by Chidem Kurdas

Today President Obama is holding a jobs summit, with the professed goal of soliciting ideas to encourage businesses to hire. Short-term tax credits for employers are among the measures mentioned.

Yesterday here on ThinkMarkets Mario Rizzo pointed to the distorting impact of such proposals and cited Gary Becker’s argument that cutting income taxes is a better way to stimulate employment.  There is another type of distortion – related to the highly informative back and forth by Jerry O’Driscoll and Roger Koppl on Mario’s post – that should be spelled out. Even as the economy recovers, government-created uncertainty is going to discourage hiring.

Payroll taxes account for a significant chunk of the cost of labor. Roger suggested a temporary reduction in payroll taxes, or FICA. Surely these taxes are a major drag on employment. But as Jerry argued, a temporary tax cut won’t create permanent jobs.

Most hiring is forward looking. Employers think not only of the cost right now but future costs. Not only will future raises in payroll taxes dwarf any temporary tax credit, even worse, their full extent is unknown. Consider that payroll taxes include the Medicare tax, which will likely surge in the not-too-distant future, given the way Medicare spending is rising.

Meanwhile, in their wisdom Congress and the administration are concocting an employer medical insurance mandate that promises to be a sinkhole for money, even if premiums don’t rise any faster than they’re already rising, as the Congressional Budget Office claims will be the case.

The bottom line is that somebody will have to pay for the increased use of medical services; taxes on “Cadillac” health plans won’t be nearly enough, especially if people move out of those plans, as the Congressional Budget Office also predicts.

Who is going to pay how much remains obscure, so the future cost of labor is uncertain. Maybe there are employers who will hire now to get a short-term little tax credit and take on unknown but potentially gigantic liabilities imposed by the government in the future. However, there can’t be a large number of employers who are that dumb and remain in business.

Payroll taxes and mandates are just one type of barrier. Richard Epstein recently wrote about the many laws and regulations that impede the creation of jobs.

But the handicaps imposed on private hiring are not a problem for proponents of expanding the government sector. Weak private employment is used to justify a 1930s-style public works program—which, as Jerry reminded us, in fact did not work. However, the $400 billion-plus package now proposed by the left-liberal Economic Policy Institute includes a $40 billion-a-year public employment program that received Paul Krugman’s approval.

Unemployment really is a nasty social ill and the government should indeed tackle it—by putting its own house in order. It should restrain Medicare spending, permanently  reduce payroll taxes and refrain from employer mandates. Of course, that’s all been said before, but given that the Obama administration and this Congress look to go in the wrong direction, it needs to be repeated.

The jobs summit is meant to persuade people that the government is doing what it can to combat the joblessness caused by the private economy. We need to be clear that the government itself is tamping down big time on private hiring— even as officials and politicians protest otherwise loudly and often. This shows in the medical entitlement bill, laden with mandates and regulations that will discourage hiring for the foreseeable future.

True, that won’t bother someone who wants to expand public and quasi-public jobs at the expense of private ones. The only constraint on politicians is that not all the people will be fooled by various dog-and-pony shows and will assign the blame where it belongs. One hopes.

by Chidem Kurdas

A surprising new Small-Is-Beautiful movement is afoot.  Mario Rizzo, Jerry O’Driscoll, Harry Kaufman and others make a case for  breaking up too-big-to-fail financial institutions. As Mr. Kaufman puts it, otherwise those companies will become financial public utilities backstopped by the government.

It’s not likely that the 2008 crisis would have been prevented had top investment banks like Goldman Sachs been smaller. Traditional little banks are going down in droves. They fail because real estate loans are going bad. So many depository banks have gone under that the FDIC, the federal agency that insures deposits, itself ran out of money and asked to be bailed out by prepayment of bank premiums.

The same real estate bubble-and-bust hit larger banks through mortgage-backed securities. That’s regardless of size. Moreover, the government does not just bail out big investment banks. It bailed plenty of small savings & loan associations in the 1980s. The concept of “too-big-to-fail” is remarkably elastic.  Consider that GM and Chrysler both received federal aid. Chrysler is a lot smaller, but the political preference is to treat it as too-big-to-fail. Keeping banks relatively small will not stop such bailouts.

That said, there is a serious quandary.

Mr. O’Driscoll points out that “the size and complexity of the major financial firms do not reflect market forces but public policies.” The government won’t let big banks go under; knowing this financial companies become big and make risky bets; since their failure may wreck havoc, taxpayers are forced to bail them out.

As Russell Roberts wrote, “If the taxpayer almost always eats the losses for the losers, you don’t have capitalism. You have crony capitalism.” Is the solution anti-trust action against the big banks?

Trust-busting may sound like the right step after a Great Crisis. But there is no real anti-trust case. The so-called bulge bracket banks are the ones you see in the headlines, but medium and small – often called ‘boutique” – investment banks are significant enough to attract many people from the big league.

Each line of business that makes up investment banking, from brokerage to trading, is subject to ferocious competition. Bank trading desks, for instance, compete with thousands of hedge funds.

So reducing the size of investment banks on the ground that they rely on government backstopping would be a new type of intervention and a major expansion of regulatory authority. This is not any less of an intervention than other kinds of regulation being bandied about. You’re not tackling monopoly power but moral hazard.  Why not stop creating moral hazard?

But let’s take it that the government can’t – or won’t – stop creating moral hazard for big institutions. What to do? Gary Becker suggested  imposing a higher capital requirement for larger banks. He wrote in March; “implement a progressive set of capital requirements relative to assets that would increase as the size of a bank or other financial firm increased.”

This automatic rule has the great advantage that it limits regulators’ discretion. It is certainly better than arbitrary interventions dictated by lobbyists, although somebody would have to decide how much to increase the capital requirement and at what levels of  bank assets.

Last week Senator Chris Dodd introduced an alternative to a financial regulation bill backed by the administration. Among other measures, Mr. Dodd would require large companies to draft emergency plans for orderly shutdown in case of insolvency.  If they fail to provide “funeral plans” they may face greater capital requirements, restrictions on growth and forced sale of risky businesses.

A clear, transparent rule of progressive capital requirements is the best idea so far.  Mr. Becker’s proposal certainly merits greater attention.

But it will not prevent future crises as long as the Federal Reserve blows asset bubbles and politicians encourage the giving of mortgages to the less credit-worthy. I suppose fiddling with banks is easier than confronting that reality.

“Sa che le dico? Che la guerra contro le droghe è fallita ma nessuno lo ammette. Eppure basterebbe mettere i numeri in fila per capire che in 35 anni di onorate battaglie si è speso troppo, ottenuto niente e, cosa peggiore, ingrassato i conti delle organizzazioni criminali. Le sembra un buon risultato?”.

Domanda inutile, perché il professor Becker, Gary Becker, premio Nobel per l’Economia nel 1992, non perde tempo e riparte all’attacco. «C’è solo un modo per ridurre il consumo di droghe: legalizzarle».

È dal 2001 che il professore emerito all’Università di Chicago ripete con ostinazione il proprio mantra antiproibizionista. La prima volta lo fece con un articolo su Business Week, tono pacato ma contenuto esplosivo, perché a lanciare il tema della legalizzazione non era l’ultimo degli hippy ma l’allievo di Milton Friedman. Nel 2006 entrò nei dettagli pubblicando uno studio sul Journal of Political Economy, rivista accademica per addetti ai lavori. E lì, insieme a Kevin Murhpy e Michael Grossman dimostrò con la forza dei numeri che le sue tesi avevano un fondamento economico.

«Ogni anno gli Stati Uniti destinano 40 miliardi di dollari per combattere la diffusione delle droghe. Se a tutto questo aggiungiamo i costi per la società e lo Stato – poliziotti, tribunali, carceri – il costo arriva a 100 miliardi di dollari ogni anno. È una cifra enorme. Di fronte alla quale è bene porsi una domanda: esiste un modo meno costoso e più efficace per ridurre il consumo di droghe? Il nostro studio, quello del 2006, suggeriva un’altra strada: legalizzare le droghe e applicare una tassa sul consumo. Il ragionamento è semplice: la guerra alle droghe, aumentando il rischio di chi le produce e le commercia, ha fatto lievitare il prezzo delle sostanze vendute, tanto che il prezzo alla vendita è in genere il 200% rispetto a quello effettivo. Ebbene, con una tassa del 200% su un prodotto legalmente venduto, quello stesso ricavo finirebbe nelle casse dello Stato anziché nelle tasche delle mafie. Così, invece di spendere soldi per contrastare inutilmente i produttori illegali, si avrebbero fondi a sufficienza, ad esempio, per finanziare campagne di informazione sui pericoli legati all’uso delle droghe».

