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On climate change 2

Posted by Economist Channel on Thursday, August 31, 2017 Label: Commentary , Energy , Environment , Regulation , Taxes

Now that 30 days have passed I can post the full Wall Street Journal climate change oped with David Henderson. The previous post has more commentary. A pdf is here.

By David R. Henderson and John H. Cochrane
July 30, 2017 4:24 p.m. ET

Climate change is often misunderstood as a package deal: If global warming is “real,” both sides of the debate seem to assume, the climate lobby’s policy agenda follows inexorably.

It does not. Climate policy advocates need to do a much better job of quantitatively analyzing economic costs and the actual, rather than symbolic, benefits of their policies. Skeptics would also do well to focus more attention on economic and policy analysis.

To arrive at a wise policy response, we first need to consider how much economic damage climate change will do. Current models struggle to come up with economic costs commensurate with apocalyptic political rhetoric. Typical costs are well below 10% of gross domestic product in the year 2100 and beyond.

That’s a lot of money—but it’s a lot of years, too. Even 10% less GDP in 100 years corresponds to 0.1 percentage point less annual GDP growth. Climate change therefore does not justify policies that cost more than 0.1 percentage point of growth. If the goal is 10% more GDP in 100 years, pro-growth tax, regulatory and entitlement reforms would be far more effective.

Yes, the costs are not evenly spread. Some places will do better and some will do worse. The American South might be a worse place to grow wheat; Southern Canada might be a better one. In a century, Miami might find itself in approximately the same situation as the Dutch city of Rotterdam today.

But spread over a century, the costs of moving and adapting are not as imposing as they seem. Rotterdam’s dikes are expensive, but not prohibitively so. Most buildings are rebuilt about every 50 years. If we simply stopped building in flood-prone areas and started building on higher ground, even the costs of moving cities would be bearable. Migration is costly. But much of the world’s population moved from farms to cities in the 20th century. Allowing people to move to better climates in the 21st will be equally possible. Such investments in climate adaptation are small compared with the investments we will regularly make in houses, businesses, infrastructure and education.

And economics is the central question—unlike with other environmental problems such as chemical pollution. Carbon dioxide hurts nobody’s health. It’s good for plants. Climate change need not endanger anyone. If it did—and you do hear such claims—then living in hot Arizona rather than cool Maine, or living with Louisiana’s frequent floods, would be considered a health catastrophe today.

Global warming is not the only risk our society faces. Even if science tells us that climate change is real and man-made, it does not tell us, as President Obama asserted, that climate change is the greatest threat to humanity. Really? Greater than nuclear explosions, a world war, global pandemics, crop failures and civil chaos?

No. Healthy societies do not fall apart over slow, widely predicted, relatively small economic adjustments of the sort painted by climate analysis. Societies do fall apart from war, disease or chaos. Climate policy must compete with other long-term threats for always-scarce resources.

Facing this reality, some advocate that we buy some “insurance.” Sure, they argue, the projected economic cost seems small, but it could turn out to be a lot worse. But the same argument applies to any possible risk. If you buy overpriced insurance against every potential danger, you soon run out of money. You can sensibly insure only when the premium is in line with the risk—which brings us back where we started, to the need for quantifying probabilities, costs, benefits and alternatives. And uncertainty goes both ways. Nobody forecast fracking, or that it would make the U.S. the world’s carbon-reduction leader. Strategic waiting is a rational response to a slow-moving uncertain peril with fast-changing technology.

Global warming is not even the obvious top environmental threat. Dirty water, dirty air and insect-borne diseases are a far greater problem today for most people world-wide. Habitat loss and human predation are a far greater problem for most animals. Elephants won’t make it to see a warmer climate. Ask them how they would prefer to spend $1 trillion—subsidizing high-speed trains or a human-free park the size of Montana.

Then, we need to know what effect proposed policies have and at what cost. Scientific, quantifiable or even vaguely plausible cause-and-effect thinking are missing from much advocacy for policies to reduce carbon emissions. The Intergovernmental Panel on Climate Change’s “scientific” recommendations, for example, include “reduced gender inequality & marginalization in other forms,” “provisioning of adequate housing,” “cash transfers” and “awareness raising & integrating into education.” Even if some of these are worthy goals, they are not scientifically valid, cost-benefit-tested policies to cool the planet.

Climate policy advocates’ apocalyptic vision demands serious analysis, and mushy thinking undermines their case. If carbon emissions pose the greatest threat to humanity, it follows that the costs of nuclear power—waste disposal and the occasional meltdown—might be bearable. It follows that the costs of genetically modified foods and modern pesticides, which can feed us with less land and lower carbon emissions, might be bearable. It follows that if the future of civilization is really at stake, adaptation or geo-engineering should not be unmentionable. And it follows that symbolic, ineffective, political grab-bag policies should be intolerable.

Update:

A good recent summary of the calculations of economic damage of climate change in an NBER working paper:

2. A Survey of Global Impacts of Climate Change: Replication,
Survey Methods, and a Statistical Analysis
by William D. Nordhaus, Andrew Moffat - #23646 (EEE PE)

Abstract:

....the estimated impact is-2.04 (± 2.21) % of income at 3 °C warming and -8.06 (± 2.43) % of income at 6 °C warming. We also considered the likelihood of thresholds or sharp convexities in the damage function and found no evidence from the damage estimates of a sharp discontinuity or high convexity.

http://papers.nber.org/papers/w23646

Yellen at Jackson Hole

Posted by Economist Channel on Wednesday, August 30, 2017 Label: Banking , Commentary , Economists , Financial Reform , Monetary Policy , Regulation

Fed Chair Janet Yellen gave a thoughtful speech at the Jackson Hole conference.

The choice of topic, financial stability and the Fed's role in financial regulation and supervision, says a lot. Financial regulation, supervision, and other tinkering, is much more centrally a part of what the Fed is and does these days than standard monetary policy. Whether overnight interest rates go up or down a quarter of a percentage point may be the subject with the greatest ratio of talk to action, and of commentary to actual effect, in all of economics. Interest rates are likely to stay around 1% for the foreseeable future. Get used to it. But the Fed is deeply involved in running the financial system, and all the talk points to more.

Rather unsurprisingly, she did not give the speech I might have given, or that some of the others campaigning for her job have given, bemoaning the current state of affairs. She's been in charge, after all. If she viewed the Dodd-Frank act as a grossly complex Rube Goldberg contraption, and the Fed only following silly rule-making dictates to comply with the law, she would have said so loudly long before this. Whether with an eye to reappointment, to write the first draft of history, or -- my sense of Ms. Yellen -- out of forthright Jon Snow-like irrepressible honesty, one should not have expected a stunning critique. Moreover, her speech is dead-center of the world in which she lives, that of international policy and regulatory organizations. It would be a lot to expect a Fed chair to lead intellectually and to strike out far from the consensus of the bubble.

Still, I am disappointed. Even accepting her view of the crisis, and the current slow growth era, there are far more "Remaining Challenges" than her three paragraphs. There are far more questions to be asked, paths to choose, and fundamental choices to be made.

Which deregulation?

The call to roll back our regulatory structure can be read two ways: 1) Reduce the insanely complex rules, and the even more intrusive discretionary supervisory regime, and replace it with even higher capital standards. 2) Reduce capital and leverage ratios, keep the lovely anti-competitive complex rules in place, slowly capture the discretionary regulators, keep the wink-wink bailout regime in place, risk on, dividends out. (An earlier post on the Trump executive order on financial regulation.)

You can guess which one I favor. I sense Ms. Yellen is mostly pushing back on the second, especially the desire by big banks for less capital and more trading freedom. But aside from

"There may be benefits to simplifying aspects of the Volcker rule... and to reviewing the interaction of the enhanced supplementary leverage ratio with risk-based capital requirements, "

she concludes that

"any adjustments to the regulatory framework should be modest,"

which sounds like a rather uncritical defense of everything put in place. Really? Is every provision of the Dodd-Frank act wise? Is there no room, after 10 years, and a lot of experience, for a thoughtful retrospective evaluation and revision of the tens of thousands of pages of rules?

Safer?

The most important question, really: Is the system in fact safer, more "resilient," ready to deal with the next crisis, especially if that crisis comes from a new source -- say pensions, student debt, or worst of all, a global sovereign debt crisis?

Ms. Yellen asserts, that yes:

"reforms have boosted the resilience of the financial system. Banks are safer. The risk of runs owing to maturity transformation is reduced. Efforts to enhance the resolvability of systemic firms have promoted market discipline and reduced the problem of too-big-to-fail. And a system is in place to more effectively monitor and address risks that arise outside the regulatory perimeter."

Really? How and why?

"Loss-absorbing capacity among the largest banks is significantly higher, with Tier 1 common equity capital more than doubling from early 2009 to now. The annual stress-testing exercises in recent years have led to improvements in the capital positions and risk-management processes among participating banks. Large banks have cut their reliance on short-term wholesale funding essentially in half and hold significantly more high-quality, liquid assets."

