Archive for April, 2012

Robert Wenzel gave an address to the New York Fed earlier this week. It is worth reading in its entirety (here). You can read some positive reviews by Vox Day (Vox Populi) and Tyler Durden (Zero Hedge, see some of the comments).

On economic methodology:

I hold the view developed by such great economic thinkers as Ludwig von Mises, Friedrich Hayek and Murray Rothbard that there are no constants in the science of economics similar to those in the  physical sciences. …

I defy anyone in this room to provide me with a constant in the field of economics that has the same unchanging constancy that exists in the fields of physics or chemistry. And yet, in paper after paper here at the Federal Reserve, I see equations built as though constants do exist.

On Bernanke’s reign at the Fed:

There have been more changes in monetary policy direction during the Bernanke era then at any other time in the modern era of the Fed. Not under Arthur Burns, not under G. William Miller, not under Paul Volcker, not under Alan Greenspan  have there been so many dramatically shifting Fed monetary policy moves. Under Chairman Bernanke there have been significant changes in direction of the money supply growth FIVE different times. Thus, for me, I am not at all surprised at the current stop and go economy. The current erratic monetary policy makes it exceedingly difficult for businessmen to make any long term plans.

On Bernanke’s appeal to Operation Twist, Wenzel notes that it seems quite peculiar, given that a 2004 Fed paper coauthored by the current chairman concluded:

 “Operation Twist is widely viewed today as having been a failure, largely due to classic work by  Modigliani and Sutch”


“Operation Twist does not seem to provide strong evidence in either direction as to the possible effects of changes in the composition of the central bank’s balance sheet.”

After additional comments on the Fed (none of them positive), Wenzel ends on a delightful note:

The noose is tightening on your organization, vast amounts of money printing are now required to keep your manipulated economy afloat. It will ultimately result in huge price inflation, or,  if you stop printing, another massive economic crash will occur. There is no other way out.

Again, thank you for inviting me. You have prepared food, so I will not be rude, I will stay and eat. 

Let’s have one good meal here. Let’s make it a feast. Then I ask you, I plead with you, I beg you all, walk out of here with me, never to come back. It’s the moral and ethical thing to do. Nothing good goes on in this place. Let’s lock the doors and leave the building to the spiders, moths and four-legged rats.

The address contains a nice primer on Austrian economics, a lively critique of current policy, and a lot of head scratching. One can only imagine how it was received at the New York Fed. 

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If you recall, in March, AG Holder justified the use of drones in “targeted killings” (see related post here). The comments were of interest, in part, because a drone had been used recently to kill Anwar al-Awlaki, a US citizen, in Yemen and in part because Congress was authorizing the expanded use of drones domestically (see related post here). As Holder explained at the time, the decision to target a US citizen would not be subject to judicial review. There would, however, be some guarantee of “due process,” although little was said as to what that process would entail. Who needs details when we have Mr. Holder’s word:

Any decision to use lethal force against a United States citizen – even one intent on murdering Americans and who has become an operational leader of al-Qaeda in a foreign land – is among the gravest that government leaders can face. The American people can be – and deserve to be – assured that actions taken in their defense are consistent with their values and their laws. So, although I cannot discuss or confirm any particular program or operation, I believe it is important to explain these legal principles publicly.

Now it has been revealed that the administration has authorized the expanded use of drones in Yemen. The CIA and the Joint Special Operations Command will be allowed to use drones for so-called “signature strikes.” That is, targets are identified based on a variety of intelligence without actually knowing the identify of the targets themselves.  As the Washington Post reports:

The expanded authority will allow the CIA and JSOC to fire on targets based solely on their intelligence “signatures” — patterns of behavior that are detected through signals intercepts, human sources and aerial surveillance, and that indicate the presence of an important operative or a plot against U.S. interests.

Until now, the administration had allowed strikes only against known terrorist leaders who appear on secret CIA and JSOC target lists and whose location can be confirmed.

If we don’t know the identify of the targets—they may or may not be US citizens–I am assuming that this will not create any problems for AG Holder’s guarantees of due process.

Even if we could accept the guarantee of due process, there is another problem—the lack of congressional authorization. As Bruce Ackerman noted last week before the policy change, the authorization is questionable:

Just days after the Sept. 11, 2001, attacks, Congress authorized the use of force against groups and countries that had supported the terrorist strikes on the United States. But lawmakers did not give President George W. Bush everything he wanted. When the White House first requested congressional support, the president demanded an open-ended military authority “to deter and preempt any future acts of terrorism or aggression against the United States.” … The effect was to require the president to return to Congress, and the American people, for another round of express support for military campaigns against other terrorist threats.

In Ackerman’s judgment, the policy change (then being contemplated) was well outside of congressional authorization. Ackerman offered the President some advice:

The president should not try to sleep-walk the United States into a permanent state of war by pretending that Congress has given him authority that Bush clearly failed to obtain at the height of the panic after Sept. 11.

Apparently, the advice was rejected and President Obama has assumed powers that even his predecessor could not exercise.