Lei contesta i risultati della cosiddetta guerra alle droghe, eppure l’Onu, lo scorso giugno ha pubblicato un rapporto in cui si spiega che l’uso di eroina, cocaina e marijuana, in alcuni mercati, inizia a calare.
“È il minimo che potesse accadere, visto quello che si spende in tutto il mondo. Ma è una impostazione sbagliata. Il concetto di “guerra alle droghe” venne lanciato per la prima volta da Nixon negli anni Settanta e ribadito da tutti i presidenti, nessuno escluso. Se i risultati di cui parla l’Onu fossero legati a un’attività di uno o due anni li potrei apprezzare. Trattandosi di una guerra di 35 anni si tratta di un fallimento. Non solo, ma trattandosi di mercati illegali, le stime che circolano sono del tutto teoriche: come si fa sapere la reale produzione mondiale di droga? O il consumo? Sono numeri difficili da dimostrare. E non dimentichiamo che quando un tipo di droga cala, quasi sempre ne spunta un’altra. Quelle sintetiche, ad esempio».

In effetti l’Onu parla proprio di un aumento di queste ultime, soprattutto nel Terzo mondo.
«Restiamo su quelle “classiche”, l’oppio ad esempio: un aspetto di cui si parla poco è che la produzione e il commercio di droga è la fonte principale di finanziamento dei talebani e di Al Qaeda. Ora, ha senso mandare truppe in Afghanistan e, nel contempo, consentire alle forze che si intende combattere di continuare a ricevere finanziamenti? Se le droghe venissero legalizzate, quegli introiti verrebbero meno».

Alberto Maria Costa, il direttore dell’Ufficio Onu contro la Droga e il Crimine, dice che anche in presenza di un mercato legale vi sarebbe sempre un mercato parallelo controllato dal crimine.
«Prendiamo l’alcol. Negli Stati Uniti è stato illegale per quattordici anni, fino a quando il presidente Roosevelt, nel 1933, decise di legalizzarne la produzione e l’utilizzo. Bene, prima di allora whisky, gin e quant’altro erano tutti controllati da organizzazioni criminali. Al Capone, per intenderci, era un trafficante di droga. E quella droga si chiamava alcol. Con la legalizzazione nacquero distillerie legali, distributori legali, rivenditori legali. In un attimo si mandò all’aria l’intero business del crimine. Lo stesso può accadere con le droghe vere e proprie. È possibile che continui a esistere una sorta di mercato nero per alcune sostanze, ma si tratterà di piccole nicchie all’interno di un mercato tutto alla luce del sole».

Ma lei esclude ogni tipo di divieto?
«Niente affatto. Tanto per cominciare vieterei la vendita ai minori, proprio come avviene negli Stati Uniti per i liquori. Un’altra limitazione, proprio come per le bevande alcoliche, è legata alla guida: punizioni severe per chi si mette al volante sotto l’effetto di droghe mettendo a rischio la vita degli altri. E visto che parliamo di regole e restrizioni ne aggiungerei un’altra: trattandosi di prodotti legali, i produttori dovranno essere sottoposti a controlli di qualità come avviene per il settore alimentare o farmacologico. Questo eviterebbe la circolazione di sostanze tagliate e pericolose come oggi invece avviene».

Chi si oppone alle sue proposte sostiene che la liberalizzazione provocherebbe un aumento dell’uso, non una diminuzione.
«Dipende dal livello di tassa che viene applicato: se è adeguatamente alta, la domanda non cresce affatto. Anzi, trattandosi di un bene legale, viene meno quel richiamo del proibito che è una spinta, almeno tra i giovani, a far uso di droghe».

Per i minorenni però questo richiamo continuerebbe ad esserci.
«Già, ma sarebbe un divieto limitato all’età. E tutti prima o poi diventiamo adulti. L’importante è non diventare dei fuorilegge. La guerra alla droga produce devastanti effetti collaterali. Proprio in Italia avete avuto il caso di quel ragazzo pestato a morte dopo essere stato trovato con 30 grammi di hashish: è la conferma che con la guerra alle droghe si entra in una visione violenta del problema. Da noi, come da voi, le carceri scoppiano perché vengono riempite con persone che hanno avuto a che fare con la droga. E non importa quanto siano state seriamente coinvolte. Quando sei in guerra, anche le ombre diventano nemici».

Lo dica francamente: è davvero convinto che si possa legalizzare l’uso delle droghe?
«Non subito e non ovunque. Ma la strada è quella. Guardi il Messico, lo scorso agosto ha approvato una legge che permette l’uso di hashish, marijuana e persino Lsd. Non è una proposta: è una legge. E qualcosa di simile è accaduto in Argentina».

E negli Stati Uniti?
«Non siamo ancora pronti, ma qualcosa si sta muovendo. La discussone al momento riguarda solo l’uso di marijuana per scopi terapeutici, ma è già qualcosa. Non mi illudo che tutto cambi all’improvviso. Ci vuole tempo, ma sono fiducioso. L’unica droga di cui abbiamo realmente bisogno è l’uso della ragione. Quando la provi, non smetti più».

Luca Landò

L’Unita

People are motivated by incentives. As a student of economics, I live and breathe by this principle. If prices are lowered for a product, utility-maximizing individuals will buy more of that product. If wages are higher in one sector, more people will compete for jobs in that sector. If the government raises taxes on a good, the higher prices will make me shift my preferences away from that good.

Some incentives are stronger than others. If the price of heroin doubles, heroin addicts might not change their consumption habits too much (what economists would call inelastic). On the other hand, if Miller Lite doubles its price for a bottle of beer my consumption of Miller Lite will change a lot (elastic demand). But sometimes people overstate the inelasticity of a good or discount the incentive-mechanism all together.

Libertarians will cry foul when taxes are raised on a good (saying it will be horrible for business) but understate the role of incentives in the case of welfare or public education for increasing immigration. Progressives are happy to point to the role of incentives when taxing gasoline to reduce driving but seem to forget that increasing welfare benefits can be counter-productive by increasing the incentive to be on welfare. Similarly, conservatives will say a porn tax will lower the demand for porn but they won’t admit that a gasoline tax could be good for the environment.

Along these same lines, people forget the role of incentives when talking about caps on executive pay. The caps are obviously understandable, as Gary Becker writes:

I sympathize with all the people who are upset by the very large bonuses, stock options, and other compensation received by heads of some financial institutions that ran their companies into the ground through bad investments.

The fact that we bailed these people out is even more disgusting. But capping executive pay might not be the answer.

The generous bonuses and stock options received by financial executives may often have been unwarranted, but they are being used as a scapegoat for other more crucial factors. Financial institutions underrated the systemic risks of the more exotic assets, and apparently so too did the Fed and other regulators of financial institutions. In addition, large financial institutions may have recognized that they were “too big to fail”, and that they would be rescued by taxpayer monies if they were on the verge of bankruptcy because they took on excessively risky assets.

Executive pay is being used an easy scapegoat for politicians and voters to vent their frustration with the economic climate. And putting caps won’t do anything. Ben & Jerry’s, everyone’s favorite hippie ice cream company, once made a promise that it would not pay any executive more than five times its lowest paid employee. What happened? All of their management was low-quality. With lower pay, the incentives for the best executives in the industry were with other firms. Eventually, Ben & Jerry’s was tanking and eventually got bought out by British conglomerate Unilever.

It might seem like an overstated case. After all, look at how great these bankers did with their huge bonuses, why do we need them to fix it? But we can’t discount the role of incentives and how important management is in these huge institutions. Cap pay, you take away the incentives. Take away the incentives, you get poorer quality management. Poorer quality management, the problem might not get fixed.

But more fundamentally, the government capping executive pay and deciding what people deserve is a frightening thought to me. We bailed out these banks, sure. Those guys deserve nothing. But governments on principle shouldn’t be deciding what people are entitled to. That’s what voluntary exchange is for.

No, says Nobel Laureate Gary Becker.

Estive longe de um terminal de computador por alguns dias, mas consegui me informar sobre o Nobel. Bem, não li ainda o que meus colegas de blogosfera publicaram, mas eis o que eu penso sobre este Nobel.

