Central Bank Independence, Old-Fashioned?

The Economist speculates that central bank independence might be on its way out. The article suggests that motives for independence (i.e., Sargent/Wallace or Barro/Gordon type arguments) might be less relevant given the environment of low inflation and interest rates.

See also my earlier, related blog post.

India’s Tax System

In the FT, Amy Kuzmin reports that after debating for nearly a decade,

India’s parliament has approved a long-awaited overhaul of the country’s fragmented tax system … The bill … will amend the constitution to permit replacing the current patchwork of national, state and local levies with a single, unified value added tax system.

He expects the reform “to create a genuine single market” and hails it as “one of the most significant reforms to the Indian economy since liberalisation began 25 years ago.”

Research Funding in Economics

In the Journal of Economic Perspectives, Tyler Cowen and Alex Tabarrok question whether NSF funds are allocated efficiently. They write:

First, a key question is not whether NSF funding is justified relative to laissez-faire, but rather, what is the marginal value of NSF funding given already existing government and nongovernment support for economic research? Second, we consider whether NSF funding might more productively be shifted in various directions that remain within the legal and traditional purview of the NSF. Such alternative focuses might include data availability, prizes rather than grants, broader dissemination of economic insights, and more. …

Public goods theory tells us that the National Science Foundation should support activities that are especially hard to support through traditional university, philanthropic, and private-sector sources. This insight suggests a simple test: to the extent that the NSF allocates funds to genuine public goods as opposed to subsidies on the margin, we ought to see a large difference in the kinds of projects the NSF supports compared to what the “market” sector supports. But what stands out from lists of prominent NSF grants … is how similar they look to lists of “good” research produced by today’s status quo.

Scandinavian Fantasies?

In an NBER working paper entitled “The Scandinavian Fantasy: The Sources of Intergenerational Mobility in Denmark and the U.S.,” Rasmus Landersø and James J. Heckman argue that

[m]easured by income mobility, Denmark is a more mobile society, but not when measured by educational mobility. … Greater Danish income mobility is largely a consequence of redistribution … policies. While Danish social policies for children produce more favorable cognitive test scores for disadvantaged children, these do not translate into more favorable educational outcomes, partly because of disincentives to acquire education arising from the redistributional policies that increase income mobility.

Money Demand

In a recent NBER working paper, Luca Benati, Robert E. Lucas, Jr., Juan Pablo Nicolini, and Warren Weber report estimates of long-term money demand. They write:

[U]sing annual data on money (M1, for us), nominal GDP, and short term interest rates from 31 countries over periods that range in some cases to over 100 years. We find remarkable stability in long run money demand behavior in many countries, and an equally surprising sameness across different countries. In some cases of instability, anomalies have straightforward explanations.

Private Sector Rescue for Italian Bank

In the FT, Rachel Sanderson and Martin Arnold report that the board of Monte dei Paschi is about to approve a recapitalization led by JPMorgan in order to avoid the alternative, a bailin according to European rules.

Other news sources reported that the European Commission had made it clear that it rejected the proposal by Italy’s prime minister (supported by the ECB president) to change the rules and let the Italian government finance the recapitalization. EU finance ministers and Angela Merkel had opposed the proposal as well.

This time, rules won.

“The IMF and the Crises in Greece, Ireland, and Portugal”

The Independent Evaluation Office of the International Monetary Fund released a critical report on IMF supported policies in Greece, Ireland and Portugal. It questions the legitimacy of certain decisions. The executive summary states that

[t]he IMF’s pre-crisis surveillance mostly identified the right issues but did not foresee the magnitude of the risks … missed the build-up of banking system risks … shared the widely-held “Europe is different” mindset … Following the onset of the crisis, however, IMF surveillance successfully identified many unaddressed vulnerabilities, pushed for aggressive bank stress testing and recapitalization, and called for the formation of a banking union. …

In May 2010, the IMF Executive Board approved a decision to provide exceptional access financing to Greece without seeking preemptive debt restructuring, even though its sovereign debt was not deemed sustainable with a high probability. The risk of contagion was an important consideration … The IMF’s policy on exceptional access to Fund resources, which mandates early Board involvement, was followed only in a perfunctory manner. The 2002 framework for exceptional access was modified to allow exceptional access financing to go forward, but the modification process departed from the IMF’s usual deliberative process whereby decisions of such import receive careful review. Early and active Board involvement might or might not have led to a different decision, but it would have enhanced the legitimacy of any decision. …

The IMF, having considered the possibility of lending to a euro area member as unlikely, had never articulated how best it could design a program with a euro area country … where there was more than one conditional lender, the troika arrangement … proved to be an efficient mechanism … but the IMF lost its characteristic agility as a crisis manager. … the troika arrangement potentially subjected IMF staff’s technical judgments to political pressure …

The IMF-supported programs in Greece and Portugal incorporated overly optimistic growth projections. … Lessons from past crises were not always applied, for example when the IMF underestimated the likely negative response of private creditors to a high-risk program. …

The IMF’s handling of the euro area crisis raised issues of accountability and transparency, which helped create the perception that the IMF treated Europe differently. … Some documents on sensitive issues were prepared outside the regular, established channels; the IEO faced a lack of clarity in its terms of reference on what it could or could not evaluate; and there was no clear protocol on the modality of interactions between the IEO and IMF staff. The IMF did not complete internal reviews involving euro area programs on time, as mandated, which led to missed opportunities to draw timely lessons.

