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Why I support a UBI

First, I want to apologize for my recent light posting–a combination of being busy and not feeling well meant that something had to give.  Still the last few weeks have been the busiest this blog has ever seen (more attention than I really want, honestly… I’d prefer just to influence the thinking of the more important bloggers) and I don’t think ignoring all that traffic shows respect for my readership.   So I’m going to try to up my game and post more regularly this week.

This post, just like my last several (here and here) is again a response to Steve Waldman (indirectly) and his series on social welfare economics.   This time I mostly agree with what Waldman wrote… I have some nitpicks with the fifth post in the series, but that’s all.

I’m actually responding to a commenter who suggested in my last post that Waldman is trying to justify a universal basic income.  But I also support a UBI!   Probably for different reasons than Steve, too.  That’s what I want to talk about… I’ll present my thinking here in list form.

1.  Efficiency of Unconditional Institutions

Let’s think in terms of two basic institutional structures which might make up the welfare state, two packages of benefits as it were.  I’ll call them “conditional” benefits and “unconditional”.   These labels are pretty self-explanatory, but let me pedantically spell them out.

There is a state of the world s and a set of all states S.  Conditional benefits means that for some s and s’ in S, there are associated benefit levels, b_s and b_s’, which are not the same.  Unconditional benefits means that the benefit level, b, is the same in all states of the world S.   Simple.  Here’s the thing, though: who decides if the state of the world is s or s’?

If the government decides, than conditional benefits mean larger bureaucracies and more fraud.   If beneficiaries decide than you have to worry about creating “truth telling mechanisms“… that is you need to think about the cost of encouraging people not to game the system, to reveal their true type as an economist might put it.  The problem with this second approach is that any type revelation mechanism requires what we call information rents.  Which in non-economese means that the benefits packages have to be less targeted or less generous than would be idea.

2  Interlocking Macroeconomic Institutions

This is a point I haven’t heard elsewhere, but I think is the single greatest benefit to a UBI… It plays really well with another macroeconomic institution I support: nominal GDP targeting monetary policy.

Consider this.  Fund a UBI through a simple flat tax on all income (for simplicity).  So, you earn UBI benefits of w, then the after-tax benefit is (1-t)w and the tax collected is (t x NGDP… I’ll write NGDP as PY from now on).  If the population is N, then Nw = tPY.   So, if the growth target for nominal income is adjusted for population growth, then the funding stream for UBI is stable when the UBI grows at the same rate as NGDP.   Another way to say the same thing is that wage pressure in the economy always grows at the rate of nominal income growth.

Yet a UBI would be a powerful counter-cyclical automatic stabilizer: rising in importance whenever NGDP falls below target.  That reduces how hard the central bank has to work

That’s not all, though.  Suppose NGDP is on target, but there is a supply shock, what happens?  Well, inflation rises as a share of nominal growth.   The purchasing of the UBI erodes relative to trend growth.  Marginal workers reenter the labor force.  So potential GDP growth rises again.  Also note that when the UBI is set “too high”, that’s just a kind of adverse supply shock.

So, a UBI is an automatic stabilizer for Potential GDP as well as Nominal GDP when coupled with NGDP level targeting.  This is a point that Nick Rowe ought to appreciate.

3  Work Paternalism is bad

Unlike Adam Ozimek, I don’t think it’s OK for libertarians to denounce all forms of paternalism… except when it comes to telling people that they necessarily have to work.   Un.  Cool.

Why do most people drop out of the labor force?   1) Personal reasons like becoming mothers (or, increasingly, fathers)… that’s something you ought to support if that’s the choice people want to make; 2) Professional reasons like retiring or career changes–these shouldn’t be tied to strict cutoffs like a retirement age but based on personal choices and normally libertarians are the first to point this out; 3) education–a UBI makes it easier to be a student and that’s a good thing for the economy.  These are all people who are making better choices because of UBI.

That leaves only two theoretical groups, those who are demoralized by lengthy spells of unemployment (“discouraged workers”) and (theoretically, at least) there are the  “parasites”.