Em primeiro lugar, creio que este Nobel segue uma lógica que vem desde a concessão do prêmio para Hayek e Myrdal (por dizerem praticamente o oposto, mas por terem em comum a preocupação com o desenvolvimento e o uso do conhecimento).

Depois veríamos Douglass North e Ronald Coase serem igualmente agraciados com o prêmio por falarem de custos de transação na história e em geral. O ponto comum, novamente, é claro: o que atrapalha o funcionamento dos mercados?

James Buchanan também é parte desta história, já que ampliou nosso conhecimento sobre como o sistema político influi no funcionamento dos mercados ao invés de corrigi-lo, como reza a cartilha do “planejador benevolente”.

Se pensarmos um pouco no significado de prêmios como este, poderíamos até falar de Gary Becker e outros que abriram campos de pesquisa por meio do relaxamento de hipóteses dos modelos, digamos assim, canônicos (embora este não seja um bom nome, creio).

Oliver Williamson – na minha opinião – é simplesmente a versão North-Coase aplicada a aspectos de Organização Industrial. Já merecia ter ganho o prêmio há mais tempo. Não é uma de minhas leituras favoritas – acho até que ele é muito prolixo – mas é, sem dúvida, um importante autor na área de Organização Industrial. Sem cair no canto da sereia pterodoxo, Williamson foi capaz de reler o funcionamento dos mercados sob a ótica dos custos de transação. Estranho mesmo é pensar que Baumol ainda não ganhou o prêmio por lançar muitos dos conceitos que nós – Williamson incluso – tomaríamos como base para o avanço da teoria de Organização Industrial nos últimos anos.

O outro prêmio, o de Elinor Ostrom, é bastante merecido. Lembro-me de ter começado minha dissertação, graças ao Marcos Fernandes, com a leitura de Vincent Ostrom, seu marido, que tratava do federalismo como uma instituição. Por meio dele, acabei descobrindo os artigos de Elinor Ostrom sobre problemas de bens de uso comum. Rules, Games and Common Poll Resources, editado por ela e mais alguns outros pesquisadores, foi um dos primeiros livros que li na tradição dos estudos empíricos de economia sobre o problema (ou a tragédia) dos comuns. Não foi o livro que mais me entusiasmou na época, mas a abordagem empírica me atraiu. Depois eu teria contato com gente como Bruce Benson (a lei como ordem espontânea), Robert Ellickson (Order without Law), John Umbeck e Jack Hirshleifer (o uso da violência como forma alternativa de alocar recursos na sociedade), dentre outros.

Talvez possamos associar o prêmio de Elinor Ostrom com o de alguns anos atrás, ganho por Vernon Smith por suas contribuições à economia experimental. Talvez se possa pensar no prêmio como mais um representante do “ampliação das fronteiras do conhecimento” (Becker, Buchanan, etc), já que a profa. Ostrom, como tantos antes dela, mostrou que instituições importam para o funcionamento dos mercados. Mais ainda, não é apenas “instituições importam”, mas também como importam.

Não é um convite para que economistas fujam da economia para estudar sociologia ou antropologia. É um convite para que cientistas sociais (e alguns economistas) leiam mais Elinor Ostrom.

Agora vou ler o que meus colegas escreveram a respeito. Boa terça-feira, leitor.

The Wikipedia page on the Mayors Against Illegal Guns Coalition was repeatedly ripped out by an anti-gun cabal. I seems that Wikipedia has become politicized and manipulated by the Politically Correct.

Below is the content, minus all the references, about Mayor Bloomberg’s coalition. Please go to Mayors Against Illegal Guns Conservapedia page to see it all. http://www.conservapedia.com/Mayors_Against_Illegal_Guns

There are a lot of indictments and felony convictions for members of a “crime fighting” organization!

The Mayors Against Illegal Guns Coalition is a leftist political coalition of mayors from about 400 United States cities, with a stated agenda of “making the public safer by getting illegal guns off the streets.” The group was formed by Boston Mayor Thomas Menino and New York Mayor Michael Bloomberg. The coalition’s CEO is Chicago Mayor Richard M. Daley.

The majority of members of the Mayors Against Illegal Guns Coalition are Democrats.

Criticism of Methods and Hypocrisy

Bloomberg has been sued for defamation by a Smyrna, Georgia gun dealer represented by former congressman Bob Barr.^[1][2]

Indicted, convicted, and scandalized members

A substantial number of member of the coalition have been indicted in recent months, on felony charges. Here in the US, conviction of felony means the immediate loss of both the right to vote and the right to own a gun for the rest of one’s life. This is an organization that espouses doing away with “illegal guns”, yet a surprising number of their members have made choices in their lives that have set themselves on the path to being disenfranchised from ever owning a gun.

Personal character and integrity are prerequisites for anyone entering public office, to serve in an elected position of “special trust and confidence”, such as a mayorship. Abuses of that trust, gross lapses of integrity, and forays into criminal conduct are not tolerated in our society. If anything, elected politicians are held to a higher standard than the general public, and their actions are closely watched. For an elected official to become a criminal, when they themselves are entrusted to protect us from criminals is nearly the most heinous and unforgivable thing imaginable in a democratically-ruled republic. For some of these same individuals to continue to be considered members in good standing of a “crime-fighting” organization–and not even censured by the organization–has been criticized as being hypocritical.

Four current and former members of the Mayors Against Illegal Guns Coalition are currently under felony indictments, five others were recently convicted of felonies, one indicted member died of a heart attack before completion of his trial, and one member was recently convicted of a violent misdemeanor. The indicted and convicted members and former members include:

• Former Mayor Gary Becker^[3] of Racine, Wisconsin is under five felony indictments for child pornography, attempted child sexual assault and child enticement.^[4] He resigned after pleading not guilty and being released on bond.^[5] His location is currently being monitored electronically, as he awaits a trial scheduled to begin in October, 2009.^[6]
• Former Mayor David Della Donna^[7], of Guttenberg, New Jersey was indicted under a Federal extortion and mail fraud charges.^[8] He was convicted in 2008^[9] and sentenced to four years and three months in federal prison.^[10]
• Mayor Sheila Dixon was indicted in 2009 on twelve counts^[11], comprising four counts of perjury, two counts of misconduct, three counts of theft, and three counts of fraudulent misappropriations.^[12] The felony theft charges stem partly from incidents in 2004, 2005, 2006, and 2007 in which she allegedly misappropriated gift cards intended for the poor and used them for personal purchases.^[13][14] Dixon’s trial, originally scheduled for September 8, 2009, was postponed to November 9, 2009.^[15]
• Mayor Jerramiah Healy was convicted for obstruction of justice in 2007^[16] and more recently was implicated in the corruption sweep in New Jersey involving the sale of body parts and money laundering. In all, 44 individuals were indicted. (Healy was named as “JC Official 4″ and implicated, but was not indicted, in the probe.)^[17][18][19]
• Former Mayor Kwame Kilpatrick was indicted, arrested, and convicted. and subsequently jailed for 99 days. Kilpatrick pleaded guilty to two felony obstruction of justice charges stemming from his efforts to cover up an extramarital affair. He also pleaded no contest to charges of assaulting a police officer attempting to serve a subpoena on a Kilpatrick friend in that case.^[20] The charges and allegations (not all against Kilpatrick himself) were of marital infidelity, conspiracy, perjury, corruption and murder.^[21] Following Kilpatrick’s conviction, the Citizens Committee for the Right to Keep and Bear Arms called on Kilpatrick to resign from the Coalition.^[22]
• Mayor Larry Langford was investigated in 2007 by the SEC on corruption charges. In 2008 a lawsuit was filed against him for illegally accepting $156,000 in cash and benefits. On December 1, 2008, Larry Langford was arrested by the FBI on a 101 count indictment^[23] alleging conspiracy, bribery, fraud, money laundering, and filing false tax returns^[24] in connection with a long-running bribery scheme.^[25][26][27] His trial date was postponed to October 2009, and the trial venue moved to Tuscaloosa, Alabama.^[28]
• Deceased Mayor Frank Melton at the time of his death was under felony indictment on civil rights charges.^[29] (He died before a scheduled re-trial, following a mistrial.) In 2006, Melton pled guilty to a firearms charge, stemming from a raid (in which he was armed with a concealed pistol) on a suspected crack house. Melton conducted the extra-official Buford Pusser-style raid without a warrant to “bust up” a duplex apartment, accompanied by a group of youths that were not sworn law enforcement officers. That same event led to Melton’s civil rights indictment. In November 2006, he pleaded no contest to three misdemeanor charges: carrying a gun in a park and in a church, and carrying a concealed weapon.^[30]
• Mayor Eddie Perez was indicted on bribery, fabricating evidence, and conspiracy to fabricate evidence felony charges.^[31] Perez turned himself in to state police, stating that he had a lapse in judgment but did nothing illegal, and vowed that he would not step down as Hartford’s mayor.^[32] He was arraigned on September 8, 2009.^[33] His trial date was postponed to November 2009^[34], and then to February, 2010.^[35] On September 2, 2009 Perez was again arrested, and additionally charged with first-degree larceny by extortion, stemming from a no-bid parking lot deal, unrelated to the other corruption charges.^[36] He again proclaimed that he would stay in office, despite these new felony charges.^[37]
• Former Mayor Samuel Rivera, of Passaic, New Jersey was convicted of corruption, influence peddling, and extortion charges.^[38][39] In August 2008 he pled guilty,and was sentenced to 21 months in prison.^[40]
• In 2008, former Mayor Will Wynn was convicted of Class C misdemeanor, for a choking assault on a man who had crashed a party.^[41]

