Archives: 04/2015

None of the Fed’s Business

The latest Commerce Department report and FOMC press release have, as usual, led to a flood of commentary concerning the various economic indicators that the Fed committee must have mulled over in reaching its decision to put off somewhat longer its plan to start selling off assets it accumulated during the course of several rounds of Quantitative Easing.

Those indicators also inspire me to put in my own two cents concerning things that should, and things that should not, bear on the FOMC’s monetary policy decisions. My thoughts, I hasten to say, pay no heed to the Fed’s dual mandate, which is itself deeply flawed. But then again, since that mandate allows the FOMC all sorts of leeway in making its decisions, I doubt that it would prevent that body from following my advice, assuming it had the least desire to do so.

I have a simple–some may call it quaint–way of deciding whether some information supplies reason for the Fed to either sell off or buy more assets. Here it is: does the information offer reliable evidence of either a shortage or a surplus of nominal money balances?

More Proof of Math Gone Mad

Last September Kevin Dowd authored a dandy Policy Analysis called “Math Gone Mad: Regulatory Risk Modeling by the Federal Reserve.” In it Kevin pointed to the dangers inherent in the Federal Reserve’s “stress tests,” and the mathematical risk models on which those tests are often based, as devices for determining whether banks are holding enough capital or not.

Recently my Cato colleague Jeff Miron, who edits Cato’s Research Briefs in Economic Policy, alerted us to a new working paper, entitled “The Limits of Model-Based Regulation,” that independently reaches conclusions very similar to Kevin’s. The study, by Markus Behn, Rainer Haselmann, and Vikrant Vig, is summarized in this month’s Research Brief.

The authors conclude that, instead of limiting credit risk by linking bank capital more tightly to the riskiness of banks’ asset holdings, model-based regulation has actually increased credit risk. At the same time, because the model-based approach is relatively costly, large banks are much more likely to resort to it then smaller ones. Consequently, those banks have been able to expand their lending–and their risky lending especially–at the expense of their smaller rivals. In short, big banks gain, small banks lose, and we all are somewhat less safe than we might be otherwise.

Here is a link to the full working paper.

[Cross-posted from]

The Death (and Rebirth?) of Peer Review

Here’s a headline from today’s Washington Post: “Sexism in science: Peer editor tells female researchers their study needs a male author.” Peer review is the usually-anonymous process by which articles submitted to academic journals are reviewed for quality and relevance to determine whether or not they will be published. Over the past several years, numerous scandals have emerged, made possible by the anonymity at the heart of that process.

The justification for anonymity is that it is supposed to allow reviewers to write more freely than if they were forced to place their names on their reviews. But scientists are increasingly admitting, and the public is increasingly noticing, that the process is… imperfect. As the Guardian newspaper wrote last summer about a leading journal, Nature:

Nature […] has had to retract two papers it published in January after mistakes were spotted in the figures, some of the methods descriptions were found to be plagiarised and early attempts to replicate the work failed. This is the second time in recent weeks that the God-like omniscience that non-scientists often attribute to scientific journals was found to be exaggerated.

In the 1990s I sat on the peer review board of an academic journal and over the years I have occasionally submitted to and been published by such journals. Peer reviews vary wildly in depth and quality. Some reviewers appear to have only skimmed the submitted paper, while others have clearly read it carefully. Some reviewers understand the submissions fully, others don’t. Some double-check numbers and sources. Others don’t. It’s plausible that this variability (particularly on the weak end) is a side-effect of reviwers’ anonymity. I have seen terse, badly-argued reviews to which I doubt the reviewer would have voluntarily attached his or her name. Personally, I try never to write anything as a peer reviewer which I would not happily sign.

Baltimore and the Rights of the Poor

​Well… there goes our trip to Baltimore. ​We’d been hoping to see the annual Kinetic Sculpture Race, but I see it’s been postponed sine die.

If you’re inclined, now is your chance to laugh. Get it out early.

Here’s a problem in describing how cities work: Any example I might pick to symbolize the decay of Baltimore can always be ridiculed: Weep, weep my friends for that lousy corporate CVS, the one that nobody really liked anyway!

See how easy that was?

The one direct effect I have experienced from the recent riots is that my daughter and I will possibly not be seeing a giant pink taffeta poodle pedaled down the streets of Baltimore by a bunch of probably inebriated art students. I’m unlikely to suffer any of the riots’ more troubling effects, like having to walk an extra half mile to get my asthma medication. Or like getting my car torched.

(And yes: Leading with the pink taffeta poodle might just be the definition of white privilege, but at least I’m, you know, aware of it.)

Cities are hard to explain. They’re made up of millions of tiny little things, and of the networks of trust and expectation that exist among them. Any one of those things—a CVS, a giant pink taffeta poodle, a population of inebriated art students—does not make a city. Almost any one of them can be laughed at, or just dismissed as trivial, in isolation. But good, functional cities are networks. They’re not isolated nodes. A city isn’t the big taffeta poodle, but it might be the expectation that there will be something fun, and free, to do in the streets on some warm spring afternoon. For which we can thank the art students.

President Obama Wields Much More Influence over Police than He Admits

Taking time out of his press conference with Japanese Prime Minister Shinzō Abe on Tuesday, President Obama addressed the chaos in Baltimore following the unexplained death in custody of Freddie Gray. 