In terms of the demoralized, I think people have the sign wrong: a UBI would help keep morale up, because low morale is one of the consequences of living without an income.   More than that an income can help fund hobbies and hobbies can help prevent skill degradation by giving them an outlet to use some of those skills even without a job.

As for the parasites… to a good approximation, I don’t think they exist.  Adam and other libertarians, on the other hand, seem to think that everyone who chooses not to work in a UBI regime must be a parasite.  That’s ridiculous.  A UBI, at least at the level people talk about, would be barely enough, or perhaps not even enough, to live on.   People who would use their benefits to buy pot and video games would find no money left for rent and groceries, while who use their benefits for rent and groceries would find no money left to enjoy their free time.   These are just not choices that actual human beings would make.

At any rate, that’s my thinking on a UBI.  There is one more reason for me supporting a UBI, but that’s an issue which I think will come up when I’m ready to discuss my thesis online.

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Embedding Cruel Biases in Policy Choices: Credit Checks

Here’s a question that perhaps someone can answer for me:  why do businesses check the credit history of potential hires?   Seems obvious, right?   Except it’s not… when you stop to think about it, it’s a mean and idiotic practice with no reasonable justification.

Of course, credit history is nothing more or less than a measurement of financial stress.   It’s not a perfect measurement, to be sure… someone with (otherwise) good finances could have a poor credit score simply from not paying bills on time which could have been paid; or someone in financial stress can manage to maintain good credit ratings by borrowing from informal channels (family and friends) which don’t report to credit agencies.

Either way, the difference between your credit score and your financial stress is a matter of measurement error.   In the first example, the individual could borrow more–a rational bank would like to lend more, if given perfect information–but that particular individual probably needs the additional (unrelated) service of auto-billpay.   If the bank could swap auto-billpay for credit, it would surely do so.   In the second case the individual is in distress, and it is only the lack of communication with credit agencies which obscures this.

So, your credit score is a measure of your financial stress.  So what?

So why do businesses use credit checks to screen their hires?

If someone is unemployed, especially if that someone has been for quite a long time, that someone is almost certainly under financial stress.   Credit checks (I’m sure among other things) build in a bias in the system against the long-term unemployed.   That’s cruel.   Why do this?

Financial stress is unlikely to be correlated with future productivity.   Why would it be?   If you wanted to discriminate against the long-term unemployed, all you need do is look at their work history–that’s not it (not that that’d be a good reason, anyway).

I think the assumption is that credit history will be correlated with trustworthiness… but again, why?   The potential hire here wouldn’t be paying their employer, it’s the other way around.   So even if the hire is someone who skips paying their bills on time, now could that affect their employment.

I’m racking my brain to think up a rational reason for this cruelty and mostly coming up short.   The only explanation I have is one I try to stay away from–classism.  It is those people, the unwashed masses, they are the ones with poor credit scores.   We don’t want their kind here.

As I said, not very convincing.

As a social issue, the people who struggle to pay their bills and who are credit risks as a result are precisely the people we should be prioritizing in terms of getting them back to work.  Even if businesses have a rational reason for doing this–one which I haven’t thought of–as a society, we ought to be discouraging it.

The Consumption Model of Inequality

With all the talk about inequality recently, I thought it was time for me to lay out my model of the political dynamics around inequality.   So let’s forget briefly about IMF studies and Piketty and simply ask ourselves how we can use the machinery of economics to understand the political cleavages it engenders.   As an aside, while I’ve never seen this model in the literature or anyone’s course notes, I’d nevertheless be shocked if I’m the first to think in these terms… I just don’t know who to credit with the idea (I think the idea is so simple and obvious that few bother to go through details).

The basic idea is that I’m going to view equality as something that makes agents more satisfied, in the sense that measurements of inequality, such as the Gini coefficient, enter into the agent’s utility directly.   So, if there’s a vector of “normal” goods, x_i for each i, and G is the Gini coefficient, then agent i has utility U_i(x_i,G), where dU_i/dG < 0 (inequality is a bad).  I’m implicitly viewing this as a static model, but it would be a simple matter to include time.

