regulation


New podcast episode with Brink Lindsey and Steven Teles about their new book The Captured Economy:

Brink Lindsey and Steven Teles argue in their new book “The Captured Economy” that the last few decades have been characterized by an increase in political rent-seeking. Focusing on the financial sector, intellectual property laws, occupational licensure, and land use, they show how legislation has been captured by special interests in ways that slow growth and increase inequality. In this episode, Lindsey and Teles discuss how these policies distort various markets and cause upward redistribution, as well as the different ways we can work to better “rent-proof” our politics.

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The political atmosphere surrounding climate change is often excruciating to bear; scientists keep offering dire warnings but politicians can’t seem to agree on what to do, if anything. Governments can try tactics like capping total emissions, investing in alternative fuels, or mandating specific fuel efficiencies. But none of these has seemed to work thus far. Economic theory suggests we can shift the behaviors of consumers and firms to account for the negative effects of carbon by making its use more expensive. Would this “carbon tax” be any more politically feasible than the other alternatives? Will it be too much of a burden? Can we trust the government to implement it? Find out the dirt on carbon taxes and how it stacks up against other efforts to battle climate change.

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-What does the Federal Reserve do?
The Fed does a lot of things, most notably it manages the money supply to achieve what it perceives is the right balance between inflation and employment. It does this by buying/selling US treasury securities, changing the amount banks must hold as “reserves,” and changing the discount rate (the rate at which banks borrow from their local Federal Reserve branch). The bottom line is that all of these things affect the amount of currency and ease of attainment in the loanable funds market. If there’s a lot of money out there, the ‘price’ of borrowing (the interest rate) is low and aggregate demand goes up. The Fed also acts as chief regulator, the lender of last resort, and many other duties given to it over time since its founding one hundred years ago.

-Why is it important?
The Fed has enormous impact on the economy, to say the least. Markets respond to something the chairman whispers in his sleep. The Fed’s impact on interest rates affects every financial market, from currency trading in Indonesia to the local housing market here. Since an increase in aggregate demand affects everyone, not just those directly in financial institutions, the Fed’s actions are incredibly important. Thinking about taking out a loan? If inflation will be high later you’ll have to pay back less in real terms. Think the Fed will tighten money to cut back on inflation? The lower aggregate demand might mean you forecast lower levels for your business. It’s not an overstatement to say the Fed chairman is a more powerful force in shaping the global economy than the US President.

-What is Quantitative Easing?
This is in the news a lot, and most of the journalists covering it outside of the economics blogosphere don’t seem to understand it. When nominal interest rates approach the “zero bound” aka zero, the Fed cant use their conventional methods to increase lending channels and aggregate demand. QE tries to get around this. When a central bank engages in QE they are buying up financial assets from banks and other financial institutions to try to increase the monetary base, the amount of cash out there. The Fed currently holds more than two trillion dollars in assets on its balance sheet.

-Is QE good or bad?
There are two general sides in the debate over QE: those that think it’s necessary and mitigated some of the effects of the global recession, and those that think it is doing little now and will only lead to massive inflation when banks finally start lending out all that cash they’re sitting on. Proponents of QE like Scott Sumner point out that nominal GDP (our output in terms of dollars out there) crashed during the crisis and has yet to rebound. With inflation incredibly low and unemployment boringly and stubbornly high, it only makes sense to keep increasing the monetary base. A few brilliant economists like John Taylor, Paul Volcker, and Greg Mankiw have expressed skepticism over QE but generally most economists believe it has been a good thing and we shouldn’t taper at this point. The effectiveness of QE thus far will always be inconclusive, much in the way fiscal stimulus is. If you go to a doctor, he gives you medicine, and you’re still sick a week later – did the doctor give you the wrong medicine or not not enough of the right one? This is basically how debates over macroeconomics function. It’s very frustrating, because both sides will always claim victory. But some arguments are better than others.

-Larry Summers vs Janet Yellen as the next fed chair?
Ben Bernanke is stepping down soon and Obama will have to nominate the next Fed chair. These two are considered the favorites, with Summers looking like the inevitable candidate. Relative to all other economists, they aren’t too different. Both are ‘doves’ in that they will focus more on employment than worrying about inflation. Summers is one of the most gifted economists of the last thirty years, with breadth of research equalled by only a couple people if any. But he also is connected to deregulation in the 90s (righty or wrongly) that many think Democrats will have issue with during the nomination process. He also made some uncomfortable statements about women in STEM jobs while at Harvard, is a shrewd man, and has no formal experience or writings on monetary policy. Yellen is the vice chairman of the Fed right now and frankly pretty awesome. Her main issue might be that she is not a White House insider and doesn’t have the political clout Summers has accumulated. She also is cordial and polite during arguments, whereas Summers is known to be, basically, somewhat of an asshole. Here’s one way to look at the debate: the central banker has two situations, one in crises and one in regular times. In regular times one can follow a rule-based policy that a computer could essentially do. In a crisis you need an exceptionally skilled central banker. Summers is overqualified for the first situation and not qualified for the second. Yellen can do the second.

