The Ambrosini Critique

Following Prof. Caplan, but I’m going to be slightly easier on the bailout. Assuming a bailout happens, which is likely given trading at Intrade, if unemployment stays below 7.8%¹, I’ll take that as evidence the bailout had no effect. I’m using the same reasoning as the Professor; if we’re as close to disaster as bailout supporters suggest, you’d expect unusually high unemployment rates, bailout or no. Otherwise, I’ll take unemployment higher than 7.8% to be evidence that the bailouts helped.

UPDATE: Catching myself in a potential gotcha. If unemployment goes above 7.8% before a bailout passes or is implemented, I’ll still take that as evidence that the bailout matters. The expectation of a bailout might help just as much as the actual implementation of one.

1. this is about the 20 year high [↩]

By Johnny Debacle

A dark stage, with a single spotlight on Henry Paulson

Henry Paulson: Good morning, ladies and gentleman. My name is Henry Paulson and I run the Treasury. And I don’t mean to make you panic, but if you do not give me a balance sheet that can hold $700 billion on it, and unlimited funding, than the economy will die. That’s right it will die. I don’t mean to cause fear and panic, but those are the only two legitimate reactions you should be feeling right now and you should let those guide you. Let them flow over you, sucking you into my myopic morass which now shrouds my former optimistic obfuscations.

Ben Bernanke: Every other economist disagrees with this proposed bailout but I believe in fear and panic and am drunk on the wine of my new powers. I too must insist that you, the fine people of this country, please give into your fear and panic. It worked in dealing with 9/11, it worked in getting us into Iraq, it worked in re-electing George Bush and now it will work in bailing out this economy. You don’t want it to DIE, do you?

Barney Frank: (Looking disheveled with a bad teen moustache) Blahrm-bram blrankrtrtyc encncmmphphphgh nbmmanana. Bragblahma ththtlthabzzzgh ndragh plghtythmrhm phjalth.

George Bush: I know nothing, if not fear and panic. Trust me, we need this.

Violin solo in the background playing the Vivaldi classic “Short Term Political Cycles Are Mismatched With Jobs Charged With Making Decisions That Have Effect Decades Later”

Congress: FEAR. PANIC.

The Economists: NO!

Congress: FEAR. PANIC.

Wall Street: FEAR. PANIC.

All players dancing on the stage surrounding The Economists who disappear into the floor

—
Scene 2

A Rational Man: Do we need this?

Henry Paulson: Yes, I need this.

A Rational Man: I said “we”.

Henry Paulson: And I said “I”.

A Rational Man: What will this do? Honestly, I’m a Rational man, thus I have no vote.

Henry Paulson: Maybe, maybe might unfreeze the interbank market.

A Rational Man: But will this save us from recession?

Henry Paulson: No.

A Rational Man: But will this lead to massive inflation?

Henry Paulson: Almost certainly.

A Rational Man: And what about the unknowable second order effects, or third order effects, or x order effects?

Henry Paulson: I ignore them.

A Rational Man: So this bailout is a longshot to do anything positive and it increases the downside risk if it doesn’t work?

Henry Paulson: That is what our math tells us.

A Rational Man: Is this socialism?

Henry Paulson: No, this is necessary.

-Fin-

Someone should tell netflix — a service I otherwise adore to itty bitty pieces — that people watch movies at night:

I would have thought their market research would have picked up on that.

… this post has the potential to dramatically change my mind about a number of things. Its long but worth it.

In any case, I’ve never seen a better example of moving the conversation forward:

[T]here is now no time for tolerance of the three objections to this analysis [Feds are in effect controlling the risky rate of interest as they do the risk-free rate] and this plan of action [the "bailout"], roughly: (1) it’s immoral, (2) it’s unfair, and (3) it can’t work in the long run. To expand a bit:

1. It’s immoral because people have a right to be treated like adults–which means that they have a right not to be rescued by the government from the consequences of their bad judgment, and we are violating that right.
2. It’s unfair because feckless greedy financiers who caused the problem ought to lose money and aren’t–or aren’t losing enough money–and because feckless greedy imprudent thriftless borrowers who caused the problem ought to lose money and aren’t–or aren’t losing enough money.
3. It won’t work–at least not in the long run.

