Satz and Noxious Markets

Watching a speech by ethicist Debra Satz on noxious markets, left me quite underwhelmed.  Noxious markets, like markets in child labor, prostitution, and kidney exchange are markets that society sometimes chooses to outlaw.  For some reason, trade in noxious markets is or should be restricted.  I firmly believe that economics needs to absorb insights from other disciplines and that this argument is important, but I find the paradigm Satz offers us to think about these markets falls well short.

She offers these major criteria for identifying noxious markets:

1. Weak Agency

2. Vulnerability and Inequality

3. Extreme harms to individuals

4. Extreme harms to society

She then walks through what her paradigm would say about kidney exchange.  For weak agency, she argues that 40% of kidney sellers in India didn't know how many kidneys they had; they aren't informed enough to make a decision.  For inequality, how do we feel about the poorest in the world becoming the world's kidney sellers?  She argues that allowing kidney markets changes the price of credit.  Those willing to use a kidney as collateral have more access to credit, hurting those unwilling to donate, which in some sense in an externality of the kidney market.

As a test of your intuition on whether this is a problem, imagine, she says to the group of Stanford students, that Stanford had required that they put up an arm as collateral for their student loans.  I thought the comment starkly showed the weakness of here discussion.  Strikingly, no where in her discussion of kidney markets does she consider all of the people that wouldn't die, because they got new kidneys.  But, of course, that's the whole game.  Contrast a legal market in arms, where peculiar wealthy people enjoyed the sense of power they felt by purchasing arms to the poor.  Surely that market is much more noxious than a person whose kidney is failing and just wants a chance to keep living.

It's quite possible that a world with legal kidney donations has in it many kidney donors that regret their decision to donate, but it also has a lot more people that didn't die waiting for a kidney.  Any serious discussion, must attempt to grapple with both possibilities.

Additionally, is there a worse way to test your intuition about kidney markets than by considering a market in arms?  Markets in things that don't exist are really weird and really hard to think about.  I expect my intuition especially likely to fail me.  That the student loan market can saddle an 18 year old with $150,000 debt that they can't get rid of through bankruptcy is also potentially noxious, but it isn't nearly as weird to think about, since it actually exists.  

A lot of her talk is about weird markets and sales that make us cringe, but we also need to think hard about noxious markets we allow, like pornography, gambling, and plasma donations.  We can check all of the noxious boxes and still be better off with a legal market than an illegal market.  

Lawyers (Other Than Me) Aren't Useless

I've noticed a weird trend of smart, pragmatic type thinkers assuming that lawyering isn't really a sector of the economy we want to expend resources on or see a lot of innovation in.  Here's Matt Yglesias.

It seems to me that having smart, ambitious, hardworking people become lawyers is a huge waste. When Apple and Google compete to produce the best smartphone operating system, consumers win as products improve. But while there's presumably some level of lawyerly incompetence that would be socially problematic, at the margin, big firms getting better and better at suing one other doesn't help anyone.

I think the basic idea is that law is a zero sum game, and more resources spent on lawyering just turns it into an arms race. Party A gets better lawyers so Party B has to get better lawyers and now we are spending more on lawyers, but it is still Party A vs Party B with the same facts and the same law and the same equally good lawyers (if better than the last ones) representing each client.  We don't gain anything, just more expensive and subtle legal tricks to get to the same outcome

This way of thinking about the legal profession is breathtakingly stupid.

The basic problem here is that once Party A and Party B get better lawyers, they also might get a different outcome.  Maybe Party A was going to win, but there is some subtle and obscure point of law or argument or fact that can only be dug up by great lawyering, so now Party B will win.  It doesn't matter that the arms race means they *both* have great lawyers capable of making subtle arguments, once they got there it turned out that the subtle arguments are all in Party B's favor.

This happens.  I've seen it.  Sometimes, as things get elevated to better and more senior attorneys, someone catches something or writes something or thinks something that worse lawyers missed, and it changes the whole case, without the great lawyers on the other side having their own set of innovative tricks to change things back again. Better lawyers can change outcomes, and that means they can help society in three ways:

1. They Make Better Laws

In our country, courts make law.  Better lawyers means better judges (who are normally required to be lawyers) getting better, fuller arguments presented to them by both parties before they make that law.  I would guess that smarter judges hearing smarter arguments from smarter lawyers make smarter laws.