Those protesters all around the big cities aren’t going away. Whether they’re right or wrong, something motivated them to be there. A lot of conservative commentators are passing the protestors off as youths who don’t feel like paying back college loans or people that took out mortgages more ambitious than their finances allowed. I think this is very inaccurate and really, really dodges the issue at hand.

People have a right to be angry at banks. Unemployment is just hovering a bit above 9% due to a balance sheet recession that many bankers were made rich from. While the economy tanked, many got big bonuses (supposedly performance-based). Any reader of this blog knows that I am a market enthusiast, but it’s hard to explain bankers getting their compensation as any sort of productive incentivizing device. Furthermore, these banks got huge bailouts from the government.

However, the protestors are wrong in confusing corporatism for capitalism. It was government who gave the banks bailout money. It was the government supporting Fannie Mae and Freddie Mac that kept artificially low interest rates and spurred a disastrous bubble in the name of ‘fairness.’ The popular radical argument on both sides these days is that the Fed was the cause of all of this (though I personally think these arguments are overstated).

So what are those in the “#OccupyWallStreet” faction hoping to accomplish? It’s unclear. Right-wingers are taking this to mean a “protest for the sake of protesting.” If a group doesn’t have clear aims in terms of policy, they’re just complaining (or so people are saying). I think this is totally unfair. The Occupiers may be foolish in trying to be overly un-organized (because then they’d be just like THE MAN!) but there’s nothing wrong with coming together because of general disdain for current conditions. A lot of the Arab Spring protests were driven my general dissatisfaction with the status quo. I’m fairly certain that the millions of protestors had incredibly varied reasons for protesting. What they shared in common was that they wanted change.

The Occupiers are just like this. The current system in America has gotten high unemployment, high debt, and frankly, rewarded a lot of people who made the problem worse. So the Occupiers are protesting the status quo.

Where I do think they are foolish is directing all of their anger at Wall Street. Wall Street created wealth and is responsible for a lot of the prosperity in America (if “Wall Street” can really even qualify as a collective noun here). The government had a lot to do with the bad stuff too.

Some opponents are saying the Occupiers are complaining about all this nonsense, yet most of them voted for Obama. Yes, Obama. The same guy who bailed out the auto companies and spent foolish money all around the place. But this doesn’t weaken the justifiability of their angst, I believe. The Tea Party was very much the same. And here’s what I’ve been waiting to get to.

The Tea Party and the Occupiers are very, very similar. Both groups were protesting the status quo with vaguely defined policy goals. The Tea Partiers wanted less government spending (from where? military? social security? medicare? they were never too clear). A lot of them voted for George Bush, the guy who did those huge wars and presided over huge deficit spending. The Occupiers want better wealth distribution and less corporatism. A lot of them voted for Obama. So yes, there’s so inconsistencies and some may say hypocrisies on both sides. But I don’t think that means they’re wrong.

I think both the Tea Party and the Occupiers are right. In fact, I’ll be as bold to say that I agree with both of the groups. Wall Street has been getting special treatment for a long time, mostly because of corporatist practices. The government has been spending beyond its means. A lot of people like to dismiss the tea party because it’s easy to characterize them as religious whackos who think any sort of government is socialism. Indeed, some people in the movement are like that. But some people in the Occupy group are just as idiotic – smelly, lazy, hippies who just like many Tea Partiers have no actual knowledge or insight for what they’re fighting for/against.

But evaluating a group based on their most absurd characters is misguided. It’s the message that we should be attacking or defending. Most importantly, we need to figure out what the policy result of these protests will be.In the case of the Tea Party, politicians were elected who mostly favored borrow-and-spend government instead of tax-and-spend government. For the Occupiers: Will corporations be so villified that business will shrink significantly in America? Or will it mean that corporations stop getting bail outs and a true free market is realized? I hope the latter.

I think Nick Kristoff is one of the better NY Times columnists, but today he penned a clunker:

With Tea Party conservatives and many Republicans balking at raising the debt ceiling, let me offer them an example of a nation that lives up to their ideals.