Five current members of the Mayors Against Illegal Guns Coalition have been troubled by scandals that involved firearms:

• As New York Mayor Michael Bloomberg came into office, he inherited a chronic firearms permit favoritism scandal from his predecessors that still remains an unresolved issue. Writing in the New York Sun, attorney David Kopel observed: “The problem is acute in New York City. Celebrities, the ultra-wealthy, and the politically influential get carry permits. But many of the people who need them the most — such as stalking victims, or crime witnesses who have been threatened by the criminal’s friends — often do not.”^[42] There are currently only about 36,169 permits to keep firearms in private homes in New York City, with the majority issued to retired police officers. Of these permit holders, only 2,516 are more liberally licensed for concealed carry outside their homes. The issuance of permits is discretionary in New York City, per Penal Law 400^[43]. (It is considered a “may issue” locality, unlike the “shall issue” policy used for concealed carry in most other localities.) Despite “tight” restrictions on “demonstrated need or special danger”, a who’s-who list of celebrities, billionaires^[44], entertainers^[45], professional athletes^[46], and politicians^[47] has somehow managed to get firearms permits. This list includes New York Times publisher Arthur Ochs Sulzberger, publisher Michael Korda, and talk show host Howard Stern.^[48] In 2007, The New York Post reported that gun license holders include financier Donald Trump, his son Donald Trump Jr., Queens district attorney Richard A. Brown, Westchester County district attorney, Janet DiFiore, music executive Tommy Mottola, chief executive of Marvel Comics, Isaac Perlmutter, radio show host Don Imus, lawyer Barry Slotnick, lawyer Raoul Felder; publisher Robert Forbes, the cab-driving political activist Fernando Mateo, former new York Senate Majority Leader Joe Bruno (recently indicted for fraud), actor Robert De Niro, actor Harvey Keitel, film producer Martin Bregman, cosmetics heir Ronald Lauder, and Aerosmith singer Steven Tyler.^[49][50] All of these individuals have retained their gun licenses under Bloomberg’s “tough on guns” administration. The New York Post noted: “Television news anchor John Roland, who let his license lapse in 2006, got his gun permit back in 2007.”^[51] A surprisingly high number of celebrities have concealed carry permits, rather than the more common “keep at home” (premise) permits. According to The New York Times, “Mr. Bloomberg asked Police Commissioner Raymond W. Kelly to look at the issue, and added: ‘If you want a gun permit, you should have to really show that your life is in danger, and that having a gun will protect you, will improve the chances of you surviving.’”^[52] But despite Bloomberg’s publicly-stated concern, there have been no announcements of any celebrity gun permits being rescinded, or any reforms to prevent favoritism, cronyism, bribes, or other abuse of discretion in license issuance. With a city population of 8.3 million, the 36,169 gun permit holders represent just .043% of the population and the 2,516 concealed carry permit holders represent a scant .003% of the population.
• Mayor Richard M. Daley has been criticized for the city of Chicago’s long-standing practice of providing armed bodyguards for a number of city politicians, including city clerk James “Jim” Laski. In the city clerk scandal, Daley was shamed into removing the perk of the armed bodyguards for the clerk. The Chicago Sun-Times reported: “The decision was made almost immediately after Laski became the first elected official to be caught up in the Hired Truck scandal. But Daley insisted that the bribery and extortion charges against Laski were not the trigger. It was the fact that, until this week, Laski had not been showing up for work.”^[53] Laski was later convicted of taking $48,000 in bribes and received a two year sentence.^[54] Former Mayor Eugene Sawyer, City Treasurer Judy Rice and Alderman Edward M. Burke, chairman of the City Council’s Finance Committee still have armed bodyguards.^[55]
• Mayor Gerald Jennings of Albany, New York was implicated in a scandal regarding the alleged illegal purchase of 52 machine guns.^[56] It is unclear whether the weapons were purchased for departmental use or for the use of private individuals. Weapons were delivered to Police Department addresses but apparently paid for with private funds. The Department has not produced a list of weapons, their location, the names of the individuals who purchased them, or their disposition or destruction. At least one later turned up, illegally for sale to the public, in an area gun store. The police officer who sold the gun to the store has testified that he bought it from a Police Union official who was also the Department’s armorer.^[57] The current Chief of Police is the fifth appointed by Jennings.^[58] The case is still open.^[59]
• Following the illegal seizure of firearms in the wake of Hurricane Katrina, Mayor Ray Nagin settled a lawsuit and had a permanent injunction issued prohibiting Nagin or any New Orleans employee from confiscating any lawfully possessed firearm and ordering the return of hundreds of illegally confiscated firearms. (They had been confiscated at Mayor Nagin’s order.).^[60] Nagin’s administration has also been troubled by reports of improprieties with the police department evidence rooms, where guns were stolen, guns were allowed to rust, and $200,000 in cash was stolen.^[61][62]
• Mayor Bill White’s administration has been embarrassed by an ongoing scandal involving guns stolen from the Houston Police Department’s evidence room. In January 2009, the Houston Chronicle reported: “For months, maybe years, people with criminal backgrounds had access to secure areas of the police station, including a property room from which 30 guns disappeared within six months, according to internal police documents. The documents, obtained by the Houston Chronicle, indicated that lax security created an environment ripe for theft. No one has been charged in the gun thefts, although police suspected telephone repairmen who admitted stealing other items, and a temporary employee who had access to the property room while awaiting trial on aggravated robbery charges.”^[63][64]

Resignations from the coalition

Announced resignations

Twelve mayors that had been members^[65] have withdrawn from the organization, claiming either that they were misled about the group’s anti-gun platform, or that they were enrolled in the coalition without their knowledge.^[66][67][68] They are:

• Idaho Falls, Idaho Mayor Jared Fuhriman^[69]

• Carmel, Indiana Mayor James Brainard

• Rio Rancho, New Mexico Mayor Kevin Jackson^[70]

• Anchorage, Alaska Mayor Mark Begich^[71]

• Oldmans Township, New Jersey Mayor Harry Moore^[72][73][74]

• Walton Hills, Ohio Mayor Marlene Anielski,^[75]

• Williamsport, Pennsylvania Mayor Mary B. Wolf^[76][77]

• Madeira Beach, Florida Mayor Patricia Shontz^[78]

• Knoxville, Tennessee Mayor Bill Haslam^[79][80]

• Warsaw, Indiana Mayor Ernest B. Wiggins^[81]

• Sioux Falls, South Dakota Mayor Dave Munson^[82]

• Houston, Texas Mayor Bill White^[83]

In her resignation letter, Mayor Patricia Shontz of Madeira Beach, Florida wrote, “I am withdrawing because I believe the MAIG is attempting to erode all gun ownership, not just illegal guns. Additionally, I have learned that the MAIG may be working on issues which conflict with legal gun ownership.” She added, “It appears the MAIG has misrepresented itself to the Mayors of America and its citizens. This is gun control, not crime prevention.”^[78]

In his resignation letter to Bloomberg, Mayor Harry Moore stated: “It is simply unconscionable that this coalition, under your leadership, would call for a repeal of the Shelby /Tiahrt amendment that helps to safeguard criminal investigations and the lives of law enforcement officers, witnesses and others by restricting access to firearms trace data solely to law enforcement. How anyone, least of all a public official, could be willing to sacrifice such a law enforcement lifeline in order to gain an edge in suing an industry they have political differences with is repugnant to me. The fact that your campaign against this protective language consisted of overheated rhetoric, deception and falsehoods is disturbing.”^[84]

The resignations of Kevin Jackson and Jared Fuhriman left the state of Idaho completely unrepresented in the organization, and Alaska with just one representative mayor. Since Mayor Rocky Anderson of Salt Lake City left office, it has also left Utah unrepresented. Mayor Kathy Taylor of Tulsa, Oklahoma has announced that she will not seek re-election^[85], and as of September, 2009, her name has been removed from the coalition’s roster. This also leaves Oklahoma unrepresented. According to the U.S. Conference of Mayors there are 1,201 cities in the US with a population of 30,000 or more that are headed by mayors.^[86] Several of the mayors in the Mayors Against Illegal Guns Coalition represent even smaller towns and cities–particularly in New Jersey and Pennsylvania, which are disproportionately represented.

