"Looking Out for Number One"

I think this should be the new motto of UC Berkeley. Its chancellor and vice-chancellor make a pitch in the Washington Post for a new Morrill Act (the act that provided federal support for the land grant colleges). Their plan, however, only calls for federal support for a "limited number of our great public reasearch and teaching universities." I wonder if they have any particular schools in mind.

Behavioral Economics?

In the New York Times Richard Thaler claims that "with the help of a little behavioral economics" we can increase the number of organ donors. He then describes a number of different schemes that have been used in the the U.S. and other countires and concludes that "the key ... is to make sign up easy." All these years I have been telling my students that if you lower the cost of doing something people will do it more. I thought it was just the law of demand. Does this mean we are all behaviorlists now?

Austrian Economics

For students interested in Austrian economics (Scott) here are a series of videos you might find interesting.

Economists got it right

John Taylor's view.

Financial Crisis Inquiry Commission

The Financial Crisis Inquiry Commission began to hold public meetings last week. I wouldn't hold my breath waiting for a definitive analysis. This week I am going to talk to my economic history class about the Panics of 1837 and 1839. I can tell them that in the last decade economists like Peter Rousseau and John Wallis have added a great deal to our understanding of these events that took place more than a century and a half in the past. See this old post. New papers continue to appear on pretty much every financial crisis in American history. I've recently started reseaching the Panic of 1907 because there are parts of the current story about it that do not make sense to me.

Then again, its not clear the prupose of such commissions is actually better understanding. The opinion page of the Sunday NY Times complains about the commissions slow start and wonders if it reflects "the apparent ambivelence of lawmakers to rein in the banks?"

David Levine on Paul Krugman

David Levine of Washington University also didn't like Krugman's essay in the New York Times.

What I've Been Listening To

At EconTalk Russ Roberts talking to John Nye about the Great Depression, the backlash against globalization in the early twentieth century, long run changes in the role of government, and more.

At VoxTalks Romesh Vaitilingam talks to Dean Karlan about microfinance and the use of experimental methods in economic research.

Which economists got it wrong?

Gregory Mankiw’s most recent blog post is “How did economists get it so wrong?” with a link to an answer by Barry Eichengreen. Paul Krugman had a long essay on the topic in last weeks Sunday New York Times. A group of British economists even felt the need to respond when the Queen asked the question. I am getting tired of the question for several reasons. First, many economists were pointing to problems before the recession began. Robert Shiller, Nouriel Roubini, Raghuram Rajan would just be the start of the list. Krugman himself wrote a book titled The Return of Depression Economics. How much warning do people need. Does every economist have to stand up and shout at the same time?

Second, who are the economists who got it wrong. Who is the Irving Fisher of our time?

Third, its not clear that it would have made a difference if all economists had shouted at the same time. Since when did policy makers start doing what economists say. If policymakers listened to economists we wouldn’t have tariffs, quotas, or agricultural price supports.

The irony of the tea party protest

The irony of holding tea party protests on April 15 is that the Tea Act of 1773 was a tax cut. Prior to the Act the English East India Company had to send tea to London where it paid a duty of about 2 shilling six pence per pound. Only after going through London and paying this duty could it go to the colonies.The Act allowed the Company to ship directly to the colonies, paying only a duty of about three pence per pound in the colonial ports. The purpose of the Act was to aid the East India Company not the colonists, but it resulted in a considerable reduction in taxes on tea shipped to the colonies. The trouble is that many people had done well under the old rules, for instance, profiting from smuggled Dutch tea. While the Tea Act would have lowered the tax for consumers it would have harmed these people.

The Allegory That Would Not Die

The BBC Online examines the Wizard of Oz as a monetary allegory. I was interviewed because of my paper “The Fable of the Allegory: the Wizard of Oz in Economics” Journal of Economic Education (Summer 2002). I said in the interview that there is no evidence that the Wizard of Oz was written as an allegory. Even those who advocate using it as a monetary allegory generally agree. See, for example, Ranjit Dighe’s book and reply to my paper. I also say that I am not convinced that the allegory adds to the understanding of monetary issues in the late nineteenth century. In particular, I don’t think it add to the understanding of support for the gold standard. In general support for the gold standard was not based on some superstitious notion that only gold could be money. People at the time had experience with gold and silver as well as paper money. Participation in the gold standard required that currency be convertible into gold at a fixed rate. Adherence to this requirement meant that control of the money supply was taken out of the hands of policy makers. When multiple countries adhered to the gold standard it also created a system of fixed exchange rates. Fixed exchange rates remove exchange rate risk and, other things equal, encourage foreign investment. Advocates of the gold standard recognized these benefits. The issues surrounding the adoption of the gold standard in 1900 are still relevant to today. Students can gain historical perspective on the adoption of the euro, and the use of fixed exchange rates or dollarization in less developed countries by studying the gold standard. I am not yet convinced that The Wizard of Oz adds to the understanding of economic history.

