Tuesday, December 29, 2009


Robert Shiller resurrects an impractical technocratic ideas--selling equity shares in the government (with a dividend payment as a certain portion of GDP):
CORPORATIONS raise money by issuing both debt and equity, the latter giving investors an implicit share in future profits. Governments should do something like this, too, and not just rely on debt.

Borrowing a concept from corporate finance, governments could sell a new type of security that commits them to paying shares in national “profit,” as measured by gross domestic product.
We’d like our countries to issue securities that we call “trills,” short for trillionths...

Each trill would represent one-trillionth of the country’s G.D.P. And each would pay in perpetuity, and in domestic currency, a quarterly dividend equal to a trillionth of the nation’s quarterly nominal G.D.P.

This idea has gotten a lot of criticism, and there would be serious implementation problems getting it in place. It's also probably better suited for Third World countries with trouble borrowing debt rather than for a country which can borrow almost for free.

Still, there are some huge upsides for the government--which Shiller strangely doesn't mention. The Federal Debt is ~12 trillion, against a GDP of ~14 trillion. Paying off the interest and scheduled payments on that debt comes out to about ~700 billion dollars a year--and quickly growing. This makes up one of the largest portions of the federal budget.

Instead, the government could float stocks instead of debt. Swapping out all debt for shares would leave government liabilities the same, but now the government pays out a dividend that's about a constant one percent of GDP a year--or 140 billion dollars a year.

The downside is that the government pays out that one percent in perpetuity, and inflation can't erode it away. The upside is that the government could cut scheduled payments to service its liabilities by over 500 billion a year. That's huge, and very welcome at a time when the government needs about that much annually to curb looming deficits. Or, having cut the deficits some other way, Washington could then turn around and devote that 500 billion towards buying back shares over time. Freed up dividend payments can then go towards buying back more debt and that 12 trillion can be wiped out in about 20-30 years.

I don't want to discount the downsides here--the largest one being that such a cheap source of funding may go towards a spending binge rather than fiscal prudence. But I think a lot of the opposition to this proposal is driven by status quo bias. Suppose we had a plan in place like the above. I think very few people would argue that the government should instead take on trillions in debt and pay over half a trillion dollars a year more in interest payments. It sounds a little crazy, but so did the very idea of stocks not so long ago. This is one financial innovation that could have a huge impact.

As an added bonus, having a concrete equity as a proxy for GDP allows the Fed to better target monetary policy to match investors' expectations, rather than using lagging indicators.

Wednesday, December 23, 2009


Here's Felix Salmon:

“Do you even know who we are?” Talia asked. She thrust her hand into her purse. Out came a grip of shareholder credentials.

“I don’t care,” said the manager. “You’re getting out of this restaurant. Now.”

The women strutted out to a black Mercedes-Benz. As Talia drove, she enumerated a few of her present frustrations. She hated the tacky nowhereness of Omaha. She hated the gawking shareholders who think they own it for a weekend. Most of all, she hated Gorat’s for unjustly ejecting her from the premises. “They thought I was a whore because I’m good-looking and rich!” she exclaimed. “What can I do?”

“They never see the likes of us around Omaha,” replied Tanya.

“We have more shares than all those fuckers,” Talia said…

“Where were you at the cocktail events?” Talia asked me. “We were there with all the ballers. The real deal. You didn’t go to Borsheim’s, did you? That’s where all the suckers go, with one baby B share. The big parties are up at the houses.”

He comments:

This is what happens to the millions of dollars that Buffett earns for his earliest and most loyal investors: they end up fueling the very snobbery and condescension that Buffett himself could never abide.

Tuesday, December 22, 2009

The Constitution

One of the right-wing talking points going around is that the individual mandate (more on that later) is unconstitutional. The left-wing counter point is something like this statement from Senator Reid:

Those of us who voted to proceed to the health reform bill and who voted for cloture on the substitute amendment take seriously our oath to support and defend the Constitution. And we have looked at this question seriously and concluded that the penalty is constitutional.

