Interesting — could Germany’s failure be due to forgetting that free markets are better at innovation than government labs?
Archive for April, 2008
China is upping its target for wind power to 100 gigawatts from 30 gigawatts. The new number equates to about 100 nuclear plants (yes, we know) and more generation capacity than in all of France… How much is that? The entire world had installed 94 gigawatts of wind power at the end of last year. Germany, the most wind power-friendly country on earth, has about 20 gigawatts…
Yes, central planning does allow change to happen faster [more…]
“I’ve experienced a deathbed conversion,” he said, smiling. “I just bought a Macintosh.”
I just found Jeffrey Zaslow’s column on Randy’s “Last Lecture” — which reminded me of this quote from the beginning of the lecture.
John McCain finally presents his health-care reform plan:
The Senator is also starting to enfold these ideas in a larger narrative that will be indispensable in the philosophical fight that is so clearly ordained for the general election between private and government health care. Mr. McCain undertook yesterday to recast this looming argument in a new mold. He contended that the health insurance and delivery system is in fact failing many Americans – but that it was failing because of market distortions mostly created by the government itself. Fixing these irrationalities would both make insurance more affordable and increase overall coverage in the bargain. Nor would it require the vast new entitlement programs Democrats are eyeing.
His major proposal would change the tax treatment of insurance. To review: Today’s tax code permits businesses to deduct the cost of providing insurance to their employees, but it doesn’t do the same for individuals. This creates third-party payment problems; workers aren’t aware of the full, true costs of many treatment decisions, part of the reason the U.S. has double-digit health-care inflation. And it makes insurance less affordable for everyone outside the employer-based system, who must pay with after-tax dollars besides. Mr. McCain would correct this imbalance with a refundable tax credit, restoring the parity of health dollars.
The speech transcript is here.
On March 17, Alan Greenspan wrote an article for the FT entitled “We will never have a perfect model of risk“, in which he argued: “We will never be able to anticipate all discontinuities in financial markets.” He concluded: “It is important, indeed crucial, that any reforms in, and adjustments to, the structure of markets and regulation [do] not inhibit our most reliable and effective safeguards against cumulative economic failure: market flexibility and open competition.”
At the Financial Times Economist’s Forum you will find all the responses to the Greenspan article. And Alan Greenspan’s reply, which begins…
I am puzzled why the remarkably similar housing bubbles that emerged in more than two dozen countries between 2001 and 2006 are not seen to have a common cause. The dramatic fall in real long term interest rates statistically explains, and is the most likely major cause of, real estate capitalization rates that declined and converged across the globe. By 2006, long term interest rates for all developed and major developing economies declined to single digits, I believe for the first time ever.
Doubtless each individual housing bubble has its own idiosyncratic characteristics and some point to Fed monetary policy complicity in the US bubble. But the US bubble was close to median world experience…
…De Grauwe is correct; I do believe bank risk managers and loan officers are more knowledgeable than government bank regulators. Bank loan officers, in my experience, know far more about the risks and workings of their counterparties than do the bank regulators that examine those counterparties.
Regulators, to be effective, have to be forward looking to anticipate the next financial malfunction. This has not proved to be feasible. Regulators confronting real time uncertainty have rarely, if ever, been able to achieve the level of future clarity required to act preemptively. Most regulatory activity focuses on activities that precipitated previous crises and that investors have long since largely abandoned, although new laws may prevent recurrences. New problems, to repeat, are by their nature incapable of being anticipated with any degree of confidence.
Aside from far greater efforts to ferret out fraud (a long time concern of mine), would a material tightening of regulation improve financial performance? I doubt it. The problem is not the lack of regulation, but unrealistic expectations about what regulators are able to anticipate and prevent. How we otherwise explain how the FSA, whose effectiveness is held in such high regard, fumbled Northern Rock? Or in the US, our best examiners have repeatedly failed over the years. These are not aberrations.
…Subprime securitization exploded because subprime mortgage-backed securities (MBS) were seemingly under-priced (high-yielding) at original issuance. Subprime delinquencies and foreclosures (in a rising home price market) were modest at the time, creating the illusion of great profit opportunities. Investors of all stripes pressed securitizers for more MBS. Securitizers, in turn, pressed lenders for mortgage paper with little concern about its quality. As a consequence underwriting standards collapsed, and mortgage originations and securitizations rose to far greater heights than would have occurred without securitization. Even with full authority to intervene, it is not credible that regulators would have been able to prevent the subprime debacle. It would have required insights that would enable regulators to override the investment judgments of the most experienced analysts of the private sector, the very people on whom regulators rely for their market insights. When investment judgments are distorted by euphoria, even so valuable a financial innovation as securitization will perform poorly.
…Much of the commentary critical of my FT article is directed less at its substance and more, as Wolf describes it, to “the ideology I display.” Ideology, which regrettably has become a pejorative term, defines that set of ideas that we each believe explains how the world works and therefore how we need to act to achieve our goals. Some of our views of causative forces are rational, some are otherwise. Much of what we confront in reality is uncertain, some of it frighteningly so. Yet people have no choice but to make judgments on the nature of the tenuous ties of causation or they are immobilized.
I do have an ideology. So does each of the members of the Forum. I trust our views are subject to the same standards of evidence that apply to all rational discourse. My view of how the efficiency of global capitalism has evolved over the decades as new evidence has appeared contradicting some earlier judgments and confirming others. I have been surprised by the fierceness of investors in retrenching from risk since August. My view of the range of dispersion of outcomes has been shaken, but not my judgment that free competitive markets are by far the unrivaled way to organize economies. We have tried regulation ranging from heavy to central planning. None meaningfully worked. Do we wish to retest the evidence?
