Sunday, February 19, 2017

Good Review

Frank Diebold, on Mostly Harmless Econometrics:
All told, Mostly Harmless Econometrics: An Empiricist's Companion is neither "mostly harmless" nor an "empiricist's companion." Rather, it's a companion for a highly-specialized group of applied non-structural micro-econometricians hoping to estimate causal effects using non-experimental data and largely-static, linear, regression-based methods. It's a novel treatment of that sub-sub-sub-area of applied econometrics, but pretending to be anything more is most definitely harmful, particularly to students, who have no way to recognize the charade as a charade.
Disclaimer, I haven't read the book. The lovely quote does summarize feelings I have had in many seminars involving difference in difference in difference regressions with 100 fixed effects and controls. But mostly I post it as a lovely quote.

Monday, February 13, 2017

Economies in reverse

How can economies forget? How is it that once we have learned to do something better, that knowledge can be lost and economies move backward? How can productivity decline? Viewing productivity as knowledge, it would seem almost impossible for it to do so -- and real business cycle theory was often derided on that point. Yet middle ages eurpoeans lost the recipe for concrete, and time after time we have seen economies get worse. How can our own productivity be growing so slowly overall when so much we see around us is progressing so fast?

Scott Alexander at Slate Star Codex has an intriguing blog post that illuminates these questions (HT marginal revolution). I'll offer my thoughts on the answers at the end.

Scott starts with education:

Inputs triple, output unchanged. Productivity dropped to a third of its previous level.

Friday, February 10, 2017

Healthcare repair on "The Hill"

On repeal and replace, a healthcare oped on "The Hill", here.  

Republicans replacing Obamacare, beware. It has a certain logic. Much of it patches up unintended consequences of previous regulations. If we just roll back and patch once again, we will end up right back where we started.

It’s wiser to start with a vision of the destination. In an ideal America, health insurance is individual, portable, and guaranteed renewable — it includes the right to continue coverage, with no increase in cost. It even includes the right to transfer to a comparable plan at any other insurer. Insurance companies pay each other for these transfers, and then compete for sick as well as healthy patients. The right to continue coverage is separate from the coverage itself. You can get the right to buy gold coverage with a silver plan.

Most Americans sign up as they graduate from high school, get a drivers’ license, register to vote, or start a first job. Young healthy people might choose bare-bones catastrophic coverage, but the right to step up to a more generous plan later. Nobody’s premiums subsidize others, so such insurance is cheap.


People keep their individual plans as they go to school, get and change jobs or move around.  Employers may contribute to these individual plans. If employers offer group coverage, people keep the right to individual plans later.

Health insurance then follows people  from job to job, state to state, in and out of marriage, just like car, home and life insurance, and 401(k) savings.

But health insurance is not a payment plan for small expenses, as home insurance does not “pay for” lightbulbs. Insurance protects your wallet against large, unexpected expenses. People pay for most regular care the same way they pay for cars, homes, and TVs — though likewise helped to do so with health savings and health credit accounts to smooth large expenses over time. Doctors don’t spend half their time filling out forms, and there are no longer two and a half claims processors for every doctor.

Big cost control comes from the only reliable source — rigorous supply competition. The minute someone tries to charge too much, new doctors, clinics, hospitals, and models of care spring up competing for the customer’s dollar. “Access” to health care comes like anything else, from your checkbook and intensely competitive businesses jockeying for it.

What about those who can’t afford even this much?  Nobody dies in the street. There is also a robust system of government and charity care for the poor, indigent, those who have fallen between the cracks, and victims of rare expensive diseases. For most, this simply means a voucher or tax credit to buy private insurance.

But — a central principle — the government no longer massively screws up the health insurance and health care arrangements of the majority of Americans, who can afford houses, cars, and smartphones, and therefore health care, in order to help the unfortunate. We help people forthrightly, with taxes and on-budget spending.

Why do we not have this world? Because it was regulated out of existence, and now is simply illegal.