While pleading for calm, President Obama lamented his lack of authority to fix the problem:

Now, the challenge for us as the federal government is, is that we don’t run these police forces.  I can’t federalize every police force in the country and force them to retrain.  But what I can do is to start working with them collaboratively so that they can begin this process of change themselves. 

Obama also lamented the lack of political momentum to address the poverty and violence afflicting communities like Baltimore:

That’s how I feel.  I think there are a lot of good-meaning people around the country that feel that way.  But that kind of political mobilization I think we haven’t seen in quite some time.  And what I’ve tried to do is to promote those ideas that would make a difference.  But I think we all understand that the politics of that are tough because it’s easy to ignore those problems or to treat them just as a law and order issue, as opposed to a broader social issue.

Both of those lamentations are misleading.

While it’s true that the federal government generally lacks the power to “force” local police departments to change their behavior, Obama’s comments completely omit his role in administering several federal policies that facilitate, and even incentivize, the abuses and tensions he condemned.

The federal drug war tears apart families through mass incarceration and violence and unjustly forces millions of (especially poor, minority) Americans to carry the stigma of being a convicted criminal. Prohibition, just as it did in the 1920s and 30s, has turned huge swaths of urban America into battlefields in the competition for black market real estate. President Obama has already demonstrated a willingness to ease federal drug enforcement in several states, and there is nothing keeping him from expanding that rollback.  He has also pardoned several non-violent drug offenders, even while federal prosecutors convict new ones every day.

Is Bernie Sanders the Most Liberal Senator?

Sen. Bernie Sanders, the independent socialist from Vermont, is running for president as a Democrat. Since he’s a self-proclaimed socialist, he’s surely to the left of all the Democrats in Congress, right? Well, a few years ago I checked into that, and I found that in fact plenty of Democratic senators have been known to spend the taxpayers’ money more enthusiastically than Sanders:

According to the National Taxpayers Union, 42 senators in 2008 voted to spend more tax dollars than socialist Bernie Sanders. They include his neighbor Pat Leahy; Californians Barbara Boxer and Dianne Feinstein, who just can’t understand why their home state is in fiscal trouble; and the Eastern Seaboard anti-taxpayer Murderers’ Row of Kerry, Dodd, Lieberman, Clinton, Schumer, Lautenberg, Menendez, Carper, Biden, Cardin, and Mikulski. Don’t carry cash on Amtrak! Not to mention Blanche Lambert Lincoln and Mark Pryor of Arkansas, who apparently think Arkansans don’t pay taxes so federal spending is free. [It turned out that Arkansans were not so clueless.] Sen. Barack Obama didn’t vote often enough to get a rating in 2008, but in 2007 he managed to be one of the 11 senators who voted for more spending than the socialist senator.

Meanwhile, the American Conservative Union rated 11 senators more liberal than Sanders in 2008, including Biden, Boxer, Feinstein, and again the geographically confused Mark Pryor. The Republican Liberty Caucus declared 14 senators, including Sanders, to have voted 100 percent anti-economic freedom in 2008, though Sanders voted better than 31 colleagues in support of personal liberties.

Now, I wrote that in January 2010, when 2008 ratings were the latest available. And it seems that 2008 was Sanders’s best year in the eyes of taxpayers, when he voted frugally a whopping 18 percent of the time. But as this lifetime chart shows, even in the past two years a dozen or so senators were more spendthrift than the socialist guy. In 2011, at an impressive 16 percent, Sanders was only the 55th spendiest senator. Spending interests will be glad to know that in the one year that they served together and NTU has rated, Sanders spent a bit more of the taxpayers’ money than Sen. Elizabeth Warren.

Sec. Clinton’s Criminal Justice Reform Proposals

Today, presidential candidate Hillary Rodham Clinton addressed criminal justice reform in a speech at Columbia University. Earlier in the week, the Brennan Center released a book with chapters from politicians across the political spectrum discussing the need for criminal justice reform, and Secretary Clinton contributed one of them. Now that the Democratic front-runner has joined Republican presidential aspirants in addressing reform, criminal justice appears to be a significant 2016 campaign issue.

Three of Clinton’s policy suggestions are problematic.

First, and perhaps the one that will get the most headlines, she called for making police body cameras “the norm everywhere,” by using federal grants and matching funds. Putting aside the considerable price tag to subsidize the roughly 18,000 American law enforcement agencies to buy body cameras, how officers use those cameras and how law enforcement uses their data must be of utmost concern. As my colleague Matthew Feeney noted in a blogpost yesterday, the proposed body camera policy in Los Angeles would allow officers to review body camera footage before giving statements on use of force incidents. That policy would not serve transparency interests, but instead police officer self-interest.

Throwing money for cameras to local police departments as a solution to police transparency may sound good in theory, but making it work will be much more difficult in practice. 

Second, she argued that low-level offenders, “must be some way registered in the criminal justice system.” The criminalization of drug consumption has been one of the primary drivers of incarceration. Diverting low-level offenses to drug courts, as Clinton suggests, could be an improvement over jailing offenders, but for many of these cases, it’s not clear that the criminal justice system should be involved at all.