Sunday, April 27, 2014

Is Limited Government Possible?

By Robert H.

I'm not sure many non-lawyers give much thought to the above question, but think about it: the American government is, formally and officially, one of unlimited powers.  If you can get a constitutional amendment passed, you can do anything.* Them's the rules.

For other governments, this is not true.  The German Basic Law has an eternity clause which says that human dignity is inviolable, human rights are great, and this clause can never ever be amended or changed.  Them's their rules.

Now this is a big formal difference, but is it a big practical difference?  And even if it is, does this track what we mean by "limited government?"  For example, when Americans say they want a more limited government, do they mean they want an eternity clause?  Or do they mean they want more rules that can only be changed with supermajority votes?  And if they mean the latter, why don't they just say, "I want more supermajoritian consensus in government?" and argue for that?  And how do they intend to *get* their limits?  Amending the constitution?  That, again, means they are just advocating for supermajoritarian governance.

So, in contrast to libertarian laymen, libertarian lawyers tend to focus less on what formal "limits" should be placed on government (balanced budget amendment!) and more on what processes, procedures, checks, and government/constitutional structures could lead to smaller government (for example, Ilya Somnin's focus on foot voting).  Questions like this are why.  When you dig down into it, saying "government should be limited" is most meaningful when you are really saying "I want these practical, process checks on government."  Otherwise you're just saying "here's a policy I think is great and everyone should be forced to adopt.  Don't ask me how we'll force the issue."

*Ok, you can't deny a state its equal suffrage in the senate or end slavery before 1808, but come on.

Piketty Thoughts

By Robert H.

The book is Capital in the 21st Century, a french guy wrote it, and you can find dozens of summaries and reviews from both sides of the political spectrum if you don't know what I'm talking about.  These are my general thoughts on it.


Let's disaggregate possible problems with economic inequality.  Note that I think some of these are dumb and not real or likely problems, I'm just trying to be complete:

1. Negative political effects -- the elite will use their increased share of the pie to dominate the government and use it for rent seeking (er, more so).
2. Less meritocratic society -- Elites will create social and economic barriers to make it harder for people born out of the upper class to get ahead.  This will lead to wasted human capital.
3. Psychic effects -- inequality makes the bottom 99 percent jealous and unhappy.
4. Dis-utilitarian distribution -- Because of diminishing marginal utility, a more equal distribution should be preferred to a less equal one, ceteris paribus.
5. Poverty -- the real problems with historical inequality is the poverty at the bottom. It is sad when lots of people are poor.
6. Art -- The best art comes in periods of high economic mobility into and out of the upper class, during which times the Venn diagram of those who have been highly educated, have suffered poverty or repression, and who have the leisure to write has the most overlap.
7. Inherent badness -- Inequality is just bad because it is.

From what I've read, Piketty's supporters seem to want to focus mostly on four and one (inequality will have negative political effects, whereas a more equal distribution will increase total utility). His detractors are most interested in five (the living standards of the poor is what matters and taxing capital will slow growth and lower those living standards).  I think the anti-Piketty folks are mostly right.  Wages and living standards for the bottom quintiles are likely to rapidly grow if returns on capital remain high over the next century, even if inequality also increases.  This is a success story.  Piketty gets it wrong to focus on the living standards of the poor relative to the rich rather than focusing primarily on the living standards of the poor, full stop.  We shouldn't target inequality or capital accumulation or high rates of growth on capital, we should just work on making the lives of the less well off better and should do so with the most efficient taxes available.

That said, I think the problems associated with point one (negative political effects) are real, and I'm disappointed so few of Pikety's critics have latched onto them.  Relatively simple democratic reforms could make good (er, relatively good) governance much more likely in a period of high inequality -- mandatory voting, campaign finance reform, proportional representation, cash rewards for voters who pass civics tests, etc etc.  The idea is to make sure that more cash doesn't equal more ability to rent seek for rich people, and there are all kinds of ways to do that short of "have a global wealth tax."  But Pikety's detractors, while acknowledging that higher inequality is possible or likely in the future, don't seem to want to embrace any of the relatively trivial reforms that could help democracy weather inequality better.  I wish they would!

Standard Disclaimer: Obviously the books is brilliant and worth reading and Piketty's historical research is amazing.

Wednesday, April 23, 2014

Data and Japan

Steve Williamson has a new post on monetary policy.  He argues that the data supports his view that quantitative easing lowers the rate of price inflation and low interest rates cause low inflation.  Unfortunately, he made a pretty significant error in constructing the data, and after fixing the error I think there is reasonable evidence that he's wrong.  [As a Ph.D. student I live in constant fear of using a data set incorrectly, so it's nice to see that even high ranked tenured professors can make mistakes.]

Here is the graph he shows:

The graph is pretty striking.  So much so that I started googling for stories about Japanese deflation.  The graph shows year over year measures, so the price level has to drop about .9% in a month to get from 1.5% in February to .4% in.  That would be an annualized inflation rate of -11%.