Constraining the state's ability to employ force

"Constraining the state's ability to employ forces: the standing army debates, 1697-99" by Shawn Humphrey and Bradley A. Hansen was just accepted by the Journal of Institutional Economics.

Abstract: Britain's Glorious Revolution of 1688 is one of the most widely studied cases of institutional change. Recent institutional analyses of the Glorious Revolution, however, have failed to address one of the central issues in political science: control of the state’s comparative advantage in violence. This paper examines this issue through analysis of the standing army debates of the late 1690s. Participants in the debates disputed whether a standing army or a militia would be the most effective institutional arrangement to guard against threats from abroad and tyranny at home. Both sides of the debate analyzed the effects of a standing army in terms of the incentives that it created for soldiers, citizens, the monarch, and foreign governments.

Internships

Think Tanks
The Cato Institute
The Brookings Institution
The American Enterprise Institute
The Heritage Foundation
The Urban Institute

Government
Council of Economic Advisors
Bureau of Labor Statistics
The Bureau of Economic Analysis
Congressional Budget Office
Environmental Protection Agency
Federal Reserve Board
Federal Trade Commission

Business
BB &T
Geico

Development
First People’s Worldwide

Alexander Hamilton

Robert Wright reviews Hamilton's Curse a new book by Thomas D Lorenzo.

Majoring in Economics

If you are thinking about majoring in economics you are not alone. Here are stories from NPR and the Chronicle of Higher Education.

More Historical Perspective on Finance

Ed Perkins writes about The Rise and Fall of Relationship Banking at Common Place.

Rodrik on the Reinvention of Capitalism

Dani Rodrik writes that "we need to contemplate a transition from the national version of the mixed economy to its global counterpart.
This means imagining a better balance between markets and their supporting institutions at the global level. Sometimes, this will require extending institutions outward from nation-states and strengthening global governance. At other times, it will mean preventing markets from expanding beyond the reach of institutions that must remain national.The right approach will differ across country groupings and among issue areas.
Designing the next capitalism will not be easy."

Reviews of the Lords of Finance

Both the New York Times and the Washington Post review Liaquat Ahamed’s Lords of Finance: the Bankers Who Broke the World. The book is about the leaders of the central banks of the U.S., England France and Germany during the years leading up to the Great Depression. Both reviews are quite positive. I have not looked at the book yet, but I m a little worried because, although both reviewers liked the book, both also seem to have come away from it with little understanding of how monetary policy, generally, or the gold standard, specifically, operated. Joe Nocera in the Times states that “In a brilliant stroke, Schact created a new currency, the Rentemark, then chose the exact right moment to fix it to the mark … In so doing, he restored faith in Germany’s currency and beat back inflation.” The key to beating inflation isn’t to introduce a new currency at the right moment. The trick is to not keep printing that currency at an ever more rapid pace. Likewise, Frank Ahrens in the Post quotes Ahamed to the effect that all the gold mined up to 1914 “was barely enough to fill a modest two-story town house.” He then adds that, “There simply was not enough of it to fund a global conflict or to allow economic recovery afterward.” To be clear the first quote is Ahamed the second is Ahrens. The small supply of gold is of course what made it useful as an international monetary standard. People didn’t carry around bags of gold. They had long used bank notes or checks as we do now. People can by the same amount of stuff with a few valuable dollars as they can with lots of worthless dollars. By requiring convertibility at a fixed rate the gold standard placed a constraint on changes in the money supply. It limited inflation and exchange rate risk, and encouraged foreign investment. It was adopted for the same sorts of reasons that countries sometimes peg their currency to the dollar or the franc, for instance. The gold standard did not create complete stability. Gold flows and, therefore, changes in the money supply could be influenced by political factors as well as economic ones. And the United States experienced periodic financial crises while on either a gold or bimetallic standard.

When I have had a chance to look at the book I’ll let you know what I think of it, but I worry that the reviewers do not seem to have come away with a very clear picture of the way things worked.

What I am Listening To

Daron Acemoglu talks to Russ Roberts about the financial crisis.

The New Deal

In the Washington Post, Amity Shlaes writes about the failure of the New Deal to promote economic recovery. She points out that unemployment remained high and investment low for the entire decade. But this isn't really news. After all, the common wisdom is that the War ended the Depression. Bob Higgs, for one, disputes this common wisdom, nevertheless if people believe that the War ended the Depression they must know that the New Deal didn't.