2. Our Legal System Can Bear More Complexity

I think there is a dumb idea among non-lawyers that the law is complex because lawyers and judges and legislators make it so.  That ain't the case.  The law is complex because the world is complex.  *Really* complex.  It is nice when the legal system can be complex too, because excessively simple rules either lead to 1. Unjust and inefficient outcomes as a mess of complex real world fact patterns are decided with too-simplistic rules not designed to account for them or, 2. A lack of predictability as the rules are made wishy-washy enough to deal with complexities on a case-by-case basis.  So, as an example, here's a dude complaining that the world has gotten more complex with the advent of driverless cars, and we desperately need a bunch of complex new law to deal with it.  New weird facts have raised uncertainties under the old, general laws, so now people want the law to be more specific and complex.  Happens all the time.

But if we want a complex system where outcomes can hinge on subtleties, we need minds that can grasp subtleties to work that system.  The basic limits on how complex the law can be without costs becoming unbearable are library sciences and lawyer smarts.  The smarter the lawyers, the less we have to trade off flexibility for predictability.

3. It's fairer

There's probably a reason, once we dug up all the best, most subtle arguments, Party B won.  When a party wins after the court has been exposed to all the arguments -- subtle and simple -- they are more likely to be the party we want winning then when a party wins after being exposed to only the most obvious arguments.

***

Anyways, I'm not claiming we should pay lawyers more or less or the same.  Obviously the benefits of spending more on lawyering has costs.  I'm just saying, the benefits exist in the first place.  You can't unthinkingly dismiss the idea that spending a lot on lawyering is socially useful.

What is the Conundrum?

Arnold Kling posts the following:

1. Policy has no effect. Markets do what they will do, regardless. The market uses the best prediction model, so economists’ macro models can, at best, replicate the market’s implicit model. 

2. Policy has an effect, but markets try to anticipate policy. The expected component of policy has no effect. Only policy surprises have an effect. 

It seems to me that the market monetarists (e.g., Scott Sumner) believe something closer to (2) than to (1). But (2) can get you into some strange conundrums. Does the Fed have free will? That is, does it have the ability to surprise markets, other than by acting randomly? If its actions are not random, they should be anticipated by markets. If they are anticipated by markets, then they should have no effect. etc.

 But what is the conundrum?  He could just as truly be writing about Congress.  Congress can write legislation that effects the market.  Congress can effect long-term growth, price to dividend, and interest rates.  Does Congress have free will?  Does it act randomly?

The same "conundrum" surrounds firms.  Only unexpected news about firms moves markets.  Does that mean Bill Gates can have no effect on the price of Microsoft's stock?  Could he wake up tomorrow and deliberately tank it?  In fact, markets are always trying to anticipate what CEOs are doing and evaluate how their actions will change the value of the underlying stock.

So where is the conundrum?  Why does thinking about the Fed this way make Kling so uncomfortable?

HT: Scott Sumner (with his own comments)

Defending Macro Research Against People Who Aren't Really Attacking It

    Paul Krugman again laments the state of macro, and links to a blog reaction to a Delong interview.  Yet, I'm struck that the conversation maligning the state of macroeconomic research never actually feels the need to mention macroeconomic research.  For instance, Krugman and Delong both agree that we have inadequate aggregate demand.  They both believe that monetary stimulus should be tried, meaning raising the expected future rate of inflation and/or NGDP.  So if we have a monetary disequilibrium, should we not ask the top monetary economists what to do?

So who are they?  Let's check the rankings:

1. Ben Bernanke

2. Lars Svennson

3. Michael Woodford

4. Mark Gertler

Bernanke and Gertler are long-time coauthors.  Both of their research focuses on monetary policy, the macroeconomy and financial frictions.  Also, Bernanke was an outspoken critic of Japan's central bank and the lost decade.  If there was anyone with the type of intellectual pedigree and viewpoint that would be able to prevent a similar occurrence here, it was widely agreed Bernanke was that person.  (I'm pretty sure Krugman said as much and he supported Bernanke's appointment).  

