Wednesday, September 30, 2015

40 Years of EPA Regulation - Political Factors

I've been a bit lazy about posting lately, but I think the next series of posts will be interesting if you liked our previous posts on the EPA. Within the last few weeks, the Mercatus Center has put out a much longer time series going back to 1974. I have some ideas for journal articles I'll be exploring over time, but as I sift through the data I thought I might share some of the insights they provide as I go.

Most of us who haven't studied the EPA's history in detail probably have a few assumptions about the political drivers of EPA regulation, especially regulation of agriculture. We'd probably think about things like pesticide bans, clean air and water regulations, and fuel standards. We'd probably associate these regulations with Democrats, with an exception for Nixon, who created the EPA.

The charts below show the annual index of regulatory restrictions on agriculture by the EPA (red line). The blue shaded areas indicate years in which Democrats held the majority in the House of Representatives, the Senate, or held the Presidency.

Thursday, September 24, 2015

Are Rentiers Valuable?

A few weeks ago I had a short conversation with someone who believed that "unearned income" from asset ownership should be taxed nearly completely away. Why, my interlocutor asked, are speculators and those who live on interest entitled to that money? He said that they hadn't produced anything to earn their money and so should have to give nearly all of it to the poor.

What is "unearned income?" Wikipedia defines it as "income received by virtue of owning property (known as property income), inheritance, pensions and payments received from public welfare. The three major forms of unearned income based on property ownership are rent, received from the ownership of natural resources; interest, received by virtue of owning financial assets; and profit, received from the ownership of capital equipment."

This definition lends itself to a moral distinction between earned income (which is justly acquired since some kind of physical discomfort was required to get it) and unearned income (which doesn't require any work in the present). This distinction is lost on me personally because someone at some point had to work to acquire an asset. It's true that heirs have assets transferred to them without work, but the fact that the maxim "shirtsleeves to shirtsleeves in three generations" is about 2000 years old suggests that their unearned wealth will go to others in pretty short order.

Saturday, September 19, 2015

Julien Noizet on Monetary Policy

This is part 3 in an interview series with Julien Noizet. For more about Julien, see the first post.

The interview questions are:
Why do you think inflation has been low in US after the 2008 recession?
What is the most important thing economists get wrong about the way banks work? 
What are your thoughts on NGDP targeting?
What are your thoughts on free banking?

FH: What are your thoughts on NGDP targeting?

JN: I am definitely open to the idea. I believe NGDP targeting would be a strong improvement on the current inflation targeting dogma. It would lead to a more stable economic framework, would at last (in theory) release central bankers from error-prone discretionary policies, respecting the concept of the rule of law. While not my ideal, I still see NGDP targeting as a step in the right direction.

Tuesday, September 15, 2015

Julien Noizet on What Economists Get Wrong About Banking

This is part 2 in an interview series with Julien Noizet. The first post can be found here.

The interview questions are:
Why do you think inflation has been low in US after the 2008 recession?
What is the most important thing economists get wrong about the way banks work? (this post)
What are your thoughts on NGDP targeting?
What are your thoughts on free banking?

FH: What is the most important thing economists get wrong about the way banks work?

JN: There are a lot of misconceptions about banking among economists. Those misconceptions vary by school of thought. The main problem with mainstream (neo, new classical and new Keynesian) economics is that they often forget banks altogether. Banks seem to merely represent a means of implementing monetary policy. Monetary policy seems to be considered in a vacuum. The issue here is that banking isn’t free. It is actually the most regulated industry on this planet. Bankers are market actors that react to incentives. This can lead to severely distorted economic effects.

Sunday, September 13, 2015

Julien Noizet on Low Inflation

Julien Noizet's blog is, in my mind, indispensable. Julien is a banker who also understands economics very well; a combination that allows him to offer unique insights into macroeconomics and banking. I've featured content from his blog in the past and wanted to get his thoughts on recent macroeconomic trends and banking theory. Julien was kind enough to answer 4 questions I thought Farmer Hayek readers might be interested in.

The questions are:
Why do you think inflation has been low in US after the 2008 recession? (this post)
What is the most important thing economists get wrong about the way banks work?
What are your thoughts on NGDP targeting?
What are your thoughts on free banking?

I'll provide links in each post to the other 3 as they come out.

FH: Why do you think inflation has been low in the US after the 2008 recession?

JN: First, it depends what we mean by inflation. If we simply mean ‘CPI inflation’, then the reasons aren’t fully clear. The ability of the banking system to expand lending has been multiplied by the large amounts of reserves injected into the system through the various QE programmes. Excess reserves have jumped and the money multiplier has collapsed, indicating that banks haven’t increased lending volume much. However, it is a mistake to believe that inflation would sky-rocket within years of this massive liquidity injection by the Fed. The crisis involved a balance sheet-led recession, meaning that many banks and bank customers were insolvent. In such case, people and companies attempt to clean up their balance sheet before borrowing again. The experience of the Great Depression clearly showed that it can take decades for the money multiplier to get back to its previous highs.

Saturday, September 12, 2015

Bryan Caplan on Monopoly

Over the last year I've posted several times on monopoly theory. I've discussed the usefulness of what Ronald Coase called "blackboard economics" and alternative ways of evaluating firms' real-world competitive behavior.

In a post on industrial organization and the Structure-Conduct-Performance (S-C-P) model, Bryan Caplan offered a very interesting insight on standard monopoly theory (italics in original):
Still, it's easy to see the intuitive appeal of S-C-P.  Namely: If you are a monopoly, you'll charge high prices, and hence produce low quantity. 
The problem with S-C-P is that it ignores an even more intuitive truism.  Namely: If you want to become and remain a monopoly, you will produce high quantity, and hence charge low prices.
So the question is, how does a firm obtain monopoly status without going through the process of becoming a monopoly? Caplan concludes:
In short, the desire to become and remain a monopoly leads firms to do the exact opposite of what they'd do if their monopoly status were a law of nature - or the law of the land.
This is one of those cases where an important and interesting insight is obvious once it's pointed out. It's also an example of the power of the economic way of thinking and the importance of economic intuition.

Wednesday, September 9, 2015

Arnold Kling on Falsifiability in Economics

Arnold Kling posted some commentary on falsifiability in economics that I found very interesting. I may not agree with everything he says, but the post is certainly food for thought. Here's an excerpt:

In general, I shy away from using the term “social science,” because I do not think that economists can aspire to the same level of falsifiability as physicists. I believe that the difference between social science and natural science boils down to this:
In natural science, there are relatively many falsifiable propositions and relatively few attractive interpretive frameworks. In the social sciences, there are relatively many attractive interpretive frameworks and relatively few falsifiable propositions.
The reason that there are relatively few falsifiable propositions in the context of social phenomena is that there are many causal factors, and decisive experiments are rarely possible. Social phenomena are characterized by high causal density, to borrow a term from James Manzi.

As a result, economics is closer to history than to physics. If a historian wants to examine the causes of the decline of Rome, or the decline of empires in general, he or she will provide an interpretive framework. That framework cannot be falsified, but readers can compare it to other frameworks and make judgments about its plausibility.

. . .Economists who employ models think of themselves as “doing science,” meaning that they are generating falsifiable propositions. However, in practice, they rarely reject their preferred models. Instead, they explain away anomalous observations. In that sense, they are really using their preferred models as interpretive frameworks.

I recommend reading the whole post as he throws in a couple of examples.