So, Shlaes goes further. Because of New Deal policies "the Depression lasted a half a decade longer than it had to, from 1929 to 1940, rather than say 1929 to 1936." So we had to have depression but it shouldn't have been so great. She declares that "the monetary shock in the first years of the Depression was imense, but it was this duration that made the Depression Great." In other words, the economy would have recovered on its own if not for FDR. The recovery that did take place had nothing to do with Roosevelt. Shlaes even has a pretty good idea of when the economy would have been complete. If not for FDR’s policies, the three years of economic decline before he took office would have been wiped out three years after he took office.

In a recent paper in the AER Gauti Eggertsson points out that this sort of argument depends on the belief in a huge coincidence. In discussing recent analysis of the New Deal, he notes that “a surprisingly large part of the literature treats the recovery as inevitable and/or exogenous and coincidental with Roosevelt inauguration.” It is surprising because as he shows in a number of graphs the recovery of investment, production, and prices all coincided with the inauguration. Eggertsson argues instead that Roosevelt created a shift in expectations that caused economic recovery.

Its not hard to identify New Deal policies that do not appear conducive to growth. On the other hand, assuming that the recovery just happened to coincide with Roosevelt's innauguration seems like a questionable place to begin your analysis.

More historical perspective on financial crises

Richard Sylla, Robert Wright and David Cowen examine Alexander Hamilton's response to the financial crisis of 1792.

Business History at Oxford

Chris McKenna talks about business history at Oxford's Said School of Business.

Narrative History and the Social Sciences

I just listened to an interview with John Demos at the Making History Podcast. Demos is author of the award winning books Entertaining Satan: Witchcraft and the Culture of Early New England(1982) and The Unredeemed Captive: A Family Story from Early America (1994). He talks about his movement from doing social science history to doing narrative history. I was thinking I would rather not draw a line between the two. It doesn't matter whether you consider yourself a social scientist or an historian, sometimes the best way to answer a question is to tell a story.

Some places narrative never seems to go out of style. Story appears to be the primary method of learning at top business schools. And, by the way, MIT is putting more free stuff on the web including case studies from the Sloan school.

More Historical Perspective on Economic Crises

Video of a forum at The Council on Foreign Relations with Michael Bordo, Jerry Muller, Robert Shiller, and Richard Sylla

Historical Perspective on Financial Crises

For many years it was regarded as appropriate to lay the blame for the Panic of 1837 on Andrew Jackson. In 1832 Jackson vetoed the recharter of the second Bank of the United States and began to place the government’s deposits in other banks. With the conservative influence of the Bank of the United States gone, his critics claimed, other banks over issued their notes, fueling a speculative boom. Peter Temin showed that this explanation of the Panic of 1837 paid insufficient attention to the international sector. If banks were over issuing their notes, he argued, then the ratio of notes to reserves should have been decreasing, but it was increasing. The number of bank notes in circulation was increasing, but bank reserves were increasing even more rapidly. Reserves were increasing not because of Jackson’s policies but because of international forces. Because the country was on a bimetallic standard, the supply of money was ultimately dependent on the amount of specie in the country. Temin argued that both the inflation of the early 1830s and the crisis were caused by specie flows that were driven by external events. While acknowledging the negative influence of external forces, Peter Rousseau has recently shifted attention back to internal forces. International forces set the conditions for the Panic, but the economy was pushed over the edge by distribution of the federal surplus and the Jackson administration’s requirement that land purchases be made in specie, both of which drained specie from New York City banks.
The Panic of 1837 has received far more attention than the Panic of 1839, but for many the real trouble did not begin until 1839. The Panic of 1839 initially appeared to be a sequel to the Panic of 1837. However, unlike the Panic of 1837, there was no quick recovery. John Wallis has attributed the difference between the two panics to the run up in state debt that occurred between them. The boom of the 1830s involved mutually reinforcing expansions of land sales and internal improvements. The prospect of low cost transportation fueled demand for western lands; land sales in turn raised the revenue of western states and promised even further increases in revenue in the future. People were willing to buy land because states were going to build railroads and canals, the states were willing to borrow for internal improvements because people were going to come and buy the land. The credit crunch brought and end to both. Land sales and prices fell, the market for state bonds collapsed.
Possibly the most useful lesson to be gained from this history is humility. More than a century and a half after the panics of 1837 and 1839 we are still trying figure out what happened. It might be useful to keep this in mind when reading (or writing) diagnoses of the current financial problems.

What I am listening to

Russell Roberts and Robin Hanson talking about truth and disagreement in economics at econtalk

http://www.econtalk.org/archives/2009/01/roberts_and_han.html