It lists the following recommendations:

… should develop procedures to minimize the room for political intervention in the IMF’s technical analysis. … should strengthen the existing processes to ensure that agreed policies are followed and that they are not changed without careful deliberation. … should clarify how guidelines on program design apply to currency union members. … should establish a policy on cooperation with regional financing arrangements. … should reaffirm their commitment to accountability and transparency and the role of independent evaluation …

In her response, the IMF’s Managing Director emphasizes that the IMF-supported programs did work in the cases of Ireland and Portugal (and in Cyprus) while Greece was a special case. She supports the report’s last four recommendations but disagrees with the premise of the first.

Could the Fed have Rescued Lehman Brothers?

In a paper, Larry Ball argues that

inadequate collateral and lack of legal authority were not the reasons that the Fed let Lehman fail. …

… the primary decision maker was Treasury Secretary Henry Paulson–even though he had no legal authority over the Fed’s lending decisions. … evidence supports the common theory that Paulson was influenced by the strong political opposition to financial rescues. … Another factor is that both Paulson and Fed officials, although worried about the effects of a Lehman failure, did not fully anticipate the damage that it would cause.

James Stewart comments in the New York Times.

Economics: The Core

The Economist reviews core ideas in economics. The introductory article to a new series points out that

economists’ fundamental mission is not to forecast recessions but to explain how the world works.

It argues that economists have delivered and it discusses six exemplary areas of economic research:

  • Nash equilibrium (article, August 20);
  • Mundell-Fleming trilemma;
  • Minsky financial instability (article, July 30);
  • Stolper-Samuelson trade effects on wages (article, August 6);
  • Keynes fiscal multiplier (article, August 13); and
  • Akerlof et al information asymmetries (article, July 23).

Refreshingly, the article argues that

[t]hese breakthroughs are adverts not just for the value of economics, but also for three other things: theory, maths and outsiders.

I agree. But the value of economics also derives from more elementary insights, related to, for example,

  • budget and resource constraints;
  • the information content of prices;
  • public choice; or
  • the link between monetary aggregates and the general price level.

Today, these latter insights might appear even more trivial than those picked by The Economist. But they are central, and emphasizing them might lead to different policy conclusions than the common focus on economic frictions and aggregate demand.

“Geldpolitik soll eigenständig bleiben (Monetary Policy Independence),” FuW, 2016

Finanz und Wirtschaft, July 20, 2016. PDF. Ökonomenstimme, July 29, 2016. HTML.

In a perfect world, monetary and fiscal policy are coordinated. In the real world with its political frictions they are not. So much on helicopter money.

The West’s Flight from Dignity

In the FT, Edward Luce worries about a loss of dignity that is reflected in contemporary politics.

Republicans generally favour liberty over equality and Democrats the reverse. Other people’s dignity is not up for grabs. Mr Trump’s hostile takeover of the Republican party has shredded that equation. … “You walked out of a Reagan rally in a spirit of optimism,” says Stuart Stevens, an adviser to Republican nominee Mitt Romney. “You leave a Trump rally ready for a fight.” …

… Luigi Zingales, recalls an event … The shocking part was not Mr Berlusconi’s boorishness but the audience’s wild applause. “Such approval would have been unimaginable before the rise of Berlusconi,” said Mr Zingales. “There is no way of measuring the degree to which he has debased public life in Italy.” The same applies to the Trump effect. But the quality of Italy’s democracy is largely an Italian affair. … What happens in America shapes the fate of democracy around the world. …

Mr Trump’s rise is bad news for our system of government on three fronts. First, he has shown you can rise to the top of the world’s most cherished democracy by scapegoating entire categories of people. … Second, he has made post-factual politics respectable. … Finally, Mr Trump has corroded faith that rules-based societies are self-sustaining.

America’s Class Distinctions

In the FT, Edward Luce writes about America’s class distinctions.

The real story, as depicted by historian Nancy Isenberg, author of White Trash, is that America was founded amid highly conscious class distinctions. African slaves were not the only group to be disenfranchised. …

It would be difficult to read America’s history — or decode the 2016 presidential election — without reference to the struggle between poor whites and the descendants of former slaves. Lyndon Baines Johnson, who became president a century after the civil war, vividly captured its political effects. “If you can convince the lowest white man he’s better than the best coloured man, he won’t notice you’re picking his pockets,” said LBJ. “Hell, give him somebody to look down on, and he’ll empty his pockets for you.”

Puerto Rico may Restructure its Debt

In the FT, Eric Platt reports that US Congress has passed emergency legislation allowing Puerto Rico to restructure its debt.

Unlike US cities and municipalities, Puerto Rico and other territories do not have access to protections under the US bankruptcy code.

The legislation gives the island and its debt-issuing entities that right, so long as they have made “good-faith” efforts to negotiate with creditors and have received sign-off from the control board.

With the deal, Puerto Rico will be able to continue funding basic services and avoid crippling lawsuits.

Political Correctness, Free Speech, and Decency

Letters to the editor of The Economist lay out the pros and cons of curbing free speech. Some views:

  • Who is “just” offensive should not be prosecuted.
  •  Insulting religious feelings is ok, but not at a place of worship.
  • Freedom of speech for the purpose of debate needs to protected, but not if it is only “intended to insult or inflame passions.”
  • Clark Kerr, president of the University of California (1958–1967), defended free speech on campus with the words

    The university is not engaged in making ideas safe for students. It is engaged in making students safe for ideas. Thus it permits the freest expression of views before students, trusting to their good sense in passing judgment on these views. Only in this way can it best serve American democracy.

Commitment within Reach, Part II

The Economist reports about cyber thieves “outsmarting” a smart contract.

Well, what does that mean? Engaging with a code that runs in all states of the world is to engage with a complete contract. How can one outsmart a complete contract?

Previous post on smart contracts and commitment.