And those who study constitutional law as a line of work have drawn that same conclusion. Most legal scholars who have considered the question of a requirement for individuals to purchase health coverage argue forcefully that the requirement is within Congress’ power to regulate interstate commerce.

On the merits, I'm sure they're right. But this interstate commerce clause is really something. At the point when it's trying to carry Endangered Species Act and Health Reform--it's clear that something's wrong. The Founders clearly didn't intend this to be a general allowance for anything Congress can think up. They also didn't write a Constitution fit for modern governance. All of this raises the issue of why we pretend to care so much about the Constitution, when we are unwilling to let it be a serious hindrance.

Then there's the tricky business of whether the Constitution itself is constitutional--in the sense of fitting the laws of the government at the time, the Articles of Confederation. At the time, a number of wealthy landowners and merchants decided that they preferred a stronger government--a preference in accordance with their private commercial interests. As far as I can tell, the states did not have the authority to create a new government. On balance, I'd say history supports the point of view of the Framers. But it leaves me a little bewildered as to the actual content of what a Constitution means and what it should do.

US China Relations

Earlier I was very downcast about the potential for China-American cooperation. James Fallows, among others, hit back against this train of thought by arguing that this sort of diplomatic engagement takes time, and more progress would surely follow.

Now Fallows links to an account of Copenhagen, supposedly by someone "in the room" so to speak during the US-China negotiations. The claim is that China deliberately scuttled the talks to maximize blame on the West generally, and America in particular.

Obviously, I can't vouch for the validity of the claim. But the fact of its plausibility highlights that the climate change talks are prominent not because they represent the pathway to progress, but because they're perpetually deadlocked. The China-US G2 relationship receives so much press coverage not because it is the fundamental driver of global governance, as the Europeans seem to fear, but because that relationship is so badly dysfunctional. The BRICs have the political power of major powers yet behave like the poor countries they really are.

Friday, December 18, 2009


I haven't seen Avatar, and don't plan on it; but by all accounts it's a fairly simplistic tale of corporations gone bad and heroism for the sake of the natives.

But it's a little ironic to have the movie take that message. After all, the movie is a shining beacon of the wonders of capitalism: the financing, work, and organization required to put the thing together could only be accomplished by an corporation. One that's entirely happy bashing other corporations.

Or as Steven Colbert put it; "I firmly support capitalism, except when it's in my financial interest otherwise."

Wages and Bernanke

Here's what Becker has to say about job creation:
Keynes and many earlier economists emphasized that unemployment rises during recessions because nominal wage rates tend to be inflexible in the downward direction. The natural way that markets usually eliminate insufficient demand for a good or service, such as labor, is for the price of this good or service to fall. A fall in price stimulates demand and reduces supply until they are brought back to rough equality. Downward inflexible wages prevents that from happening quickly when there is insufficient demand for workers.
Here's Mark Thoma, hitting back:
There's a more sophisticated story below, and I may be oversimplifying too much, but basically when things are bad -- when firms cannot sell all that they are (or could be) producing -- a cut in the wage does not generate any new employment, it simply reduces income. Why hire more people when you aren't selling anywhere near to existing capacity (in the story below, even if interest rates did fall as a result of the wage cut, I don't think it would generate much investment due to the excess capacity that firms have)? In fact, the reduction in income from the fall in wages makes it even harder to sell the goods that are (or could be) produced, and that will cause firms to lay off even more workers, which lowers income even more, and a downward spiral ensues.
The point is that in a severe recession, a cut in the wage rate may not generate any new employment, instead it simply lowers income and demand, and that makes things even worse.
The mixed effect here centers around the fact that what we call a wage refers to two separate things. One is the wage paid by the employer. This is the price of employment; and Becker is correct to point out that the higher this price, fewer people will be employed. During recessions, companies are willing to pay much less for labor; but wages are fixed. So they lay off workers. If we could get this wage to go down in bad times, companies would be willing to hold on to employees and we wouldn't have ten percent unemployment.