So, the economics here simply stem from the fact that the level of inequality is shared by all agents–that is, it is a pure public good (non-rival, non-excludable).    Beyond that simple insight, there’s only one other thing we need to know, which is how wealth is redistributed to reduce inequality.   You can use a simple mapping, G’ = R(T,G), where G’ < G (this would make the problem a standard public good, which is good enough to account for half the problem).

Or, to be more realistic… if w is the vector of each agent’s wealth (w_i… for simplicity arrange i so that w_i < w_j for i < j, so that w is effectively the lorentz curve and let W be aggregate wealth), then G = Sum_i 2*[ 1 – N*w_i/(i * W) ].   Then a valid redistribution maps w’ = R(w) such that the properties(i)  W’ = W, (ii) w_i < w_j  ==>  w’_i < w’_j and (iii) G’ < G all hold.   This means, graphically, that R maps the lorentz curve to a (weakly) higher lorentz curve keeping total wealth constant.

Public goods models are not particularly trivial to solve, although we know in general that inequality will be “overproduced” in the simple version of this model (with G’ = R(G,T)).

In the more complex version (with w’ = R(w)… effectively this version models models the technology for reducing inequality directly), there are two effects.   The under-provision of public goods is still an issue here… but only for those rich enough to pay net taxes (those for whom w’_i – w_i = t_i > 0… put these agents into a new set, I).   The set I is a function of how much redistribution is actually done, but it is only agents in I for whom the public goods game is non-trivial (those outside I, by definition, receive lower levels of inequality without paying net taxes… a win-win situation for them).   Generally (but not universally) as I expands there are more resources available to redistribute and there are fewer people to redistribute towards.   A marginal (the richest agent not paying net tax) agent i by definition balances the benefit of reducing inequality with her own tax bill from that more aggressive redistribution.

So here’s what’s interesting… this model (simple intuitively as it is… tho difficult to solve) exhibits tipping points.   Don’t believe me?   Consider this thought experiment… increase W by adding to w_i only of i in I.   Givewn the right initial setup, nothing will happen until G rises enough that the set I expands… basically at some point those not in I will demand to (on net) contribute to reducing inequality.

Of course, the details depend on R and how R is chosen (simple majority voting?), but the framework for thinking about the politics of inequality are here.   Note that if Piketty or the IMF are correct, then this model will understate the degree to which equality is under-provided.

Efficiency, Optimality and Values

May 4, 2014 2 comments

For the record, I see this post as a continuation and (yet another) response to the Sargent-Smith/KrugmanHouse debate over Sargent’s equity-efficiency assertion which I’ve commented on before.   The latest round of posts related to the topic have this debate trending in what I think is an odd direction putting me in the awkward position of defending a concept, Pareto efficiency, which I’d be more comfortable criticizing.

My proximate purpose  is to respond to Simon Wren-Lewis’s new post which I think illustrates the problem–this is, I think, one of the biggest confusions among economists about our own subject (not that Wren-Lewis is necessarily confused here, but he’s at least bringing up the problem).   The key graf:

Why is there this emphasis on only looking at Pareto improvements? I think you would have to work quite hard to argue that it was intrinsic to economic theory – it would be, and is, quite possible to do economics without it. (Many economists use social welfare functions.) But one thing that is intrinsic to economic theory is the diminishing marginal utility of consumption. Couple that with the idea of representative agents that macro uses all the time (who share the same preferences), and you have a natural bias towards equality. Focusing just on Pareto improvements neutralises that possibility. Now I mention this not to imply that the emphasis put on Pareto improvements in textbooks and elsewhere is a right wing plot – I do not know enough to argue that. But it should make those (mainstream or heterodox) who believe that economics is inherently conservative pause for thought.    

The problem is that Pareto efficiency and optimality are not the same things, cannot (or should not) be used interchangably.  In fairness, when I’m being a sloppy, I do the same thing; but it’s important to remind ourselves why this is a mistake.

