Diversity in academia

99 percent of donors from Princeton gave to Obama, reports the Daily Princetonian, 157 to 2.  Princeton's one-percenters are a visiting lecturer and a custodian.

As a colleague pointed out, it may be little wonder that Republican politicians distrust academic "studies," whether about the effects of taxes on growth or carbon on the climate.

Dodd-Frank and Stigler's Ghost

The New York Times finally published  Gretchen Morgenson's article, pointing out that Dodd-Frank enshrines rather than eliminates "too big to fail," though systemic "designation" of "financial utilities" such as the exchanges has been underway since the bill's beginning. Needless to say, this has been my opinion all along.

Today let's move on. I'll label the bigger problem, "too big to fail means too big to compete." TBTF=TBTC. There, we can put that on bumper stickers.

As the Ms. Morgenson figured out, the Chicago Mercantile Exchange is now too big to fail, and will be able to borrow from the Fed and get a bailout. But that's not the big issue. The CME is now too big to compete. Who can now start a new exchange, maybe offering more protection against high frequency traders or other conveniences to customers, and threatening the CME's customer base? Not against a protected "financial utility."

George Stigler taught us that regulators are prone to "capture." Over the years, regulators start to sympathize with the industry they're regulating. Next thing you know, the regulations end up being used to protect the industry from competition. Luigi Zingales' great new book calls it "crony capitalism," emphasizing that it, not too much benevolent government or too much ufettered market competition, is the main characteristic of our society.

Predictions

I did a short spot on NPR's Marketplace this morning (also here). The announced topic was what I thought would happen to economic policy after the election. Jeff Horwich, the interviewer wanted to stitch together a story about everyone is going to get together and play nice now, which seemed like a fairly pointless line to pursue. What "I would do" is now off the table, and I didn't think it worth arguing with Jared Bernstein's repetition of Obama campaign nostrums.

But it gave me a chance to put some thoughts together. I usually don't predict anything, because I (like everyone else) am usually wrong. But I'll make an exception today

Forecast in three parts: The sound and fury will be over big fights on taxes and spending. They will look like replays of the last four years and not end up accomplishing much. The big changes to our economy will be the metastatic expansion of regulation, let by ACA, Dodd-Frank, and EPA.  There will be no change on our long run problems: entitlements, deficits or fundamental reform of our chaotic tax system.  4 more years, $4 trillion more debt.

DeMuth on Obamacare

Christopher DeMuth has a nice Oped in the Wall Street Journal. Thesis: Obamacare is the big question for the election.

He makes two points that I haven't seen expressed this well before, including by me despite 25 pages of trying:

Why the electoral college is a great idea

With the election looming, we see the quadrennial complaining about the electoral college. "The electoral college effectively disenfranchises most Americans" complains the New York Times  "Shafted by the electoral college" complains the usually excellent Steve Chapman at the Chicago Tribune.

Here's why I think the electoral college -- with (crucially) winner-take-all selection in the states, which is under attack -- is a great idea. (Even though I live in Illinois.) Look at the map. (Source here, I found it just by google searching, so no endorsement.)

With the electoral college, Governor Romney and President Obama have to get 51% majorities in enough states to get 270 votes, to win the white house.

Suppose we had a popular vote instead. Now, instead of fighting for 51% of Ohio, President Obama could instead try to raise his 60% of New York and Illinois to 70%, even if it meant 45% of Ohio. Or he could try to raise his 80% of New York city and Chicago to 90%, (made up number).  He doesn't need to persuade people, really, he just needs to  encourage more New Yorkers and Chicagoans to turn out.

Debate with Goolsbee

Last Tuesday, Glen Weyl asked me to debate economic policy issues in the current election with Austan Goolsbee, in the famous "rational choice" workshop. Here's my 10-minute opening statement. Austan did a great job in a tough audience.