The original sin of American health insurance is the tax deduction for employer-provided group plans — but not, to this day, for employer contributions to portable individual insurance.  “Insurance” then became a payment plan, to maximize the tax deduction, and then horrendously inefficient as people were no longer spending their own money.

Worse, nobody who hopes to get a job with benefits then buys long-term individual insurance. This provision alone pretty much created the preexisting conditions problem.

Patch, patch. To address preexisting conditions, the government mandated that insurers must sell insurance to everyone at the same price. Insurance companies will then try to avoid sick people, so coverage must be highly regulated.  Healthy people won’t buy it, so it must be nearly impossible for people to just pay out of pocket. Obamacare added the individual mandate.

Cross-subsidies are a second original sin. Our government doesn’t like taxing and spending on budget where we can see it. So it forces others to pay: It forces employers to provide health insurance. It forces hospitals to provide free care. It low-balls Medicare and Medicaid reimbursement.

The big problem: These patches and cross-subsidies cannot stand competition. Yet without supply competition, costs increase, the number of people needing subsidized care rises, and around we go.

The Republican plans now circulating make progress. Rep. Tom Price’s plan ties protection from preexisting conditions to continuous coverage. His and Speaker Paul Ryan’s “Better Way” plan move toward premium support for private insurance, and greater portability.

So far, though, the announced plans do not really overturn the original sins. But those plans were crafted in a different political landscape. We can now  go big, and really fix the government-induced health care mess in a durable way.

I visited my dermatologist last month. I spent 20 minutes with a resident, and 5 minutes with the dermatologist. The bill was $1335. An “insurance adjustment”  knocked off  $779. Insurance paid $438. I paid $118.  The game goes on. We start with a fake sticker price to negotiate with the uninsured and to declare uncompensated care. But you cannot just walk in and pay as you can for anything else. Even $438 includes a huge cross-subsidy.

We’ll know we’ve fixed health care when we don’t get bills like this.

Mr. Cochrane is a Senior Fellow of the Hoover Institution at Stanford University and an Adjunct Scholar of the Cato Institute.

Wednesday, February 8, 2017

Carbon compromise?

In a remarkable and clear oped "A Conservative Answer to Climate Change" James Baker and George Shultz lay out the case for a carbon tax in place of the complex, cronyist and ineffective regulatory approach to controlling carbon emissions.

A plea to commenters. Don't fall in to the trap of arguing whether climate change is real or whether carbon (and methane) contribute to it. That's 5% of the debate. The real debate is how much economic damage does climate change actually do. Science might tell us that the temperature will warm 2 degrees in a century, with a band of uncertainty. But the band of uncertainty of the economic, social and political consequences of 2 degrees is much bigger. Moreover, the band of relative uncertainty is bigger still. Does "science," as the IPCC claims, really tell us that climate change is the greatest danger facing us -- above nuclear war, pandemic, state failure, and so on?

And most of all, given that our governments are going to do something about climate change, how can we do something much more efficient, and (plea to environmentalists) much more effective? That's the question worth debating.

Both sides have fallen in to the trap of arguing about climate change itself, as if it follows inexorably that our governments must respond to "yes" with the current system of controls and interventions. The range of economic and environmental effects from the "how" question are much, much larger than the range of the effects of the "is climate change real" question.

So, Baker and Shultz lay out in gorgeous clarity the kind of compromise we all hope our governments can still occasionally achieve: Given that we're going to do something, trade a carbon tax for the removal of intrusive regulation. You get more economy and less carbon.

The oped refers to a report from the Climate Leadership Council, which is here and worth reading. The Niskanen Center has also been championing the case, and reaching out to environmental groups.

There is a natural bargain, if our political system can get around its current habit of take-no-prisoners maximalism.