So to remind ourselves, what is optimality and what is efficiency?

Optimality is the solution to a kind of thought experiment; the answer to the question of what would a benevolent, god-like social planner do if it had complete control of the economy (or “constrained optimal” if the social planner must work under constraints).   The advantage of the approach is that it produces unambiguous outcomes (often a single point in allocation-space).   The disadvantage is that  the planner’s problem is by definition not values-neutral.   Why do I say it’s not value’s neutral?  Because you need to define the planner’s objective function (i.e. the social welfare function) and the social welfare function defines the trade-offs the social planner is willing to make, for example, when balancing equity/efficiency.   “All I care about is Bill Gates’ wealth” is an acceptable, if odd, social welfare function, as is “complete equity at all costs”.   The general case is somewhere in between these two.

Efficiency means that there are no unexploited gains (no one can be made better off except at the cost of making another worse off):  contra Wren-Lewis, I want to argue that this is very much a values-neutral idea.   To see why consider this little factoid: regardless of the social welfare function you choose, the solution to every planner’s problem is Pareto efficient.  The converse is not necessarily true (Pareto efficiency is a necessary, not sufficient condition of optimality… as an aside this is where the confusion–I think–comes from, since economists often refer to the planner’s solution as “efficient”).   So here’s the thing, for every point in the Pareto set there is a social planner who would choose that point as the optimum (or you might say there’s a set of values which corresponds to each point in the Pareto set).   That’s the sense in which Pareto efficiency is values-neutral.

What Wren-Lewis is arguing about is slightly different issue.   Is the search for Pareto improvements also values neutral?  I think most economists would say ‘yes’.   After all, no social planner would be any worse than indifferent to a Pareto improvement (a valid social welfare function is weakly increasing in the well-being of every individual agent in the economy).

Does that actually make a Pareto improvement values neutral, however?   No, of course not (this is what I think Wren-Lewis has in mind, but I’m only guessing).   A Pareto-improvement shifts the outcome in allocation-space, but as a general matter a Pareto improvement “picks a direction”–different social planners will disagree that it is the correct direction to take.   Some social planner’s would even prefer to take away from some agents to give to others.   To put it more simply, if you keep exploiting Pareto inefficiencies randomly until you reach an efficient outcome, is the result optimal?   The answer is that with probability one, it will not be.

I’m not sure if I have any other comments to make… just a reminder to myself and others to be careful regarding efficiency and optimality.   I do suspect that the “confusion” here reflects a preference among some economists for the “core” solution concept of cooperative games… but I need to think about that a bit before I make that argument.  So I’ll leave this post here for now.

Who’s in the echo chamber?

April 29, 2014 1 comment

Via Krugman, I see this post by Chris House talking about an efficiency-equity trade-off.  House, of course, is just writing from the standard, near consensus view within economics.   The thing is, though, there is no evidence or theory (not depending on modelling choices) within economics which supports the view that there is necessarily a trade-off.

Let me be clear.  I’m not saying that there is no trade-off, I’m saying that House and Sargent (whose speech to some Berkeley undergrads started this whole blog debate) are making a claim which, while commonly believed by many economists, has no other justification.

Sargent’s speech lists 12 principles of economics that everyone ought to know, the principle in question is his assertion that:

There are tradeoffs between equality and efficiency

Again, I’m not saying this is wrong, I’m saying there is no justification.

So, what is House’s case?   Basically this:

The truth is that if we want to really attack the problem of income inequality (promote equality and help the poor) then we are going to have to take stuff away from richer people and channel it to poorer people. This kind of action will most likely have consequences for markets and these consequences will be unsavory.

Taking stuff away from the rich and giving it to the poor equals unsavory consequences… and you can justify this generally, without invoking a model-specific result, right Chris?

I’ve written about this before, but this particular argument is one that I perhaps didn’t adequately deal with, so here goes.   House is saying that in order to correct for a… let’s call it a maldistribution… will require taxes and transfers.   Taxes and transfers have efficiency costs, ergo equality-efficiency tradeoff.   QED.

