Does The U.S. Really Have A Fiscal Crisis?

By Simon Johnson

The United States faces some serious medium-term fiscal issues, but by any standard measure it does not face an immediate fiscal crisis.  Overindebted countries typically have a hard time financing themselves when the world becomes riskier – yet turmoil in the Middle East is pushing down the interest rates on US government debt.  We are still seen as a safe haven.

Yet leading commentators and politicians today repeat the line “we’re broke” and argue there is no alternative other than immediate spending cuts at the national and state level.

Which view is correct?  And what does this tell us about where our political system is heading? Continue reading “Does The U.S. Really Have A Fiscal Crisis?” →

Conventional Meaninglessness

By James Kwak

David Brooks may be a wonderful person, but I don’t like his columns (and I didn’t like Bobos in Paradise, either). It’s hard to put my finger on why, but he helped me out with yesterday’s column. For one thing, he has this annoying habit of trying to claim the reasonable center, often by making false equivalences between the two things he is trying to sound more reasonable than. So, for example:

“No place is hotter than Wisconsin. The leaders there have done everything possible to maximize conflict. Gov. Scott Walker, a Republican, demanded cuts only from people in the other party. The public sector unions and their allies immediately flew into a rage, comparing Walker to Hitler, Mussolini and Mubarak.”

Comparing the other side to Hitler is bad.* Pushing for legislation that hurts the other side is something else. In the abstract, that legislation may be justified; Walker did just win an election, after all. But it’s a completely different category from making stupid signs to hold at rallies, and it’s a classic David Brooks false equivalence.

But that’s just a minor peeve. It’s when Brooks adopts his pseudo-reasoned “everybody knows” tone that I get really mad.

“Everybody now seems to agree that Governor Walker was right to ask state workers to pay more for their benefits. Even if he gets everything he asks for, Wisconsin state workers would still be contributing less to their benefits than the average state worker nationwide and would be contributing far, far less than private sector workers.”

Continue reading “Conventional Meaninglessness” →

February 18, 2011

By James Kwak

Thank you for all the suggestions about my post on the3six5. I decided to write about my favorite topic: my daughter. But at the suggestion of several people, here’s another one (also limited to 365 words and in diary style).

***

Today I spent another two hours in the car, mostly on Interstate 91.

The section between Amherst and Hartford is the stretch of highway I know best in all the world. For six years I went to the Hartford airport every week or two for business. For three years I’ve been driving to New Haven for school. And I recently accepted a job in Hartford.

The thing that makes it at all tolerable is the radio — more specifically, the podcasts I play from my phone. My favorite, loyal readers know, is This American Life, followed by RadioLab, Planet Money, Fresh Air, and TED Talks. (When I’m too tired for anything even remotely intellectual, I listen to embarrassing music on Pandora.)

Most of those shows come from NPR or its affiliates. The spending cuts just passed by House Republicans eliminate funding for the Corporation for Public Broadcasting, which according to Wikipedia provides about 17 percent of all funding for public broadcasting stations.

Continue reading “February 18, 2011” →

Is Economics the Problem?

By James Kwak

For a class, I recently read “The Psychological Consequences of Money,” a 2006 article in Science by Kathleen Vohs, Nicole Mead, and Miranda Goode. It describes nine experiments testing how reminding people of money leads them to behave differently — in ways that we should not be proud of. You may have heard of these experiments.

In Experiment 5, participants first played Monopoly, after which the game was cleared except for a large or a small amount of play money; then they were asked to imagine a future with abundant finances or with strained finances (there was also a control group); then someone walked into the room and dropped a box full of pencils. People who saw more money and imagined having a lot of money picked up fewer pencils. In Experiment 7, participants saw a screensaver with currency symbols floating underwater or fish swimming underwater; then they were asked to move two chairs together for a conversation with another person. People who saw the currency symbols placed the chairs further apart than people who saw fish.

Continue reading “Is Economics the Problem?” →

Branching Out

By James Kwak

Tomorrow I’ll be writing the February 18 post for the3six5, a collective diary written by 365 different people, mostly creative/artistic/media types (which I am not, in case you hadn’t noticed). The post should be a diary entry for that day — so, not an analysis of the Treasury’s proposal for Fannie and Freddie, for example. But if you have any suggestions feel free to let me know.

No No No! It’s Already Priced In!

By James Kwak

That was undoubtedly the response of theoretical law and economics devotees to the premature retirement of Kansas City Royals pitcher Gil Meche a few weeks ago, which we discussed in one of my classes last week. Meche signed a five-year, $55 million, guaranteed contract before the 2007 season, which would have paid him $12 million in 2011 simply for showing up, despite a broken-down shoulder that made him an ineffective pitcher. Yet Meche decided to retire, giving up the $12 million. Meche said this:

“Once I started to realize I wasn’t earning my money, I felt bad. I was making a crazy amount of money for not even pitching. Honestly, I didn’t feel like I deserved it. I didn’t want to have those feelings again.”

Continue reading “No No No! It’s Already Priced In!” →

Derivatives Industry Report Collapses

By Simon Johnson

The credibility of a major report commissioned by the “Derivative End Users Coalition” – run by big banks against implementing the Dodd-Frank reforms – just collapsed.

As Andrew Ross Sorkin reports in the New York Times, the report has no meaningful substance – it is destroyed by the critique of Joe Stiglitz – and the consulting company (Keybridge Research) behind the report sought misleading credibility through falsely claiming affiliations with substantive academics. 