Tuesday, February 7, 2017

Summers on Trade

Larry Summers has an excellent FT column, "Revoking trade deals will not help American middle classes." (If you can't access FT, these usually show up eventually on Larry's blog)

The key point: whatever you think of the impact of trade and globalization, trade deals are not responsible for stagnating "middle class" wages.
...the idea that past trade agreements have damaged the American middle class and that the prospective Trans-Pacific Partnership would do further damage is now widely accepted in both major US political parties. 
... the idea that the US trade agreements of the past generation have impoverished to any significant extent is absurd. 
There is a debate to be had about the impact of globalisation on middle class wages and inequality. Increased imports have displaced jobs...
My judgment is that these effects are considerably smaller than the impacts of technological progress... 
But an assessment of the impact of trade on wages is very different than an assessment of trade agreements. It is inconceivable that multilateral trade agreements, such as the North American Free Trade Agreement, have had a meaningful impact on US wages and jobs for the simple reason that the US market was almost completely open 40 years ago before entering into any of the controversial agreements. 
...The irrelevance of trade agreements to import competition becomes obvious when one listens to the main arguments against trade agreements. They rarely, if ever, take the form of saying we are inappropriately taking down US trade barriers. 
Rather the naysayers argue that different demands should be made on other countries during negotiations - on issues including intellectual property, labour standards, dispute resolution or exchange rate manipulation....
In other words, the US was open already in the postwar period. Trade deals ask other countries to take down trade barriers in specific markets, and also to make internal changes, for the US to remain open.
The reason for the rise in US imports is not reduced trade barriers. Rather it is that emerging markets are indeed emerging. They are growing in their economic potential because of successful economic reforms and greater global integration. 
These developments would have occurred with or without US trade pacts, though the agreements have usually been an impetus to reform. Indeed, since the US does very little to reduce trade barriers in our agreements, the impetus to reform is most of what foreign policymakers value in them along with political connection to the US. 
Trade deals are very useful for many countries, including the U.S. When politicians get demands for subsidies, protection, stifling regulation, or lack of needed regulation, they can point to the trade agreement. That's a good argument for multilateral agreements as well -- look at the broad range of countries that has agreed to behave, not just look at our special deal with one country.
The truth too often denied by both sides in this debate is that incremental agreements like TPP have been largely irrelevant to the fate of middle class workers. The real strategic choice Americans face is whether the objective of their policies is to see the economies of the rest of the world grow and prosper. Or, does the US want to keep the rest of the world from threatening it by slowing global growth and walling off products and people?
Framed this way the solution appears obvious. A strategy of returning to the protectionism of the past and seeking to thwart the growth of other nations is untenable and would likely lead to a downward spiral in the global economy. The right approach is to maintain openness while finding ways to help workers at home who are displaced by technical progress, trade or other challenges.
If it works, protection only enriches some Americans at the expense of foreigners and other Americans.  It is a negative-sum game. If you do not think America's role in the world is to try to send a billion Chinese and Indians back to grinding poverty, to benefit a bit selected American workers and businesses, then you ought not to be a fan.

Larry focuses on the TPP, but the trade agenda is now much larger -- a substantial increase in US trade restrictions, including a return to tariffs, industry - by - industry quantative restrictions, even in violation of trade agreements, and so on.

Larry mentions protectionism in the past, but don't get all nostalgic. That was in the far past, last seen in the universally reviled Smoot-Hawley tariff of the Great Depression. Nobody looks back to that nostalgically as part of "Great" America.

Do read the whole essay.

Monday, February 6, 2017

Dodd-Frank Reform

Dodd-Frank reform seems to be back on the front burner, according to the latest Presidential executive order. At last.

But let us hope it can be done right. Simply pulling down regulations in ways demanded by big banks will lead, I am afraid, to lower capital standards, more debt implicitly guaranteed by the government, and just enough regulation to keep the big end of the banking industry protected from competition and disruptive innovation.

