Christine Exley graduated from UMW in 2009. She went on to earn a Ph. D. in economics from Stanford University. She taught for several years at Harvard Business School and is currently associate professor in the Department of Economics at the University of Michigan.
Christine has published extensively in the top journals in economics.
Examples of recent work include
The Gender Gap in Confidence: Expected But Not Accounted For
and
Nonprofits in Good Times and Bad
Sierra Latham graduated from UMW in 2009. Since then she has earned masters degrees as Georgetown University and University of Chicago, worked at the Urban Institute and for the City of Alexandria. She is currently a Senior Research Analyst at the Federal Reserve Bank of Richmond.
Here is some recent work she has done on
and
Alli graduated in 2018 and is currently an assistant manager at the Federal Reserve Bank in Kansas City.
Here is a recent article she coauthored on small business lending.
Paul Rhode has an important new paper in the January issue
of Explorations in Economic History ("What
fraction of antebellum US national product did the enslaved produce?."
2024. Explorations in Economic History 91). Rhode frames the
argument against Ed Baptist’s claim that “almost half of the economic activity
in the United States in 1836, derived directly or indirectly from cotton
produced by the million-odd slaves…”, which has been not just repeated but exaggerated
by others. It was easy to show that Baptist’s claim had no foundation in either
theory or evidence and was purely a creation of Baptist’s imagination (see here),
but the question of how large a fraction of output was produced by enslaved labor
remained unanswered.
I have for years suggested that the place to begin an answer
to this question is the labor supply. Begin with the percentage of the labor supply
accounted for by enslaved people and then ask why the percentage of output would
be either higher or lower than the percentage of labor (see for instance here in
my
thoughts on Stelzner and Beckert’s attempt to answer the question). I was
too lazy to do the work, but fortunately for us Paul Rhode was not.
He estimates that the percentage of output was probably about
the same as the percentage of the population, around 12 percent. He also does a
series of robustness checks using alternative assumptions that raise or lower
the estimate a little bit. As with all such estimates people will be able to
quibble, but I think he makes a pretty strong case that it is difficult to
produce an estimate that is much larger than the percentage of the population.
Rhode’s conclusion is not just important because he debunks
Baptist. The flaws in Baptist’s work were so obvious that only people so
enamored with his conclusions that they were willing to completely disregard all
evidence continued to support his work. Rhode’s estimate is important because, like
recent work by economists Hornbeck
and Logan and the economic historian Joe Francis, it lays
waste to a tradition rooted in the work of Fogel and Engerman. In Fogel and
Engerman, slavery, although morally repugnant, was not just profitable it was efficient
and highly productive. Later economists, including Engerman and Sokolof, would
argue that despite its productivity slavery had negative long run consequences
(see here
for instance). But this recent work says that slavery did not just have
negative long -term consequences, it was a massively inefficient misallocation of
resources while it was taking place. Rhode’s conclusion that the fraction of
output produced by enslaved labor was about the same as the fraction of the population
accounted for by enslaved people means that the fraction was much less than the
percentage of the labor force accounted for by enslaved people, about 22
percent in 1860.
I recently listened to Rick Hornbeck on the Chicago Booth Review Podcast in the episode
An Economist Debunks Gone With the Wind
Its kind of a silly name for the episode, but Hornbeck does a great job of describing important research by himself and and Trevon Logan. The paper calls for a significant reconceptualization of the economics of slavery. Hornbeck and Logan present slavery as a giant externality in which the labor of enslaved people was dramatically misallocated because slave holders did not have to take into consideration the full cost of their decisions. Consequently, although studies of emancipation have traditionally focused on the negative effect on production in the South, Hornbeck and Logan portray it as the biggest increase in productivity in American economic history.
You can access the working paper One Giant Leap: Emancipation and Aggregate Economic Gains through the Becker Friedman Institute for Economics
I got an email notification last week for a new episode of
Bishop Barron’s Word on Fire podcast asking Is There a Catholic Antidote to the Crisis in Higher Education
“According to Fortune magazine, overall undergraduate
enrollment experienced the steepest rate of decline on record from
2019 to 2022, and it has only worsened since then.
There are several explanations, but one cause is entirely self-imposed:
most universities and colleges have now replaced education with ideology,
subverting the search for truth with political indoctrination.
In this episode of The Word on Fire Show,
Bishop Barron and Matthew Petrusek, Senior Director of the Word on Fire Institute,
discuss the ideological takeover of higher education and how the Catholic
conception of the university can help provide an antidote.”
I’m afraid that before providing an antidote they should put some more work into their diagnosis. The episode does not provide any evidence that “most universities and colleges have now replaced education with ideology, subverting the truth with political indoctrination.”
What it does provide are some references to the recent congressional testimony of some Ivy League presidents and some vague allusions to wokeness. Given the argument that students are not attending college because faculty are pressing a certain ideology and the Bishop’s example of the prevalence of this ideolog at Ivy League schools they must be at the forefront of the decline in enrollment. Anyone who knows anything about higher education knows that nothing is further from the truth. Ivy League schools are seeing record numbers of applications, leading to record low acceptance rates. They are doing just fine.
