Fast Track Authority

When I receive a political e-mail that urges an action that I strongly disagree with, this always gets my immediate attention. A few weeks ago, I received an e-mail from USAction urging that I oppose Fast Track authority proposed by Obama to help negotiate free trade agreements. In response, I unsubscribed from USAction’s e-mails, citing this as the reason:

I support Fast Tracking authority because, as an economist, I understand that trade barriers inevitably harm domestic consumers more than they help domestic producers. Furthermore, to the extent they do help domestic producers, it is only at the expense of foreign producers who have every right to compete for consumers as anybody else.

The main reason trade restrictions occur is because it helps a few people a lot and hurts many people a little. The few thus have a strong incentive to complain loudly. Furthermore, the legislative branch is ill-suited to making trade policy because many legislators answer to relatively small geographical areas, and thus are more beholden to firms and workers in industries seeking to tilt the playing field in their favor. The president, on the other hand, has more of the national interest in mind and is more likely to weight consumer interests more equally with producer interests.

I have no idea how I got on this list, but I strongly believe you are working against the best interest of the country by opposing fast track authority.

Trickle Down

I’ve been commenting pretty regularly on a Facebook group known as Hossain Academy. The moderator regularly posts economic questions, and one recent one asked if we agreed or disagreed with this statement: “Trickle down theory is promoted by the capitalist to increase their wealth.”

Here was my response:

Most capitalists and economists probably don’t view it that way, but the fact is that if you have economic power, you face incentives to expand that power through all available channels, including influencing politics directly through lobbying and campaign contributions, as well as indirectly through donating to policy think tanks and funding academic research. I would imagine most capitalists view this as just an additional cost of doing business, and since their competition engages in this, they must do so as well to stay competitive.

Economics in turn faces incentives itself from politics because the U.S. government (as well as think tanks and journalism) appoints a high number of economists (far more than political scientists, surprisingly enough). As such, economists face incentives to provide research in demand from one of the two political parties. Note that an economist’s career is far more enhanced by having research cited approvingly by a politician than creating a model that forecasts more accurately. This mostly affects macroeconomics.

This probably doesn’t apply as strongly in other countries, but I imagine that most have central banks and government economic advisors. Regardless, the U.S. has both the largest economy as well as most of the influential economics departments in the world.

I think the supply-side school is Exhibit A of this effect. I imagine many supply-side economists probably really do believe cutting the marginal tax cut rate will spur productivity and growth, but I also believe the theory would never have come into existence unless politics did not have the degree of influence over the field that it does. Politicians will often twist what the school says (e.g., it does not claim tax cuts will always pay for themselves), but supply-side economists rarely publicly correct them.

It is also interesting to note that N. Gregory Mankiw removed material critical of the supply-side school from his market-leading principles textbook when working for Republicans.

I plan to expand on this later, as this draws upon Barbara Bergmann and G. William DomhoffI am not as liberal as either, as I have also been influenced a lot by Milton Friedman. But Friedman himself once said, “Only a crisis – actual or perceived – produces real change. When that crisis occurs, the actions that are taken depend on the ideas that are lying around. That, I believe, is our basic function: to develop alternatives to existing policies, to keep them alive and available until the politically impossible becomes the politically inevitable.”

So Friedman clearly recognized the extent to which academia could influence politics, although I’m not sure if he realized that this was a double-edged sword.

Boycotting the NFL

This is an e-mail I sent to the NFL today, canceling my NFL Game Rewind subscription (links added later):

Hello,

Please cancel my subscription to Game Rewind, ending the auto-renew (which always irked me anyways as a very sneaky and manipulative practice).

I have been increasingly concerned with how the NFL has handled numerous issues throughout the year, including Ray Rice and Adrian Peterson. Money appears to be the motivating factor as far as I can tell. Rice’s monetary value to the NFL dictated the light penalty, and the monetary penalty due to the negative PR was the only reason the NFL changed its mind.