That’s not how it works, Chris.

The way it actually works in economics when we want to study efficiency is that we imagine a god-like social planner and ask ourselves “what would the social planner do”… so what would a social planner view as a maldistribution of wealth?   (I’m presuming that utility is weakly increasing in wealth, not income, btw)  You can view this in several ways, but the simplest intuition is just this:  GDP, which House is implicitly using as a measure of well-being (although it’s nothing of the sort), is “additive”, but all else equal, social welfare is “multiplicative” (as a result of convexity).    Maximizing a sum (or equivalently an arithmetic mean) would leave a social planner indifferent to distribution… there is no maldistribution in House’s world.   Social welfare on the other hand is maximized at the point of equality (or equivalently the geometric mean).

The reason that there would be any “optimal” inequality at all, then, is that there is an informational rent associated with figuring out which factors are most productive and encouraging those factors to be active.   This is the heart of Mirlees’ optimal taxation result.   So House has things backward: a sufficiently god-like social planner would make sure that everyone has equal wealth, ceteris paribus and any deviation from that result has to be justified on informational grounds.   Inequality can only be justified as constrained efficient, not to be confused as efficient.

More than that, though, is that its just not clear that taxes must necessarily cause inefficiency.  It’s not at all difficult to tell a story in which wealth taxes, for example, can encourage capital formation by, say, encouraging complementary human capital to accumulate or by encouraging productive capital over “frivolous” capital (by that I mean things like McMansions).   Taxing productive capital may increase its after-tax cost, but the redistribution it funds can also increase the value of its production stream.

So, are efficiency and equality free of any tradeoff?   Not necessarily, and certainly that’s not what I’m saying.    No, the point is that Sargent’s “principle” is not some immutable law of nature, but a model-dependent best-guess.   You might say that the sign of the tradeoff is ambiguous in theory… and it is at this point that I should mention that the only empirical evidence I know of which directly test the sign of that tradeoff are those IMF studies that suggest that equality and efficiency move together.

So, Chris, if you’re reading this, I leave you with the following wise words:

Talking in an echo chamber can be fun but public intellectuals like [House and Sargent] have a greater responsibility to self-censor than most because they have large audiences. They have a responsibility to the public and also a responsibility to their… readers who take their statements to heart

Just sayin’…

No, there is no trade-off between equality and efficiency

April 21, 2014 1 comment

Matt Yglesias has a good post up knocking down Tom Sargent’s claim (now circulating the econo-blogosphere, although the speech was in 2007) that “There are trade-offs between equality and efficiency“.

The thing of it is that not only is Sargent wrong here–although the sentiment is common among professional economists–but more importantly is that there really isn’t any reason to believe that this is right… just some vague sense that proper incentives require paying the most skilled among us more.  So basically, Yglesias is letting Sargent off much too easy.

To show why, I’ll go through all the interpretations of Sargent’s claim one-by-one and explain why each is wrong.    I could do much more than this: one of my thesis projects is directly relevant here, although that work’s not really ready for daylight.