Economic Policy and the Election: 

Growth is our number one economic challenge. Here’s how recoveries are supposed to look. We get a period of very strong growth rates, until the economy recovers to “trend,” or potential.”

Here we are. Not only have we failed to bounce back, growth is slowing down. We seem headed for a permanent loss of about 8% and sclerotic 1-2% growth.

Good and bad local news

Revealing bits of good and bad local news from the Chicago Tribune: Food trucks and congestion pricing.

NBER Asset Pricing conference

I spent Friday at the NBER Asset Pricing conference in Palo Alto. All the papers were really good, and the discussions were especially thoughtful. Here are a few highlights that blog readers might like.

There's no better way to wake up than with a good puzzle. Emanuel Moench presented his paper with David Lucca,The Pre-FOMC Announcement Drift.(If these links don't work for you, most papers can be found with google.)

Here are average cumulative returns on the S&P 500 in the day preceding scheduled FOMC announcements (when the Fed says what it will do with interest rates). The grey shaded areas are 2 standard error confidence intervals. The S&P500 drifts up half a percent in the day before FOMC announcements!  In fact, 80% of the total return on the S&P500 over this period was  earned on these days.

Christina Romer on Stimulus

(Small update to clarify in response to early comments)
Christiana Romer has an important column in Sunday's New York Times on the stimulus. You will recall that as chair of the Council of Economic advisers, she played a big part in designing the stimulus, and forecasting its effects. She also is one of the preeminent academics who have done empirical work evaluating the effects of stimulus programs. You expect a thoughtful essay.

Pile of paper

In response to my long health-care essay, a friendly doctor sent me the image at the left, with an explanation:

"You want to talk about filling out forms? Here are two hospital privilege renewal applications. Most of my info - such as where I graduated from, where I trained, license #, etc - has not changed. That includes my face, yet they want a new photo. My staff tabbed all the places where I have to sign or initial. This is a standardized form, yet I have to fill one out for every hospital and they all want extra information (including a copy of my signature on a check made out to the hospital)."

Comment: And, amazingly this is all on paper!  

After the ACA: Freeing the market for health care

This is an essay, based on a talk I gave at the conference, “The Future of Health Care Reform in the United States,” at the University of Chicago Law School. The pdf version on my webpage may be easier to read than this version, which is a bit long for a blog post. Also, I'll update the pdf over time as I collect comments, but not this blog post.

Update 2/6/2013 I revised the essay on my webpage which is now better than this one. 

Clearly, two important items on the policy agenda are, if we could get rid of the ACA and Dodd-Frank, what would we replace them with? This essay thinks about ACA, I'll be back on Dodd-Frank. Here goes:

After the ACA: Freeing the market for health care
John H. Cochrane¹
October 18 2012

Most of the current policy debate, and the optimistically-named “Affordable Care Act,” focuses on health insurance. I think we need to move on to think about the economics of health care. If the ACA is repealed, we still have a mess on our hands, and just fixing insurance will not be enough to clean up that mess.

Are recoveries always slow after financial crises and why

Carmen Reinhart and Ken Rogoff have an interesting new Bloomberg column, "Sorry, U.S. recoveries really aren't different." They point to the great Barry Eichengreen and Kevin O'Rourke "Tale of two depressions: what do the new data tell us" columns. (Hat tip, commenter Tim to "slow recoveries after financial crises" who asked what I think. Here's the answer)

Reinhart and Rogoff go after the sequence of studies who have questioned their assertion that recessions after financial crisis are deeper and recoveries slower.

If air travel worked like health care

I spent the day at the Law School's "Future of Health Care Reform in the United States." I'll post my talk soon. In the meantime, Einer Elhauge from Harvard showed this hilarious video. Enjoy!

Dynamic Tax Scoring

The Tax Foundation study, "Simulating the Effects of Romney's Tax Plan" is worth reading and thinking about, especially in contrast to the standard static analysis that I complained about at the CBO.