."..Economic research provides further support for the notion that reforms have made the system safer. Studies have demonstrated that higher levels of bank capital mitigate the risk and adverse effects of financial crises. Moreover, researchers have highlighted how liquidity regulation supports financial stability by complementing capital regulation."

Yes! Capital, capital, capital, and the more the merrier. But we don't need ten thousand pages of regulations, nor annual stress tests to just demand more capital. Moreover, just how much capital, and how measured? That alone could have made a good, and quite long, speech.

The rest is less encouraging:

Assets under management at prime institutional money market funds that proved susceptible to runs in the crisis have decreased substantially.

That assets under management have decreased is not a good sign. Money market funds are easy to fix -- float NAV, change to ETF structure, or add equity cushions. Capital and fixing run-prone liability structures substitutes for intrusive asset regulation, a point that seems to be missed entirely.

"Credit default swaps for the large banks also suggest that market participants assign a low probability to the distress of a large U.S. banking firm."

CDS tell us about the probability of an imminent crisis, not about the resilience of banks if one should come.

As the Wall Street Journal notes compactly in response to Ms. Yellen's overall claim of safety

"Banks are safer, but they should be after eight years of modest expansion. The real test of financial stability comes in times of economic stress, when interest rates rise or investors get nervous and rush to safer assets."

Ms. Yellen recognizes the narrow point,

"To be sure, market-based measures may not reflect true risks--they certainly did not in the mid-2000s--and hence the observed improvements should not be overemphasized."

But not, I think, the larger point. All the banks looked perfectly safe to everyone who was looking in 2006, including the Fed. Yes,

"supervisory metrics are not perfect, either."

The big banks passed their regulatory standards through the crisis. So did Lehman Brothers. Ms. Yellen concludes only that

"policymakers and investors should continue to monitor a range of supervisory and market-based indicators of financial system resilience."

Pay attention to a lot of signals none of which indicated the last crisis? And then do what? As the WSJ put it,

"You have to ignore history to believe that regulators are suddenly so wise that they know the current regulatory regime will prevent the next crisis. ... Fed officials Ben Bernanke and Tim Geithner then underestimated the financial risks in early 2008 when the stresses were already apparent."

Ms. Yellen herself, in another context, recognizes the fact

And yet the discussion here at Jackson Hole in August 2007, with a few notable exceptions, was fairly optimistic about the possible economic fallout from the stresses apparent in the financial system.

In a nutshell, just how much better is Ms. Yellen's feeling that the banking system is safe than was Mr. Bernanke's in 2007, and on what basis? More deeply, what justifies her faith, reflecting that in all the regulatory community, that this time, "policymakers" by monitoring "a range of supervisory and market-based indicators of financial system resilience" will see the crisis coming, and do something about it? Shouldn't the screaming lesson of the last crisis be, that we need a resilient system, not clairvoyant "policymakers" (I hate that word) "monitoring" and by implication guiding, the system?

Regulation vs. supervision

That is another huge question going forward -- what is the emphasis on regulation vs. supervision? On rules vs. discretion? On process vs. outcome?

Most people just use "regulation" to mean both things, but the nature of regulation is one of the central issues. Does the Fed set rules of the game, or does the Fed actively tell banks what to do? And is the Fed's "systemic" effort best spent on rules -- more capital -- or on efforts to improve its clairvoyance, see crises before they happen, to monitor the decisions of individual banks and actively take action?

An analogy: The highway patrol, DMV, and department of transportation are in charge of highway safety. By and large they set rules -- drive 55 mph here, and 35 mph there; stop at red lights; freeway lane markers must look so and so. They do not ask, "submit your plan to drive to LA for approval," nor do they put an employee in the back seat to tell you it's time to pull over and rest, as the Fed has over a hundred employees embedded in each big bank. We tend to call both activities "regulation," but "supervision" is a better polite word for the latter. There are many impolite words.

So, the big question: Is the Fed's job to set up stable rules of the game, standards like capital, so that the system is "resilient" on its own? Is it in charge of the fire code, and how many sprinklers and extinguishers are in each house? Or is the Fed's job to be the fire department, spotting fires as they break out, rushing to the rescue, and sending its employees to watch over how you cook dinner?

The view that next time, they will really see it coming, and do something about it, pervades this speech. A small example is faith in the "resolution authority."

"the ability of regulators to resolve a large institution has improved, reflecting both new authorities and tangible steps taken by institutions to adjust their organizational and capital structure in a manner that enhances their resolvability and significantly reduces the problem of too-big-to-fail.

To my mind, the idea that the Fed chair and Treasury secretary will quickly and painlessly "resolve" a big bank, that owes a lot of other big banks money, and that is too complex for bankruptcy court to handle, in the panicked environment of a developing crisis, without a big creditor bailout, is a pipe dream. Really? If you had resolution authority, you would have closed Citi and AIG, forcing losses on creditors?

The Wall Street Journal agrees with the general rules vs. discretion view:

"That’s one reason to support a financial regime with high levels of capital to defend against potential losses but with less regulatory micro-managing."

More deeply, it charges

"Fed officials are launching a political campaign to retain their vast discretionary control over the American financial system."

I think that's a bit harsh and unduly conspiratorial. The government and chattering classes pretty much asked the Fed to become the great financial dirigiste, the Fed fills the role uncomplainingly. One slips into discretionary financial dirigisme naturally and slowly. Fed officials live largely in an international bubble of self-described "policy makers", where the idea that central banks should actively direct all facets of the financial system is just taken for granted. But however one views the motivation, the outcome is the same.

Macro-Prudential Policy

This buzzword really captures that big question going forward. Interest rates will be stuck low for a while, and appear increasingly ineffective. Central banks are the giant discretionary financial regulator, making little distinction between sit-back-and-make-rules vs. decree actions and outcomes. Surely, then, regulation, supervision, and policy activities should merge. When a little "stimulus" is needed, just tell banks to lend, or push up some asset prices. If a "bubble" is diagnosed, tell them to cut back, tighten regulations, sell some assets.

A tiny but revealing item on this agenda came my way last month at the excellent Stanford SITE conference. (I hope to review some of the other papers later.) This little story helps to explain the mindset in the bubble, and how one does not need to see politicization to see how the Fed slips in to financial dirigisme. Marco DiMaggio presented "How QE works: Evidence on the Refinancing Channel." (Paper with Christopher Palmer and Amir Kerman). They found that when the Fed purchased mortgage-backed securities in QE, that funded lots of cash-out mortgage refinancing, and then people spent the money. Stimulus!

OK, that seems like a reasonable though unanticipated effect of the policy. Then, their policy conclusions:

Overall, our results imply that central banks could most effectively provide unconventional monetary stimulus by supporting the origination of debt that would not be originated otherwise.

...it appears preferable for LSAPs to purchase MBS directly instead of Treasuries during times when banks are reluctant to lend on their own. Related, central-bank interventions could be more effective by providing more direct funding to banks for lending to small business and households.

You see the natural progression. A financial market intervention by the Fed has an effect on the economy. Ergo, the Fed should get ready to use it next time. FOMC discussions previously about the path of interest rates now should include "if we buy some MBS, we can get people to cash out refi, and buy new cars."

I don't mean to pick on Marco and coauthors. This is one sentence of an otherwise excellent paper. Had they written "could" instead of "should" I would have no objection. Their paper is not about constitutional questions of central banking!

My point: this kind of thinking pervades the policy-maker bubble. Hundreds and hundreds of papers find that the central bank can affect this or that by buying securities, changing bank regulations, changing financial regulations. They, and conference participants, segue into "policy conclusions" that central banks should use this dandy new tool. Practically nobody stops to ask, just because the central bank can affect the economy through its regulatory or asset purchase powers, should it do so? The question, "do we really want an independent central bank routinely dialing up and down levers of cash-out refinancing, with an eye to raising or lowering stimulus" just never occurs to anyone.

That constitutional question is the big one we all should be asking as central banks move to financial regulation and discretionary supervision. Ms. Yellen could have asked it. We seem to have this new power to direct the financial system. Do you really want us to use it? She did not. That's not surprising. Essentially nobody inside the central banking bubble asks this question. It's not "political" in the WSJ sense, though any large discretionary power will soon be politicized. (Many central banks around the world allocate credit to politically popular constituencies.)

What's systemic anyway?

Just what is a "systemic" crisis anyway? That would seem to be a foundational question that a Fed chair should weigh in on, and Ms. Yellen writes (as usual for the policy-maker world) as if we all knew exactly what it is. Yet the answer is decidedly muddy.