I dismiss objection (1). It is made, mostly, by those who speak for the Princes of Wall Street. Note that the Princes of Wall Street themselves are not opposed to what the Federal Reserve and the Treasury and the congress doing–anything, anything at all that promises to raise asset prices is something that each of the Princes of Wall Street would trade at least one of their organs of generation for. But those who speak for the Princes of Wall Street–well, they really believed that the Princes earned their fortunes by virtue of their virtue–their intelligence, their nerve, their skill, and their willingness to run great risks for great rewards. The idea that there is a public safety net to catch the Princes when they all fall off the tightrope at once–that they are not actually rugged Randite individualists running great risks–that they are people in the right place at the right time with enough low animal cunning to cover themselves with glue and then step outside at 57th and Park or on Canary Wharf as the money blows by so that a bunch of the money sticks to them–well, this strikes those who speak for the Princes of Wall Street on the editorial page of the Wall Street Journal or in Investors’ Business Daily as a betrayal of the moral order.

The response to objection (1) is that the people who make it need to grow up. There is no more a John Galt or a Jane Galt than there is a Santa Clause. There are no Randites in a financial crisis–or no even quarter-sane Randites. The fact that there is a safety net in a financial crisis is something that has been obvious to everything with a spinal column for at least a century and a half–that’s what central banks are for, for Jeebus’s sake! The Princes of Wall Street did not earn their fortunes by virtue of their virtue, their intelligence, their nerve, their skill, and their willingness to run great risks, et cetera, et cetera, low animal cunning, glue, money sticks as it blows by.

The response to objection (2) is “tough.” Yes, it is important to design the elements of the rescue package in such a way as to give as few windfalls as possible to the undeserving feckless, greedy, imprudent, thriftless, et cetera. We will do what we can within the law to make sure as few gains ill-gotten survive going forward. But as Federal Reserve vice chair Don Kohn says, it is bad public policy to hold the jobs of tens of millions hostage in an attempt to teach a few feckless financiers (or even somewhat more thriftless borrowers) even a much-deserved lesson.

The response to objection (3) is that it was first made by Karl Marx at the end of the 1840s: that the problem is not overspeculation but rather overproduction, and cannot for long be solved by paliatives that address overspeculation only:

Karl Marx and Friedrich Engels: Neue Rheinische Zeitung Revue (1850): Speculation regularly occurs in periods when overproduction is already in full swing. It provides overproduction with temporary market outlets… but then precipitating the outbreak of the crisis and increasing its force…. What appears to the superficial observer to be the cause of the crisis is not overproduction but excess speculation, but this is itself only a symptom of overproduction. The subsequent disruption of production does not appear as a consequence of its own previous exuberance but merely as a setback caused by the collapse of speculation…

Marx was wrong then–the business cycles of the 1850s were not the harbingers of a world-wide communist revolution and not the expression of the dialectical contradictions of capitalism. “Overproduction” does not necessitate a crash. “Overproduction” simply means that the economy has built a lot of capital, and that a bunch of that capital is not going to be worth what the rich people who invested in it had hoped, and in the aftermath the economy’s real interest rate will be low. Big whoop–a low long-term real interest rate. All historical evidence suggests that stage III policies can work. And that avoiding them definitely for reasons of ideological purity does not work.

Wow. Arguing to abolish the Fed is crazy talk, no? If it is and so we admit the world is not first-best and a central planner must control a price (the risk-free interest rate), what theorem or moral principle tells us they shouldn’t control two? In my dazed thinking sitting in my brothers apartment 10 blocks north of Wall Street six hours before the market opens, all I can fall back on are slippery slope arguments… if two prices, why not three? ten? hundreds? all prices?

We know central control of all or most prices is bad, bad, bad, but does it follow that control of two (but, of course, not the one) is bad too? Notsneaky wants to know what the most important unsolved problems in economics are. The proper size of government gets my vote.

There needs to be a well-considered response to Prof. Delong’s post (or at least this section of the post). I’m just simply not up to the task. Let this just serve notice of excess demand for such a response.

I hope I live to see the day that statements like this:

And of course, the poor have done much worse. Household incomes for the bottom quintile have barely moved for decades.

are openly mocked as hopelessly economically illiterate.

“The Poor” (or “The Bottom Quintile”) ain’t nobody¹ is the obvious rejoinder so feel free to insert such a reply right ***here***. Or ***here***. Add exclamation points if necessary. And make sure to reference the Marxist Fallacy.

Economists usually have a deep appreciation for dynamics in society; intertemporal investment decisions, inflation expectations, growth dynamics and all that. Why is it when it comes to income distribution we slip back into this clunky static framework? As I pointed out earlier this summer, even within the stuffy confines of “income quantiles” thinking, expectations of moving between quantiles, of so-called income mobility, implies agents are ok with increasing income inequality as long as everyone’s incomes are at least weakly increasing (aka “non-zero sum increases in inequality”).