However, there is also the wage received by employees. Lowering this wage reduces the purchasing power people have, so they cut consumption and prices fall. Brad DeLong and Lawrence Summers have a good paper estimating that effect.

Under normal situations, the two wages are the same, and it's not obvious what employment effect a wage decrease or increase will have (though some evidence suggests that raising wages didn't work in the Great Depression).

But there's a way around this--create a gap between what employers pay and what employees receive. This way, employers could cut their wages to employees during bad times, so employment would stay high. But employees would receive the same amount, so you maintain price stability.

One way of doing so is through a permanent payroll tax cut. Employers are now more likely to hire at the margin; and employees will spend and save more.

But the best way of creating this gap is through a direct wage subsidy. This allows employers to slash the wages they pay out; while keeping the wages employees receive fixed by having the government make up the difference. Labor market interventions like these are the dominant way Europe is responding to the recession (they have rather small stimulus projects); and they're keeping employment losses lower than America.

Obviously, this involves a fiscal cost. But the government is already taking on a huge fiscal burden through automatic stabilizers and a stimulus comprised of bad tax cuts and spending. These projects are much less effective than a direct wage subsidy in cost-effectively creating jobs and cutting unemployment.

Still, none of this is the best way to target unemployment--the best way would be to use monetary policy to generate inflation expectations to lower real interest rates below zero. This can be difficult when interest rates are already zero, but a number of scholars--among them Bernanke and Krugman--have advocated such policies in the past for countries like Japan. Yet Bernanke now rules out this policy out for the United States:
  • D. Brad Delong, University of California at Berkeley and blogger: Why haven’t you adopted a 3% per year inflation target?

[Bernake] The public’s understanding of the Federal Reserve’s commitment to price stability helps to anchor inflation expectations and enhances the effectiveness of monetary policy, thereby contributing to stability in both prices and economic activity. Indeed, the longer-run inflation expectations of households and businesses have remained very stable over recent years. The Federal Reserve has not followed the suggestion of some that it pursue a monetary policy strategy aimed at pushing up longer-run inflation expectations. In theory, such an approach could reduce real interest rates and so stimulate spending and output. However, that theoretical argument ignores the risk that such a policy could cause the public to lose confidence in the central bank’s willingness to resist further upward shifts in inflation, and so undermine the effectiveness of monetary policy going forward. The anchoring of inflation expectations is a hard-won success that has been achieved over the course of three decades, and this stability cannot be taken for granted. Therefore, the Federal Reserve’s policy actions as well as its communications have been aimed at keeping inflation expectations firmly anchored.

This is a little puzzling. The Fed's mandate is to balance inflation and unemployment; yet inflation is at zero percent and unemployment is at ten. Yet Bernanke is fine with this balance, and will not do anything to reduce unemployment further--even though his academic work, which got him his job, emphasized exactly those policies.

So one way or another, all the ways to create jobs--fiscal stimulus, monetary policy, labor market intervention--are off the table. I would find this even more discouraging if I were unemployed.

Monday, December 14, 2009

Deliver me from Sin, but not Today

Majken Friss Jorgensen, managing director of Copenhagen's biggest limousine company, on the climate change conference, from the London Telegraph (Dec. 5):

Jorgensen reckons that between her and her rivals the total number of limos in Copenhagen next week has already broken the 1,200 barrier. The French alone rang up on Thursday and ordered another 42. "We haven't got enough limos in the country to fulfill the demand," she says. "We're having to drive them in hundreds of miles from Germany and Sweden."

And the total number of electric cars or hybrids among that number? "Five," says Ms Jorgensen. [WSJ]

Tuesday, December 8, 2009

Going Rogue

Following up on Stanley Fish's experiment; I went to the Strand Bookstore here in Manhattan to find a copy of Going Rogue. Yet not only did they not turn me away; they told me it was sold out! With six other people in line to buy it.

That's right. We read Sarah Palin here in the Blue States. And they read Obama in Red States. In some states, people even read Red State Blue State Rich State Poor State: Why Americans Vote the Way they Do (recommended, btw).