It bears on policy. For example. right now, there is a movement around the world to declare that asset managers are systemic dangers. How is that possible? The manager buys and sells your stocks. If he or she invests in a stock and it goes down, you can't demand your money back; you can't run, you can't force the manager into bankruptcy. Shouldn't asset managers get a non-systemic gold star, for not issuing run-prone securities? Well, the story goes, they might "herd" or be prone to "behavioral biases," and, heaven forbid, sell stocks, which might go down. I guess, and a hyper-leveraged bank might get in trouble (despite all of Ms. Yellen's assurances)? "Financial stability" now seems to mean nobody should ever sell anything and stocks should never go down. Except we want lots of "liquidity" so people can sell things fast (to who?) in a crisis...The intellectual quicksand is rising fast.

Are insurance companies "systemic?" Are retirement plans "systemic?" Just who gets saved when?

What is a crisis anyway? Is it just a bunch of bankruptcies? What is the nature of "contagion?" Is it dominoes -- A fails, A owes B money, B fails? Is it (my view) a run -- A fails, so people question B and pull out run-prone assets? The system seems to handle even big bankruptcies fine at sometimes, and not at others. What makes those times different? How do you "resolve" in a crisis?

Ms. Yellen points to "liquidity" being a problem in a crisis, and her Fed now encourages institutions to have lots of "liquid" assets to sell in the event of losses. But to who? Isn't there something deeply wrong about a system in which everyone's risk management plan is to sell assets in the event of price declines?

Ms. Yellen's account of the crisis, though a nice capsule history, is not at all insightful on this point. She speaks of "liquidity" and "solvency" and "vulnerabilities." But moving from what happened to why, she writes only a familiar story of behavioral excess -- much of it, curiously, squarely blaming past central bankers, though cloaked in passive voice -- with no mention of mechanics. Yet her job is to fix the machine, not to wish for smarter people

"Financial institutions had assumed too much risk, especially related to the housing market, through mortgage lending standards that were far too lax and contributed to substantial overborrowing. Repeating a familiar pattern, the "madness of crowds" had contributed to a bubble, in which investors and households expected rapid appreciation in house prices. The long period of economic stability beginning in the 1980s had led to complacency about potential risks, and the buildup of risk was not widely recognized. As a result, market and supervisory discipline was lacking, and financial institutions were allowed to take on high levels of leverage. This leverage was facilitated by short-term wholesale borrowing, owing in part to market-based vehicles, such as money market mutual funds and asset-backed commercial paper programs that allowed the rapid expansion of liquidity transformation outside of the regulated depository sector. Finally, a self-reinforcing loop developed, in which all of the factors I have just cited intensified as investors sought ways to gain exposure to the rising prices of assets linked to housing and the financial sector. As a result, securitization and the development of complex derivatives products distributed risk across institutions in ways that were opaque and ultimately destabilizing."

That's not an encouragingly insightful description of what's wrong with the machine. And when you read it, if it's all "madness of crowds", including (admirably) madness of regulators, there is absolutely nothing in the new regime to stop it from happening again.

A last nice word.

If Ms. Yellen is not reappointed, will her successor do better? Well, that depends who it is, of course, but parts of the speech show just how high that bar will be.

The speech is detailed, and knowledgeable. In most of her points, Ms. Yellen makes deep contact with academic literature, much of it conducted at the Fed. As our leaders consider whether she should continue or who and what kind of person should replace her, this is worth keeping in mind. A banker or professional policy type is unlikely to be able to assimilate this wide resource thoughtfully and critically.

Now, academic economics doesn't have a great popular image these days, and you may react, "so much the better if our next Fed chair doesn't listen to a bunch of pointy-headed geeks." I think the pointy-headed geeks have got a lot of things wrong too, and tend to write papers that please the upper echelons. I disagree with much of the literature she cites. But this is the expertise we have. A thousand well-trained minds thinking about the issues, and absorbing the facts we have, is better than none.

While we may wish for a Fed chair, or a president, or any other leader, with a great "gut instinct" and "experience," the history of the Fed shows that just about every major disaster has been one of wrong gut instincts and misleading experience. America works with great institutions that guide imperfect and sometimes mediocre people, not by hoping for wiser aristocrats.

Moreover, Ms. Yellen knows to be skeptical. When staff come in with a model or regression that shows this or that, she knows where the bodies are buried. Though I have made fun of the academic-policy-maker bubble, someone too far outside of the bubble will either be bamboozled by the BS or unaware of the wisdom. Neither is good.

Good bankers know how to run banks, but not a banking system. Things that are great for a bank -- more leverage, less competition, more bailouts -- are not so good for a banking system. Good political appointees know about politics and policy, but are not likely to answer my questions with any more clarity, and also to be befuddled by the confusing issues. Yes, economists don't understand "systemic" and "liquidity" and "contagion" very well. But practitioners, even those who know how to make money on them, understand their mechanisms even less.

A good Fed chair needs a deep, yet skeptical knowledge of Ms. Yellen's footnotes, together with lessons of experience, a deep knowledge of financial and economic history, and now an understanding of financial economics and the economic, legal, and institutional architecture of the financial system, along with the ability to run a sprawling institution, political acumen, and that ineffable characteristic, wisdom.

Paid Research Experience Posts

Posted by Economist Channel on Monday, August 28, 2017 Label:

There is an opportunity for paid research experience assisting the development of the behavioural science and policy research group at UCD working with Professor Liam Delaney. Tasks include those below. Please note these are temporary positions and we also will advertise longer term positions as they arise. The typical duration will be one day per week for up to 12 weeks, with pay varying from 11 euro to 14 euro per hour depending on experience. Please send your CV to Emma.Barron@ucd.ie The posts would be particularly suited to economics and psychology graduates with a high degree of research aptitude and interest.

a) Assisting with events and social media relating to the research activities of the group, including minuting the weekly meetings.

b) Assisting in the background research on a book on the history of economics and psychology

c) Assisting in the development of a measurement methodology for examining decisions in everyday contexts.

d) Assisting in the background research for the development of an ethics framework for behavioural public policy.

e) Assisting on projects in the areas of health, environment, and education.

f) Assisting on the development of research funding proposals in the area of behavioural public policy

Behavioural Science and Public Policy Launch

Posted by Economist Channel on Tuesday, August 15, 2017 Label:

On September 8th, we will host a one-day workshop to launch our new programme on behavioural science and public policy at UCD Geary Institute for Public Policy. The programme is based at the Institute and works in conjunction with colleagues at the UCD School of Economics and College of Social Sciences and Law. The sign-up page for the event is here. The event will take place from between 9am and 430pm. Our keynote speaker will be Professor Peter John from UCL.

Event Programme

9am to 930am: Registration, and Welcome

930am to 1045am: Presentations on Measurement in Behavioural Science and Policy

Lucie Martin (UCD): "Naturalistic Monitoring and Behavioural Public Policy".

Liam Delaney (UCD ): "Results of Nationally Representative Survey of Well-Being and Consumer Decisions"

1045am to 1115am: Coffee

1115am to 1230pm: Presentations on Economic Behaviour and the Lifecycle

Michael Daly (UCD and Stirling): "Self-Control, Economic Outcomes, and Well-Being Across Life"

Orla Doyle (UCD): "Early Intervention and School Outcomes"

1230pm to 130pm: Lunch

130pm to 245pm: Presentations on Ethics and Public Policy

Pete Lunn (ESRI): "Behavioural Economics and Regulation in Ireland"

Leonhard Lades (UCD and EnvEon): "Behavioural Science, Ethics, and Public Policy"

3pm to 430pm: Launch and Keynote Speaker Professor Peter John. " How Far to Nudge?: Behavioural Economics and Public Policy".

See below for details of our new initiative:

Research

- A behavioural science research centre based in the UCD Geary Institute of Public Policy around three main clusters of activity: measurement of economic behaviour; life-cycle models of economic behaviour; ethics of behavioural science policy. The development of these three key themes reflects the importance of a coherent measurement and ethical basis for policies based on behavioural economic ideas. Key workshops and kick-off meetings, along with funding opportunities, to develop these three areas will be announced here in due course.

- Widespread national research collaborations with other universities, public, and private bodies. Continuation of annual conference in this area to further promote whole-island network development. Programme for last year’s workshop available here (http://economicspsychologypolicy.blogspot.co.uk/2016/07/9th-annual-irish-economics-and.html).

- Development of a cohort of full-time and part-time PhD students and postdoctoral researchers in this area based at the Geary Institute. ERC, IRC, and other Irish and European peer-reviewed funding sources will be the key method of financing the development of this cohort.

- Development of a European network on behavioural science, policy and ethics based in Dublin. The likely funding source for this will be either a COST or Marie-Curie application during the 2018 funding rounds.

- Development of a full plan for an Irish Centre for Behavioural Science and Public Policy to be funded from external sources within the first three years. The potential, in particular, for a bid to the SFI strategic research clusters initiative is one feasible strategy for this but other alternatives are being actively considered.

Teaching and Training
- An MSc in Behavioural Economics based in the UCD School of Economics. Widespread collaboration and module sharing with Psychology, Law, and other disciplines.