It turns out that the March data doesn't exist yet.  From the comments, it sounds like Stephen conflated two series, the Ku-area of Tokyo CPI and the Japan area CPI.  Specifically, the way he did it created a large error, because he was using the price level of Japan CPI and inserted the price level of the preliminary March Ku-area CPI into it.  These two series are completely different and use different bases.  On his chart it looks like the price level (2010 base) fell from 100.7 to 99.8.  In reality, the Ku-area price level rose from 99.3 to 99.8.  The preliminary results show more inflation, not less.  Below are the two graphs:

We should know by April 30th what happened to Japan CPI in March.  If the Japan numbers are up as the preliminary Tokyo numbers are, then Japan CPI will be getting pretty close to the 2% target.

Stephen Williamson's model predicts in the long run that low rates and Quantitative Easing should cause low inflation.  That isn't evident here and it isn't evident in the breakeven inflation rates for Japan.

This graph shows a quick and dirty market measure of inflation over the next five years.  It shows 2.3% and has been rising.

So we have Sweden that raised rates and then deflation followed and Japan that has not raised rates and not had QE and so far has seen measured inflation and expected inflation rise.  My prediction is that if Japan inflation falls a lot, it will be because Japan raised rates or stopped QE to early and caused expected inflation to fall dramatically long before measured inflation falls.  

Monday, April 7, 2014

Constitutions are Laws, Not Alternatives to Laws

By Robert H.

Here is a mistake lots of libertarians make.  "Democracy sucks; it must be bound by strict, constitutional limits on government; so let's have more constitutional limits on government."

The problem is that Constitutions are laws.  That means that if you have a fundamental problem with the way laws are made, "rely more on constitutions" can't be the answer.  I mean, how do you select the constitutional constraints and principles of a limited government?  The current answer in America is "with a supermajority," but super majoritarian voting is even more susceptible to most criticisms of majoritarian voting than majoritarian voting itself.  Take the two criticisms kling cites in my link: 1. supermajorities don't solve the problem of voter ignorance.  Now, instead of a majority of informed people, we have to scare up a SUPERMAJORITY to create good policy. 2. Supermajorities don't solve the problem of forcing voters to join a coalition to effect change.  Now they have to join an even bigger coalition!  

Things aren't better on the enforcement side.  How do you enforce constitutional principles of limited government?  The current answer is "with elected politicians or those they appoint."  But those are the same guys who make laws!  If they can't be trusted to do the latter, why the former?

It's laws all the way down, and the fact that one set of constitutional law makers made one constitution in 1789 which libertarians like one interpretation of is not a reason to think "constitutionalism" will solve libertarian problems with democracy.  So, just for a practical example, the most popular model constitution for new nations to adopt has been, since the wall fell, the German basic law.  Germany also attracts lots of migrants, and would attract more if immigration restrictions were lifted.  But the German constitution would make a libertarian's heart seize up: it's littered with second generation rights (ie, mushy socialist stuff like rights to a clean environment or to healthcare) and isn't particularly federalist.  If both super majoritarianism and migration have created and fortified a popular constitutional model libertarians hate, what's the alternative libertarian method for creating and preserving "good" constitutions?  Military coups?

So here's the math: to make a constitutional regime libertarians like, they would have to convince a supermajority.  To just pass good laws they approve of, they would have to convince a majority.  Instead of writing off democracy and embracing the first model, libertarians who go the second route will have a far easier time.  Scoreboard time: In the last 50 years American democracy killed segregation, slashed tariffs, ended the draft, embraced LGBT rights, lowered top marginal tax rates, had an amnesty for migrants, embraced Friedman's monetary ideas, etc. etc.  Libertarian ideas can and have won at the polls. In that same amount of time, more or less no libertarian constitutional amendments were passed*.   Learn your lesson, people.

*Maybe the 24th?  

Sunday, April 6, 2014

Mind the fiscal gap?

By Robert H.

Is fiscal gap accounting something I shouldn't think is stupid?

Basically the idea behind fiscal gap accounting is that you get the best estimate of our fiscal situation not by looking at US debt held by the public and maybe projecting it out over x years, but rather by adding up all our future obligations and subtracting all our future income, holding policy constant.

I've always thought it's dumb for three reasons:

1. It operates on an infinite timeline.  Assuming we are going to, to pick random examples, keep paying out SSI obligations and keep taking in gas taxes at current rates forever strikes me as an ahistorical and useless way of thinking.

That said, this may be stupid on my part.  The social discount rate means that a dollar spent on SSI 700 years from now doesn't count very much in assessing the current fiscal gap.  But that means fiscal gapers have to estimate the social discount rate for America over a decades long timeframe, and that also strikes me as crazy and impossible.

2. Related to 1, the fiscal gap gyrates from year to year in ways that don't seem helpful for policy makers.  I can't find a chart of the fiscal gap that goes back to the war (a bad sign in and of itself), but here's a chart showing the projected fiscal gap rise by 300 percent over the last ten years.  Should I be 4 times more concerned about the deficit than in 2003?  Really?  How many fiscal gapers were only 25 percent as concerned about the deficit ten years ago?

3. The market for US debt appears to be totally unrelated to the fiscal gap.  Again, the fiscal gap says our fiscal situation is four times worse off than 2003, but treasuries have significantly lower yields than ten years ago.  Fiscal gapers  seem to fail the market test.