Monday, December 7, 2009

Causality and Climate Change

I've believed for a while that the debate over climate change is troubled in part because of a slippery grasp of causality. I've been thinking of an analogy to make the point, and Richard Lindzen provides one:
Consider the following example. Suppose that I leave a box on the floor, and my wife trips on it, falling against my son, who is carrying a carton of eggs, which then fall and break. Our present approach to emissions would be analogous to deciding that the best way to prevent the breakage of eggs would be to outlaw leaving boxes on the floor.
What does this have to do with anything? Well, consider the doomesday scenarios being tossed around. The Maldives, for instance, is in threat of ending up under the waves due to rising sea levels. Water wars are supposedly looming in other countries, and so forth.

But the causality here is a little mixed. It's not the case, for instance, that every country faces the threat of going underwater. The Netherlands has set up a fancy water wall that will contain the effects of higher sea levels. The EU will handle any future political turmoil just fine. Climate change will have very different consequences in different places.

So you cannot isolate certain effects, dub them the "result" of global warming, and see carbon cuts as the only solution. Rather, climate change intersects with multiple problems--chief among them poverty, political instability, and bad institutions--that combine to cause further issues down the road. It's by no means obvious that targeting climate change on its own is the best way to address these issues, let alone whether action against climate change is the most cost-effective way to improve welfare in the developing world. All of the problems above will continue to exist whatever the state of the climate; yet we continue to weight deaths due to climate fluctuations far more than deaths due to dysentery and the like.

This is particularly problematic as proposed action against climate change--carbon dioxide reduction in one form of another--harms growth and so destroys economic base necessary to adapt to and mitigate the effects of a warmer world. Back to the Maldives--the government plans to turn the country into a Prius and go carbon-neutral. This is all well and good as a publicity stunt. But it is a waste of resources that comes exactly when the government needs to figure out its climate adaption strategy--throwing up sand bars, buying up land elsewhere, or what have you.

Indur Goklani has an analysis which makes this point clearly. He estimates the GDP per capita in 2100 of developing countries under energy-intensive development with global warming–$72,800–and under a more environmentally friendly regime–$40,200. Ignoring (important) distributional effects, the welfare consequences of enduring lower growth outweight the costs of global warming--even for developing countries.

There is also an incredible amount of status-quo bias in this debate. Can anyone really say that the temperature that prevailed in, say, 1900 was really the optimal temperature for humanity? Is it obvious that a warmer planet is worse; and, if so, wouldn't that imply that a global temperature colder than it is now would be better? Of course a temperature change of any magnitude would change settled patterns and (again) imply distribution effects. Yet a quick scan across America--where temperatures varies substantially without a corresponding variation in income--suggests that climate matters very little in determining the quality of life in a developed economy. Maybe things are different elsewhere. But that's all the more reason for them to develop quickly--something which will be harder for them to do with carbon targets.

I say all of this without questioning the science behind climate change (which Richard Lindzen does) or opposing a revenue-neutral carbon tax. But the broader point is that climate change is crowding out other fruitful tactics for improving the lot of the poor; carbon cuts are crowding out other strategies for dealing with the consequences of climate change; and a focus on reducing emissions by raising taxes ignores other cheap hanging fruit like technology transfers and preventing deforestation.

Wednesday, December 2, 2009

For Wars Before Being Against Them

I'm not always a fan of Robert Kagan, but he's right about this:
There is a new doctrine out there that seems to enjoy enormous cache among the smart foreign policy set: fight wars until they get hard, then quit. Vice President Biden seems to be a leading proponent of this approach. While a member of the Senate Foreign Relations Committee, Biden backed the Iraq War and spent the first few years after 2003 rightly calling on the Bush administration to send more troops. But when Bush finally wriggled himself free from the disastrous strategies of Donald Rumsfeld, Biden declared the situation hopeless and called instead for breaking up Iraq into three pieces. He then proceeded to oppose the very troop increase he had so long, and so courageously, fought for. And, of course, in opposing the surge, he had the whole foreign policy establishment on his side, epitomized by the wise people of the Baker-Hamilton commission.

