Friday, March 30, 2012

Gary Becker on tenure

Becker concludes:

I oppose teachers unions and the tenure system for teachers (including university teachers) partly because they are especially detrimental to the education received by students from low income and more disadvantaged backgrounds. Nevertheless, I do not believe that elimination of unions and tenure would vastly improve the performance of students from these backgrounds. As the 1966 Coleman Report showed decades ago, family background is a much more important contributor to the overall performance of students than are the type of schools that students attend.

Nevertheless, it is very worthwhile to improve what schools can do by eliminating tenure, reducing the power of unions, and introducing more competition into the public school system. To improve family life is not easily achieved and requires a long time horizon. So it is best to do what can be achieved that will help student performance, especially help students who need the greatest help from the schools they attend.

His co-blogger Posner has a different take and concludes:

The problem with American elementary and secondary education may not be its primarily public character, but income inequality and the tendency to segregation of students by family income.

Thursday, March 29, 2012

Greg Mankiw

Mankiw demonstrates a grace and commitment to scholarship in this reference. DeLong lacks civility and is, at times, shocking in his lack of . . . . "consistency". Mankiw graciously overlooks this in pointing to a thoughtful essay. I see both economists as role models - one a positive one, the other a cautionary one.

Sunday, March 25, 2012

Teaching SRAS shocks

A perceptive post well worth reading for those of us who teach macroeconomics.

I hate teaching Short Run Aggregate Supply shocks.

1. It's easy to teach them wrong.

2. I don't understand them very well.

3. I don't think anyone understands them very well.

Monday, March 19, 2012

Lecture 1: Origins and Mission of the Federal Reserve

Chairman Ben S. Bernanke will deliver a four-part lecture series about the Federal Reserve and the financial crisis that emerged in 2007. The series begins with a lecture on the origins and missions of central banks, followed by a lecture that will discuss the role and actions of the Federal Reserve in the period after World War II. In the final two lectures, the Chairman will review some of the causes of, and policy responses to, the recent financial crisis, focusing specifically on the actions of the Federal Reserve.
The lectures are being offered as part of an undergraduate course at the George Washington University School of Business.

Lecture 1: Origins and Mission of the Federal Reserve
Watch live on March 20, 2012 12:45 p.m. ET

Live video of each lecture will be available to the public at Transcripts and video recordings will be made available following each lecture.

Free live streaming by Ustream

Powerpoint slides

Thursday, March 15, 2012

“Financing U.S. Debt”

Guest Contribution: “Financing U.S. Debt”

In a Guest Contribution today, John Kitchen (U.S. Treasury, formerly Chief Economist, Office of Management and Budget) addresses the issue of “Financing U.S. Debt: Is There Enough Money in the World -- and at What Cost?”. The comments are based on a paper recently published in International Finance (Winter 2011), co-authored with Menzie Chinn. The views expressed are the author's and do not represent the views of the U.S. Treasury.

Ultimately, measures that reduce the deficit by changing the trajectory of tax revenues and spending, particularly in the latter years of the horizon we consider and beyond, would mitigate concerns about the financing of the U.S. budget and current account deficits. In the absence of such actions, it is unlikely that the rest of the world would finance our needs at the terms that are currently being projected, and American policymakers will become less and less the masters of our own economic fortunes.

Sunday, March 11, 2012

Lombard Street

This text will be one of basis for discussion at the FTE/PTA conference in April. Bagehot references Adam Smith in his analysis of the costs and benefits of central banking v competitive or free banking. He writes:

The value of money is settled, like that of all other commodities, by supply and demand, and only the form is essentially different. In other commodities all the large dealers fix their own price; they try to underbid one another, and that keeps down the price; they try to get as much as they can out of the buyer, and that keeps up the price. Between the two what Adam Smith calls the higgling of the market settles it. And this is the most simple and natural mode of doing business, but it is not the only mode. V, The Mode in Which the Value of Money is Settled in Lombard Street

Bagehot uses Smith's concept of "natural liberty" in his characterization and preference for a system of "natural" banking - a financial system that would be decentralized and competitive, although he realizes that the path dependent nature of emergent systems precludes this system in 19th century England and, presumably contemporary times.