  1. Efficiency requires a particular distribution.   Nope.    In standard theory, the set of Pareto efficient allocations turns out to contain any distribution of wealth/utility between the agents.  One person has 100% of the wealth?   There’s an efficient allocation like that.   A different person has 100% of the wealth?  Also one like that.   Complete equality?   Yep, there’s one like that, too.  This is always true in any trading situation.   The only thing that causes Pareto inefficiency are market distortions.
  2. Efforts to correct for the distribution result in inefficient allocations.  Nope.  The proof for the Second Welfare Theorem in fact requires redistributing wealth before trading.  Then, after this redistribution is completed, it is shown that any efficient allocation can be attained.   You like perfectly equal, efficient outcomes?   The Second Welfare Theorem says that there is a redistribution which will provide that efficient outcome.  The statement precisely is that the efficient market will produce the efficient outcome as a “price quasi-equilibrium with transfers” (from Mas-Colell if you’re curious).
  3. Dynamic Inefficiencies from redistribution?   This is the point that Yglesias is in effect debunking.  So, I’ll leave that to him and send you back to that post.   I will add to his argument only that wealth is itself a market distortion.  How can I say that?   Well, I’d say go look at my thesis, but that’s out (for now)… so instead just think about it in terms of Piketty’s point: if the rate of capital accumulation, r, is greater than the economy’s growth rate, g, then it must be the case that wealth (i.e. claims to ownership) explodes in the limit.  That is, one  person eventually owns everything.
  4. Countries with unequal wealth grow faster, and do so for a longer time?   No, on both counts.   Don’t ask me, though, just ask the IMF.  Oh snap.   The sign seems to go in the opposite direction.  Ouch.   In fairness, Sargent didn’t know about this line of research which hadn’t been published yet.   But then, maybe that’s why he shouldn’t make strong claims to impressionable college students who go home with the wrong lesson which they then hold tight to for the rest of their lives.
  5. Wealth rewards the exceptional for being awesome.   Heh.  No.   And anyway, economics isn’t a morality play and outcomes aren’t rewards for anything.  If I were Joe Stiglitz I might even argue that the current economy is one in which fortunes are amassed mostly through rent-seeking, anyway.

So, yeah, there’s no support in economic theory for Sargent’s claim.   He’s just saying something that he believes without any theoretical or empirical support.

Now it IS generally true that most taxes will have a dead-weight loss… that people will react to the tax in a way that results in less economic activity.   A tax can distort the market.  Interestingly, though, there are taxes which in theory mimic an efficient “lump sum” tax.   I’m thinking an idealized consumption tax in particular.

I would also emphasize that the Second Welfare Theorem’s redistribution has a flavor of “wealth” redistribution, not income redistribution.   That’s important.   That’s all the caveats that occur to me at the moment.

Have the west’s institutions become extractive?

June 13, 2012 4 comments

I recently finished reading Acemoglu and Robinson’s (A&R) new book, Why Nations Fail.   Really, even before I even started–ever since I first heard the premise of their thesis–I’ve had this uncomfortable feeling.   For the last 30 or 40 years, with (pretax) inequality rising everywhere in the western world (and overall growth slowing), are we in fact witnessing the early stage of the formation or transition to extractive institutions in Europe and North America?

Before I get into the argument, let me first say that my own answer is somewhere between “I have no idea” and “maybe, maybe not”.   This is not an open and shut case, by any means.   I do, however, have this uncomfortable feeling.

I’ve been meaning to write this post for some time, but part of the current impetus is, via Thoma, this excellent essay in the Democracy Journal by James Kwak.   James, it seems, has the same worry I do; you should read him in full to get the entire pro argument.   Reflecting my own uncertainty, my case is going to be much more muddled.

Background:  what are extractive/inclusive institutions and why do we care?

The basic case that A&R make revolves around a simple intuition about the functioning of the political economy of prosperity and inequality.   It can be separated into two distinct feedback loops:

  1. The vicious circle (extractive institutions):  essentially, great wealth buys political power and political power leads to greater wealth. Historically, the easiest way to become richer is to dominate the political process, which shapes the economic institutions and those economic institutions (i.e. contract enforcement, property rights) define the economic incentives of everyone.  By rigging the economic playing field in their favor, the wealthy elite has the resources to dominate the political process.   Wash, rinse repeat.   A&R document (sometimes in excruciatingly repetitive detail) how this pattern shows up again, and again around the world leading inevitably to the impoverishment of the nation.
  2. The virtuous circle (inclusive institutions):   widely distributed power leads to widely distributed wealth which in turn makes accumulating power far more difficult (though not impossible).   Far less inevitable than the vicious circle, it is nonetheless the case that under the proper circumstances these inclusive political institutions (i.e. democracy) provide voters with the tools to undo excessive concentrations of wealth and power–which might threaten, for example, one’s right to sell one’s own labor in a free and fair market or one’s property (i.e. inclusive economic institutions).   The ‘populists’ are (often) the heroes of this story.   Always working against the virtuous circle is the fact that finance and markets–necessary to provide healthy incentives to work and innovate–have a tendency to concentrate wealth while the centralization of political power–necessary to distribute power broadly–also concentrates power in the hands of a few; you can’t have 300 million presidents.