As with much reform, there is a rather detailed and clearheaded effort coming out of Congress, which gets much less attention than it should relative to the Administration's preliminary thoughts. Watch Rep Jeb Heainsarling's Choice Act for Dodd Frank reform. (Speaker Paul Ryan's "Better Way" plan is the one to watch on everything else. Though corporate taxes are getting a lot of news, the personal tax plan is more important.)

The core of the Choice act offers a clever carrot: Much less regulation in return for much more capital.

A reader asked me a while ago how I would deal with the extraordinary complexity of the Dodd-Frank act. I answered that fixing it was easy  -- a trained parrot could do it. Just teach the parrot to say "More capital. More Capital. More capital."  

Which is all to introduce a little essay I wrote that was serendipitously published last week in the Chicago Booth Review, "A way to fight bank runs—and regulatory complexity" It's a much edited version of an earlier blog post, and offers some suggestions on how even the Choice act might be improved. I'd copy it here, but the Booth Review team did such a nice job of formatting it that I'll hope to get you to click the link instead.

(I've been doing this for a while with the Chicago Booth Review, and they now have a page with all my essays.)

Wednesday, February 1, 2017

Corporate tax (or is it?) reading list

On the house and administration plans to reform the corporate tax, and my struggles to figure it out.

Larry Kotlikoff, "With Some Tweaks, The Democrats Can Love The House Tax Plan."
..the corporate tax reform, which is the most significant part of the House plan and represents a major and long overdue shift toward consumption taxation.  ...  there are two ways to tax consumption, C. You can either tax it directly (e.g., via a retail sales tax or a personal consumption tax) or indirectly by taxing everything available for consumption, namely output plus imports, less investment plus exports.
Greg Mankiw, "A Three-Point Tax Reform"
Consider the following tax reform:
1. Impose a retail sales tax on consumer goods and services, both domestic and imported.
2. Use some of the proceeds from the tax to repeal the corporate income tax.
3. Use the rest of the proceeds from the tax to significantly cut the payroll tax.
...
As I understand it, this plan is, in effect, what the Republicans in Congress are proposing.
William G. Gale, "Understanding the Republicans’ corporate tax reform"
The DBCFT is essentially a value-added tax (VAT), but with a deduction for wages.  ...The deduction for wages makes the DBCFT progressive, relative to a VAT. It only taxes consumption financed out of holdings of capital, whereas a VAT burdens all consumption. 
..A final concern is that the corporate reform proposals described above, ... would reduce federal tax revenue..Rough estimates suggest that setting the DBCFT rate at around 30 percent for all businesses would eliminate the revenue shortfall. 

Monday, January 30, 2017

Immigration and trade

Question: What is an easy way to reduce immigration in to the US (if you want to do that)?

Answer: Buy what they have to sell. If they can make good money at home, they are less likely to want to come here.

Question: Won't we lose jobs?

Answer: What do you think people do with the dollars we send them in return for foreign goods? There is only one thing to do with dollars -- buy American goods,  invest in American companies, or buy US government debt, and the government spends it.

Question: But what about those jobs moving overseas?

Answer: Some jobs do move overseas. But those dollars, flowing back, create new jobs in the US. There are losers. It is true. There are also winners. That is also undeniable. Trade restrictions basically transfer jobs from some people in the US -- new jobs in export-oriented industries or industries fueled by foreign investment demand --  to other people in the US -- old jobs. And they do so inefficiently, making Americans buy more expensive goods overall.

Question: What's another way to reduce immigration in to the US (if you want to do that)?

Answer: Help their homes to be peaceful as well as prosperous. The costs of feckless foreign policy are not just lives and countries ruined, refugees washing up on our and europe's shores, but electoral and political responses.

(Economists. Forgive me for using the misleading "create jobs" rhetoric, in the interest of connecting with non economists. You know what I mean -- create wages, opportunities, businesses, etc.)

