Mike in The Nation

“Let’s look at several of the problems that happened over the past few years in the financial sector, and see how legislative efforts have attempted to address them. (Spoiler alert: not very well.)”

Mike tells this story:

Our regulator’s goal isn’t to make a system in which there are never failures but a system in which failures are cleaned up in an orderly and nondisruptive fashion. Like an elaborate game of Jenga, even removing the smallest piece can collapse the entire structure, and regulators need to be able to remove any piece without having the entire real economy collapse.

This is a great story. Can it be rationalized? What objective function of regulators would lead them to aim to prevent “disruption”? A disruption now and again might be good by standard measures of welfare. Does Mike have a public choice model in mind? Do bailouts improve the chances of re-election?

Is the system as precarious as Mike suggests? Bailouts are sold to the public using a counterfactual that is rarely, if ever, observed. Namely, if the bailed out institutions were allowed to fail, it would have produced an undesirable level of systematic risk. When have failed banks caused systematic risk? The Great Depression had bank runs which caused a bad situation to get worse. But bank runs weren’t, by far, leading the causal chain. You need deflationary expectations, no deposit insurance and no branch banking to get those sorts of bank runs.

Besides, is the recent banking crisis evidence of the system’s precariousness or evidence against it? A long time transpired between banking crises in the US.

UPDATE: What is systemic risk?

Walk out?

I don’t think I’ll be participating in the planned walk out Thursday at UC campuses. I’m not clear what the goals of the walk out are to be. Are they to protest a short-term budget shortfall? To dispute the priorities in budget balancing? To lament the lack of voice in the process?

I’m not sure how walking off the job on Thursday will change the short-run budget issues. Short of printing their own money, neither the State nor the University can do much about the deficit. Of course, they could have done things in the past to have mitigated some of these problems (e.g. the University could be less dependent on State funds and the State could have institutions that make it less of a fiscal mess). But a protest today can’t change past actions. The best that can be said on this front for the walk out is that it could provide a modest encouragement towards making structural changes in the way the State and University do business; a very modest encouragement.

Also, the president doesn’t act as dictator nor the Regents an oligarchy. Shared governance means the University is also run by the faculty and they’ve weighed in on the issue. According to them, faculty and research quality should have precedence over access and affordability. “Our view about affordability is simple: if the state of California once again adopts the view that access and affordability are public goods worth supporting, they will be readily achievable.” To them, getting poor folks into the University is a public good and thus, it should be provided by the public, not from cuts in their paychecks.

Now voice: maybe there’s a point in protesting because we didn’t have a say in the process. But we do have a say. Students, mostly new students, can vote with their feet. There are plenty of private universities in the State and plenty of competition of all stripes outside the State. If fellow grad students don’t like the product they’re buying, then they should stop buying it.

The New Kaldor stylized facts

Kaldor published some stylized facts about growth in the sixties and growth theorist went about explaining them. They’re done now. Professors Jones and Romer came up with a new set of growth facts (h/t Kling). I will spend my career hearing theories that explain these new facts. Yeah!

Two UC Davis econ profs are cited.

Also, in that paper is my original dissertation idea:

The interaction between institutions and idea flows is easy to illustrate in familiar contexts. For example, until 1996, opponents successfully used the local permit process to keep Wal-Mart from building stores or distribution centers in Vermont. This kept powerful logistics ideas like cross-docking that Wal-Mart pioneered from being used to raise productivity in retailing in the state. Such nonrival ideas must have been at least partly excludable. This is why Wal-Mart was willing to spend resources developing them and why competitors were not able to copy them. All this fits comfortably in the default model of endogenous discovery of ideas as partially excludable nonrival goods.

Looking at the macro (state-level) data, I couldn’t find the relationship suggested in the bolded section. There’s great data on Walmart’s spread out of Arkansas after its founding. If anybody’s interested in this stuff, I can pass on citations, etc.