- Development of an undergraduate summer research internship programme based at Geary.

- Development of a series of executive education classes in behavioural economics aimed at regulators, executives, and policy-makers.

- Masterclasses in microeconometrics, behavioural economics, and statistics for graduate students and professional researchers.

- Regular seminars, reading groups, and workshops.

Industry and Policy Linkages
- A new AIB-UCD hub for research into consumer decision making. This new hub, funded by AIB, will explore the development of new ideas in the financial decision-making domain and their potential to lead to more active financial markets in Ireland. We will conduct several research projects on consumer financial decision-making and host workshops in this area in Dublin.

- Collaboration with Irish policymakers to develop the integration of behaviourally-informed ideas into Irish public policy.

- Collaboration with EnvEcon to develop the role of behavioural economics in environment policy decision making in Ireland.

- Collaboration with ESRI to develop the area of behaviourally-informed regulation in Ireland.

- Collaboration with Amarach Research to develop a range of studies with practical relevance to Irish businesses and policy-makers.

- Collaboration with Carr Communications to develop a number of applications of behavioural economics in the context of communications interventions in key policy contexts.

Knowledge Exchange and Impact
- Further development of the activities of the Irish Behavioural Science and Policy Network (http://www.irishbspn.org/).

- Development of the economics, psychology, and policy blog to further act as a widely used resource. (http://economicspsychologypolicy.blogspot.co.uk/).

- Collaboration with policy-makers to promote best practice in design and evaluation of behaviourally-informed public policies.

Stirling Workshop on Self-Control and Public Policy September 15th

Posted by Economist Channel on Friday, August 11, 2017 Label:

Please click here to register. Registration is free but spaces are limited so please register in advance.

Stirling Workshop on Self-Control and Public Policy (Friday, September 15th)

Self-control is the human capacity that enables people to control short-term impulses and desires in order to achieve long-term goals. This workshop brings together different perspectives in order to outline the implications of self-control for a range of policy issues spanning the areas of health, education, labour, and welfare policy. The speakers combine theoretical and methodological approaches from economics and psychology in novel ways to generate new approaches to policy problems, move forward in affecting change in these problems, and further uncover the policy implications of self-control.

Themes that will be discussed at the workshop include:

- Measurement of self-control for policy research.
- Capitalising more fully on the information collected in large-scale government surveys to

understand the development of self-control and its lifespan implications.
- Economic, health, and welfare consequences of different degrees of self-control.

- The effectiveness and scalability of interventions to improve self-control.

- Understanding self-control in the context of everyday life and social interactions.

- The relationship between environmental cues, 'nudge' interventions and trait self- control.

Event Programme

08.45-09.15: COFFEE

09.15-09.30: Opening and Registration

09.30-10.00: Ailbhe Booth (UCD) Examining disciplinary perspectives on self-regulation

10.00-10.30: Terry Ng-Knight (UCL) Predictors of self-control during childhood

10.30-11.00: Michael Daly (Stirling) Lifespan outcomes of childhood self-control

11.00-11.30: COFFEE

11.30-12.00: Conny Wollbrant (Stirling; Gothenburg) Time preferences and cross-country resource use

12.00-12.30: Claudia Cerrone (Max Planck, Bonn) Doing it when others do: a strategic model of procrastination

12.30-13.00: Julius Frankenbach (Saarland University) Does self-control training improve self-control? A meta-analysis

13.00-14.00: LUNCH

14.00-14.30: Leonhard Lades (UCD, EnvEcon) Self-control in everyday life

14.30-15.15: Esther Papies (University of Glasgow) Situating interventions to bridge the intention-behaviour gap: The case of healthy eating

15.15-15.30: COFFEE

15.30-16.15: Denise de Ridder (Utrecht University) Self-control, nudging, and health

16.15-17.00: Panel Discussion

On Climate Change

Posted by Economist Channel on Monday, July 31, 2017 Label: Commentary , Environment , Politics and economics , Regulation , Taxes

David Henderson and I wade in to perilous waters in the July 31 Wall Street Journal. We try to stake out a different and more productive conversation than the usual shouting match between alarmists and deniers.

Climate change is often misunderstood as a package deal: If global warming is “real,” both sides of the debate seem to assume, the climate lobby’s policy agenda follows inexorably.

It does not. Climate policy advocates need to do a much better job of quantitatively analyzing economic costs and the actual, rather than symbolic, benefits of their policies. Skeptics would also do well to focus more attention on economic and policy analysis.

As usual, I have to wait 30 days to post the whole thing.

As economists, we both have a healthy skepticism of large computer based forecasting models. The famous 1972 club of Rome forecast that we would run out of resources, and the grand failure of large scale Keynesian models in the late 1970s are two humbling examples. The "climate" models also feature a lot of questionable economics. A crucial question -- how much carbon will the world's economies add on their own, without Paris-accord policies? That's economics, very questionable economics, and not meteorology.

That said, however, the point of the oped is to try to shift the debate away from climate science and mixed climate-economic computer models. Stop arguing about climate, and let us instead investigate costs and benefits of policies. That strikes us as a much more fruitful place for discussion. If you are wary of the climate policy agenda, the costs and benefits of those policies are more fertile ground for discussion than the science of carbon emissions and atmospheric warming. If you only argue about the climate, then you implicitly admit that if the models are right about climate, the whole policy agenda follows. Do not admit that point. They may be right about climate and wrong about policy.

In California, it is seriously suggested that the way to get more water is to build a high speed train, which will save carbon, which will cool the earth, which will... actually, it goes the other way, but never mind. To address an argument like that, you should not get dragged in to whether human-released carbon warms the planet. A simple dollars per ton and tons per inch of water would do.

If it is not clear enough, nothing in this piece takes a stand on climate science, either affirming or denying current climate forecasts. I will be interested to see how quickly we are painted as unscientific climate-deniers. Shifting a politicized debate is hard. That is, if anyone pays any attention.

A few other choice bits:

Global warming is not the only risk our society faces. Even if science tells us that climate change is real and man-made, it does not tell us, as President Obama asserted, that climate change is the greatest threat to humanity. Really? Greater than nuclear explosions, a world war, global pandemics, crop failures and civil chaos?

No. Healthy societies do not fall apart over slow, widely predicted, relatively small economic adjustments of the sort painted by climate analysis. Societies do fall apart from war, disease or chaos. Climate policy must compete with other long-term threats for always-scarce resources.

As something of a conservative libertarian, I do worry about the end of western civilization and our society falling apart. And I worry about the natural environment as part of that. Still, slow warming in the next two centuries, and a sea level rise (much smaller than the one that happened a mere 10,000 years ago), while a worry, is not obviously the top worry.

Global warming is not even the obvious top environmental threat. Dirty water, dirty air and insect-borne diseases are a far greater problem today for most people world-wide. Habitat loss and human predation are a far greater problem for most animals. Elephants won’t make it to see a warmer climate. Ask them how they would prefer to spend $1 trillion—subsidizing high-speed trains or a human-free park the size of Montana

I'm also something of an environmentalist, with a soft spot for people living in terrible conditions and for the awful permanence of species extinction. Starting with wooly mammoths.

The Intergovernmental Panel on Climate Change’s “scientific” recommendations, for example, include “reduced gender inequality & marginalization in other forms,” “provisioning of adequate housing,” “cash transfers” and “awareness raising & integrating into education.” Even if some of these are worthy goals, they are not scientifically valid, cost-benefit-tested policies to cool the planet.

When I read the IPCC report, starting on p. 26, I had to check that I was not unintentionally reading The Onion. We cut for space. A longer list (from that p. 26) of the IPCC's policy ideas

Reduced gender inequality & marginalization in other forms…. Improved access to & control of local resources; Manipulation of disturbance regimes; Community-based natural resource management…. Provisioning of adequate housing,… Micro finance; Disaster contingency funds; Cash transfers; Public-private partnerships…Patent pools & technology transfer…: Awareness raising & integrating into education; Gender equity in education; Extension services; Sharing indigenous, traditional & local knowledge; Participatory action research & social learning; Knowledge-sharing & learning platforms… behavioural shifts, or institutional & managerial changes that produce substantial shifts in outcomes. (under”practical” subheading) Individual & collective assumptions, beliefs, values & worldviews influencing climate-change responses.

Again, you do not have to get deep into cloud modeling and ice melt feedback loops to wonder if all of this list necessarily follows. And, for the record, I have no qualm with lots of this list. Gender equality and equity in education? Improved access to resources? Who can object? But this is supposed to be about effective policies to cool the planet, not a grab bag of things that would be nice. (I do have qualms with a lot of the list, of course. It's a rather Orwellian and statist vision. "Public-private partnerships" characterizes much of contemporary Russia.)

I like our last paragraph.