I could use more info, though.  Has anyone correlated fiscal gaps and debt yields over time across countries?


So all that said, accounting is related to math and I am about as numerate as a puffin.  Is the fiscal gap more useful than I give it credit for?

To be clear, my current strategy is to figure that the markets especially and democracy less so are better than me at figuring out how worried to be about the debt, and using them to guide my thinking.  People who buy treasuries and elected politicians don't seem very worried.  As a check, I note that fiscal crises have been extremely rare over a century plus of modern welfare states.  So I'm pretty confident we will eventually get around to dealing with the deficit before it is a big deal.

Then the fiscal gapers start screaming no, every second of delay costs us 400 billion dollars, or whatever, and my equanimity gets perturbed.  Should I listen to them?

Friday, April 4, 2014

Learning Investments

By Charlie Clarke

As student studying abroad asks me how to learn the course I'm teaching next fall "Investments" independently.  Someone told him it was "near impossible."  I know that's not true, because I did it!  Here's my advice:  

I don't agree that Investments is a difficult subject to learn independently.  You must remember that wall street is filled with Mathematicians, Statisticians, Physicists and Engineers that have no formal Finance training.  That said, it requires some hard work, and more than that, a passion for the material, which makes it not feel like work at all.  Additionally, it's never been easier in the history of the world to learn something on your own as there is a tremendous amount of material available from top institutions.  

The textbook we use is Bodie, Kane and Marcus.  Here is an MIT course syllabus with lecture notes.

Coursera offers free online classes with videos, practice problems as well as certificates of completion if you end up taking it for credit.  I would probably start there.  None of the courses really replicate 3302, as they are probably more quantitative, but if you want to do investments as a career, that is not a bad thing.

Bob Shiller's Financial Markets course at Yale is online and has a lot of overlap with the Investments course.  This course is not that quantitative and pretty interested.

Here are some more quantitative courses.  I don't know your level of commitment and math background, but there is a lot of info about professional investing in these courses:

Computational Investing, Part I 
Financial Engineering and Risk Management (this is the most mathematical/advanced)

For outside reading, I'd start with "Random Walk Down Wall Street" by Burton Malkiel.  That's the book that got me interested in Investments.  Check out what's available and follow your interests.  You don't have to follow any particular order.  You can learn a lot.

Which Hunt?

By Robert H.

Just a friendly reminder that there were not many actual witches in Salem.  Just so, in the most famous post war witch hunt a lot of the people caught up by McCarthyism were never or had long since stopped being movement communists, and very few were spies (which is impressively bad work, since the state department actually was riddled with soviet spies).

So people, stop referring to the targeting of someone for beliefs they actually hold and things they actually do as a witch hunt!  A witch hunt is when we go after people so zealously and with so few safeguards for the innocent that we burn people at the stake who aren't even witches.  It's a useful concept, word, and premise for a Star Trek: The Next Generation episode (see The Drumhead).  Don't dilute it.

Not that it's justified to burn actual witches at the stake.  But the term for that is a human rights violation.

Tuesday, April 1, 2014

Delong and Krugman on Cochrane

By Charlie Clarke

Brad Delong and Paul Krugman are not happy with John Cochrane.  Brad Delong says John Cochrane is wrong, and Paul Krugman says he thought of it first.

Here is the original from 2009 (except everything in bold was cut):
If we just had a credit crunch, we would expect to see stagflation – lower quantities sold, but upward pressure on prices. A credit crunch, like a broken refinery is a “supply shock.” Since we are seeing lower quantities sold and easing inflation, we must also be seeing a “demand shock,” and we need to understand its source.
The bottom line, then, is that people want to hold more of both money and government debt – and don’t particularly care which.  Trying to get it, we are trying to buy less of both consumption and investment goods. Again, this is a deflationary pressure. If the government does nothing, deflationary pressure will remain until goods are so cheap that we have the desired real value of nominal government debt.  Until deflation happens, output falls.
What do to? In this analysis, monetary policy is impotent, but not for the usual reason that interest rates are nearly zero. The Fed can arbitrarily exchange Treasury debt for money, and increase the money supply as much as we like. But nobody cares if it does so, since the “flight to liquidity” is equally towards all forms of Government debt.  If we want more fruit and less cheese, putting more apples and less oranges in the fruit basket won’t help.
Looking at it this way gives us a logical reason that fiscal stimulus might work. It leaves the private sector with a trillion more dollars of government debt in their pockets. But the Fed’s many facilities also issue government debt and money, which helps to satisfy the demand for government debt.  Which is the better path?

I think the bolded sections make clear that Paul Krugman has the right response.  Cochrane is in all senses agreeing with Brad and Paul's analysis.

Cochrane goes on to disagree with fiscal policy for much more banal reasons.  He worries the money would not be spent well.  He prefers "fiscal policy" by which he means that the Fed could buy up lots of almost safe debt, "I would be happiest if the Fed and Treasury satisfied the large demand for government debt and money by transparently buying or lending against high quality corporate and securitized debt, at market prices."