Thursday, January 26, 2017

Corporate Tax

My view: the corporate tax should be zero. Not just a zero rate, but the tax should be abolished. Lowering a rate is just an invitation to renegotiation, and a quick raise when the next party takes over. Lowering a rate keeps all the lobbyists around to keep all the exemptions going. To reduce a tax, you must follow the advice of a zombie movie -- kill it, and drive a stake through its heart. Burn the code, delete it from the hard drive.

In my best guess, the tax is entirely really paid by consumers in higher prices and workers in lower wages. However, it works best only with a shift to a consumption tax (progressive if you wish) on individuals.

In the news, Marginal Revoultion has a short piece on eliminating the corporate tax, linking to Utah Senator  Mike Lee and to Matt Yglesias, Scrap the Corporate Income Tax. When I agree with Matt on something, a rare event, I like to celebrate. Matt:
"Closing loopholes while lowering rates would still leave the basic structure in place, with well-connected companies ferociously lobbying for their tax breaks. We need something much bigger and tougher that corporate income tax reform: an alternative source of revenue that will let us do away with the corporate income tax entirely. 
.. Just give up. Though the corporate income tax as presently constructed supports a small army of accountants, tax lawyers, lobbyists, and CNBC talking heads, it doesn’t raise very much revenue.
Rather than trying to mend the tax, we ought to end it and replace it with something else.
Pick who or what we want to tax, and tax it deliberately."
Lee writes
"..what would a tax system that puts American workers first look like? It would start with a cut in the federal corporate tax rate. Not to 25 percent or 15 percent, but to zero. Eliminate it altogether."
Issue 1 Incidence 

What, shouldn't corporations "pay their fair share?" As both authors recognize, corporations bear no tax burden. Every cent of corporate tax comes from people -- from higher prices for products, lower wages for workers, or lower profits for investors. A corporation is just a shell, money goes in and money goes out.

Tuesday, January 24, 2017

Uncommon Knowledge Interview



A broad-ranging interview on economics and policy by Peter Robinson as part of the Hoover "Uncommmon Knowledge" series. Click above for youtube, or

· Hoover Institution: http://www.hoover.org/research/whats-wrong-american-economy

· Twitter: https://twitter.com/uncknowledge/status/823926553058775042

· Facebook: https://www.facebook.com/UncKnowledge/

· Instagram: https://www.instagram.com/p/BPF8TnJgsBz/?taken-by=uncommon_knowledge_show

· Youtube: https://www.youtube.com/watch?v=spe619WX-Q4

· Bitly Link: http://hvr.co/2jqxNkp

The full transcript is available on the episode page at http://www.hoover.org/research/whats-wrong-american-economy.

Monday, January 23, 2017

Chinese Tidbit

From the WSJ moneybeat blog:
China’s central bank extended support on Friday to a group of unnamed but large banks...  the People’s Bank of China extended a longer-term but temporary liquidity facility... Details on the facility were typically vague. In recent weeks it has also injected record amounts of cash. 
The move gives banks some breathing room for now, just as interbank liquidity stresses escalate. The new facility, analysts from ANZ say, doesn’t require banks to post collateral like other facilities typically do. And it makes it easier for them to reach a key regulatory barometer that monitors banks’ liquidity risk in cases of stress in the short term. A helping hand can lighten another burden–but not for long.
"Interbank liquidity stresses" and central bank long term "loans" without collateral are not a good sign. An escalating war on capital flight is not a good sign either.

Tuesday, January 10, 2017

Bruni on Rule of Law in Regulation

I found Frank Bruni's opinion piece in the Sunday New York Times noteworthy on the whole question of rule of law in regulation:
Hillary Clinton as New York City mayor?

Imagine the fun:  City building inspectors start to show up daily at Trump Tower, where they find a wobbly beam here, a missing smoke detector there, outdated wiring all over the place. City health inspectors fan out through Trump’s hotels, writing citations for clogged drains in the kitchens and expired milk in the minibars. 
The potholes near his properties go unfilled. Those neighborhoods are the last to be plowed. There’s a problem with the flow of water to his Bronx golf course, whose greens are suddenly brown. And the Russian Consulate keeps experiencing power failures. It’s the darnedest thing. Clinton vows to look into it, just as soon as she returns from the Hamptons.