Climate policy advocates’ apocalyptic vision demands serious analysis, and mushy thinking undermines their case. If carbon emissions pose the greatest threat to humanity, it follows that the costs of nuclear power—waste disposal and the occasional meltdown—might be bearable. It follows that the costs of genetically modified foods and modern pesticides, which can feed us with less land and lower carbon emissions, might be bearable. It follows that if the future of civilization is really at stake, adaptation or geo-engineering should not be unmentionable. And it follows that symbolic, ineffective, political grab-bag policies should be intolerable.

For the record, I favor a uniform carbon tax in place of all the other direct energy regulations and subsidies. (A neighbor just showed me his electric car, purchased in addition to a regular car, for one reason only: you can ride it solo in the HOV lane, a right worth thousands in California.) The rate on such a tax can be raised or lowered as politics and science see fit. If we're going to do something, and if the health of the economy is a prime consideration, then we must do something economically efficient. (David disagrees, but he can explain his views in his own blog.) As I favor a uniform VAT in place of the idiotically complex income and corporate tax system. I recognize the essential failure of our political system to enact simple transparent reforms, but that's a question for another day.

I do think there is hope however. A while ago I went to a meeting organized by the Niskanen Center bringing together free-market and libertarian types with some large environmental organizations. The environmentalists were concerned about climate change, understand that feel-good policies (like the subsidy for my neighbor's car) aren't going to slow down climate change, and will suck resources away from policies that could. The free marketers were largely a bit skeptical about just how much of a threat climate change is, but appalled at the inefficiency of IPCC style regulations. There is a deal to be had -- we'll do something efficient and effective (say, a carbon tax) in return for eliminating the junk. We can agree to disagree about the level of that tax. My sense is that environmental groups are not ready to say this in public, for fear of angering allies who want to use the environmental label for a grab bag of policies (see IPCC list!), and the libertarians and free market types don't trust the "get rid of" rather than "in addition to" everything else part of the bargain. But there is a bargain to be made, and strong political leadership could bring it about.

(By the way, we didn't choose the figure caption. We know that Rotterdam is not prone to floods. Much of it is below sea level, and Miami is 9 feet above sea level.)

Update: Ian Martin and Bob Pindyk have a classy AER paper on the subject of "insurance" and multiple potential catastrophes. They go beyond our point -- if you buy overpriced insurance for each catastrophe you exhaust GDP quickly -- and consider the general equilibrium interactions. Catastrophes affect marginal utility a lot, so when you insure against one you change the state-contingent valuations of another. Evaluating policies in isolation is doubly bad.

Thornton on interest rate humility

Posted by Economist Channel on Wednesday, July 19, 2017 Label: Economists , Inflation , Monetary Policy

Dan Thornton has an interesting essay, ``The Limits of Monetary Policy: Why Interest Rates Don’t Matter.’’

Just why do we think that the Fed raising and lowering interest rates has a strong effect on output (or inflation)? Just why does the Fed control short-term interest rates rather than the money supply, or something else?

Dan's essay is a nice quick tour through the history of this question. No, there is not as much logic and evidence behind this hallowed belief as you might think, and yes, people did not always take the power of interest rates for granted as they seem to do now. Dan's historical tour is worth keeping in mind.

This question is especially relevant right now. We are unlikely to see big changes in interest rates going forward. And central banks are busy thinking of different things to control -- the size of the balance sheet; treasury, MBS, corporate bond, and even stock purchases; use of regulatory tools to control lending. So we may be on the cusp of a fairly major change in thinking about what central banks do -- what their primary tool is -- and how that tool affects the economy. (And, I hope, whether it is wise for central banks to use new tools that come along. Their mandate is not to be the great macroeconomic-financial planner after all.)

As Dan points out,

it is a well-known and well-established fact that interest rates are not very important for investment, or for spending decisions generally.

Quoting Bernanke and Gertler

… empirical studies of supposedly “interest-sensitive” components of aggregate spending [fixed investment, housing, inventories, and consumer durables] have in fact had great difficulty in identifying a quantitatively important effect of the neoclassical cost- of-capital variable [interest rates].

That is by and large true. But I see an alternative breaking out. Investment is strongly influenced by stock prices, by the risk premium in the cost of capital. The total cost of capital is risk premium plus risk free rate, and the risk premium varies much more than the risk free rate.

Here is the latest version of a graph I've made several times to emphasize this point. ME/BE is the market to book ratio of the stock market, or "Q.'' P/(20xD) is the ratio of price to 20 x Dividends. IK is the ratio of investment to capital.

Investment responds to the stock market, and the stock market moves because risk premiums move, not because interest rates move.

The "alternative" then is the increasing amount of attention paid to the Fed's effect on stock and corporate bond prices, together with evidence like this that investment responds to risk premiums in stock and corporate bond prices.

I am a long-time skeptic of the stories that say low levels of interest rates encourage asset price "bubbles." After all, borrowing at 1% and investing at 5% is the same as borrowing at 5% and investing at 9%. Why should the level matter to the risk premium? But those stories are repeated more and more often (like the story about interest rates!) So overall, what may break out is a story that the central bank can influence risk premiums-- this needs segmented markets, leveraged intermediaries, and other financial frictions, modern heirs to the "credit channel"-- and risk premiums influence investment. Macro-finance is full of this sort of analysis right now.

I recoil at the idea that central banks should start operating this way -- targeting risky asset prices, using a range of tools to do it, and thereby trying to control investment spending. Central planners can set prices too, but that doesn't mean they should. But this may be where the world is going.

Now, back to Dan. After reminding us that consumption and investment spending does not respond (much) to interest rates, Dan's intellectual history. (Excerpts here, the original is worth reading)

“So why do policymakers believe that monetary policy works through the interest rate channel and that monetary policy is powerful?” Well, there was one important event that brought economists and policymakers to this conclusion. Specifically, the Fed under Chairman Paul Volcker brought an end to the Great Inflation of the 1970s and early 1980s.

Prior to this event, Keynesian economists … believed that monetary policy was totally ineffective. “Why?” Keynesians believed that the only thing monetary policy could affect was interest rates. Since interest rates were not important for spending, the effect of monetary policy actions on interest would have essentially no effect on spending and, consequently, no important effect on output. Keynesians believed that monetary policy was essentially useless.

There was a smaller group of economists called monetarists who believed that monetary policy could have a large effect on output. But they believed this effect was due to the effect of monetary actions on the supply of money, not interest rates. Both Keynesians and monetarists believed that the effect through the interest rate channel would be tiny.

It's worth remembering that the power of pure interest rate changes is a recent idea. Separately,

Bernanke and Blinder find that monetary policy works through the bank credit channel of monetary policy—not through interest rates. However, … because banks have financed most of their lending by borrowing funds from the public since the mid-1960s, it is unlikely that the bank credit channel is important. …It is now well-recognized that the bank credit channel of monetary policy is very weak.

I'm not sure Bernanke and Blinder (as well as other fans) agree with the last sentence, but the bank lending channel has always suffered the problem that 1) Fed actions have little effect on lending -- as Dan mentions, reserve requirements really don't bite 2) Only very small businesses really rely on bank lending. There are lots of them, but not much GDP.

So how did belief in the power of interest rates come about?

When he became chairman of the Fed, Paul Volcker made ending inflation the goal of policy. … He announced that he wanted to pursue a new approach to implementing monetary policy that “involves leaning more heavily on the [monetary] aggregates in the period immediately ahead.” …it seems to have worked. Inflation declined from its April 1980 peak of 14.5% to about 2.4% in July 1983….The policy change was also followed by back-to-back recessions…. the fact that the change in policy was followed by a marked reduction in both inflation and output led economists and policymakers to dramatically change their view about the power of monetary policy to effect output and inflation.

…economists debated whether the success of the Volcker’s monetary policy was due to a marked reduction in the supply of money or to higher interest rates. But the growth rate of M1 monetary aggregate changed little over the period. Moreover, the growth rate of M2 actually increased. In contrast, the federal funds rate, which was 11.6% the day the FOMC changed policy, increased to a peak of 17.6% on October 22, 1979. The funds rate then cycled, hitting cyclical peaks above 20% in late 1980 and mid-1981. Given the behavior of the M1 and M2 monetary aggregates and the behavior of the federal funds rate during the period, a consensus formed around the idea that the success of Volcker’s policy was attributable to high interest rates not to slow money growth.

Like the Phoenix, the idea that monetary policy worked through the interest rate channel rose from the ashes. … the FOMC adopted the federal funds rate as its policy instrument in the late 1980s, circa 1988. … Policymakers pay essentially no attention to monetary aggregates…

And academic analysis of monetary policy is focused entirely on interest rates. Dan doesn't mention new-Keynesian models, but they epitomize the current thinking. The Fed sets interest rates, with no money at all, and higher interest rates induce people to spend less today and more tomrrow.

