Month: February 2011

Is Happiness Conservative?

By James Kwak

A few days ago I wrote a post addressing Mike Konczal’s question of whether behavioral economics, as a whole, weakens the case for the welfare state or, more generally, for activist liberal policies. I said the answer was “no.” But I think positive psychology—otherwise known as happiness research—presents a more difficult question.

I’ve only consumed popular versions of happiness research, such as The Happiness Hypothesis, by Jonathan Haidt, but basically the story is something like this. For much of its history, psychology had a pathological bent: it was concerned with figuring out why people had psychological problems and how to cure those problems. (Whether it had any success whatsoever is a question for another day and another blog.) A few decades ago, however, some psychologists decided they would try to figure out what makes people happy, and they started a wave of happiness studies that continues today. In many of these studies, people are pinged at random times and asked to rate how happy they are at that moment. Then treatments are introduced so you can measure the difference in happiness between the treatment and control groups. For example, if people find a quarter in a pay phone,* afterward they will report they are happier than people who didn’t find the quarter; not only does this effect persist for a surprisingly long time (into the next day, I think), but also affects people’s reported happiness about unrelated parts of their life, like their family life.

Continue reading “Is Happiness Conservative?” →

“To Blame Wall Street For the Financial Meltdown Is Absurd”

By Simon Johnson

At the heart of the Treasury Department’s strategy for refloating our largest financial institutions is an important assumption – decision-makers at our largest institutions have “learnt their lesson” and will be more careful going forward.

The latest string of pronouncements from the top of Wall Street suggests that this assumption is badly flawed.

In a column now running on Bloomberg, I review the recent statements of Robert Benmosche (AIG) and Bob Diamond (Barclays).  Their views are not encouraging.  They want to run bigger, more global and extremely complex financial institutions.  They also appear to favor a great deal of leverage (high debt relative to equity) wherever possible.

Steve Eckhaus – a top Wall Street compensation lawyer (he will get you your bonus) – articulated the underlying view with great clarity to Saturday’s Wall Street Journal, “To blame Wall Street for the financial meltdown is absurd.” (p.B13 of Feb.5-6 print edition).

The absurdity here is that we have created Too Big To Fail banks (and insurance companies) and that we are allowing them to become Too Big To Save – while our political elite blithely looks the other way.

Direct link to Bloomberg column: http://www.bloomberg.com/news/2011-02-07/wall-street-knows-meltdown-was-just-bad-dream-commentary-by-simon-johnson.html

Does Behavioral Economics Undermine the Welfare State?

By James Kwak

That’s the title of a post by Mike Konczal, who answers it in the negative. The question comes from Karl Smith and is based on a paper by Bryan Caplan and Scott Beaulier. The paper argues that welfare programs expand the set of choices available to people; while that is all good according to traditional economics, if we think that people are inclined to make bad choices (“behavioral economics”), then welfare programs give people more opportunity to make bad choices and hurt themselves. This is particularly a problem because, they claim, “there are good empirical reasons to think that behavioral economics better describes the poor than it does the rest of the population” (p. 4). In other words, if poor people are more irrational, then giving them more choices will hurt them more than other people.

Let’s start with that last claim. What could it even mean that “[some academic subfield] better describes [one group of people] than it does the rest of the population”? It seems to me there’s a category error here. Behavioral economics describes human beings, and the major population used in most experiments is undergraduates at prestigious universities. If the findings of the research are biased in any way, that’s the bias.

But what Caplan and Beaulier really mean to say is this: “Existing literature provides good reasons to think that the deviations of the poor from the standard neoclassical model are especially pronounced.  Their judgmental biases are more extreme, and their self-control problems more severe, than those of the rest of the population” (p. 12). So basically they boil down all of behavioral economics to the proposition that people behave irrationally (admittedly, this is what is most prominent in the popular literature), and then they say that the poor are more irrational than “normal” people. (The normative standpoint is theirs, not mine. Check out this clause: “deviant behavior is much more pronounced among the poor.”)

Continue reading “Does Behavioral Economics Undermine the Welfare State?” →

The Problems with Rivlin-Ryan

By James Kwak

Uwe Reinhardt has a post about the Rivlin-Ryan Medicare Plan, which would convert Medicare into a voucher program for people currently under 55 and also fix the growth rate of the value of the vouchers at GDP growth plus one percentage point. The issue Reinhardt focuses on, and which I also blogged about a while back, is that health care costs have been climbing considerably faster than that, so over time the value of the vouchers will fall relative to real health care costs.

But another problem is that, at least according to the CBO’s summary, the Rivlin-Ryan plan doesn’t say anything about how elderly people will buy insurance. Today, the cost of Medicare is reduced by the program’s bargaining power with providers. which means the total amount spent by Medicare is less than the total amount that would be spent by all Medicare beneficiaries if they had to buy insurance on the individual market. A voucher system would push them into the individual market, which means that the amount they would have to spend would go up dramatically.

Now, it’s possible that the Rivlin-Ryan plan takes the Obama health care reform and its reforms to the individual market (including a prohibition on medical underwriting and the creation of exchanges for buying insurance) as a starting point. But that would be interesting, since Paul Ryan voted to repeal the Obama health care reform.

Continue reading “The Problems with Rivlin-Ryan” →

Fordham Panel on Monday

By James Kwak

The Fordham Law School is holding a symposium on regulatory capture, with a vague emphasis on the financial sector, on Monday morning from 8 to noon, plus lunch if you want to stick around. Senator Sheldon Whitehouse (D-RI) will be talking — I’ve heard him, he knows his stuff — and the panelists will include Lawrence Baxter, Daniel Kaufman, Steven Davidoff and Robert Weber. And me. I’ll be talking (for ten minutes, plus discussion) about types of regulatory capture, in particular how regulatory capture can operate in the absence of corruption and dishonesty.

I believe according to the website it’s free if you don’t want lunch. And lawyers can even get CLE credit (you have to pay a bit more), even though I’m still in law school!

The Ruinous Fiscal Impact Of Big Banks

By Simon Johnson

The newly standard line from big global banks has two components – as seen clearly, for example, in the statements of Jamie Dimon (JP Morgan Chase) and Bob Diamond (Barclays in the UK) at Davos last weekend.  First, if you regulate us, we’ll move to other countries.  And second, the public policy priority should not be banks, but rather the spending cuts needed to get budget deficits under control in the US, UK, and other industrialized countries.

This rhetoric is misleading at best.  At worst it represents a blatant attempt to effectively shakedown the public purse.

On Tuesday morning, in testimony to the Senate Budget Committee, I had an opportunity to confront this myth- making by the banks head-on and to suggest that the bankers’ logic is completely backwards. Continue reading “The Ruinous Fiscal Impact Of Big Banks” →

A Bit More on Fannie and Freddie

By James Kwak

My previous post on Fannie/Freddie had two major parts. In the first part, I questioned whether the thirty-year fixed-rate mortgage would really go away (or become much more expensive) without Fannie/Freddie, as some people have argued. In the second part, I said, who cares?

The first part has gotten a fair amount of good criticism, for example from Arnold Kling and John Hempton (by email), and also in comments. My position, simplified, was that a thirty-year fixed-rate mortgage includes three kinds of risk: credit risk, interest rate risk, and prepayment risk. Credit risk can be diversified, interest rate risk can be hedged, and Fannie/Freddie didn’t do anything about prepayment risk anyway. This is the kind of theoretical argument people make all the time, and the obvious question is whether the world actually works that way.

Continue reading “A Bit More on Fannie and Freddie” →