Legislative Initiatives

With the stated goal of reducing the number of straw purchase of guns, the coalition has favored new legislation to require mandatory reporting of lost or stolen guns.^[87] As of September, 2009, seven states (Connecticut, Massachusetts, Michigan, New Jersey, New York, Ohio and Rhode Island) and the District of Columbia have laws criminalizing failure to report lost and stolen guns to law enforcement. Several other states and local governments are working to pass similar laws.^[88] Critics counter that straw purchases are already illegal, and hence mandatory theft and loss reporting laws are redundant.^[89]

Former prosecuting attorney C.D. Michel analyzed mandatory reporting laws, using one in Ventura County, California as an example: “Ironically, the ordinance cannot be used against the real bad guys. No law can compel lawbreakers to report themselves. So a straw purchaser who legally buys a gun cannot be compelled to report that he resold it illegally. And since it wasn’t actually lost or stolen, he hasn’t violated the ordinance. Similarly, if a felon prohibited from possessing a gun illegally possesses one anyway, and it is lost or stolen, he can be prosecuted for having the gun in the first place, but cannot be prosecuted for failing to incriminate himself by reporting the loss. Enforcement of these ordinances places prosecutors in a precarious legal and ethical position. Say a straw-purchaser’s gun is recovered at a crime scene and traced back to him. If he lies to police claiming his gun was “stolen” when he really sold it on the black market, will we nonetheless prosecute him for something he did not do (fail to report the “stolen” gun — which wasn’t actually stolen) but to which he “confessed”? Ethics and legality aside, securing a misdemeanor conviction for failing to report a theft (that never occurred) likely prohibits prosecuting the straw purchaser for the more serious felony black market sale or for making a false statement to police. Perhaps worse, gun owners who truly are burglary victims must now hesitate to speak with police if their stolen gun is recovered at a crime scene. If the gun owner failed to report the loss at all, or on time, she faces possible criminal prosecution if she cooperates with police investigating the recovered gun. She should remain silent, get a lawyer and seek immunity first. Legal representation may also be appropriate when a gun is first discovered missing. The owner can be prosecuted if the theft is not reported within 48 hours of when the owner “should have known” the gun was missing. Proponents have made clear they believe “responsible” gun owners should know where their gun is at every single moment and “should know” a gun is gone immediately. And the fear of prosecution will encourage those who miss the 48-hour window not to report the loss at all. Effectively, these ordinances place the legitimate gun owner in jeopardy of prosecution for becoming a victim of a crime. In light of these liabilities, gun-rights groups and the criminal-defense bar have begun advising gun owners — who would ordinarily be happy to assist police with their investigation — that they need a lawyer if they are contacted by police.”^[90]

http://www.conservapedia.com/Mayors_Against_Illegal_Guns

The Daily Mail writes,

More than 100 top doctors have signed an open letter to U.S. senators to counter ‘lies’ about the National Health Service.

…The doctors, including former president of the Royal College of Physicians Sir George Alberti and Professor Alan Maryon-Davis, president of the UK Faculty of Public Health, and patient groups, used their letter to point out that life expectancy is longer in the UK than the U.S. – showing, they claimed, it is a better system.

Pointing to a relatively lower American life expectancy as proof of a flawed health care system is a false argument.  “The problem with such international comparisons, Greg Mankiw explains, “is that there are a lot of differences among nations beyond their health systems. To make comparisons in health outcomes, you need to control for other variables. Without such controls, the simple correlations have little meaning.”

As John Stossel explains,

The WHO judged a country’s quality of health on life expectancy. But that’s a lousy measure of a health-care system. Many things that cause premature death have nothing do with medical care. We have far more fatal transportation accidents than other countries. That’s not a health-care problem. Similarly, our homicide rate is 10 times higher than in the U.K., eight times higher than in France, and five times greater than in Canada. When you adjust for these “fatal injury” rates, U.S. life expectancy is actually higher than in nearly every other industrialized nation.

Nobel laureate Gary Becker makes a similar argument:

National differences in life expectancies are a highly imperfect indicator of the effectiveness of health delivery systems. For example, life styles are important contributors to health, and the US fares poorly on many life style indicators, such as incidence of overweight and obese men, women, and teenagers. To get around such problems, some analysts compare not life expectancies but survival rates from different diseases. The US health system tends to look pretty good on these comparisons.

A study published in Lancet Oncology in 2007 calculates cancer survival rates for both men and women in the United States, the United Kingdom, and the European Union as a whole. The study claims that the most important determinants of cancer survival are early diagnosis, early treatment, and access to the best drugs, and that the United States does very well on all three criteria. Early diagnosis helps survival, but it may also distort the comparisons of five or even ten-year survival rates. In any case, the calculated five-year survival rates are much better in the US: they are about 65% for both men and women, while they are much lower in the other countries, especially for men. These apparent advantages in cancer survival rates are large enough to be worth a lot to persons having access to the American health system.

Several measures of the quality of life also favor the US. For example, hip and knee replacements, and cataract surgery, are far more readily available in the US than in Europe.

For even more on this, I highly recommend reading Greg Mankiw’s New York Times Op-Ed ‘Beyond Those Health Care Numbers.’

As you know we’ve all been at an academic conference this week in Washington D.C., honouring Peter Berger, and I was inspired by my fellow blogger, Brian Pitt, who presented an excellent paper (soon to be published!) outlining the basic tenets of sociological inquiry. One of these, Brian says, is a preoccupation with social problems. I think he is correct in this assertion. And there is certainly a strong tendency in sociology to defend this focus. Michael Burroway has even claimed that sociology, as its primary scientific goal, should pursue ‘an agenda for social justice’.

But maybe we need to rethink this sociological preoccupation with social plights, or at least compliment it with a different form of sociology? Looking partly to the developments that have taken place in psychology, one can see new trails of knowledge for sociology to pursue. Ever since Sigmund Freud and Joseph Breuer reported their studies of hysteria in 1895, there has been a deep focus, some would say an obsession, in psychology with mental instability and illness. Freud reported how the pressure that female subjects were put under in modern society led to neurotic patterns of behaviour, that the individual was inevitably intwined with the development of society, and that the norms of emerging capitalist, modern societies suppressed desires and feelings to an extent that led to severe hysteria, especially among women who were marginalized in society. Psychoanalysis in its first 20 years rests on this foundation – analysis of hysteria (as well as dream analysis).

But today psychology is much more than this. Martin Seligman has built a name for himself through so-called ‘positive psychology’ which studies studies strengths and virtues that enable individuals and communities to thrive.

It is essentially turning social inquiry on its head, which can be a productive technique for illuminating one’s field of study. The question no longer becomes ‘why do things not work’, but is instead ‘why do some things work?’

Why do some people not commit crime, for example? It would seem that people with low time preferences, such as poor and disenfranchised groups, and especially those with hopeless future prospects, could benefit from crime. In the larger picture, for marginalized people, crime certainly pays. To claim anything else is moral propaganda. If crime did not pay, it would not take place, as the nobel laureate Gary Becker has helped us throw light upon.

Why do some people break negative social inheritance? In spite of the plethora of data that sociologists have amassed regarding socio-economic status and its relation to educational attainment, we have no sociological theory to explain how a disenfranchised child of a single mother can rise above his peers and not only graduate from the best universities in the world, but also become President of America.

Why are some people wealthy compared to just a hundred years ago? If we look at poverty, we also have to look at the fact that social distribution of wealth across classes has exploded in the last two hundred years, against the backdrop of millenia of poverty and exploitation.