..His [Trump's] hometown is her fief. She’s the boss of him whenever he’s in the Big Apple, and he’s in the Big Apple a whole lot.

...I’m fantasizing, yes, but with a glimmer of encouragement....there are so many scores she could settle, so many ways she could meddle. ...above all there’d be the torturing of Trump...The city’s Mexican Day Parade would be rerouted, from Madison Avenue over to Fifth, right past Trump Tower. A new city zoning experiment would locate detention centers in the strangest places. And in the city’s libraries, “The Art of the Deal” would be impossible to find, while upfront, on vivid display, there’d be copies galore of “It Takes a Village” and “Hard Choices.”
There is no indication that Bruni is kidding, that any of this would be both monstrously illegal, unethical, and a disaster for New York, and no disclaimer from his editors.

As far as I can tell, Bruni is a middle of the road Democrat, and a fan of large-government regulation.  (Like the rest of the Times, Bruni seems currently in full-tilt Trump Derangement Syndrome, with 11 out of his 14 columns since the election criticizing Trump, rather than policy, so if he's really a free-market deregulator, let me know.)

So how fascinating that Bruni -- and his Times editors -- seem to think it so natural that regulation and public services they admire -- building inspectors, muncipal water and power, zoning, even the public library -- should naturally be bent, far beyond legal limits, to partisan political service. Building inspections are used to punish political enemies, but we're supposed to trust that the IRS, Obamacare, EPA, FDA, NLRB, and Dodd-Frank are not?  Or is it just that illegal abuse of power is just fine and normal in the hands of their friends?

And how deeply naive. Really?

Monday, January 9, 2017

Leaders vs followers?

The Jan 9 Wall Street Journal had this nice graph, accompanying an article by Josh Zumbrun, "Top Economists Grapple with Public Disdain for Initiatives they Championed"

The question is this: Should we understand politicians as assembling coalitions of voters with fixed policy preferences? Or should we instead regard politicians as leaders, who give voice to general dissatisfaction, and their followers picking up ideas?

Most political analysis takes the former view. People are mad about China, the TPP, immigrants, or whatever, and Trump comes along, listens, and represents these preferences, and wins. Easy models of political preference put preexisting policy views on a line, and then think about where leaders choose to place themselves.

The article echoed the common view too
Surveys from the Pew Research Center have documented dwindling support for free trade. In 2014, 60% of Democratic voters and 55% of Republican voters supported such trade agreements. In an October survey, however, support among Democrats had fallen to 56% and support among Republicans had nose-dived to 24%.
I'm coming to a different view. Yes, people are unhappy. But the average American is busy with a real life, and doesn't think a whole lot about cause and effect in public policy. How many have read NAFTA or the TPP, or have any idea what's inside?  How many have thought about automation vs. regulation vs. trade as the source of industrial decline?

It seems to me the ideas come from the leader, giving voice to their voter's frustrations. Policy views then become general signals of team allegiance. Witness how many Trump supporters, interviewed, supported him despite not because of policy stances.

And witness the graph. How could it possibly be that in two years, opinions on the value of free trade among Republicans dropped by half, while virtually unchanged among Democrats? Surely, this is not a change of view independent of candidates, that Mr. Trump was just quicker to recognize. Surely, this represents the opposite -- candidates, especially Mr. Trump but also many of the others, denounce trade, and followers follow.

The good news is that ideas held lightly and as a badge of support can more easily change.   And other leaders can channel the same discontents to more profitable analysis of our country's problems.

Monday, December 19, 2016

Electoral College

Source: Real Clear Politics
The electoral college is back in the news, with Democrats suddenly discovering it's a terrible idea.