Svennson and Woodford are the preeminent New Keynesians.  Especially in Woodford's case, he's been outspoken for price level targeting and some measure of fiscal stimulus.   Svennson is best known for the "target the forecast" view.  The idea that central banks should be forward looking.  The view championed on the blogosphere by Scott Sumner.  Here are Woodford and Svennson writing together on the idea.

Look, its no secret that this is great research that Krugman and Delong love.  It also turns out that it has been incredibly rewarded by the profession.  The profession agrees that these are all top monetary economists.  So what happened?  

I would say one thing that happened is that business cycle research and monetary economics became less cool.  During the great moderation business cycles didn't seem that bad.  For instance, macroeconomists spent more time asking questions about the income distribution and wealth distribution.  Mapping the U.S. income distribution into the U.S. wealth distribution is a puzzle.  It seems wealth is too unequal.  Macroeconomists started trying to map stylized facts of finance.  Why do stocks have such a high return compared to bonds?  

Even this marginalization of monetary economics might be overstated.  Looking at the H-Index, Woodford only drops to 16th and above him are names like Rogoff, Blanchard, Summers, and Stiglitz that I don't think Krugman and Delong feel any need to distance themselves from.

So what's the problem with academic research?  Lots of economists that Krugman, Delong and I think are great are getting lots of citations and top publications.  And if they want to go after Fama, Lucas, Barro and Cochrane for their research, then do it!  Don't quote newspaper articles and lament that macroeconomic research is to blame.

Update:  Noah Smith with comments and links.  Scott Sumner also comments.  (neither comments are directed to me, just the more general debate).

Restricting Guns to Prevent Mass Shootings is Dumb

The majority of gun deaths in America are suicides.  Suicides are also the type of death most easily deterred by restricting access to guns: Israel has had success curbing military suicides by not letting soldiers access guns on their downtime and Australia saw a sharp drop in suicide rates when it instituted its gun buyback program, with states with more aggressive buyback programs seeing a bigger drop faster.  These are not the only studies that indicate this, and the result has "microfoundations" in psychological literature: restricting the means by which someone can kill themselves is a key step in treating patients, having a gun in the home is a risk factor for suicide, etc.

Meanwhile, mass shooting deaths are a fraction of a fraction of America's 31,000 plus annual gun deaths, and the relationship between gun control and crime is harder to suss out.

So gun control is about suicides.  This is good, because it gets us to a core reason we might need state paternalism -- to protect the mentally ill from their crazy decisions.  It has the added benefit of being less condescending to gun owners: "we know you are responsible, we know you can handle your weapon safely, but we are worried that some depressed member of your household is going to use that gun to off themselves when they aren't thinking straight."

And it gets the numbers into a world where severely restricting gun rights makes sense: the economic impact of the firearms industry was about 31 billion dollars last year (by their trade group's estimates), meaning, if we value lives at about $7,000,000 (a standard figure in public policy planning, I think), we only need to save just under 4,500 lives a year to make the complete death of the gun sales industry worthwhile.  Not only do I think that is a realistic figure (there are 17,000 plus firearm suicides a year; deterring just a quarter of them from killing themselves would get us there), I think we can stop short of completely ruining all the utility people get out of gun ownership and completely bankrupting the industry (licensing guns to people when need can be shown (security guards, cops, etc), allowing rentals for firing ranges and hunting, perhaps still allowing a tightly regulated collecting hobby, etc).

So passing a restriction on big magazines or assault rifles to prevent mass shootings might be a marginally good idea, but it is going after a really small problem.  The problem is suicide.  The solution is heavy gun restriction.

If you think that people have an individual right to bear arms in the constitution, the solution is repeal of that right and heavy gun restriction.

Hot Opinions: Slavery Sucks!

In the comments to this post, J Billings asks, "Not asking because I disagree, just haven't thought about it before, but what are your reasons for opposing self selling?"

