk appetite…

Appropriate disclosure of climate risks: Firms must develop and maintain methods to evaluate and disclose these risks.

The Bank of England will be the first regulator to stress-test its financial system under various climate pathways…This stress test will.. make the heart of the global financial system more responsive to changes to both the climate and to government climate policies.

The Bank of England will develop the approach in consultation with …other informed stakeholders, including experts from the Network of Central Banks and Supervisors for Greening the Financial System.…"

(Yes, my quotations are selective, so you can see what's going on in the otherwise sleep-inducing verbiage. Read the originals if you're unhappy about that.)

On to inequality.

The IMF is now advocating, along with climate, a full range of policies including increased "social spending," progressive taxation, income redistribution, and social-justice policies far beyond anything traditionally monetary or financial. 

The IMF is now advocating, along with climate, a full range of policies including increased "social spending," progressive taxation, income redistribution, and social-justice policies far beyond anything traditionally monetary or financial.  For example, IMF Managing Director Kristalina Georgieva (2020) writes in "Reduce Inequality to Create Opportunity,"

Progressive taxation is a key component of effective fiscal policy…Gender budgeting is another valuable fiscal tool in the fight to reduce inequality….The ability to scale up social spending is also essential…Active labor market policies…job search assistance, training programs, and in some instances, wage insurance….Geographically-targeted policies and investments can complement existing social transfers…:

During the implementation of the IMF-supported program, Egypt more than doubled its coverage of cash transfers,…we are working to implement our social spending strategy by weaving it into the fabric of our work…

Note the latter point -- during the implementation of the Egypt program... In the past, when the IMF parachuted in to a bankrupt country, the first thing it would do is to tell the government to rein in useless subsidies and other spending programs. When you look at a typical EME budget, they spend money on a lot of politically popular but ineffective subsidies. Many of them subsidize gasoline, not a great climate policy. Now the IMF is going to reverse that -- on inequality grounds, have a Bloody Mary for that debt hangover. And spend more money on green subsidies too.  [Update: A correspondent inquires what "gender budgeting" means. It is a new euphemism to me.]  

The IMF (2019) "Strategy for Engagement on Social Spending" goes into details. 

…concerns about rising inequality and the need to support vulnerable groups,… a global commitment to continue support for inclusive growth, as expressed in the 2030 Sustainable Development Goals (SDGs).… Social spending is viewed as a key policy lever for addressing these issues. 

The Fund has concomitantly increased its work on social spending. …The growing emphasis on inclusive growth is also reflected in operational activities, including the use of social spending "floors" in IMF-­supported programs. There has been enhanced engagement on inequality issues in surveillance, as well as increased technical assistance to expand fiscal space for social spending. 

Requirements for "sustainable accounting" (see Finley, 2020 WSJ, criticizing a Michael Bloomberg proposal), "disclosure" of environmental, social, and corporate governance (ESG) blessings, "stakeholder capitalism," divestiture, and de-financing more unfavored industries are already being advanced.

The messenger not the message

I emphasize that my objection here is to the messenger, not the message. These institutions are empowered to worry about financial affairs. They are not empowered, nor competent as general purpose do-good agencies. 

There is a reasonable risk that climate change may be, in 50 or 100 years, a big economic problem. There is a larger risk that climate change is an environmental problem with little economic impact. But the risk that unforeseen changes—risk—in climate threatens the financial system with another run is essentially zero on the 5-year-or-so timeline of honest risk assessment. (Except maybe risks induced by the same regulators!) 

Repeating the contrary assertion over and over in speeches does not make it so. That, say, coal company stock investors may lose money when regulators shut down their businesses is not a systemic risk, unless we debase "systemic" to mean anyone ever losing money on anything. 

Likewise, you may regard inequality as a big economic problem. (I regard lack of opportunity as a big economic problem, but I'm more focused on compassion for the unfortunate than hatred of the super-rich.) But no matter how you feel about the issue, bringing inequality into the financial mandate by claiming that inequality causes systemic runs, as the IMF is doing, is a similar flight of fancy. And once you cook the books to advance climate and inequality, the books are cooked for everything else, too. And when the IMF  comes flying in to solve a genuine crisis, everyone knows "here come the book-cookers, everything they say is going to be political.  

As I write, (this was late Feb 2020) the chance of a systemic crisis induced by a pandemic is a strong possibility. That none of this scenario-building and stress-testing even considered pandemic risk, in the wake of SARS, MERS, Ebola, and HIV, exposes just how much groupthink and virtue-signaling and how little quantifiable prescience any of this effort has—and how utterly this whole project for a regulatory elite to foresee risk has failed. The possibility of advanced country sovereign default is similarly absent from these exercises, though it has happened many times before and would be a calamity to our system built on the sanctity of such debt and its ability to bail others out in crisis.

In sum, my objection has nothing to do with the importance or not of climate and inequality or the worthiness or not of these (regulate, de-fund, redistribute) policy approaches to climate and inequality. The main problem is that these are, obviously, highly partisan and deeply political actions on which people disagree rather strongly, at least outside of the bubbles in which international central bankers and NGO staff seem to operate. 

Maybe climate change and inequality are the existential problems our economies must address. Perhaps green new deal controls, highly progressive taxation, universal basic incomes, and wealth taxes, rather than a carbon tax and a focus on opportunity—my favorites—are necessary means to fight them. But central banks and their supporting alphabet soup institutions should not appoint themselves to coerce financial institutions and governments to these causes, especially by such transparently dishonest means. 

Independence

The concluding part of the essay points out that such blatant politicization will cost the institutions their independence, as well as their reputation for technocratic competence. But I think I said that well enough last time so I'll leave you here. 

Update: International institutions

The real tragedy of this situation only struck me after the fact. I, and I suspect many of you, hold some conservative reverence for the postwar era of strong international institutions, and a rule-based international order, rather than the emerging era of bilateral deals among nations. Yet the evident rot at international institutions is one good reason countries are retreating from international institutions or ignoring them. 

Update: New Zealand

Commenter Coker below points us to the Reserve Bank of New Zealand's climate initiative I read most of it as a pledge that many overpaid RBNZ employees will spend a lot of time churning out reports that nobody will read. But there is a clear statement of intent to implement ECB style policies, i.e. to use bank regulation to channel credit and subsidize 'green' (their scare quotes) investments: 

"Engage with regulated entities to understand how climate related risks are being addressed within the sectors that we regulate. As part of this, the Bank will:

Engage with entities to explore their own internal climate risk strategies to evaluate the New Zealand financial system’s awareness and management of climate risks; and

Seek to identify opportunities to enhance disclosure of climate risks in New Zealand.

Monitor the development and operation of capital markets to identify any impediments to the efficient provision of finance for ‘green’ investments."