Congress is brilliant at never taking responsibility. Its members always voted for the war before they voted against it -- in Vietnam, in Iraq and in Afghanistan. The foreign policy establishment and intellectual world are much the same. They fully supported intervention in Vietnam, mostly supported intervention in Iraq and fully supported the war in Afghanistan -- until the wars got hard, or embarrassing and difficult to defend in polite company. Then they bailed, desperately trying to cover their tracks along the way, and offering reassuring images of what losing would look like.
People who oppose interventions on principle, I can stand. People who love war, and continue to support it when the war is going poorly, I can stand. People like Biden--I'd love to play poker with them. They're the types who check till the river then fold.

Afghanistan is a tricky case. Obviously, you have to invade. This is, after all, the good war. But I'm not convinced by these arguments that the focus on Iraq destroyed the war effort. The timing isn't quite right; Afghanistan seems to have gotten worse around 2005ish due to several factors, many of them domestic. The country continued to enjoy a steady supply of US aid. A counterfactual in which it received a lot more in the way of help may have been better; but the extent to which the US "bailed out" has been exaggerated.

How would a Biden who didn't invade Iraq deal with Afghanistan? Invade, set up shop, watch the place burn down, and then leave? Suppose you went back and told this guy the inevitable failure of this strategy. Well, he would still have to invade Afghanistan. And the war effort would still probably have failed, due to forces outside Biden's control.

I don't think either Party is seriously engaging this issue. The Democrats believe that it was good to invade Afghanistan; the US should have set up a government there; but Bush's faults can explain all of the problems. I don't think they've thought through the implications of what you do about a war that's both necessary and highly likely to fail. The Republicans want to surge everything.

Someday, we'll get into another conflict. This will enjoy broad support from all Americans. Then it will get hard, and people will bail. This is a crappy way to run a foreign policy. Go all in or go home.

We should just get Putin to run our foreign policy. Can you believe this guy? He's running a second-tier power, at best, yet runs circles around everyone else. He's always a couple of steps ahead. Can you imagine what he'd do with American-style power?

Tuesday, December 1, 2009

If Only Afghanistan Were Vietnam

From Obama's Afghanistan speech:
First, there are those who suggest that Afghanistan is another Vietnam. They argue that it cannot be stabilized, and we're better off cutting our losses and rapidly withdrawing. I believe this argument depends on a false reading of history. Unlike Vietnam, we are joined by a broad coalition of 43 nations that recognizes the legitimacy of our action. Unlike Vietnam, we are not facing a broad-based popular insurgency. And most importantly, unlike Vietnam, the American people were viciously attacked from Afghanistan, and remain a target for those same extremists who are plotting along its border. To abandon this area now -- and to rely only on efforts against al Qaeda from a distance -- would significantly hamper our ability to keep the pressure on al Qaeda, and create an unacceptable risk of additional attacks on our homeland and our allies.
Yet it would be great if Afghanistan were another Vietnam. In the popular imagination, there is a straight line from the Tet Offensive to US withdrawal from Saigon. Yet seven years separated those two events. In between, American and Vietnamese forces virtually eradicated the Viet Cong resistance within South Vietnam. There's really no dispute about this point.

The so-called "revisionists" think that South Vietnam could still have held after that point had US support continued against North Vietnamese (backed by the Soviet bloc) attacks. Whatever you think of this view, it's undoubtedly true that what ultimately ended the Vietnam war was the invasion of another sovereign country. The insurgency--while potent--was ended through exactly the sort of counter-insurgency tactics rediscovered in Iraq and Afghanistan.

Obviously, this need not imply that those same tactics work in Afghanistan. But that's exactly my point. It would be great if Afghanistan were more like Vietnam, where counter-insurgency worked. It's the fact that it isn't like Vietnam that's causing all the trouble.