I wrote at length in defense of the college in a previous post. I wrote just before the 2012 election so I can credibly claim that my view is not a sudden discovery motivated by partisan feeling.

I don't want to repeat the whole post, though I'm still proud of it and hope I can send some traffic there.

Short version: The electoral college forces candidates to attract geographically dispersed support. Moving a swing state from 45% to 55% is much more important than moving a solid blue or solid red state from 75% to 85%.

This is vital. Our country is already polarized, and that polarization is reflected in geography.  See the map. A set of rules that encourages further polarization would be a disaster. American democracy failed miserably once. 700,000 people died and government of the people, by the people, and for the people nearly did perish from the earth. Things like this don't happen again only when people think they can, and vice versa.

In a pure popular vote contest, after candidates and parties adapt their positions and coalitions of support, we are likely to see whole swaths of the country with 70, 80, 90% or more majorities of one or the other party -- and even greater demonization of the other side. Fill in the gaps what happens next.

The deep point: When you set up rules for anything, there is a tension between measurement and incentives. Once people show up at the polls on election day, there is a strong case that "each vote should count the same." But if you do that, the incentives, and hence the outcomes will be much worse.

Thursday, December 15, 2016

National Fellows at Hoover

How would you like to work at Hoover for a year, focusing on research with no teaching or other responsibilities, and soaking up the intellectual climate of Hoover and Stanford? If you are an economist roughly 3-10 years post PhD, doing research with some policy relevance that would benefit from a year here, this could be for you.

More information and application form here.


Monday, December 12, 2016

New Paper

A draft of a new paper is up on my webpage, "Michelson-Morley, Occam and Fisher: The Radical Implications of Stable Inflation at Near-Zero Interest Rates." This combines some talks I had given with the first title, and a much improved version of "does raising interest rates raise or lower inflation?"

Abstract:
The long period of quiet inflation at near-zero interest rates, with large quantitative easing, suggests that core monetary doctrines are wrong. It suggests that inflation can be stable and determinate under a nominal interest rate peg, and that arbitrary amounts of interest-paying reserves are not inflationary. Of the known alternatives, only the new-Keynesian model merged with the fiscal theory of the price level is consistent with this simple interpretation of the facts.
I explore two implications of this conclusion. First, what happens if central banks raise interest rates? Inflation stability suggests that higher nominal interest rates will result in higher long-run inflation. But can higher interest rates temporarily reduce inflation? Yes, but only by a novel mechanism that depends crucially on fiscal policy. Second, what are the implications for the stance of monetary policy and the urgency to “normalize?” Inflation stability implies that low-interest rate monetary policy is, perhaps unintentionally, benign, producing a stable Friedman-optimal quantity of money, that a large interest-paying balance sheet can be maintained indefinitely. However, with long run stability it might not be wise for central bankers to exploit a temporary negative inflation effect.
The fiscal anchoring required by this interpretation of the data responds to discount rates, however, and may not be as strong as it appears.

Saturday, December 10, 2016

Trump Taxes Two

Source: Wall Street Journal
"President-elect Donald Trump owns a helicopter in Scotland.
To be more precise, he has a revocable trust that owns 99% of a Delaware limited liability company that owns 99% of another Delaware LLC that owns a Scottish limited company that owns another Scottish company that owns the 26-year-old Sikorsky S-76B helicopter, emblazoned with a red “TRUMP” on the side of its fuselage."
So write Jean Eaglesham, Mark Maremont, and Lisa Schwartz in the Wall Street Journal

"WTF?" wonders the incredulous reader. Why does Mr. Trump structure his finances with such mind-boggling complexity, to say nothing of astronomic legal costs? The article is pretty thin on explaining the logic of all this.

You can see the Journal writers struggling for a narrative. Is this about Mr. Trump's "conflict of interest" issues? Is this something nefarious about Mr. Trump, efforts to hide something? (You can be sure earnest investigative reporters at the Times will be beating both drums for the next four years. And just as sure that nobody will pay much attention unless they can tempt Mr. Trump into saying something stupid about it all.)