The schools that are seeing declining enrollments are less prestigious
schools, especially smaller regional schools. The students who aren’t going don't express concerns about ideology; they are concerned about stress and mental health, the
rate of return on their investment (which evidence still indicates is high),
and their ability to pay. See, for instance, Exploring
the Exodus from Higher Education
People will always be able to find anecdotes about some
college course that they don’t like or some statement by an administrator that
sounds preposterous, but as someone who has taught in colleges for more than 30
years, I just don’t see the world that Bishop Barron and other purveyors of the
wokeness boogeyman want people to believe in. The most popular major in the United
States is business, accounting for around 1 in 5 undergrads. Some of the other
top majors are engineering, computer science, and nursing. Are we seriously
to believe that these schools are not in fact preparing people to be managers,
accountants, engineers, computer programmers, data scientists, nurses, teachers, etc. but
are instead just indoctrinating them in a political ideology?
If Bishop Barron really wants to play a positive role in
higher education he should try to do better than this.
Planet Money has a nice story about rum production (The
billion dollar war behind U.S. rum) in Puerto Rico and the Virgin Islands,
particularly the consequences of Virgin Islands deal to lure Captain Morgan
away from Puerto Rico.
It should be of interest to anyone paying attention to
Youngkin’s attempts to lure the Capitals and Wizards away from D.C.
It is also a nice example of a real world prisoners dilemma type
game.
This is from The New
York Times article Why
Big Banks (and Some Odd Allies) Oppose a Plan to Protect Banks:
“Regulators are calling
for an increase in the amount of capital — cash-like assets — that banks have
to hold to tide them over in an emergency to avoid needing a taxpayer-funded
bailout like the one in the 2008 financial crisis.”
No! No! No! No! No!
Bank capital is not “cash like assets.” Those are reserves. Reserves are
money that banks keep either as cash or as deposits with other banks. They are
cash like assets. And there are reserve requirements regarding
the percentage of deposits that have to be kept as cash like assets, but those
are not capital requirements.
A bank's capital is just the
difference between the value of the bank’s assets and its liabilities. In other
words, it is the equity the owners (shareholders) have in the bank. Capital
requirements regulate the size of the capital. The
most basic capital requirement is a leverage ratio, requiring that capital be
equal to a certain percentage of assets.
Capital requirements are
intended to deal with the threat of insolvency. A bank becomes insolvent when the
value of its assets falls below the value of its liabilities, primarily the
money it owes to depositors.
Why would the value of
assets fall? The investments banks make are risky. The prices of securities
that they buy, stocks or bonds, can go up, but they can also go down. If the
bank owns stocks and bonds and the prices of those securities fall, the value
of the bank’s assets falls. Part of the problem faced by Silicon Valley Bank
was that it purchased a lot of long term bonds before interest rates started to
increase, and as interest rates rose the price of those bonds fell. The loans
banks make can also decrease in value. If the bank loans money to a person or a
business and they do not repay the loan, the value of that asset (the loan)
falls. In U.S. history, bank runs, (people racing to the bank to withdraw their
money) tended to occur during economic downturns when falling security prices
and failing businesses meant that the value of bank assets were declining. Under
these circumstances people had greater reason to fear that some banks might
become insolvent and not be able to repay their deposits. Capital helps protect
against insolvency and banking crises.
Capital helps protect
against insolvency by providing a cushion when asset prices fall. Assume you
have $100,000 in assets, $80,000 in deposits and $20,000 capital, if the value of
your assets falls by $15,000, you still have more than enough to cover all of
your deposits. On the other hand, if you had $100,000 in assets, $90,000 in deposits
and $10,000 capital, a decrease in value of $15,000 would leave the bank
insolvent. In addition, it can be argued that banks have less incentive to take excessive risk when they have more of their own money at stake. They have more skin in
the game.
Financial institutions, including
banks, generally recognize the benefits of capital. I have written a lot about the
history of New York City trust companies and one of the things they were most
likely to mention in advertisements was the size of their capital. They called
it capital and surplus, but it meant what we mean when we talk about a bank’s
capital today. They used their capital to signal their strength and stability.
There
is, however, also a cost of higher capital: a lower rate of return. A higher
capital requirement means that you have to rely more on bank owner’s money and
less on borrowed funds (deposits). The extent to which you rely upon borrowed
funds is called leverage. To see how leverage affects return on investment
consider this example. You know of an investment that will return 10%. You have
$100 you can invest. You do so and end up with $110, earning that 10% rate of
return. Now imagine you can borrow another $100 from someone else at 5%. You now
use their $100 and your investment of $100 for a total of $200. You get back
the $200 plus 10% of 200, $220. You have to give the person you borrowed from
$105, leaving you with $115. Your $100 investment now earned $15 for a 15% rate
of return. That is the power of leverage. Of course if that investment you made doesn’t
pay off we are back to worrying about insolvency. You still owe $105.
So
what is the story in the New York Times actually about. Its really about
how complicated capital requirements can get. Toward the end of the article they
point out that some suggested regulations could decrease certain kinds of
lending. This is because capital requirements are no longer set based upon a simple
leverage ratio that applies to everyone. Modern capital requirements recognize
that not all investments are equal. Some are riskier than others. So
regulations assign different risk assessments to different assets and then
provide a risk weighted capital requirement. More risky assets, more capital.
The argument of opponents of increased capital requirements is that these risk assessments could
discourage banks from making some kinds of loans that we
actually want to promote. In other words, it could get harder to get a mortgage
to buy a home or take out a loan to start a business.
I’m
not going to try to answer which side is right. This isn’t about whether banks
should have capital requirements, its about how much capital is enough. That is
a hard question. My objective here has been to clarify what people are talking about
when they are discussing banks and refer to capital. The post is titled part 1
because this is not the only meaning of capital. In other contexts, the meaning
of capital is very different, and I plan to discuss that in the future. Who
knows, eventually I might even take on the meaning of capitalism.