The problem is that nothing else changed. There have been no new studies showing that spending is much more sensitive to changes in interest rates than previously thought. … Bernanke and Gertler’s statement that monetary policy does not work through the interest channel is as true today as it was 20 year ago. What has changed is economists’ belief that monetary policy works through the interest rate channel. … economists’ and policymakers’ belief that monetary policy has strong effects on output through the interest rate channel is more akin to religion than to science. It is built on a belief that it seems to have worked once.

This belief is reinforced by fact that few economists believe that policy could work through any of the other possible channels of policy: the exchange rate channel, the wealth effect channel, the money supply channel, or the credit channel. Monetary policy seems to work, but it cannot work through any of these other channels. Conclusion: it must work through the interest rate channel.

Quoting Alan Greenspan

We ran into the situation, as you may remember, when the money supply, nonborrowed reserves, and various other non-interest-rate measures on which the Committee had focused had in turn fallen by the wayside. We were left with interest rates because we had no alternative. … – Alan Greenspan, FOMC Transcript, July 1-2, 1997, pp. 80-81.

Where does this leave us? In the short run, the fact remains. We have no alternative. If I were to wake up as Fed chair tomorrow, I'd move the interest rate levers just about the same way as anyone else does. In the short run, I think these reflections should add to our humility -- we really don't understand the mechanism as well as most analysis suggests, and a new idea will come sooner or later.

In the longer run, those new ideas seem to be breaking out. Central banks, increasingly gargantuan financial regulators, are using a wide range of tools to influence the economy via asset prices. In my own view this is a bad idea. But like most bad ideas it is slipping in sideways largely un noticed.

UCD Post-Doctoral Research Fellow Position in Behavioural Economics

Posted by Economist Channel on Label:

See below for an excellent opportunity to work with our colleague Suzanne Kingston and her team. UCD Post-Doctoral Research Fellow Level 1 or Level 2, UCD School of Law (Temporary Maternity cover) - Economics/Psychology/Environmental Governance
Applications are invited for a temporary postdoctoral researcher, UCD Sutherland School of Law. The successful candidate will be offered a fixed-term contract to provide maternity cover for a European Research Council Project until 20 April 2018. This is an exciting opportunity to play an important role as a postdoctoral researcher, as part of a cutting-edge project investigating the way that laws influence our decisions to engage (or not to engage) in environmentally compliant behaviour in Europe. Funded by the European Research Council, you will be the postdoctoral researcher on the project, and will form part of an interdisciplinary international team of six people, comprising Professor Kingston, 3 Ph.D. students, a research assistant and the postdoctoral researcher. This appointment may be made at either Post-Doctoral Research Fellow Level 1 or Level 2 depending on the relevant experience and qualifications of the successful candidate. Closing Date: 17:00hrs (Local Irish Time) Tuesday 25th July 2017. For further details please visit https://www.ucd.ie/hr/jobvacancies/ (see vacancy number 009518)

Ray of hope update

Posted by Economist Channel on Thursday, July 13, 2017 Label: Commentary , Health economics

The July 13 Wall Street Journal editorial updates yesterday's ray of hope.

One remaining debate is over Ted Cruz’s “freedom option.” The Texas Senator’s amendment says that any insurer that offers at least one ObamaCare-compliant plan could also sell other types of coverage off the exchanges. The expectation is that a more competitive and dynamic insurance market will emerge outside of ObamaCare. Released from federal mandates and price controls, insurers could offer many more innovative products designed for individuals, rather than standardized coverage planned in Washington.

Mr. Cruz acknowledges that insurance markets could “segment,” meaning that younger and healthier people would gravitate to the Cruz option, where premiums are likely to be much cheaper. Older people with more health expenses would remain on ObamaCare, which bars insurers from charging higher premiums based on health risks and bans exclusions for pre-existing conditions.

The logic of the Cruz proposal is that there is a rough consensus among Republicans that government should guarantee access to coverage for people with pre-existing conditions. In that case, government should pay for this guarantee, in the form of a de facto high-risk insurance pool, rather than hiding the cost in cross-subsidies imposed on private citizens.

The virtue of this approach is transparency and honesty. In a bifurcated market, premiums would be much higher for ObamaCare plans. But they’d be offset for consumers by much higher federal subsidies that rise with premiums...

So, the solution envisioned yesterday could actually emerge. The exchanges become what they already are -- places to get subsidies. Where you go to sign up for medicare, income-based premium subsidies, and so on. [The "rough consensus" really is not all that much about preexisting conditions. It is about subsidies based on income and age.] The rest of the market can be free.

It's not perfect. If we "bifurcate," just why should insurance companies have to offer an exchange policy? You can smell a cross subsidy from off exchange to on-exchange already, together with restrictions on competition to enforce that cross subsidy.

Will the off exchange policies offer guaranteed renewability, portability from state to state, and portability into and out of employment? Not yet, I think, but that's where they need to go.

The WSJ emphasizes preexisting conditions, but let's make a distinction between people with preexisting conditions right now, the day after Obamacare destroyed the individual market, and people who get conditions next year that become preexisting the year after that.

If the point of exchanges is to be high risk pools forever, for anyone who in the future develops a preexisting condition as the WSJ seems to envision, then Sen. Cruz free market idea will be very weak. It will offer people one year worth of cheap insurance, and then the minute anyone gets actually sick they transition to subsidized insurance.

The combination of free market and exchange has to be designed to keep people out of the exchanges. The previous limits on signing up for people who, starting a year from now, do not have continuous coverage, go a step in that direction. You want people to buy health insurance not so much for this year's expenses, but for the right to be covered next year if they develop a preexisting condition, and then to stay with their individual policies.

Yes, people who have preexisting conditions now cannot jump in to the market, because the market doesn't exist. But that does not mean that subsidized exchanges should forever be an absorbing state for anyone who gets sick or old. Which is all of us.

Still, the outlines of subsidies for those who need them, and freedom for the rest of us, seems to be on the table.

Update:

Or maybe not. Mike Cannon writes there will be price controls on the "free" market alternative, linking them to exchange policies. Together with a requirement to offer exchange policies, this looks just like a small broadening of exchange policies, cross subsidies intact. Since the exchange policies are specific to counties, I can't see how this is portable across even county lines, let alone state lines, guaranteed renewable, and so forth.

A ray of health insurance hope

Posted by Economist Channel on Tuesday, July 11, 2017 Label: Commentary , Health economics , Politics and economics

Kristina Peterson, covering the senate health bill in in the July 11 Wall Street Journal reports a ray of hope for our legislative and policy process:

“If we’re going to subsidize Americans who can’t afford health insurance, do it directly. Don’t do it through the premiums of others,” said Sen. Jeff Flake (R., Ariz.)

Few wiser words were spoken.

Our government wants to subsidize some people's health insurance -- poor, sick, old, disabled, veterans, children, people with specific diseases, and so on. And, in many cases, rightly so. But our politics are allergic to "tax and spend." So, we hide it -- we force some people to buy overpriced insurance to subsidize others.

It is financially completely equivalent to taxing and spending. To those who don't want "taxing and spending," you are fooling yourself by allowing cross subsidies instead.

Except it's far more damaging to the economy than the disincentives of broad-based taxation.

Cross-subsidies cannot stand competition.

If competition and free entry are allowed, insurers offer policies tailored to the wealthy, healthy, young, able-bodied, etc., and peel them off from the cross-subsidy scheme. The equivalent tax and spend can simply say, here is a voucher, go buy health care and insurance from an innovative, competitive, dynamic, cost conscious markets.

A health care and insurance market that subsidizes certain groups cannot be competitive. Then costs spiral, then health care and insurance are even more "unaffordable," then the need for subsidies is greater, the overpriced insurance rises to ridiculous costs, and people need to be herded ever more reluctantly into the system.

Peterson's reporting neatly captures this lovely revelation.

The biggest sticking point in recent days has centered on a provision supported by GOP Sens. Ted Cruz of Texas and Mike Lee of Utah that would allow insurers that sell plans complying with ACA regulations to also sell health policies that don’t.

Well, that sounds sensible, no? Why ban competition and innovation in health insurance? Whatever happened to selling insurance across state lines anyway? Well,

Health analysts say that would likely lower premiums for younger, healthier people, who would buy more limited policies, while causing premiums to rise for people with pre-existing conditions, who would buy the more comprehensive plans that comply with the ACA.

And

“His proposal would lead to unaffordable rates for people with pre-existing conditions,” Ms. Collins said Monday of Mr. Cruz’s proposal.

Cross subsidies cannot stand competition.

Senator Flake has it right. We are at a crossroads. America can choose to acknowledge the extent of subsidies we wish to have in our health care system, and forthrightly tax people to provide subsidies, transparently, on budget, where we can see what we're doing, and allow a vibrant competitive health care and insurance market to emerge -- or we can continue the cross-subsidy / anti-competition spiral to its inevitable denouement.

The Cruz/Lee/Collins/Flake debate hopefully makes that choice abundantly clear. That this little bit of freedom -- you're allowed to sell off-exchange policies again -- cannot be tolerated ought to make the choice so clear, so stark, so simple that perhaps they will all see that "muddle through" is at an end.

