Archives: 07/2009

Don’t Bail Out Bernanke

Here is the message members of Congress should send to Ben Bernanke during the Fed chief’s annual Capitol Hill testimony this week: He is fighting for his job. With his term up in January of next year, Bernanke needs to be called to account for the Fed’s many questionable actions during the financial turmoil of the past year.

Even while correctly identifying the “global savings glut,” Bernanke sat by and did nothing about the unsustainable build-up of leverage in the housing market—the “bubble” which famously burst in late 2008. Bernanke also used Fed financing to bail out Bear Stearns and AIG—hotly political moves which should rightfully have been left to Congress—and oversaw the massive expansion of the Fed’s balance sheet from about $900 billion to over $2 trillion. Under Bernanke, the Fed has transcended monetary policy and bank supervision into the world of fiscal policy.

While thus politicizing the Fed on one hand, Bernanke has sought to insulate the bank from congressional pressures by appeasing majority Democrats with various new credit regulations. Both the recently proposed credit card and mortgage rules unnecessarily restrict credit and increase the litigation risk facing banks, while doing nothing to roll back some of the irresponsible lending policies that exacerbated the housing bubble.

Bernanke’s pandering to the Left on misguided “consumer protections,” and the absence of any debate over the Fed’s role in the housing bubble, raise serious questions as to whether Bernanke understands the causes of the current financial crisis. We cannot hope to avoid the next financial crisis without a Fed chairman who understands the current one.

Lock It Down, Centralize It, Federalize It

Speaking of the Center for Democracy and Technology, Leslie Harris gave a terrific quote to Forbes.com for an article on cybersecurity:

The Rockefeller-Snowe Bill represents just the sort of heavy-handed regulation that could stifle innovation and hurt the economy, argues Leslie Harris, president and chief executive of the Center for Democracy and Technology. “If you lock things down too tight and try to centralize and federalize all kinds of standards, you’re on a collision course with the innovators who may be making the next great tech product in their backyard,” she says.

The question is why CDT doesn’t apply this thinking to the field of identification and credentialing.

EPIC on PASS ID: a National ID Card

The Electronic Privacy Information Center has produced a very thorough analysis of the PASS ID Act, which would revive the REAL ID national ID program.

The EPIC analysis states flatly, “The bill would establish a national ID card,” and, “The intent of this legislation is to facilitate a National ID system.”

That’s quite a contrast to Ari Schwartz at the Center for Democracy and Technology, who alone believes that PASS ID “prevents the creation of a National ID system.”

As Immigrants Move In, Americans Move Up

Critics warn that immigration reform would bring in its wake rising rates of poverty, higher government welfare expenditures, and a rise in crime.

In a new paper, Cato scholar Daniel Griswold says that Congress should not reject market-oriented immigration reform because of misguided fears about “importing poverty.”

Griswold argues that “Comprehensive immigration reform that included a robust temporary worker program would boost economic output and create new middle class job opportunities for native-born Americans.”

For more, read the whole thing.

Has Any Other Field Suffered a Productivity Collapse like Education?

I’ve repeatedly claimed that public schools are alone in having suffered a productivity collapse over the past 40 years: their outcomes stagnating or even declining while per pupil costs have skyrocketed. Is that really true?

Dr. Stephen Bohrer, who appears to work in Colorado’s public school system, begs to differ. Responding to a recent op-ed of mine, he writes that: “The price of a Baby Ruth is up 2,000% since 1970. It doesn’t taste any better and is smaller.”

Though historical prices on Baby Ruths are hard to find, there’s a nice suite of data on the Hershey bar, which seems a fair enough test of the good Dr.’s claim. According to FoodTimeline, the price of a 1.375 oz Hershey bar in 1970 was 10 c, and the price of a 1.55 oz bar in 2008 was 59 c. Adjusting the first price to 2008 dollars puts it at 55.5 c.

So the real price-per-oz of a Hershey bar FELL from 40.4 c to 38.1 c over the past 40 years. And it didn’t get any smaller. No gold star for Dr. Bohrer.

So, who else wants to play Stump the Chump? If you think you know a field that has suffered a productivity collapse like education over the past 40 years, send me an e-mail with your claim and the data on which it’s based (ACoulson |at| cato.org). If anybody comes up with a winner, I’ll report it here.