Lord Bauer once famously said that there are no causes of poverty — only of prosperity. To me, this is the number one phenomenon for sociology to explain today. While a focus on social problems has had its right and relevance historically in the field of sociology, we should compliment it with a positive sociology that does not presuppose a fully-functioning, perfect system as a starting point or as an achievable goal, but instead marvels at the wonder of that which actually works in today’s incredibly complex and strange world.

• David Pontoppidan

“The fundamental result of economics is that incentives matter. These laws of economics constrain public policy dreams, but show no signs of bending or breaking.”   It doesn’t get more simply or important than that.

On the NYT’s economix blog, Gerry Mulligan, a professor of economics at University of Chicago,  borrows an example from “Irrational Behavior and Economic Theory,” a paper by the Nobel laureate Gary S. Becker.

Following Paul Krugman’s earlier pronouncement that ‘most work in macroeconomics in the past 30 years has been useless at best and harmful at worst’, most were expecting a longer piece on the matter from him. Said piece finally appeared, in the form of a 7000-word article in the New York Times Magazine on the schisms between the “saltwater” economists (affiliated with East Coast universities like Harvard, MIT and Princeton; Keynesian in outlook) and the “freshwater” school (associated with the inland universities, most famously the University of Chicago; neo-classical theorists who placed faith in the EMH). Given that a number of people have already read the piece by now, I thought I would just highlight a couple of points and explain some of the causal mechanisms that I perceive.

The first is on Real Business Cycle Theory and the counterpoint that it provides to the traditional Keynesian view of recessions/depressions. Put in its simplest form, RBC proposes that recessions are, in fact, caused by supply-side issues, with the impetus being provided by extraneous, technological shocks to productivity. These shocks can be caused by regulation, technological advancements, etc. As a result, workers adjust their willingness to work based on expected future earnings (what economists call ‘inter-temporal substitution) and consequently, affect the aggregate labor supply; the leap from the individual worker’s decision to a conclusion on aggregate supply is made on the assumption that all workers act rationally in a bid to reach the optimal solution.

Krugman, understandably, derides the notion that unemployment at current levels were caused by a lack of willingness to work- ‘was the Great Depression really the Great Vacation?’ RBC theory does appear to be a statistically ingenious way of mapping an absurd conclusion onto real-world data; I find Larry Summers’ critique of the RBC school to be a highly convincing one. However, prior to getting into the critique, it is important to situate the RBC view in the current debate. Krugman notes that for long, neo-classicists (following from the work of Milton Friedman) advocated the monetarist solution to recessions:

Monetarists asserted that a very limited, circumscribed form of government intervention — namely, instructing central banks to keep the nation’s money supply, the sum of cash in circulation and bank deposits, growing on a steady path — is all that’s required to prevent depressions…Eventually, however, the anti-Keynesian counterrevolution went far beyond Friedman’s position, which came to seem relatively moderate compared with what his successors were saying.

The extreme conclusions reached by anti-Keynesians are identified by Krugman as comprising a) a view that recessions may actually be good things, espoused by Joseph Schumpeter and co. and b) the less extreme view that ‘any attempt to fight an economics slump would do more harm than good’.

Now, the monetarist solution is clearly dead on arrival in a zero interest rate situation, such as the one we are in right now. Thus, those in favor of stimulation through money supply must look elsewhere….given the dearth of options for those who would reject fiscal stimulus however, the solution is point (b) i.e. leave the economy be and let the recession run its course. To those who would argue that rising unemployment cannot be ignored, the “freshwater” reply with a reference to RBC theory- that unemployment is grounded in real decisions by workers and should thus be left alone. Summers, in the aforelinked critique, notes:

[Real Business Cycle Theories] assert that monetary policies have no effect on real activity, that fiscal policies influence the economy only through their incentive effects and that economic fluctuations are caused entirely by supply rather than demand shocks. (Emphasis added)

In this context, consider the following from Krugman:

Chicago’s Casey Mulligan suggests that unemployment is so high because many workers are choosing not to take jobs: “Employees face financial incentives that encourage them not to work . . . decreased employment is explained more by reductions in the supply of labor (the willingness of people to work) and less by the demand for labor (the number of workers that employers need to hire).” Mulligan has suggested, in particular, that workers are choosing to remain unemployed because that improves their odds of receiving mortgage relief.

Summers’ rebuttal of this view is comprehensive and concise enough to warrant a reading. A further thought on this: the lag between growth revival and fall in unemployment that we have witnessed seems to provide a rebuttal of the supply-side perspective. This works in two ways: 1) The jobless figures usually only measure those “actively hunting” for jobs, a number that rises in the face of improved growth prospects, given the accompanying rise in worker optimism. 2) As output and sales rise, companies initially choose to offer existing workers more working hours and higher wages, before hiring more labor (as a general rule of thumb). In addition, Summers notes that companies employing blue-collar labor tend to ‘hoard’ labor hours in order to provide a buffer against a surge in product demand. All these factors seem point towards definite demand-side causes to a recession. In other words, Real Business Cycle Theory really is as absurd as it sounds, the 2002 Nobel prize to its proponents notwithstanding.

Krugman’s mention of Summers’ “ketchup economics” comment is also of particular interest, given its relevance to the bubble-free view that many economists held in the lead-up to the crisis. In essence, the critique argues that efficient-markets proponents believe that if a two-quart bottle of ketchup costs twice as much as a one-quart bottle, then the ketchup market is perfectly efficient. The problem with such a view is that it says nothing about the price of ketchup in itself i.e. the fundamentals underlying ketchup price. Our ketchup market may be overvalued/undervalued as a whole even if it is efficient within itself, which isn’t captured by the aforementioned conception of efficiency. It is clear that ignoring this point would be to completely discount the possibility of a bubble, since only relative prices within a product segment are considered. Proponents of the EMH are comfortable with engaging in such analysis since an additional premise that they call upon is the ready transferability of funds; furthermore, those markets that aren’t liquid are not susceptible to unreasonable pricing. Thus, Krugman mentions of Eugene Fama:

In a 2007 interview, Eugene Fama, the father of the efficient-market hypothesis, declared that “the word ‘bubble’ drives me nuts,” and went on to explain why we can trust the housing market: “Housing markets are less liquid, but people are very careful when they buy houses. It’s typically the biggest investment they’re going to make, so they look around very carefully and they compare prices. The bidding process is very detailed.”

That this claim appears fatuous goes without saying- indeed, the fact that consumers took out mortgages based on the relative prices of houses seems to have been a large part of the problem. More generally, Fama appears to have greatly underestimated the effects of an overleveraged, illiquid market- an accusation that can surely be levelled at numerous other players in the crisis-as evinced in the disaster that ensued regarding short-term debt. Summers talks about the failure of exchange mechanisms during a depression- while he is unsure as to the precise mechanisms that operate, I contend that the problems associated with an illiquid market slot right into his narrative.

Krugman’s piece is lucid and instructive on the whole and well worth reading, even for those with only a passing interest in economics. That having been said, I do have a point of contention: Krugman seems to imply that objections to stimulus programs were grounded in abstract, irrelevant theory. In this he is erroneous: a number of professors have come out with compelling arguments that justifies more than the cursory glance that Krugman affords them. For instance, Kevin Murphy of the University of Chicago (and Robert Barro here) question the Keynesian multiplier that the Obama Administration adopted in devising its stimulus package. From Barro:

The package was predicated on a Keynesian multiplier of around 1.5, a number that came from nowhere but, if valid, would mean that even useless programs could be socially beneficial. Mixed in with the spending explosion is an apparent plan to promote economic growth by raising current and future tax rates. Clearly, the stimulus package and the proposed expansion of health outlays will require a lot more federal revenues. After trying and failing to raise these revenues by taxing the rich (a poor strategy given the already high marginal tax rates on this group), the administration will inevitably shift to a broad-based tax hike, likely involving a value-added tax. On top of this increase in conventional tax rates, the environment/energy proposals amount to additional large levies on production.

I think the point is an important one that needs to be made, lest people start to overvalue the impact of a stimulus. As a strong advocate of some form of a federal stimulus package, I believe the inefficiencies associated with fiscal stimulus must be accepted as necessary evils; however, this does not mean that we should be blind to them. Indeed, just as Krugman accuses the modern Chicago School of having misrepresented the Friedman view by taking it to illogical consequences, he appears to be guilty of a similar fallacy when it comes to representing the freshwater bunch. There is not doubt that the majority of them were more wary of fiscal stimulus than Krugman was, but their fears did not always translate into anti-advocacy. Consider this from Kevin Murphy: while Murphy cautions- correctly, in my view- that government stimulus has a high chance of failure, he leaves open the possibility (as Friedman did) of such a package in an emergency. There are subtleties to the neo-classical approach that must be appreciated in the debate that Krugman raises.