For that matter, it has also always bothered me greatly that the NFL allowed Ray Lewis to participate in a Superbowl, and I believe his case would and should have caused even more PR uproar if only there had been video evidence as with the Ray Rice case. There are, of course, numerous other cases of the NFL going easy on players very likely to have committed criminal acts, such as Ben Roethlisberger. I have a three-year-old son, and I hate that the league is filled with characters who are terrible role models and tolerates them all for the sake of making more money. That I am directly paying some of this money has thus disturbed me greatly. (more…)

Book Review: The Big Short

This is a very good book on the crisis, but is eclipsed by McLean and Nocera’s All the Devils Are Here and Nouriel Roubini’s Crisis Economics. Those two books are much more comprehensive in coverage, whereas Lewis focuses rather narrowly on a set of investors who saw the bubble for what it was and were able to successfully bet against it. Oddly, he paints them in a rather heroic light even though it would have been more noble for them to try and warn people about the bubble rather than trying to profit from it. Only Steve Eisman appears to have tried to warn anybody.

Its narrower focus means it can paint a much more vivid and compelling picture of its colorful characters than All the Devils Are Here, which can be a bit overly sprawling at times. But in terms of understanding the crisis, this book provides only a small piece of the puzzle. It’s main contribution to my understanding was in CDOs. I thought I had understood them pretty well, but Lewis explains their true innovation was to make mortgage debt more attractive to investors who were worried, not about default risk (a risk that any bond investor faces), but about *prepayment* risk.

After all, borrowers will refinance when interest rates are low, and this means the lender gets their money back at exactly the worst time to have to try and find another bond to invest in. Bundling mortgages doesn’t solve this, since a borrower who is a good credit risk is just as likely to refinance as one who is a bad credit risk. The innovation of CDOs was to move the cost of prepayments (and defaults) from one mortgage in the bundle to a different tranche in the bundle. This meant investors worried about prepayment risk could simply choose to invest in a CDO tranche that was shielded from that risk by the other tranches.

I was very glad to learn about this, but aside from this and the various stories of the people, that’s about the extent of what I learned from this book. Lewis has a good understanding of finance and economics, and this is certainly an enlightening view. So this is a worthwhile read, but you can learn a lot more about the crisis from many other sources.

Book Review: All the Devils Are Here

All the Devils are Here: The Hidden History of the Financial CrisisAll the Devils are Here: The Hidden History of the Financial Crisis by Bethany McLean

My rating: 5 of 5 stars

I consider this to be the best book on the financial crisis, edging out Nouriel Roubini’s Crisis Economics and significantly better than Michael Lewis’s excellent Big Short. Roubini excels more at explaining more of the economics in systemic big-picture terms and also laying out reform proposals to prevent the next crisis, but overreaches quite a bit with the latter and reads a bit more like a textbook due to a lack of characters and narrative. Lewis has plenty of narrative, concentrating on several individuals with a good view as to what was going on, but is a bit narrowly focused.

All the Devils are Here has a decent mix. It has a very comprehensive scale. I’ve read a significant amount of academic literature on the topic, but this one still filled in the gaps, as I didn’t yet have a good grasp of what was going on in the ratings agencies. I also learned a lot more about the role of the GSEs (Fannie Mae and Freddie Mac) from this book. It also has plenty of vivid characters playing a variety of roles. There are almost too many, and several seem a bit stock in nature, but it still holds together quite well. Despite the topic, it’s a rather quick and lively read, and the interaction between Brooksley Born and Bob Rubin is probably the most gripping (and a better treatment than the Frontline special on Born).

Unfortunately, neither author is well-versed in economics, so it’s a rather short on analysis and has absolutely no reform proposals whatsoever. This is both a pro and con, as it refrains from being overly didactic and/or political (both flaws of Roubini’s book), but it also makes for somewhat more superficial coverage. I can see readers leaving with the impression that the crisis was due to bad people doing bad things when there are numerous systemic economic issues at its core, but the book does indeed cover these issues (particularly the conflicts of interest at the ratings agencies) even if it doesn’t put them center stage.

A bigger flaw is their treatment of the Federal Reserve. This is where I think the authors should have consulted more people with an economics background, as they seem to have the impression that the Fed’s role in the economy is largely regulatory when in fact its primary role is to conduct monetary policy — controlling the money supply. The Fed was the one supplying the excess dollars that inflated the bubble, and this is one of the few points largely agreed upon by economists (even if they disagree on what, if anything, ought to be done to address this).

Still, they get it mostly right (having a decent grasp of the importance of incentives and information and how securitization made a mess of things) , and considering the vast scope of the crisis, it is probably nearly impossible to cover everything and still have a readable book. Despite its minor flaws, I consider this book both a must-read and a very enjoyable read as well.

View all my book reviews

Hello, world!