Economics Bloggers Weigh in on Income Inequality

The economics blogosphere has been buzzing about Will Wilkinson’s new paper on income inequality.

George Mason University economist Tyler Cowen discusses why social inequality has been falling for some time in the United States:

I agree with Will Wilkinson’s point that real social inequality has (mostly) been falling for some time in the United States.  Today many an upper middle class person is plausibly happier than many a billionaire.  Yet most self-made billionaires work very hard to get to that position, which creates a possible tension between cardinal and “observed choice” or “ordinal” metrics of welfare.  Why work so hard for so little?  Presumably many of these billionaires really want to “be there,” even if they are only marginally better off or in some cases worse off.

The Atlantic’s Megan McArdle offers her initial thoughts, and promises more analysis soon:

I broadly agree with Will that consumption inequality, not income inequality, is what matters.  If the rich have access to broad classes of goods that the poor can’t have, I find this worrying.  On the other hand, if the problem is that Bill Gates has a really awesome 80 inch flat panel television, while the poor have to be content with a 32 inch CRT, well, I can’t say my heartstrings are plucked very tight by this injustice.  So it’s important to know what the real differences are.

Ezra Klein parses some of Wilkinson’s arguments at WashingtonPost.com:

One of Will’s first arguments is that income inequality is not a good way to think about the issue. The real key is consumption inequality. It’s not, in other words, how much money people make, but how much stuff they buy. And “the weight of the evidence shows that the run-up in consumption inequality has been considerably less dramatic than the rise in income inequality.”

The Economist Free Exchange blog has mixed reactions to the study:

Inequality, in and of itself, is no bad thing, and inequality in America has co-existed right alongside significant improvements in welfare across the income spectrum—and contributed directly to them, in many cases. Redistribution for its own sake is bad policy, and as Mr Wilkinson notes, it’s often bad policy pursued to cover up for still more bad policy elsewhere. But America’s society is a very unequal one, by developed nation standards, and it’s not always clear that that inequality is justified or advantageous. And any good student of human behaviour can tell you that wealth will seek to protect wealth, and will often succeed.

Matt Yglesias from Think Progress has posted twice on Wilkinson’s study:

I’m not in agreement with the overall thrust of Will Wilkinson’s paper on inequality for the Cato Institute, but one point that I think is in the spirit of what he’s saying was brought to mind by a question at last night’s event. The way I would put the point is that it’s a mistake to think of the world as composed of, on the one hand, “economic issues” in which we worry about wealth or income inequality and then on the other hand, “social issues” in which we worry about racism or sexism. Progressives ought to be concerned with a general issue of justice and social inequality, of which gaps in money income or wealth may be part.

Bernanke Rules?

In today’s Wall Street Journal, Fed Chairman Ben Bernanke has outlined “The Fed’s Exit Strategy.” He tells the reader how the central bank will avoid an inflation of historic proportions resulting from all the money and credit it has injected into the economy. All of the strategies he outlines are technically feasible ways for the Fed to implement monetary restraint.

The op-ed has an air of a classroom exercise, however, rather than a practical central-bank strategy. Much of the article is devoted to explaining how the Fed can now pay interest on reserves, and how it could raise that interest rate so as to dissuade commercial banks from lending the reserves out. It could do that, but what would that rate need to be in order to meet a private bank’s threshold rate of return in normal economic times?

More importantly, the Fed has never lacked the technical tools to combat inflation. What it has so often lacked is the will to make tough decisions. And, quite frankly, it does not possess the information needed to fine-tune the economy in the way Chairman Bernanke imagines (a point made by Milton Friedman many years ago). Lack of will and lack of information combine to keep the Fed behind the curve. Its policy was too easy after 2001, and so it fueled the housing boom. It was late to recognize the turn in housing and the economy, and its policy was then too tight. If past is prologue, it will be late to implement its exit strategy.

The Fed Chairman has presented a laundry list of policy tools. What investors need is some assurance that the right tools will be used at the right moment. The mere promise of a policymaker to do the right thing has little credibility. There is no monetary rule in place, only the rule of a man.