Finally, the brilliant Gary Becker also made a compelling argument against the Cash for Clunkers scheme on his blog, further highlighting some of the problems associated with a government stimulus package. While I think Becker’s figures on the environmental effects are a little off- the new car would have to be driven over 50% further on average than the old car, for the switch to be emissions neutral- he is right on the money when it comes to the efficacy of the program as a whole. To those who contend that the ‘government inefficiency’ argument is just the relic of abstract laissez-faire attitudes, Becker points out the problems that dealers have had in claiming their rebates.

That Keynesianism is back for good seems irrefutable- the supply-side paradigm of depressions is hardly compelling and federal stimulus packages, while flawed, are a necessity. That having been said, sounding the death knell on the Chicago School would be foolish.

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Below is an audio conversation from the Online Library of Liberty between Nobel laureates Gary S. Becker and Milton Friedman. It is part of The Intellectual Portrait Series: Conversations with Leading Classical Liberal Figures of Our Time.

About this title:

Milton Friedman discusses his economic ideas with Gary S. Becker. Recipient of the 1976 Nobel Memorial Prize in Economics, Milton Friedman has long been recognized as one of our most important economic thinkers, and a leader of the Chicago school of monetary economics. A senior research fellow at the Hoover Institution since 1977, he is also the Paul Snowden Russell Distinguished Service Professor Emeritus of Economics at the University of Chicago, where he taught from 1946 to 1976. Friedman was awarded the Presidential Medal of Freedom in 1988 and received the National Medal of Science the same year.

As part of the University of Chicago’s graduation celebrations this past June, Allen Sanderson delivered an address titled “Remains of Education”, a quirky counterpoint to the “Aims of Education” address that greets entering classes. As a vocal proponent of the Chicago School of Economics, it was perhaps inevitable that Sanderson would touch upon the financial crisis and its aftermath. A number of commentators have been vocal in their criticisms of some aspects of Chicagonomics (see below), prompting Sanderson to use the address to affirm that University of Chicago economics would rise like the proverbial phoenix from the ashes- a reference, no doubt, to the university’s ubiquitous emblem.

Symbolic of the Chicago School of Economics? Allen Sanderson would like to think so.

The events of the last year leave one wondering though- is it truly time to lay Chicagonomics to rest? Despite assertions to the contrary from UChicago faculty, a number of academics and commentators seem to think so. Nobel-Laureate in Economics Paul Krugman has repeatedly called for greater fiscal stimulus and a hugely expanded role for government as the only solution to the current economic mess; indeed, Krugman’s New York Times op-eds now run the risk of flogging a dead horse, having constantly made the same point for a while now. Given that a lot of the stimulus arguments have concerned the quantitative aspect, a successful response would ideally revolve around the qualitative benefits/lack thereof of a stimulus package. Gary Becker and Kevin Murphy, two of the smartest economist out there in my view (certainly two of the best that Chicago has to offer), have provided some arguments to the contrary, most succinctly in this Wall Street Journal piece from February. Kevin Murphy makes the same point in his characteristically lucid way here as well. Given the gargantuan deficit already confronting the US Government (over $1 trillion and rising at last count), the jury seems to be out on the practicality of Krugman’s particular brand of a Keynesian renaissance.

However, this merely touches the tip of the iceberg as far as the debate at hand is concerned: Simon Johnson (former Chief Economist at the IMF and now at MIT’s Sloane School of Management) and James Kwak propose an equally radical solution to Krugman’s in a now-famous article in which, true to Johnson’s IMF roots, they prescribe nationalization and restructuring of the worst-hit banks at the center (for the time being) as the best way forward. Nationalization of the banking sector, anathema to the Chicago school regardless of the time-frame under consideration, seems to mark the final nail in the coffin of such ideals as the Washington Consensus, something that George Soros touches upon in his latest book as well (see below).

Given the rosy earnings reports from Goldman Sachs and J.P.Morgan, Johnson and Kwak’s prescription might have seemed a bit premature, but a number of debates on their fascinating blog (a must-read incidentally) remain pertinent to the issue of a possible shift in the economic and financial paradigms. Kwak has devoted plenty of space towards discussing the Efficient-Markets Hypothesis (EMH), or whats left of it after the flak that it has taken since the financial crisis began. For a summary of EMH, look here, while more detailed analyses are available at The Baseline Scenario. Academics like Yale’s Robert Shiller now appear remarkably prescient for their wariness regarding EMH even in this decade’s glory years; it would not be a far stretch to argue that the EMH has been the biggest theoretical casualty of the financial crisis. Perhaps associated most closely with Eugene Fama, professor at Chicago’s Booth School of Business, the Efficient Markets idea that the market price is right appears patently absurd and difficult to back-up given recent events. However, a more nuanced study of EMH and its applications would beg a tempering of the criticism (see this article from The Economist for instance). As Myron Scholes argues, as with all theories, EMH is not perfect and the problem thus lies largely with Wall Street, which pushes imperfect theories beyond reasonable bounds. At the end of the day, turning a descriptive theory into a prescriptive one is a recipe for disaster and in this view, the financial crisis was inevitable. This by no means provides the stronger defense of EMH that Scholes seeks though. I quote from the above-linked article from The Economist:

“In some ways, we behavioral economists have won by default, because we have been less arrogant,” says Richard Thaler of the University of Chicago, one of the pioneers of behavioral finance. Those who denied that prices could get out of line, or ever have bubbles, “look foolish”. Mr Scholes, however, insists that the efficient-market paradigm is not dead: “To say something has failed you have to have something to replace it, and so far we don’t have a new paradigm to replace efficient markets.” The trouble with behavioral economics, he adds, is that “it really hasn’t shown in aggregate how it affects prices.”

I think Scholes is wrong on this point- to prove the failure of a proposition certainly doesn’t require the affirmation of another. While behavioral economics may lack the descriptive force of the efficient-market paradigm, this does not preclude a dispensation of said paradigm. This may leave an intellectual vacuum, but so be it- academic theories are not established by default.

Kwak’s most recent post on the issue raises an interesting question. He asks:

More fundamentally, for an interesting asset like a share of stock (or a house), what does it even mean for a price to be “right?” Sure, ten years later you can see what the dividends have been for ten years and what the stock price is on that date, but that price is no more “right” than any other price; it’s still a collective, irrationality-tainted guess about the future. Future states of the world are not only unknowable right now, they don’t exist right now, so questions of right and wrong don’t even apply to them. There are just better and worse estimates, and there will never be any way to determine which estimate was better. (Just because things work out a certain way doesn’t imply that that was the most likely outcome.)

I think Kwak’s makes a very useful point here, one that needs to be factored into the EMH debate. For a while now, I have believed that the discipline of Economics is inexorably being drawn towards its behavioral component and behavioral finance takes off largely where Kwak’s question leaves off (the Wikipedia primer on behavioral finance and economics is largely useful for the links that it cites). Where heuristics and biases affect the very world we live in as much as it affects these very biases, how useful is it to talk about path-dependency grounded in rational choice models? The seminal paper by Kahneman and Tversky [1979] in this field is highly recommended. Much work remains to be done and the road ahead is not easy. The behavioral fallback of measuring stated preferences carries a number of question marks with it, unlike the revealed preferences that rational choice models utilize. However, the debate now seems to revolve around what preferences are determined to be revealed preferences- those underpinning models formulated in boom years clearly need to be reexamined. Indeed, behavioral economics may ultimately prove to merely be a tool by which the erstwhile paradigm is fine-tuned.

This now provides me with a useful segue into the post’s final subject: George Soros. His latest book, released last year, deals with the financial crisis and the way forward; specifically, Soros outlines what he considers to be a new paradigm for financial theory (and economics by minor extension). While I can only claim to have read parts of the book, this video does a good job of covering its major points in a mere 84 minutes.

There is a lot of interesting material in the above-linked conversation with Soros (and presumably, in his book as well). Its relevance to the current discussion arises from his theory of reflexivity, which the lecture page describes as follows:

…markets do not exist in a vacuum nor spontaneously self-correct. Thinking participants introduce friction, inevitably influencing outcomes for better or worse. Soros characterizes this phenomenon as the cognitive function interfering with the manipulative function and vice versa, thus the reflexivity of his theory. “Path dependence is very much due to imperfect understanding,” he states and “actions have unintended consequences.”