Gov. Romney has proposed, at heart, a reduction in marginal rates, together with tightening of deductions. He hopes to make the latter large enough so that the program is revenue neutral, or at least deficit neutral when some spending cuts are included, and as close to neutral across the income distribution as possible.

Unlike a Keynesian plan, whose purpose is to transfer wealth to the hands of people (voters) likely to "consume" it, or a redistributionist plan, whose purpose is to transfer wealth from one category to another of people, the point of a revenue-neutral, income-neutral tax reform is to permanently and predictably lower marginal rates, giving rise to incentives to work, save, invest, and increase economic growth over the long run.

What possible sense does it make, then, to evaluate such a plan by assuming off the bat that it has no effect at all on output, employment, investment and so forth? Yet that is precisely what the standard "static" scoring does!  We build a rocket ship to go to the moon, and we evaluate its cost effectiveness by assuming that it never leaves the launch pad?

Europe's payroll taxes

The Wall Street Journal made this nice graph on Saturday.

Forget "who bears," it's the totals here that are mind-boggling. In most countries, if you add up the "employer" and "employee" contributions, you get between 30 and 40%. So, if a worker produces 100 euros worth of output, 30-40 euros immediately go to the government. And there is an additional 20%+  VAT when the worker goes to buy something. So, right out of the gate, we have a 50-60% wedge between working and the fruits of labor. Income taxes, corporate taxes and property, excise, and other taxes are all on top of that! It's a wonder anyone in Europe bothers to work at all.

(I haven't looked in to the numbers, but I presume the European numbers include financing of their health systems, and the US number does not. Don't feel so cheeky.) 

Two views of debt and stagnation

Two new papers on economic stagnation in periods of high government debt (i.e. now) are making a splash: 

Public Debt Overhangs by Carmen  Reinhart,Vincent Reinhart and Ken Rogoff
The Output Effect of Fiscal Consolidations by Alberto Alesina, Carlo Favero and Francesco Giavazzi

This review is mostly about the former, with a little mention of the latter (maybe I'll get back to that later)

Sargent and interest-rate options

By now, you've probably seen Tom Sargent's great Ally Bank TV spot.


But, were I to needle Tom just a bit, I might ask, "Tom, the Ally Bank CD allows you the option of raising your CD rate once over its two-year life. Can you explain when to optimally exercise that option?''  Or (second beer), "Tom, to what portfolio optimization question is the answer, combine a two-year CD with an American option to raise the rate once?  You must have some great robust-control result here about parameter uncertainty in dynamic interest-rate models."

Unraveling the Mysteries of Money

Harald Uhlig and I did a fun interview run by Gideon Magnus (Chicago PhD) at Morningstar. We talk about the foundations of money, fiscal theory, monetary policy, European debt problems, etc. Gideon framed it well, and Harald is really sharp. Somebody combed my hair. A cleaned up version of the interview appeared in the Morningstar Advisor Magazine (html) (A prettier pdf)



A link in case the video doesn't work or doesn't embed well (if you see "server application unavailable" the link usually still works), or if you want the original source.

The video starts a little abruptly, as it left out Gideon's thoughtful introduction (it's in the Magazine) and framing question:

Gideon Magnus: I want to discuss the value of money and the idea that money is valued similarly to any other asset. Are there really assets backing money? If so, what are they? John, please explain.

How not to blow it with phase-outs

Today's Wall Street Journal article, How Not to Blow It With Financial Aid, appparently about financing college education, has important lessons for the ongoing grand fiscal debate.

The article is about college financial aid, especially federally funded, and unwittingly exposes the atrocious incentives of the system.

"Every $10,000 reduction in income is going to improve your aid eligibility by [about] $3,000" if you have one child in college..

Bad Hair Day

A short interview by Betty Liu on Bloomberg TV: (if that doesn't work a link). The ECB's big bond buying program, how "sterilizing" won't solve everything, and discussion of the WSJ Oped on the future of the Fed