It has among the lowest tax burdens of any major country: fewer than 2 percent of the people pay any taxes. Government is limited, so that burdensome regulations never kill jobs.

This society embraces traditional religious values and a conservative sensibility. Nobody minds school prayer, same-sex marriage isn’t imaginable, and criminals are never coddled.

The budget priority is a strong military, the nation’s most respected institution. When generals decide on a policy for, say, Afghanistan, politicians defer to them. Citizens are deeply patriotic, and nobody burns flags.

So what is this Republican Eden, this Utopia? Why, it’sPakistan.

The conclusion:

[I]n this season’s political debates, let’s remember that we’re arguing not only over debt ceilings and budgets, but about larger questions of our vision for our country. Do we really aspire to take a step in the direction of a low-tax laissez-faire Eden …like Pakistan?

For what it’s worth, Pakistan ranks 83rd on the most recent Ease of Doing Business Index from the World Bank (the US is number five). Pakistan’s government has trouble maintaining order, is plagued by widespread corruption and cronyism, and, despite what Kristoff claims, has a complex web of burdensome, growth-impeding regulations (which partially explains its Ease of Doing Business ranking). This, more or less, is why Pakistan is such an unattractive place to live relative to the United States, not because of the mere fact that it has low taxes and conservative sensibilities. Pakistan is not the logical conclusion of conservative economic ideals.

However, I think that there’s a more interesting point to be made here. Populist conservatives, but also many conservative intellectuals as well, often frame the central ideological battle in the United States as being Big Government versus Small Government. But Kristoff is right that Pakistan’s government is “small” in a certain sense: it does have a low tax burden. The government has direct control over a much smaller portion of money in the economy than does the US government, or the Danish government.

But a government being small in this sense doesn’t mean that it doesn’t impose egregious restrictions on social freedoms or growth- and innovation-stifling economic regulations. The size of the government’s budget as a percentage of the overall economy doesn’t tell you anything about how free citizens living under the government are. What really matters is that the government is limited in the sense that it respects rights and doesn’t crowd out efficient private sector economic activity. The language of “small government” is simplistic in a way that is perhaps attractive from a populist perspective, but it obscures the real issue and the result is confused and misguided thinking by normally smart guys like Nick Kristoff.

There’s a movement afoot in my home state of Vermont to allow preschool and daycare providers to unionize. Howard Dean claims that the proposed bill “makes for common sense public policy“. According to an article on the proposal, “supporters say the effort will allow them to negotiate better pay and benefits and, at the same time, have a greater say in establishing workforce standards and programs to boost professional development.”

I don’t know enough about this to be justified in having a strong opinion. That said, the idea of having a union of independent childcare providers seems weird to me. The point of unions is to give workers more bargaining power so that gains from firms’ profits are split more fairly. Without unions, the thinking goes, individual workers are unable to get a fair cut of the surplus that corporations in capitalist economies produce.  But in the case of the proposed childcare providers union, as I understand it, it would be a bunch of independent business owners banding together.  This sounds like a monopoly. According to the article I quoted above, “The childcare educators hope to increase pay and benefits for their workforce and have a greater say in rules and regulations that are enacted to govern their profession.”

Unions resemble monopolies in the sense that they allow independent economic actors to band together and set prices for their services above what they would be otherwise. If there’s a good story about bargaining power disparities, then this might make sense, but I don’t see how that’s the case for childcare providers. It’s hard to read the previous quote without taking it to mean that they hope to set artificially high prices for their services and set up barriers to entry to stifle competition.

When an individual/firm’s actions affect people other than those immediately involved in a transaction, economists call this an “externality.” To correct a negative externality, in theory, a government is to impose a tax in order to shift the supply curve as shown (vaguely) below:

This way, the actual social cost of the action will be taken account of. When there is a positive externality, there will be underproduction of the good/service and governments should subsidize the good.

Well take the case of the negative externality of a driver going faster than the speed limit. In this situation, the driver is endangering others on the road that have no control over how fast the driver goes. To correct this externality, we impose fines – speeding tickets. This is meant to at least bring the level of speeders closer to the “socially optimum,” since drivers will now face a higher cost – the possibility of a speeding ticket – and be less likely to speed. The ticket is meant to deter the speeder.

Would a $50 dollar ticket deter a billionaire? Similarly, would a $50 fine for anything really deter a billionaire? As such, is it more appropriate to base fines like these off of personal income of the individual? Otherwise, the intention of deterring negative behavior will be very weak (or overly strong for poor people). This could lead to dangerous policies and I’m not sure the government as the competence to correctly enact such a system. But I still think it’s an interesting idea.

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