Let me suggest a productive narrative. Mrs. Clinton's email saga laid bare for all of us to see the financial arrangements of prominent public figures -- "charitable foundations" to funnel money around, all "legal." In my view, rightly felt disgust at that look into our political system had a lot to do with the election. Mr. Trump's financial arrangements lay bare for all of us to see the financial arrangements of the super-wealthy in this country, also massively complex, perfectly "legal," and smelling equally of last week's fish. The right response is equal disgust at the obscene tax code and crony capitalist system that produces this mess.  Mitt Romney's taxes were 550 pages long, and he only had investments, not operating companies! Fellow peasants, get out your pitchforks!

Thursday, December 8, 2016

Growth full oped

Source: Wall Street Journal

On November 7 I wrote "Don't believe the economic pessimists," an oped about growth in the Wall Street Journal. Now that 30 days have passed, I can post the whole thing here. pdf here (my webpage).

Don't Believe the Economic Pessimists

No matter who wins Tuesday’s presidential election, now ought to be the time that policy makers in Washington come together to tackle America’s greatest economic problem: sclerotic growth. The recession ended more than seven years ago. Unemployment has returned to normal levels. Yet gross domestic product is rising at half its postwar average rate. Achieving better growth is possible, but it will require deep structural reforms.

The policy worthies have said for eight years: stimulus today, structural reform tomorrow. Now it’s tomorrow, but novel excuses for stimulus keep coming. “Secular stagnation” or “hysteresis” account for slow growth. Prosperity demands more borrowing and spending—even on bridges to nowhere—or deliberate inflation or negative interest rates. Others advocate surrender. More growth is impossible. Accept and manage mediocrity.

But for those willing to recognize the simple lessons of history, slow growth is not hard to diagnose or to cure. The U.S. economy suffers from complex, arbitrary and politicized regulation. The ridiculous tax system and badly structured social programs discourage work and investment. Even internet giants are now running to Washington for regulatory favors.

If you think robust growth is impossible, consider a serious growth-oriented policy program—one that could even satisfy many of the left’s desires.

The next crisis?

Where will the next crisis come from?  Every crisis starts with a pile of debt that can't be paid back, and shady accounting to hide that debt. When one big one goes under, everybody starts to question the shady deals they've invested in, the extend-and-pretend game ends, heretofore simple rolling over of short term debt suddenly ends, and the run starts. Governments bail out. Really big crises happen when governments run out of bailout power or will and you have a sovereign debt crisis or inflation. Governments bail out by borrowing, but if people won't lend the government money to bail out, either default or inflation must follow.  Reinhart and Rogoff describe a frequent "quiet period" between financial crisis and sovereign crisis. So far we have just had quiet.

So, where around the world is there a lot of debt that might not be paid back and really shady accounting? Well, duh, China, right?

So if I have to dream up a nightmare scenario it goes something like this: A pile of debt in China is found wanting. China's government takes desperate steps -- huge bailouts, sell its pile of treasuries, force people to buy worthless assets, print up lots of money, but prop up its value by stopping people from taking currency abroad, and so forth.

Wednesday, December 7, 2016

Balance sheet balance

The Fed has a huge "balance sheet" -- It owns about $3 trillion of government bonds and mortgage backed securities, which it finances by issuing about $1 trillion of cash and $2 trillion of reserves -- interest-bearing accounts that banks have at the Fed. Is this a problem? Should the Fed trim the balance sheet going forward?

On Tuesday Dec 6, I participated on a panel at Hoover's Washington offices to discuss the book "Central Bank Governance And Oversight Reform" with very distinguished colleagues, Michael Bordo, Charles Plosser, John Taylor, and Kevin Warsh. We're not afraid to disagree with each other on panels -- there's no "Hoover view" one has to hew to, so I learned a lot and I think we came to some agreement on this issue in particular.