Of course, that result relies on the assumption that people only care about their own level of consumption. Things get sticky if people care about relative consumption. The problem is there just isn’t compelling evidence of such “inequality aversion”. In lab experiments (eg. 1, 2, 3 pdfs), agents do show social preferences, preferences over the consumption level of other agents, but those preferences are expressed as preferences for efficiency (i.e. maximize total consumption) or a preference to maximize the minimum consumption level in the “society”².

If social preferences are for efficiency, then the result still holds because everyone’s expected incomes increase with non-zero sum increases in inequality. Increases in everyone’s incomes satisfy a preference for efficiency by definition. Furthermore, even if social preferences come in the form of maximizing the consumption of the worse off, then the result holds due to the fact that even the bottom quantile’s income is at least stagnant by assumption. This is a key assumption and its reasonable given it conforms to recent experience.

Now, when people are surveyed, they say they don’t like inequality (e.g. this pdf). Besides the usual litany of problems with survey data, a major defect of these studies is that you can’t tell if these stated preferences reflect inequality aversion or maximin preferences or preferences for efficiency. Its next to impossible to ask a nuanced enough question to get at these distinctions and still expect survey respondents to understand what your asking. These distinctions matter a great deal for policy, of course. As mentioned above, social preferences for efficiency and maximin don’t call for redistribution in the face of increasing non-zero sum inequality. Annoyingly, these distinctions are ignored by the survey researchers who interpret their results as measures of inequality aversion and then make the attendant policy recommendations.

Results from the lab have their own litany of problems, but on net they’re a more reliable because they measure the thing we actually care about. Surveys tell us that people have social preferences, but lab experiments tell us people don’t have strong aversion to inequality.

UPDATE: Notsneaky is provoking me in the comments: “I have no basis except my intuition for this claim, but its my blog and I’ll speculate if I want to: quantile based income statistics are normatively biased against more dynamic economies. What do I mean by more dynamic economy? Dynamic economies are those that give more opportunities for individuals to reinvent themselves via schooling, relocation or just through norms that allow people to make dramatic changes in their careers. Personally, I think dynamic economies are better. Anyway, why do I think those economies are normatively biased against by quantile thinking? Dynamic economies will have more individuals that have temporarily low (or zero) incomes and so they’ll have lower incomes in the bottom quantiles.

So we have this funny situation where dynamic economies (good) will be confused for unequal economies (bad). Now, I’m not sure if the American economy is unequal or dynamic, but I am sure that everyone assumes the statistics about “The Poor” are bad.”

1. Wouldn’t it be funny if we talked like this about other transient attributes of people? “The College Town Dwellers” saw decreased incomes over the last couple of decades. “The Sneezers” saw increased tissue use inequality. [↩]
2. In the case of these lab experiments, society is just the other agents in the experiment. [↩]

On this day in 1938, Orwell was in Gibraltar and wrote:

Standard of living apparently not very low, no barefooted adults and few children. Fruit and vegetables cheap, wine and tobacco evidently untaxed or taxed very little (English cigarettes 3/- a hundred, Spanish 10d. a hundred), silk very cheap. No English sugar or matches, all Belgian. Cows’ milk 6d. a pint.

Jeez. In that one paragraph he beat Krugman to the “love of varieties” thing by about 40 years and he beat Broada and Romalis to the “price deflate using the basket of goods actually bought” thing by 70 years.

How do you like your redistribution? Prof. Kenworthy thinks there should be policy that would make more equal growth rates among people at the expense of potentially reducing those growth rates across the board.

“Why would anyone want such a policy?” I asked at his blog to which the deafening sound of crickets was the only reply. So maybe I’ll try it here:

But suppose we grant the professor his conclusion, suppose everyone is getting richer but the rich much more so. Is this really a problem? Does it make sense to enact policy (e.g. higher taxes on the rich) that makes more equal growth rates of incomes across income classes but runs the risk of reducing everyone’s income growth rates? What model of human behavior justifies this policy trade off?

Maybe an example will help. Suppose under current policy, my neighbor’s income increases by 25% every year and mine only goes up 10% per year. Now suppose there was a policy that would decrease my growth rate to 5% a year and his to 10% a year. The new policy would make growth rates more equal, but reduce everyone’s growth rates. Should I support that policy? Why?

Would anyone support this policy? Does your answer change if instead of neighbors we’re talking about adjoining cities? states? countries?

Is this just Haidt’s liberal’s fairness running amuck? If so, shouldn’t we mock it like we mocked those silly conservatives’ disgust at gays and empowered women?