Hello, Intarweb. This will be the site of my new blog, the original one being here (and also previously at fling93.com, now overgrown with weeds). I am in the process of importing my old posts (but as they were all encoded in an HTML shorthand in a now-defunct plugin, I am doing this one-by-one).

The Economics Behind ObamaCare’s Individual Mandate

In regards to the big Supreme Court decision on RomneycareObamacare, there’s been much hand-wringing on how this is a tax on doing nothing. This does seem odd, until you realize that a penalty or tax on one group but not on a second group is economically identical to having no penalty or tax on the first group but a tax credit or a subsidy for the second. Either way, it’s a transfer payment from the first group to the second group. Economist N. Gregory Mankiw made this point a few years ago:

…consider two proposals:

  1. A person is required to have health insurance. If a person is in violation, he pays a $1000 fine. The revenue from the fines is rebated lump-sum to all taxpayers.
  2. A person is not required to have health insurance, but those with health insurance receive a $1000  tax credit. The cost of the tax credit is financed with a lump-sum tax on all tax payers.

Notice that there is no economic difference between these two scenarios. The difference is purely semantic.

A subsidy or tax credit for a certain activity, such as buying a house, getting married, having children, and growing certain crops, is economically equivalent to a tax on inactivity. The mortgage deduction can just as easily be labeled a renter’s penalty or tax. So while it irks me that Obama wasn’t more up-front with the mandate actually being a tax, it’s economically identical to a tax credit for those who purchase health insurance (much like Paul Ryan’s plan).

Now generally I oppose most such transfers because they are often thinly-veiled kickbacks resulting from corporate lobbying for artificially high profits (economists call this “rent-seeking“), but while there’s plenty of rent-seeking fingerprints on Obamacare, the health insurance mandate tax is a little bit different. Here’s why.

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(Re)start Me Up

Hey all y'all,

Well, life is strange. Five years ago, I was a software engineer in the Silicon Valley, taking economics classes to transition to a new career that, at the time, I thought would be public policy. A summer in D.C. and a couple of trips to Burning Man, and well, that plan went up in flames. So I holed up for a while to do some soul-searching, and then the economy went down in flames around me.

After a tour in the desert for Black Rock City's DPW, things started making sense again. After teaching economics for a couple of semesters at San Jose State, things crystalized a little bit more. And then after meeting the woman who would become my wife during Playa Restoration, the world opened up again. We road-tripped across America, did another tour at DPW, got married during SF Decompression, settled in Austin, got married yet again in New Hampshire, and then had a son who has epically shattered cuteness records across the galaxy.

Things were still rocky there for a bit, but then I found a job in educational technology. As I said, life is strange. Heck, this city even has a Formula One race coming up.

Anyhow, now that life has settled down a bit, the writing calls back to me (the unbeknownst-Texan-in-me is also calling out for me to become an Asian redneck, but that's neither here nor there). You probably didn't notice over there on the right that I've started commenting more regularly in the blogosphere again. Well, expect more of that, only a bit longer (but not as long as I did way back when).

So y'all come back now, y'hear?

The Bucket List meme

Things you have done during your lifetime:

(X) Gone on a blind date
( ) Gone on a date with someone who was blind
(X) Gone on a date with someone who was blind and you stole food off their plate
( ) Gone on a date blind because there was a bucket over your head
(X) Had a date so ugly you wish there was a bucket over their head
(X) Been stood up by a bucket
( ) Seen Buckethead in concert
( ) Tried to bring a date to a Buckethead concert
(X) Brought a bucket as your date to a Buckethead concert

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/ within this post lies / a plea to a criminal / (in haiku format!) / #haiku

Ray Lewis, obstructor of justice

for shame, ray lewis!

sheesh, there just ain’t no justice.

murderer you are!

 

(or accessory)

you kept changing your story,

and broke your promise,

 

yet got off scot free!

your bad karma hurt your team,

and many team-“mates.”

 

(NO, I wouldn’t want

you on the Giants any

more than Plaxico!

 

yeah, LT did drugs,

but that’s a victimless crime,

and murder is not.)

 

please come clean now so

the victims’ families can

at last enjoy peace.

 

there! i spoke my piece.

my thoughts are with McGahee.

lift away his curse!

 

(ravens fans, for shame!

worse than giants fans who gave

barry a free pass.)

The facts were these:

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