Much of history can be interpreted as one or the other of these feedback processes operating to make a nation poor or rich, respectively.   Starting with the glorious revolution in England and the French revolution, the west has been mostly in the process of the virtuous circle.

Turning Extractive in the US

This is the subject of James Kwak’s essay and I don’t have much to add to it.   It is true that the the US is a democracy with broad suffrage rights.   However, as he rightly points out, this simple thinking ignores the real feedback mechanism in the vicious circle.   As the concentration of wealth  and power increase, the ability and incentive to expropriate more wealth and power increase.

I am reminded of a paper from Roger Lagunoff which shows how this might work in a relatively simple dynamic model of endogenous political change.   What’s interesting is that there emerges a simple notion of the virtuous circle in the sense that a majority rule voting model is stable.   There is also a vicious circle in that a model in which political outcomes rely on majority wealth (imagine every dollar of wealth gets its own vote) will be unstable (“admits reform”)–either the political system must become ever more concentrated or it must collapse back to majority voting.

Contra James, I’m only moderately worried about this.   After all, the naked power grab by the rich must eventually become obvious enough even to Republican voters.   No matter how much money the rich pour into elections, ultimately it is voters who vote and there’s only so much you can do to sell a defective product.

After all, as A&R point out, we’ve seen this movie before.   In the guilded age, the robber barons bought elections even more egregiously than they do now.   Eventually, this process led not to permanent political domination by the robber barons, but to the eventual collapse of their power during the progressive age.   In the Lagunoff paper, either the situation continually gets worse, or eventually it collapses back to majority vote.   In a nation with firmly entrenched democracy, the latter seems far more likely.

That’s not to say that we wouldn’t all be better off short-circuiting the process and returning to majority rule sooner rather than later.

Are Central Banks Extractive?

The one thing I really wanted to add is my main fear–there’s something profoundly anti-democratic about central bank independence.   In a sense, “insulating” the bank from politics is the point.   But then, a central bank is at the heart of a modern economy’s economic institutions.   To be honest, I don’t know the answer.   A couple of random thoughts:

  1. Central Banks are isolated from political pressures from the government, but not political pressure from banks.   For example, Jamie Dimon is still on the board of the New York Fed (as I write this) which is the regional bank which regulates JP Morgan Chase.   To put it another way, Nancy Pelosi or John Boehner have less power over the regulation of JP Morgan Chase–a systemically important institution–than Jamie Dimon.   Maybe I’m exaggerating, but not by much.
  2. Supporting point 1, note that there is evidence suggesting central banks internalize bank welfare rather than national welfare:  1) The ECB LTRO facility lent money at sub-market rates to banks, rather than democratically elected governments 2) TARP passed easily in the US, the stimulus did not 3) The ECB has insisted on austerity in the eurozone periphery–in contradiction of standard macroeconomics and often despite ambivalence or even hostility from local polities–as a condition of doing its job of macroeconomic stabilization 4) In effect, the ECB has removed at least two democratically elected governments who failed to implement austerity quickly enough.
  3. Following a negative shock to NGDP, inflation targeting redistributes 100% of loses onto debtors.   Why have most central banks been so insistent on inflation targeting?   The evidence was never really strong that IT was ever particularly superior, even in standard models which have not performed well recently.   Conversely, it seems Israel has made an NGDP target work, and an NGDP target is much more equitable in theory.   To see this, if your “sticky price” is the shadow price of debt service, than an inflation target magnifies the damage done by a shock to nominal income (say, the collapse of a housing bubble) via a classical Fisherian debt deflation dynamic as the real burden of debt rises compared to income.   So, again, why are we still targeting inflation?   Could it be that banks and the wealthy are the creditors?

To be frank, I’m really not sure about any of these points.  Just worried.