Economist Larry Summers takes note of the anti-trade Clinton, Obama campaigns
Since the end of the second world war, American economic policy has supported an integrated global economy, stimulating development in poor countries, particularly in Asia, at unprecedented rates. Yet America’s commitment to internationalist economic policy is ever more in doubt. Even before the significant increases in unemployment likely in the months ahead, the indicators are all disturbing. Presidential candidates attack the North American Free Trade Agreement. The Colombian free trade agreement languishes. There are increasing attacks on foreign investment in the US, not to mention growing support for restrictive immigration policies.
then enumerates all the reasons that trade is good. But Larry closes with these thoughts — I don’t know where this is going, but will check back with the Financial Times in a week.
In a world where Americans can legitimately doubt whether the success of the global economy is good for them, it will be increasingly difficult to mobilise support for economic internationalism. The focus must shift from supporting internationalism as traditionally defined to designing an internationalism that more successfully aligns the interests of working people and the middle class in rich countries with the success of the global economy. This will be the subject of my next column, which will appear on Monday May 5.
Today I heard a brief interview on the Cato Daily Podcast with economist John Merrifield. Merrifield is the author of a new Cato Policy Analysis which demonstrates that none of the essential ingredients of free markets exist in any of the US experiments. He is correct — but I had not focused on that fact until he raised it. Periodically we hear of some new study reporting that “we proved markets don’t work that well in education”. That’s rubbish, even advanced school choice systems like the Netherlands are nothing like real markets.
…The most intensely studied programs lack most or all of the key elements of market systems, including profit, price change, market entry, and product differentiation— factors that are normally central to any discussion of market effects. In essence, researchers have drawn conclusions about apples by studying lemons.
Merrifield suggests that for now, in the absence of any real world education markets, that
…economists should look to simulation models, indirect evidence such as outcomes in similar industries, and school systems abroad that enjoy varying degrees of market accountability.
“Most people who read The Communist Manifesto probably have no idea that it was written by a couple of young men who had never worked a day in their lives, and who nevertheless spoke boldly in the name of “the workers”.”
Economist Thomas Sowell, Rose and Milton Friedman Senior Fellow at Stanford’s Hoover Institution, has some concerns about candidate Obama:
…There is no reason why someone as arrogant, foolishly clever and ultimately dangerous as Barack Obama should become president — especially not at a time when the threat of international terrorists with nuclear weapons looms over 300 million Americans.
Many people seem to regard elections as occasions for venting emotions, like cheering for your favorite team or choosing a Homecoming Queen.
The three leading candidates for their party’s nomination are being discussed in terms of their demographics — race, sex and age — as if that is what the job is about.
One of the painful aspects of studying great catastrophes of the past is discovering how many times people were preoccupied with trivialities when they were teetering on the edge of doom. The demographics of the presidency are far less important than the momentous weight of responsibility that office carries.
Just the power to nominate federal judges to trial courts and appellate courts across the country, including the Supreme Court, can have an enormous impact for decades to come. There is no point feeling outraged by things done by federal judges, if you vote on the basis of emotion for those who appoint them.
Barack Obama has already indicated that he wants judges who make social policy instead of just applying the law. He has already tried to stop young violent criminals from being tried as adults.
Although Senator Obama has presented himself as the candidate of new things — using the mantra of “change” endlessly — the cold fact is that virtually everything he says about domestic policy is straight out of the 1960s and virtually everything he says about foreign policy is straight out of the 1930s.
[more…]
David Karoly’s rebuttal to the Phil Chapman article [our post on same] looks correct to me:
THE opinion piece by Phil Chapman (”Sorry to ruin the fun, but an ice age cometh”, Opinion, April 22) warns of an approaching ice age but contains a number of factual errors, misleading statements and incorrect conclusions.
…So what caused this rapid cooling during 2007, and also from 1998 to 1999, and from 1973 to 1974? What was common to all those periods? In each case, the common factor was a rapid change from El Nino to La Nina conditions, from warm temperatures in the eastern equatorial Pacific Ocean to cold temperatures in the same region, which has a significant effect on global climate patterns and global average temperature. La Nina is associated with below-normal global average temperature, and because of its influence, 2008 is likely to be about 0.3C cooler than the average of the previous few years.
…David Karoly is a professor in the University of Melbourne’s school of earth science
[more…]
By Wal-Mart effect I mean the impact of consumption inequality, specifically the price effect of trade. This new study by Broda and Romalis, University of Chicago: Inequality and Prices: Does China Benefit the Poor in America? [PDF] examines both income and prices data 1994 - 2005:
…The debate on trade and wages in the U.S. has entirely focused on the impact that trade with developing countries has on the wages of the unskilled in America. This debate has overlooked the impact that trade has on prices of the goods consumed by different income groups. In particular, since developing countries typically produce low quality goods that are disproportionately consumed by the poor in America, this implies that inequality measures that do not correct for differences in the basket of goods consumed by rich and poor neglect this “price” effect of trade. Using detailed household consumption data between 1994 and 2005, we find that this “price effect” offsets almost all the rise in inequality measured by official statistics over this period.
Tyler Cowen has some comments on the study, closing with this
…If this holds up it is big, big news and we must revise many claims that have been made about inequality, trade, and China.
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