•Markets and Morality –

Renewable Energy Standards: Less Effective, More Costly, but Politically Preferred to Cap-and-Trade? – The new Congress is beginning to consider various alternative energy and climate policies in the wake of last year’s collapse in the U.S. Senate of consideration of a meaningful, economy-wide CO2 cap-and-trade scheme.  Among the options receiving attention are various types of renewable portfolio standards, also known as renewable electricity standards or clean energy standards, depending upon their specific design.  These approaches, which focus exclusively on one sector of the economy, would be less effective than a comprehensive cap-and-trade approach, would be more costly per unit of what is achieved, and yet – ironically – appear to be much more attractive to some politicians who strenuously opposed cap-and-trade. In an op-ed which appeared on November 24th in The Huffington Post (click here), Richard Schmalensee and I reflected on this irony.  Rather than summarize (or expand on) our op-ed, I simply re-produce it below as it was published by The Huffington Post, with some hyperlinks added for interested readers.


The pluses and minuses of reluctant consumers – Atlanta Fed’s macroblog – If you’ve been keeping up with news from last weekend’s convergence of economists at the annual meeting of the Allied Social Science Associations, you will probably have heard of this optimistic-sounding conclusion by Harvard economist Martin Feldstein: "It is not hard to imagine that a few years from now the current account imbalances of the US and China will be very much smaller than they are today or even totally gone."  An advance copy of the article was provided a few weeks ago at Real Time Economics, and considerable commentary has followed since (here, here, here, and here, for example). Some skepticism about the probability of a substantial decline in Chinese saving rates was noted in a recent post at The Curious Capitalist, which focuses on some interesting new research that relates high Chinese saving rates to an increase in income volatility.

Fed Officials Signal Intent to Back Bond Buys – Federal Reserve Chairman Ben Bernanke appears to have support from other Fed officials to continue his $600 billion bond-buying program when they convene for their next policy meeting on January 26-27. Charles Plosser, president of the Federal Reserve Bank of Philadelphia, was the latest to signal a desire for continuity from the Fed, even though he is highly skeptical of the program’s effectiveness. "I wish we hadn’t done it, but that doesn’t mean I want to stop it right now," Mr. Plosser said in an interview with The Wall Street Journal.

Unemployment Has Doubled: Ratio Increases by State, Surprisingly Consistent. – Ryan Avent, reporting live from the AEA meeting, mentions a panel where Robert Shimer gives an excellent overview of the labor market (my bold): Rob Shimer, who’s well known for his work on labour markets, offered additional thoughts on the employment situation, beginning by laying out a few key labour market facts. Take any given group within the labour force, and the crisis has essentially generated a doubling of the unemployment rate. Turnover among the unemployed has also been quite low since the initial decline. It hasn’t been a slump in which many different groups rotate through joblessness; instead a lump of labour fell into unemployment and has struggled to return to the work force. That’s a great way to phrase it.  Charlie Eisenhood has looked at this with breakdowns of age and education here and there’s been roughly a doubling in each case. And it isn’t just unemployment. Arjun Jayadev and I looked at this with underemployment, or people working involuntary part-time jobs, and we saw that it doubled in every occupation and in every career. To me this is strong evidence that our current employment problems are primarily cyclical and demand focused.

China and Intellectual Property Theft – China has been holding down the value of its currency, the renminbi, for years, making Chinese exports to the United States cheaper and American exports to China more expensive. The renminbi’s recent rise has been too modest to change the situation, and Mr. Hu’s state visit is sure to highlight the real tensions between the countries.  Yet the focus on the currency has nonetheless become excessive. The truth is that the exchange rate is not the main problem for American companies hoping to sell more products in China and, in the process, create more jobs in this country. The exchange rate does not need to be the focus of next week’s meetings.  For the United States, the No. 1 problem with China’s economy is probably intellectual property theft. Technology companies, for example, continue to notice Chinese government agencies downloading software updates for programs they have never bought, at least not legally.  No wonder China has become the world’s second-largest market for computer hardware sales — but is only the eighth-largest for software sales.