Michael E. C. Moss puts it well in a related blog post,

the obvious compromise, the only good solution, is to do both: free-market pricing of healthcare and insurance in order to drive down prices, coupled with government subsidies for the needy to enable them to buy care and insurance at market prices.

Free market health care?

Posted by Economist Channel on Monday, July 10, 2017 Label: Commentary , Health economics

Farzon Nahvi, writing in the New York Times, reiterates the tired argument that health care can't be left to the free market, because people in comas can't negotiate.

As an emergency medicine physician in a busy urban hospital, I have patients brought to me unconscious several times a day...

Well, if the Times can recirculate tired stories, I can recirculate responses. Responding to an eerily similar essay way back in 2012, I argued in "After the ACA" (starting p. 189)

Yes, a guy in the ambulance on his way to the hospital with a heart attack is not in a good position to negotiate. But what fraction of health-care and its expense is caused by people with sudden, unexpected, debilitating conditions requiring immediate treatment? How many patients are literally passed out? Answer: next to none.

What does this story mean about treatment for, say, an obese person with diabetes and multiple complications, needing decades of treatment? For a cancer patient, facing years of choices over multiple experimental treatments? For a family, choosing long-term care options for a grandmother with dementia?

Most of the expense and problem in our healthcare system involves treatment of chronic conditions or (what turns out to be) end-of-life care, and involve many difficult decisions involving course of treatment, extent of treatment, method of delivery, and so on. These people can shop. Our healthcare system actually does a pretty decent job with heart attacks.

And even then . . . have they no families? If I’m on the way to the hospital, I call my wife. She is a heck of a negotiator.

Moreover, healthcare is not a spot market, which people think about once, at fifty-five, when they get a heart attack. It is a long-term relationship. When your car breaks down at the side of the road, you’re in a poor position to negotiate with the tow-truck driver. That is why you join AAA. If you, by virtue of being human, might someday need treatment for a heart attack, might you not purchase health insurance, or at least shop ahead of time for a long-term relationship to your doctor, who will help to arrange hospital care?

And what choices really need to be made here? Why are we even talking about “negotiation?” Look at any functional, competitive business. As a matter of fact, roadside car repair and gas stations on interstates are remarkably honest, even though most of their customers meet them once. In a competitive, transparent market, a hospital that routinely overcharged cash customers with heart attacks would be creamed by Yelp.com reviews, to say nothing of lawsuits from angry patients. Life is not a one-shot game. Competition leads to clear posted prices, and businesses anxious to give a reputation for honest and ef cient service.

So this is not even a realistic situation.

To be sure, some conditions really are unexpected and incapacitating. Not everyone has a family. There will be people who are so obtuse they would not get around to thinking about these things even if we were a society that let people die in the gutter, which we are not, and maybe some hospital somewhere would pad someone’s bill a bit. (As if they do not now!)

But now we are back to the straw man fallacy. Once again, the idea that ACA is a thoughtful, minimally designed intervention to solve the remaining problem of poor negotiating ability by people with sudden unexpected and debilitating health crises is ludicrous. As is the argument that we should accept the entire ACA because of this issue.

More generally, (p. 185)

There is a more general point here... Critics adduce a hypothetical situation in which one person might be ill served by a straw-man completely unregulated market, with no charity or other care (which we have had for over eight hundred years, long before any government involvement at all), which nobody is advocating. They conclude that the hypothetical justifies the thousands of pages of the ACA, tens of thousands of pages of subsidiary regulation, and the mass of additional federal, state, and local regulation applying to every single person in the country.

How is it that we accept this deeply illogical argument, or that anyone making it expects it to be taken seriously? Will not one person fall through the cracks or be ill-served by the highly regulated system? If I find one Canadian grandma denied a hip replacement or one elderly person who cannot get a doctor to take her as a Medicare patient, why do I not get to conclude that all regulation is hopeless and that only an absolutely free market can function? Both straw men are ludicrous, but somehow smart people make the first one, in print, and everyone nods wisely.

(Sorry for recycling, but good prose is hard!)

This is also great example of selected sampling and the dangers of making policy by anecdote. I'm sure Dr. Nahvi is a wonderful and caring emergency room physician. But despite the vividness of his experience, that does not make him a great expert on policy. In a completely heartless free market, most of the people he describes showing up on his doorstep would have bought catastrophic coverage. They are employed, normal people who buy cellphones, life insurance, car insurance and home insurance. (That's his point -- poor people are treated for free in emergency rooms. His point is entirely the cost of treatment, for that extremely narrow group, people with assets who somehow don't have insurance.) As a doctor, he does not see that economic counterfactual, or how cheap unregulated catastrophic coverage would be. And emergency room physicians dealing with comatose patients are not exactly an unbiased sample of the health care system. Even if such patients need to have government support, just why does a routine dermatologist visit need to be subject to the tender mercies of the Federal Government?

And leave it to the times to deliberately confuse health care with health insurance, and to get in a gratuitous swipe at Paul Ryan,

When it comes to health care coverage, House Speaker Paul Ryan says, “We’re going to have a free market, and you buy what you want to buy,” and if people don’t want it, “then they won’t buy it.” In this model of health care, the patient is consumer, and he must decide whether the goods and services he wants to protect his life are worth the cost.

The health care debate has, apparently, become like the old joke about jokes in prison. One inmate says "31" and everyone laughs. Another says "22", and they laugh again. The new guy says "11!" and is greeted with silence. "What's wrong? he asks." "You didn't tell it right" they answer.

Well, "22" says the Times. "35" say I. We're going to make a lot of progress this way. At least people like me acknowledge and respond to their view. The bubble, apparently, is a one-way street.

What's good about economics (sometimes)

Posted by Economist Channel on Friday, July 7, 2017 Label: Commentary , Economists , Regulation , Unemployment

Bryan Caplan has a nice post at ecconlib. The last part is an ode to the value of simple economic theory, much disparaged in public debate.

Bryan's central point: Economic theory lets you vastly broaden the range of experience that you can bring to one question -- the effect of minimum wages in Seattle, for example. Economic theory also forces logical consistency that would not otherwise be obvious. You can't argue that the labor demand curve is vertical today, for the minimum wage, and horizontal tomorrow, for immigrants. There is one labor demand curve, and it is what it is. Economics lets one experience illuminate the other, and done right forces politically uncomfortable consistency on those views. You can't argue that sticky too-high wages cause unemployment in recessions and in Greece, and not argue that sticky too-high wages from minimum wages laws do not cause unemployment in Seattle.

This kind of integrated thinking is far too rare in evaluating economic policies. But that's the fault of economists, not of economics.

Bryan:

Research doesn't have to officially be about the minimum wage to be highly relevant to the debate. All of the following empirical literatures support the orthodox view that the minimum wage has pronounced disemployment effects:

1. The literature on the effect of low-skilled immigration on native wages. A strong consensus finds that large increases in low-skilled immigration have little effect on low-skilled native wages. David Card himself is a major contributor here, most famously for his study of the Mariel boatlift. These results imply a highly elastic demand curve for low-skilled labor, which in turn implies a large disemployment effect of the minimum wage.

This consensus among immigration researchers is so strong that George Borjas titled his dissenting paper "The Labor Demand Curve Is Downward Sloping." If this were a paper on the minimum wage, readers would assume Borjas was arguing that the labor demand curve is downward-sloping rather than vertical. Since he's writing about immigration, however, he's actually claiming the labor demand curve is downward-sloping rather than horizontal!

2. The literature on the effect of European labor market regulation. Most economists who study European labor markets admit that strict labor market regulations are an important cause of high long-term unemployment. When I ask random European economists, they tell me, "The economics is clear; the problem is politics," meaning that European governments are afraid to embrace the deregulation they know they need to restore full employment. To be fair, high minimum wages are only one facet of European labor market regulation. But if you find that one kind of regulation that raises labor costs reduces employment, the reasonable inference to draw is that any regulation that raises labor costs has similar effects - including, of course, the minimum wage.

3. The literature on the effects of price controls in general. There are vast empirical literatures studying the effects of price controls of housing (rent control), agriculture (price supports), energy (oil and gas price controls), banking (Regulation Q) etc. Each of these literatures bolsters the textbook story about the effect of price controls - and therefore ipso facto bolsters the textbook story about the effect of price controls in the labor market.

If you object, "Evidence on rent control is only relevant for housing markets, not labor markets," I'll retort, "In that case, evidence on the minimum wage in New Jersey and Pennsylvania in the 1990s is only relevant for those two states during that decade." My point: If you can't generalize empirical results from one market to another, you can't generalize empirical results from one state to another, or one era to another. And if that's what you think, empirical work is a waste of time.