I've got lots!  But I think the one that most appeals to libertarians is pointing out the obvious public choice problems.  Markets -- including markets in self selling -- only work if the societal institutions around them are good.   But societal institutions are made by the people in society, and in societies with slaves they tend to be made by slave holders.  And that pretty much never results in good public policy.  Here in Texas back in the 1870's, convict labor could be rented out to help defray the cost of incarceration.   Which is no,t necessarily a terrible idea.  But, of course, it gave the politically powerful class -- business owners -- a huge incentive to screw over the politically powerless class -- the newly freed african american population.  Suddenly the law was changed so that a black man could be arrested and given a good sized sentence for just about anything ("loitering" being the great example), they were in fact arrested, in droves, and we had a new sort of slavery. 

That's really common.  Here was a trick in ancient Rome the rich people tried: go to war, laboring class has to go fight, laboring class can't tend to crops, laboring class gets in debt to you, laboring class can't pay debt, you get their land and themselves as slaves (early roman law was big on debt bondage, I think that got relaxed).  So on the one hand, maybe there was a rational decision to take on a debt, knowing failure to pay could result in slavery.  But on the other hand, the only reason the poor dude was in that position in the first place was that the rich dudes launched a war!   

So yeah, I am not convinced you could ever structure a society where 1. Labor can be coerced, and 2. when it is, it is completely the result of free market forces, with no other nudges from public policy getting people to sell themselves.  If you want a model, try this: we've got a rich guy who wants to abuse the slave system and a poor guy who doesn't.  Then the rich guy buys the poor guy.  Now, in effect, we've got two people who want to abuse the slave system, since the political voice and power of the slave now belongs to the master.  Rinse and repeat and eventually the laws and customs around self-selling will take on a coercive, brutal nature.

I don't know if that model is right, I just know that, historically, coerced labor tends to be brutal, ugly, and not fair, even if your definition of "fair" is extremely libertarian. 

Which raises the question, are our society's two big forms of coerced labor (convict labor and the draft) good ideas?  My answer: probably not!  Exhibit A: we don't have a draft anymore and have sharply limited how we use convict labor, because both systems were unpopular and cruel.  

Williamson: How should the Fed work?

A top monetary economist, Stephen Williamson, blogs at New Monetarist Economics (50th in monetary by this ranking).  I check in with Williamson's blog, which is easy to do, because he is not that prolific of a poster.  He spends a lot of time on the blog criticizing, but I understand very little about what he would consider optimal policy.

In the comments of this recent post, he is starting to spell it out:

1. I would not have set any numerical thresholds at all. I didn't like specifying the calendar dates either. I thought that was bad policy if it was a commitment, and bad policy if it wasn't a commitment. 

2. Generally, I think there's no substitute for taking a particular action at a point in time, and then carefully articulating why you are doing it. No need to map out the future. Once everyone understands how the state of the world maps into policy actions, we've reached bliss. No point in trying to describe how you map the state of the world into actions, as that will only confuse people, as we see here. 

3. "At least now we have some idea of what they want to do..." No we don't. All we know is that they will raise the policy rate, if every, at some date after we cross the 6.5% threshold. When does QE end? When will the policy rate rise? Who knows?

I still find the position strange.  He wants lots of transparency for the Fed's decision right now, but no information about the Fed's expectation for policy in the future.

He really doesn't like forward guidance:

The Fed says it is trying to get more leverage from its policy by being more explicit. But in its struggle to do that, it is not increasing the information content at all; if anything it is telling us less.

 I find it really hard to make sense of how providing more information can really be providing less information.  If the new information was worthless, market participants can just ignore it and it does not harm.

On forecasting inflation, the monetary circumstances are so unusual now that there is a huge amount of risk in anyone's inflation forecast, including what you can infer from market prices. So risk is a problem, and its also a problem that the Fed gets to choose the inflation forecast that determines its policy actions.

It's a fair point that forecasting inflation is hard.  I think forecasting future stock prices is much, much harder, but I still think current stock prices have lots of valuable information about the future prospects of firms and the economy.

I wish he'd flesh out his views more on his blog.  I'd like to understand his position better, as it seems very far from my ideal position.