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Although Romney would be strategically-wise to pick Marco Rubio for the VP slot, let’s hope Romney’s foreign policy isn’t driven by simplistic, misleading, and dangerously wrong statements like these from Rubio’s big foreign policy speech:

I always start by reminding people that what happens all over the world is our business. Every aspect of lives is directly impacted by global events. The security of our cities is connected to the security of small hamlets in Afghanistan, Pakistan, Yemen and Somalia. Our cost of living, the safety of our food , and the value of the things we invent, make and sell are just a few examples of everyday aspects of our lives that are direcly related to events abroad and make it impossible for us to focus only on our issues here are home.

More BOSNYWASH foreign policy establishment thinking with a neocon tinge from Rubio here.

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Actually, it appears to be accelerating. The train is the impending insolvency of the large entitlement programs. The news today: Social Security. A summary of the latest trustee report (as presented in the Christian Science Monitor):

The trust funds that support Social Security will run dry in 2033 — three years earlier than previously projected — the government said Monday.

There was no change in the year that Medicare’s hospital insurance fund is projected to run out of money. It’s still 2024. The program’s trustees, however, said the pace of Medicare spending continues to accelerate. Congress enacted a 2 percent cut for Medicare last year, and that is the main reason the trust fund exhaustion date did not advance.

Setting aside the fiction that the trust funds constitute a store of wealth, there is nothing genuinely surprising here given the economic conditions and the policy response. Many of those who have exited the workforce (those “discouraged workers” whose exit has helped mask a sluggish recovery) have simply retired. Many who remain employed are working fewer hours and thus paying less into the system. At the same time, efforts to prop up demand by providing payroll tax cuts have further reduced the flow of revenues into the system.

There is also little new (other than the accelerated timetable for fund insolvency). Analysts have been projecting this for decades, urging reform. Of course, myopia reigns in Washington. Few would ever engage in a serious and sustained consideration of reform if doing so would require that they sacrifice the short-term political advantages that might be derived from framing reform as “balancing the budget on the backs of the elderly” or “an ideologically-driven assault on two of government’s finest programs.

Of course, fixing Social Security is not a technically difficult task. There are a few key leverage points (e.g., increase revenues by raising the earnings cap, changing the indexing formula, means testing benefits, etc.). Medicare is more complicated, but only marginally. Each of the alternatives have costs and benefits and should be subjected to vigorous analysis and debate. The problems, alas, are political and can be reduced to a simple fact: elected officials (and those who seek to join their ranks) place a high discount rate on the future.

As we approach the 2012 presidential campaign, we have the opportunity, once again, to address the impending entitlement crisis. If the past is any guide, both major party candidates will choose instead in a conspiracy of silence.

And why not? A decade or two is an eternity in politics.

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At any rate, when it comes to human social communities:

In smaller social universes, where the total population is less diverse, people tended to form friendships with others less like themselves. (emphasis original)

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Interesting to see this come out of the center-left Brookings Institution:

Anti-density zoning — embodied in lot-size and density regulations–is an extractive institution par excellence. Through the political power of affluent homeowners and their zoning boards, it restricts private property rights — the civic privilege to freely buy, sell, or develop property — for narrow non-public gains. Property owners in a jurisdiction benefit from zoning through higher home prices (because supply is artificially low) and lower tax rates (because population density is kept down, as school age children are kept out), while everyone else loses.

Previously, my work has found that zoning laws inflate metro-wide housing costs, limit housing supply, and exacerbate segregation by income and race. Other work faults these laws for their damaging effect on the environment, since they make public transportation infeasible and extend commuting times. With a few possible exceptions…, it’s hard to think of an existing political institution in the United States that is more destructive of human and social capital.

Strong words!

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Light pollution which brightens the beautiful dark sky with an ugly muted glow is one of the most underrated negative externalities around.  I talked a little bit about this earlier.  Unfortunately, it is a really difficult problem to solve. 

On the one hand, Coasian bargaining can’t solve the problem given the huge transaction costs of dealing with the millions of people who cause the natural dark sky to disappear (not to mention that a property right in the skies relevant to this issue can’t really be defined or allocated easily unless you gave someone a near monopoly grant). 

On the other hand, even government solutions would be resisted by the “cult of light” that has formed around the notion that we need artificial lighting outdoors in order to be safe and secure (or to properly advertise business activity).  I can’t imagine a tax on improperly shielded outdoor lights large enough to change behavior and decrease light pollution would be very popular with the electorate.  And light fixture and bulb companies would almost certainly use their vast lobbying power to help kill such a tax even if it had an electoral chance.  That leaves regulation – which might suffer from the same political barriers – and education.

Of course, someone might argue that the harm done is so small in the aggregate that it isn’t even worth a political decision costly to the preferences of many more people.  Maybe so, even though I generally reject utilitarian defenses of any particular act or policy. 

So I think we are stuck for the immediate future with the ugly sky we’ve created through the millions of innocent and often well-intentioned decisions of market participants that harm others without compensation.   Part II of this series will try to help educate people about light pollution and how we can reduce it without great harm to other ends.

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