Soros goes on to discredit monetarism as an effective way to fight out of the financial crisis, calling for a neo-Keynesian fiscal programme. While eschewing the wholehearted transfer of power to the government that Johnson advocates in his article (for example, Soros calls for a recapitalization of banks through government-sponsored low-rate bonds that could be converted to stock at the discretion of the shareholders, the latter caveat being added to pacify shareholders nervous about dilution of the share-value), Soros does see governments around the globe as being the chief financial players in the new game, with monetarism (beloved to one Milton Friedman) on the back-burner. Along the way, Soros takes care to lambast EMH and rational-choice models. While the video dates back to October, 2008, I think the various issues he touches upon are just as pertinent today. On an unrelated note, his discussion on the convergence of the CDO fiasco and Marxist socialism upon the agent-principle issue is rather interesting.

Where, then, does that leave us? Is monetarism truly a thing of the past, however temporary that measure may be? Is it time to finally place the Efficient Markets Hypothesis in mothballs? What is the future of Chicagonomics? These are important questions, given the sheer weight of academic influence that the Chicago School has wielded over the years. The Economist recently carried a couple of articles on the ongoing debate within the economics discipline. Paul Krugman asserts that ‘most work in macroeconomics in the past 30 years has been spectacularly useless at best and positively harmful at worst’. While, in my view, the jury is still out on that particularly gloomy prognostication, there is no doubt that the discipline is undergoing seismic shifts. How it emerges from the storm is an ongoing story. On another note, the UChicago Phoenix may already be rising from the ashes: if this crisis has indeed paved the way forward for behavioral finance and economics, our very own Richard Thaler should be at the forefront of the movement.

Would he still be smiling today?

Addendum: A small note with regards to the Soros video: it was gratifying to note that he shares my view that letting Lehmann go was a huge mistake. In their primer on the financial crisis for the uninitiated, Johnson and Kwak comment that the government may have chosen to save AIG the very day after it let Lehmann go because of AIG’s higher exposure to Credit Default Swaps and the consequent uncertainty that an AIG collapse would bring; the indecipherable maze of counterparty exposure in the CDS game would have been impossible to comprehend and as a result, an estimation couldn’t be made of just how catastrophic an AIG implosion would be. While I think this is partly correct, it doesn’t tease out the full point viz. Lehmann’s aftermath proved just how unpredictable the entire crisis had become. In short, the decision to let Lehmann go versus not doing the same for AIG was not a calculated gamble- rather, the magnitude of the Lehmann quake forced Paulson and company to confront the reality of the CDS nightmare that they would face with AIG.

The purpose of economics is, according to Gary Becker (a Chicago economist), ‘to understand and alleviate poverty.’ Levitt, at Freakonomics, writes

What’s surprising about Becker’s comment — and I believe he is telling the truth and not just being politically correct when he says helping the poor is the point of economics, because he never worries about political correctness — is that he is a staunch Republican and a firm believer in markets. There is no reason why that belief in markets can’t go hand in hand with really wanting to help the poor, it just usually doesn’t.

In a market economy, there are inevitably winners and losers. So most folks who worry about the poor are turned off by markets, believing that some other system could do a better job for the worst off. Becker, however, would argue that markets, especially when combined with access to good education, are the best shot the poor have.

In another Freakonomics post, Dubner discusses Becker’s idea of ‘the economic approach,’ where he somewhat surprisingly concludes that almost all deaths are suicides!

The Future of Capitalism 

The Financial Times today has a special magazine on The Future of Capitalism. Leading economic analysts, journalists and academics discuss this question in light of the current crisis of capitalism.

Contributors include:

Lionel Barber, Gary Becker, Larry Fink, Chrystia Freeland, Alan Greenspan, Francesco Guerrera, Paul Kennedy, Nigel Lawson, Kishore Mahbubani, Kevin Murphy, Edmund Phelps, Amartya Sen, Robert Shiller, Sir Martin Sorrell, Joseph Stiglitz, and Martin Wolf.

The Financial Times also has a web site on ‘The Future of Capitalism’, at: http://www.ft.com/indepth/capitalism-future

Glenn Rikowski

The Flow of Ideas: http://www.flowideas.co.uk

The Ockress: http://www.theockress.com

Volumizer: http://glennrikowski.blogspot.com

Today’s article of the day comes from the Becker-Posner blog:

Most richer nations nowadays, and many developing nations, have “independent” central banks, such as the European Central Bank and the Federal Reserve Bank. “Independence” cannot be precisely defined, but it is supposed to indicate that the central bank of a country has the freedom to make decisions which the government, represented by the Treasury in the United States, does not like. The purpose of independence is to allow monetary policy to be decided independently of fiscal policy, although obviously even independent banks and governments may respond in consistent ways to broad economic events, such as the present recession.

The motivation for having an independent central bank is the many occasions in the past when subservient central banks accommodated the government’s desire to spend more without raising additional taxes. Central banks accommodate fiscal authorities essentially by buying government securities that help finance government spending. In return for receiving government debt, a central bank would either directly print additional currency that governments can spend, or it would create reserves in commercial banks that lead to an expansion of bank deposits and monetary aggregates, such as M1. Either way, inflation would result from this monetization of the government debt, often severe inflation and even hyperinflation. Hostility to rapid inflation led to the political support behind giving central banks much greater independence from fiscal authorities.

The history of the Federal Reserve’s transition in and out of independence is illuminating (see Allan Meltzer’s book, A History of the Federal Reserve, 2003). The Fed fully and enthusiastically compromised its independence from the Treasury during World War II. It bought large quantities of government debt to help the government finance the large wartime deficit. Inflation from the resulting big expansion of the money supply was suppressed through wage and price controls. This inflation became open after removal of these controls at the end of the war.

For a half dozen years after that war was over, President Truman and the Treasury pressured then much more reluctant Fed officials into maintaining the Fed’s subservience. Eventually, however, the Fed regained its independence in the famous Accord reached in March 1951. Nevertheless, the Vietnam War, the Great Society Program, and the reinstitution of wage and price controls by Richard Nixon in the early 1970s led to later erosions of the Fed’s independence.

Even during normal times, central banks, whatever their nominal independence, are under strong pressure to accommodate expansionist fiscal policy, especially as elections approach. During extraordinary times, whether in peacetime or during wars, this pressure usually becomes too powerful to resist. So the rather complete bending of the Fed to the Treasury’s wishes during the present worldwide recession is not surprising. Still, that does not make it right, and I have some doubts about the Federal Reserve’s recent behavior.

One concern is the somewhat arbitrary choices the Fed made about which banks to bailout and which ones to close or merge into other banks. This added significantly to the enormous uncertainty already prevalent in financial markets. I am also worried about the Fed’s support of the huge federal deficits generated by the sharp expansion in federal spending. I understand such actions are necessary to help governments fight wars, but why help finance so much spending during this recession, particularly spending that has dubious stimulating potential? One example is the almost $800 billion so-called stimulus package that will do little to stimulate the economy, but will greatly raise long term government spending in directions desired by the President and Congress (see the posts on January 11 of this year). Another example of dubious government spending that the Fed seems willing to help finance is the ill thought out Treasury plan for hedge funds and other financial institutions to buy toxic bank assets (see the criticism of this plan in my posts on March 29 and 31).

The huge increase in bank reserves is a major consequence of the Fed’s monetization of the government’s large spending programs. Reserves went from about $8 billion in early Fall to around $800 billion, or a hundred fold increase in only 6 months. The recession rather than the wage and price controls imposed during prior periods is keeping inflation suppressed at present. Once the economy begins to recover, the inflationary risks will be enormous. In order to soak up these reserves, the Fed would have to sell large quantities of its government securities back to the private sector. These sales would put downward pressure on security prices- that is, upward pressure on interest rates- that will slow the economy’s expansion at that time. For this reason, any government in power then, whether Democratic or Republican, will vigorously resist such Fed actions.

Hence it is not obvious that the Fed will be able to conduct these sales sufficiently smoothly to prevent either a recession or a serious bout of inflation. These are not pressing concerns when a serious recession is the immediate problem, but they will become major challenges down the road.

From Drop Box

Esta aí em cima é a minha sobrinha Teresa. Que consequências os bebês trazem para a economia? Bem, que tal isto? Ou talvez isto. Mais aqui, aqui e aqui. Aliás, o último reúne dois gigantes do pensamento econômico: Robert Barro e Gary Becker.