MIT Lecture by Charles Ferguson on the Financial Crisis

Post-Apocalyptic Detroit – Some cool pictures of abandoned buildings in Detroit.   How do you abandon a public library and leave all the books?  All these buildings appear vandalized.  Could it be a sign of Detroit’s problems that no one bothered to even steal the books?

Satyajit Das: European Death Spiral – Communicable Diseases European politicians and central bankers have provided useful geographical clarifications. Prior to succumbing to the inevitable, the Ireland told everyone that they were not Greece. Portugal is now telling everyone that it is not Greece or Ireland. Spain insists that it is not Greece, Ireland or Portugal. Italy says it is not in the “PIGS”. Belgium insists it was no “B” in “PIGS” or “PIIGS”. EU pressure on Ireland to accept external “help” was to safeguard financial stability in the Euro area, as much as rescue Ireland. However, contagion is proving difficult to prevent. Greece had a bloated public sector and an uncompetitive economy sustained by low Euro interest rates. Ireland suffered from excessive dependence on the financial sector, poor lending, a property bubble and an increasingly generous welfare state. Portugal has slow growth, anaemic productivity, large budget deficits and poor domestic savings. Spain has low productivity, high unemployment, an inflexible labour market and a banking system with large exposures to property and European sovereigns. Italy has low growth, poor productivity and a close association with the other peripheral European economies. . The Italian banking system is relatively healthy but exposed to European sovereign debt. Belgium is really two ethnic groups that share a king and high levels of debt (about Euro 470 billion, 100% of GDP).

Under the regulator’s microscope: Credit default swaps – Some argue that the widening spreads between sovereign debt in Germany and that of other European countries has been exacerbated by activity in the market for credit default swaps. In the past year there has been much discussion on (naked) short selling, frequently associated with the question of “naked CDS” (the widely-used acronym for credit default swaps). Yet naked CDS are of a different nature and deserve to be treated soThis column argues that “naked credit default swaps” are of a different nature to naked short selling and deserve to be treated so. It explores insights from the academic literature, market participants, and securities regulators.
Federal Reserve Earned $81 Billion in 2010 – The Federal Reserve system is doing its part to cut the budget deficit. The central bank earned $81 billion in fiscal 2010, of which a bit more than $78 billion will be remitted to the Treasury. That’s $31 billion more than last year. According to the Fed’s news release yesterday,  The resulting $81 billion in net profits were then distributed as follows: $78.4 billion to the Treasury, $1.6 billion as dividends to member banks, and $0.6 billion retained to “equate surplus with paid-in capital.”
How the company that made Jared Lee Loughner’s gun became so successful. On Saturday in Tucson, Jared Lee Loughner allegedly used a Glock 19—a lightweight, $500 semi-automatic commonly carried by law enforcement officials—to kill six people and injure 13 more, including Rep. Gabrielle Giffords. In 2007, Cho Seung-Hui used the same gun, a along with a Walther P22, to kill 32 people at Virginia Tech before committing suicide. And Giffords herself boasted to the New York Times in 2010: "I have a Glock 9 millimeter, and I’m a pretty good shot."

Math is Math: There Was No "Second Stimulus" – One of the best rules in mathematics is that, to determine the value of all the variables, you need only as many distinct equations as you have variables. (previous sentence edited for clarity.) So let’s combine a couple of recent articles (h/t Mark Thoma for the first, Digby for the second.) Richard Florida finds three studies of State Government Spending Multipliers. The three studies find multipliers of 1.5, 1.7, and 2.12. Let’s be nice (in context) and use the lower one. StateMultiplier = 1.5 David Dayden notes that budget cuts in just two (large) states can be matched against the Fed’s "stimulus" monies. Let’s see how much, putting the best face possible on the data (i.e., taking the most optimistic projections). CADeficit (ignoring "reserve"): $26.4B (12.5 + 12 + 1.9). ILDeficit: $19B (13 + 6).That gives us a CA-ILEconomyCost of (26.4 + 19)*1.5 = US$68.1B.  The Federal Stimulus is $55-60B