At the end of Sorkin’s article is a remarkable admission by Mr. Wescott, the president of Keybridge, conceding these facts.   Continue reading “Derivatives Industry Report Collapses” →

Misleading “Research” From The Chamber Of Commerce

By Simon Johnson

On behalf of key financial sector players, Keybridge Research has just published a report that claims the Dodd-Frank reforms for over the counter derivatives market “could cost 130,000” jobs.  My MIT colleague, John Parsons, deftly takes this apart on his blog today – pointing out that the technical basis of this report is very weak (or nonexistent). 

John is an expert on these issues and spends a great of time with nonfinancial companies that use derivatives in a sensible and responsible manner.  His critique should carry weight – including with the relevant congressional hearings scheduled for this week.

But I would go further. Continue reading “Misleading “Research” From The Chamber Of Commerce” →

Bad Data

By James Kwak

To make a vast generalization, we live in a society where quantitative data are becoming more and more important. Some of this is because of the vast increase in the availability of data, which is itself largely due to computers. Some is because of the vast increase in the capacity to process data, which is also largely due to computers. Think about Hans Rosling’s TED Talks, or the rise of sabermetrics (the “Moneyball” phenomenon) not only in baseball but in many other sports, or the importance of standardized testing scores in K-12 education, or Karl Rove’s usage of data mining to identify likely supporters, or the FiveThirtyEight revolution in electoral forecasting, or the quantification of the financial markets, or zillions of other examples. I believe one of my professors has written a book about this phenomenon.

But this comes with a problem. The problem is that we do not currently collect and scrub good enough data to support this recent fascination with numbers, and on top of that our brains are not wired to understand data. And if you have a lot riding on bad data that is poorly understood, then people will distort the data or find other ways to game the system to their advantage.

Readers of this blog will all be familiar with the phenomenon of rating subprime mortgage-backed securities and their structured offspring using data exclusively from a period of rising house prices — because those were the only data that were available. But the same issue crops up in many different stories covering different aspects of society.

Continue reading “Bad Data” →

$1.30 > $1.00

By James Kwak

Bruce Bartlett (hat tip Catherine Rampell) reproduces a table from a paper by Suzanne Mettler showing that most people don’t realize that they are beneficiaries of government social programs. For example, 60 percent of people who take the mortgage interest deduction say they “have not used a government social program.” Now, while the mortgage interest deduction is a subsidy designed to enable people buy houses, you could get into an argument about whether it’s really a “social program.” But these are the analogous figures for some more classic welfare programs:

  • Social Security retirement and survivors’ benefits: 44%
  • Unemployment insurance: 43%
  • Medicare: 40%
  • Social Security Disability Insurance: 29%
  • Medicaid: 28%
  • Food stamps: 25%

Continue reading “$1.30 > $1.00” →

Richard Posner Is My New Hero

By James Kwak

Yes, I have said some critical things about Posner in the past, usually about his penchant for abstract theoretical arguments that presume perfectly functioning markets. But I’m happy to say we can make common cause on an issue of much greater importance: the Bluebook.

The Bluebook is the 511-page “uniform system of citation” that is prescribed by — well, actually, by the editors of the main student law reviews at Columbia, Harvard, Penn, and Yale — and enforced by the student editors of law reviews (almost) everywhere. But  it is not enforced by the courts, whose citation systems vary from jurisdiction to jurisdiction and are not effectively enforced by anyone, anyway. Posner calls it “a monstrous growth, remote from the functional need for legal citation forms, that serves obscure needs of the legal culture and its student subculture.”[1]

Continue reading “Richard Posner Is My New Hero” →

What Did Bank CEOs Know And When Did They Know It?

By Simon Johnson

One view of executives at our largest banks in the run-up to the crisis of 2008 is that they were hapless fools.  Not aware of how financial innovation had created toxic products and made the system fundamentally unstable, they blithely piled on more debt and inadvertently took on greater risks.

The alternative view is that these people were more knaves than fools.  They understood to a large degree what they and their firms were doing, and they kept at it up to the last minute – and in some cases beyond – because of the incentives they faced.

New evidence in favor of the second interpretation has just become available, thanks to the efforts of Sanjai Bhagat and Brian Bolton.  These researchers went carefully through the compensation structure of executives at the top 14 US financial institutions during 2000-2008. Continue reading “What Did Bank CEOs Know And When Did They Know It?” →

Paul Ryan Criticizes Bernanke for Failing to Contain Tooth Fairy

By James Kwak

In a Congressional hearing today, Representative Paul Ryan (R-WI), chair of the House Budget Committee, strongly criticized Federal Reserve Chair Ben Bernanke for failing to contain the severe inflation threat posed by the Tooth Fairy.

Ryan pointed to numerous studies showing that, despite ongoing economic sluggishness, the Tooth Fairy is paying much more for children’s baby teeth than in past years. In neighborhoods such as Winnetka, Cleveland Park, the Upper East Side, and Palo Alto, children can receive more than $20 per tooth — a dramatic increase from the 25-50 cents that the Tooth Fairy paid only a decade or two ago. In the Hamptons, summertime prices for teeth can easily exceed $100, according to a survey commissioned by the American Enterprise Institute.* Because the Tooth Fairy is able to create money magically, her purchases of unused teeth (with no apparent economic value**) increase the money supply, fueling inflation. Without explicitly accusing Bernanke of participation in the Tooth Fairy’s scheme, Ryan implied that the Tooth Fairy’s higher payouts may be part of the Federal Reserve’s quantitative easing scheme.

Continue reading “Paul Ryan Criticizes Bernanke for Failing to Contain Tooth Fairy” →

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