4. The literature on Keynesian macroeconomics. If you're even mildly Keynesian, you know that downward nominal wage rigidity occasionally leads to lots of involuntary unemployment. If, like most Keynesians, you think that your view is backed by overwhelming empirical evidence, I have a challenge for you: Explain why market-driven downward nominal wage rigidity leads to unemployment without implying that a government-imposed minimum wage leads to unemployment. The challenge is tough because the whole point of the minimum wage is to intensify what Keynesians correctly see as the fundamental cause of unemployment: The failure of nominal wages to fall until the market clears.

Pollyanna

Posted by Economist Channel on Thursday, July 6, 2017 Label: Banking , Commentary , Financial Reform , Regulation

In case you stay up at night worrying about the next financial crisis, the good folks at the Financial Stability Board have produced a nice soothing little video (original link in case the embed doesn't work, and so you can see that no, I'm not making this up),

The short summary:

Safer, Simpler, Fairer

3 July 2017

A decade on since the start of the global financial crisis, G20 countries have rebuilt the financial system so that it serves society, not the other way round.

By fixing the fault lines that caused the crisis, the financial system is now safer, simpler and fairer than before.

View and share our videos that explain the G20's work to reform the financial system.

As cheery propaganda, it's not quite up to the Chinese "belt and road" video standard, but pretty good. It needs more puppies and singing children. As unintentional humor, it scores highly. I mean, wasn't "safer" enough, questionable as it is? Did they really have to stretch for simpler and fairer? I don't think Dodd and Frank themselves buy that one. As a good link to have around for the next financial crisis, better still. As an insight into the wisdom of the Financial Stability Board... well, sometimes I find things that leave even me sputtering to find a pithy summary. You'll have to enjoy it on your own, and try to come up with something good in the comments.

Update: Look at the "capital" bucket. What capital ratio is in the video? What capital ratio is in real life?

Mallaby, the Fed, and technocratic illusions.

Posted by Economist Channel on Wednesday, July 5, 2017 Label: Commentary , Finance , Monetary Policy

One of the frustrations -- or perhaps challenges -- of studying monetary economics and monetary policy is howFed talk and writing on economic mechanisms, causal channels, and effects of policies is far ahead of our actual, scientific knowledge. And writers outside the Fed go leaps and bounds beyond the Fed in advocating strong policies based on the latest stories.

A good example is Sebastian Mallaby, author of "The Man Who Knew: The Life & Times of Alan Greenspan," who wrote last week in the Wall Street Journal Review, that the Fed should surprise us more.

His basic idea: the Fed should monitor asset prices; diagnose when a boom turns in to a bubble; and then actively suppress higher stock prices. And, in addition to interest rates, asset sales, "macro-prudential" regulation (telling banks to stop lending), the Fed should deliberately surprise markets more, adding volatility, in place of central banks' and governments' centuries-old quest (often illusory) to smooth asset prices.

By being less transparent—and reserving the option of deliberately ambushing investors with a shock move—the Fed could discourage them from taking too much risk.

The painfully learned lesson from the late 1990s and mid-2000s is that excess financial serenity leads to excess risk-taking, which in turn increases the chances of a blowup.

But the equally hard lesson of 2008 hasn’t yet been absorbed: that they [the Fed] should embrace modest, short-term market instability to head off truly disruptive crashes over the horizon. Instead, the calmer markets remain, the prouder the central bankers feel.
Mr. Greenspan and his colleagues faced the danger that the interest rate that would stabilize consumer prices would also destabilize asset prices. The Fed could have escaped this dilemma by acting less predictably. Instead, it telegraphed its intentions and avoided surprises.

Rather breathtaking, no? The last paragraph adds more -- when the Fed wants to lower interest rates to stoke the economy, that causes "bubbles," and the Fed should offset the bubble with deliberate volatility. Hit the gas and the brake at the same time. Greenspan wasn't obscure enough.

What's wrong with "bubbles" anyway? There is one sensible comment,

..when risks seem modest, Wall Street borrows to make bets that look great based on the Sharpe ratio.

Financial crises are always and everywhere about debt. But if Wall Street debt is the problem, just what is the entire Dodd-Frank apparatus to monitor Wall Street debt all about? Really, if Wall Street defaults are the problem, is deliberately inducing volatility to your and my portfolio the answer? Would not a little more capital be a better idea?

Academics do not know exactly how the financial system works. What I as an academic do know, a little more than the average person, is the limits of knowledge - just how much is not known, what the holes are in stories bandied about, and which stories have no basis yet in theory, experience, or evidence. An academic knows that many stories about how the world works are wrong, and we know that many other stories might be possible but have not been written down coherently and evaluated against experience. Knowing what you don't know is knowledge.

It is amazing in that context how much people advocate strong public policy actions -- actions that cost a lot of money, and threaten to put a lot of people in jail -- on stories that are either demonstrably false, or as in this case have no scientific foundation beyond cocktail party speculation, and many glaring logical holes.

For example, it is commonly bandied about, as in this article, that low interest rates induce investors to "reach for yield,'' and create "bubbles'' in asset markets. This is stated as a known, scientific, fact. I know, though it may be true, that this is not yet a known fact. Known facts have to start with a mechanism. Just what is the mechanism? Borrowing at 1% and lending at 3% is exactly the same as borrowing at 5% and lending at 7%. What connection is there between the level of short-term interest rates and the risk premium reflected in the differences between prospective rates of return on different assets?

Well, there are stories about it. Many theory papers have done so in the wake of such speculation. It takes a lot of friction carpentry -- only leveraged intermediaries hold assets, and a lot of nominal illusion or accounting constraints, so that 7-5 is not equal to 3-1. Yes, past booms have involved credit in some way. But most of the time low interest rates correlate with busts, not booms. There are empirical papers, that seem to show some effects, with all the caveats about empirical work in economics. But none of this elevates it to a known and verified fact, ready for exploitation by policy makers. [I foresee also a swarm of comments opining that yes, low interest rates cause asset booms, thereby missing the point that we shouldn't make policy on such opinion, but rather on well understood causal channels.]

Good policy waits for some sort of scientific evidence. We don't want the government jumping on every food fashion that comes out of the organic farmer's markets of Palo Alto either.

And if the idea that the Fed has the technocratic competence to understand the difference between "boom" and "bubble," the political mandate to determine the correct level of stock prices -- something that affects many voter's pocketbooks! -- and is ready to exactly offset its manipulation of short term rate by deliberately injecting just enough volatility to hold down prices... Well, I titled the post "technocratic illusions" for a reason.

Automation and jobs

Posted by Economist Channel on Saturday, July 1, 2017 Label: Commentary , Growth , Inequality , Unemployment

I am often asked to opine about whether automation will destroy all the jobs. Yes, we talk about tractors, which brought farm employment from something like 70% of the country at the beginning of the 20th century to about 3% today. And cars, which put the horse drivers out of business. And trains, which put the canal boats out of business.

A more recent case occurred to me. This is what offices looked like in the 1950s and 1960s:

Embed from Getty Images

Typing Pool. Source: Getty Images

This is a "typing pool." There used to be basketball-court sized rooms that looked like this, all over the place, staffed almost exclusively by women.

Then along came the copier -- many of these women are copying documents by typing them over again with a few sheets of carbon paper -- the fax machine, the word processor, the PC. And that's just typing. Accounting involved similar roomfuls of women with adding machines. Filing disappeared. Roomfuls of women used to operate telephone switchboards, now all automated.

This memory lives on in the architecture of universities. All the old buildings have empty hutches for secretaries.

If you are prognosticating in about 1970, and someone asks, "what will happen now that women want to join the workforce, but office automation is going to destroy all their jobs?" It would be a pretty gloomy forecast.

What actually happened: Female labor force increased from 20 million to 75 million. The female participation rate increased from below 35% to 60%. Women's wages relative to men rose -- they moved in to higher productivity activities than typing the same memo over a hundred times. Businesses expanded. And no, 55 million men are not out on the streets begging for spare change.

Civilian Labor Force Level: Women

Civilian Labor Force Participation Rate: Women

I'm simplifying of course. And surely some people with specific skills -- shorthand, typing without making mistakes, and so on -- who could not retrain didn't do as well as others. But the magnitude of the phenomenon is pretty impressive.

Update. So did women just take all the men's jobs? As MC points out, the male labor force participation rate did decline, from 87.5 to 70.0. That's a big, worrisome decline. But it's 15 percentage points, while the women's increase was 25 percentage points.

But even if women are moving in and men are moving out of employment, that does make the case that you don't just look at who has what jobs now threatened by automation! The typing pool got better jobs.

Please (please!) keep in mind the point here. No, this is not a post about all the ills of the labor market, and "middle class" America, and all the rest. Yes, there are plenty. The narrow point is, will automation mean that all the jobs vanish. In this case, even combined with a large expansion of the people wanting to work, it did not.

Also the male labor force expanded from 45 million to 82 million. So the idea that there is a fixed number of jobs and if women take them men lose them is not true.