It’s Hard to Put a Price on Obamacare – The vote on repealing the health care bill looks likely to be delayed for a while, which gives us more time to quarrel over what such a repeal would mean. Not what it will mean, of course–Republicans don’t have the votes to get it through the Senate, so this is largely a symbolic move.  But there’s still plenty of room to argue about what would happen if they managed to retake the Senate and get it done. Democrats are pointing to the CBO score on repeal, which estimates that repealing the law would cost over $200 billion.  Republicans are pointing out that the score is highly contingent on actually implementing the law as passed–something that even the bill’s proponents recognize will be a political challenge. Already the high-risk pools are a disaster, and the provision to require greater use of 1099s is generally agreed to be a bad idea; we haven’t even begun to do the hard stuff, like cutting back on services in order to hold down costs.


Bernanke Defends Crisis Lending – U.S. Federal Reserve Chairman Ben Bernanke, in a letter to Sen. Bernard Sanders, defended emergency actions the Fed took to stem the financial crisis and disputed allegations of conflict-of-interest issues at the Fed. ( Read the full letter.) Sanders, an independent from Vermont and a vocal critic of the Fed, had argued in a recent letter that companies such as Goldman Sachs Group Inc. received low-cost loans from the Fed while senior executives from the company served on the Fed’s regional boards of directors. Bernanke, however, said the Fed’s board of governors, not Federal Reserve Bank directors, made decisions about the emergency rescue programs. “Federal Reserve Bank directors had no involvement in a Reserve Bank’s decision to make credit available under any of these emergency lending facilities,” Bernanke said.

Markets and Morality –Greg Mankiw has an essay on economic morality that essentially outlines a Just Deserts Theory of morality. Under this conception there is nothing wrong with people getting fabulously wealthy, its only bad when people cheat their way to the top. Greg also brings up an argument that I used to be attached to, that charity is a public good – no one wants to see poor people but we would all prefer that someone else do something about it – and as a public good is rightfully financed by government spending.I’ve moved away from this view. Greg is right that it reflects common intuition. The problem is that this intuition does not survive introspection. It works so long as you don’t think too much about it. As you think more and more you are forced either into something like a consequentialist camp, that is to say that it matters who ends up with what. Or, you are forced into miniarchist camp. That is, that there should be almost no government at all. It’s hard to keep the idea that there should be some public goods if you are not explicitly conditioning your idea of a good society on what society actually exists.

Is winner-take-all bad or good for the middle class? Evidence from baseball – A “winner-take-all” market is one in which the top stars get paid much more than anyone else. It’s an apt description of the American economy in recent decades. Top financiers, CEOs, entertainers, and athletes now routinely earn more than ten million dollars a year, and the share of all income (after taxes) going to the top 1% of households jumped from 8% in 1979 to 17% in 2007. What impact does the rise in the share taken by those at the top have on the incomes of those in the middle? On one view it’s bad: if the additional millions going to the “winners” had instead been spread among those in the middle, the latter would have been better off. Others suggest the impact is good: winner-take-all markets help make the pie bigger than it otherwise would have been, and a larger pie means a larger slice for the middle class in absolute terms, even if that slice has shrunk relative to the slice of those at the top.* Pay in major league baseball is a good test case.

Sometimes Business Isn’t Just Business – Maxine Udall – I’m not sure why I’m telling you this story. Maybe because it’s a story about how people with very different ideas can be brought together peaceably by commercial exchange, a mere desire to truck and barter with each other, giving value and getting value. Its a story about how they can tolerate someone with ideas that are quite at odds with their own because the market has provided them with neutral ground where they can meet, exchange, and part, better off for the transaction. But it’s also a story about how, at some point, something other than gaining and getting may also matter. When one party to the exchange promotes ideas that could undermine the social fabric that makes the exchange possible, is it time to step back and ask ourselves: what are we trading and bartering here? If one party to the exchange promotes ideas that could undermine the institutions and tolerance and moral fabric that make markets and democracy possible, should we be more willing to take our business elsewhere, and sooner?


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