He outlines the system of natural banking:

Under a natural system of banking it would have every facility. Where there were many banks keeping their own reserve, and each most anxious to keep a sufficient reserve, because its own life and credit depended on it, the risk of the Government in keeping a banker would be reduced to a minimum. It would have the choice of many bankers, and would not be restricted to any one.IV.6

But he recognizes the barriers to this natural system:

But it will be said—What would be better? What other system could there be? We are so accustomed to a system of banking, dependent for its cardinal function on a single bank, that we can hardly conceive of any other. But the natural system—that which would have sprung up if Government had let banking alone—is that of many banks of equal or not altogether unequal size. In all other trades competition brings the traders to a rough approximate equality. In cotton spinning, no single firm far and permanently outstrips the others. There is no tendency to a monarchy in the cotton world; nor, where banking has been left free, is there any tendency to a monarchy in banking either. In Manchester, in Liverpool, and all through England, we have a great number of banks, each with a business more or less good, but we have no single bank with any sort of predominance; nor is there any such bank in Scotland. In the new world of Joint Stock Banks outside the Bank of England, we see much the same phenomenon. One or more get for a time a better business than the others, but no single bank permanently obtains an unquestioned predominance. None of them gets so much before the others that the others voluntarily place their reserves in its keeping. A republic with many competitors of a size or sizes suitable to the business, is the constitution of every trade if left to itself, and of banking as much as any other. A monarchy in any trade is a sign of some anomalous advantage, and of some intervention from without.

On this account, I do not suggest that we should return to a natural or many-reserve system of banking. I should only incur useless ridicule if I did suggest it. Nor can I propose that we should adopt the simple and straightforward expedient by which the French have extricated themselves from the same difficulty. In France all banking rests on the Bank of France, even more than in England all rests on the Bank of England.

Saturday, March 10, 2012

Natural Liberty

The Scottish philosopher's suspicions about business people were well-founded.

Friday, March 9, 2012

Thursday, March 8, 2012

Unemployment in EURO zone hits all time high

Talking about "headwinds to economic growth" in Europe, from the WaPo: Euro unemployment hits 10.7 percent in January, new high since euro established in 1999
Mass unemployment in Greece and Spain, where nearly half of those under 25 are out of work, sent the jobless rate across the 17-nation eurozone on Thursday to its highest level since the euro was established in 1999. Eurozone unemployment rose to 10.7 percent from an upwardly revised 10.6 percent the previous month, according to Eurostat

Wednesday, March 7, 2012

"Value-free economics?"

This important and thoughtful post on the nature of economic analysis and the distinction between positive and normative economics is a must read. The call to reexamine the distinction between science (positive) and values (normative) is provocative and, as a teacher of economics, challenges a fundamental foundation in economic education.

Amartya Sen has argued throughout his career for the robust possibility of reasoning about value issues -- in economics and elsewhere. (A very early place where Sen takes up this topic is in "The Nature and Classes of Prescriptive Judgements"; link.) Much of what Sen brings to this debate within economics, according to Walsh and Putnam, is found in his capabilities theory as a foundation for a theory of welfare or wellbeing. This theory is based on the idea of human functionings; and there is a plain intermingling of factual and evaluative ideas associated with this notion. We need to know what human beings can and want to do, before we can say how well off they are. And this means bringing in orienting human values at the foundations. Putnam draws attention to Martha Nussbaum's list of core human capabilities. Anyone reading these descriptions would agree that they presuppose human values. And Nussbaum (as well as Sen and Putnam) believes that we can rationally discuss and evaluate these. But if welfare economics is to incorporate a substantive notion of human wellbeing, then it plainly cannot be maintained that it is "value-free".

Another important locus for Sen's reintroduction of ethical concepts into economics is his critique of the narrow conception of individual economic rationality. As Sen puts the point in "Rational Fools" (link),

A person thus described may be "rational"in the limited sense of revealing no inconsistencies in his choice behavior, but if he has no use for these distinctions between quite different concepts, he must be a bit of a fool. The purely economic man is indeed close to being a social moron. Economic theory has been much preoccupied with this rational fool decked in the glory of his one all-purpose preference ordering. To make room for the different concepts related to his behavior we need a more elaborate structure. (336)

Sen introduces the idea of "commitments" directly into the concept of economic rationality. Individuals choose among preference rankings based on their commitments -- to each other, to political ideas, to groups with whom they have decided to affiliate. And this brings normative ideas directly into economic decision-making -- and therefore into the domain of economics.

Monday, March 5, 2012

What Powers for the Fed

The FTE Partners with Federal Reserve Board of Governors and the Federal Reserve Bank of Richmond for PTA “Members Only” Conference.

FTE’s 2012 Professional Teachers Association “Members Only” Conference will explore “Perspectives From and On the Federal Reserve System.”

The conference will be held April 26 – 28, 2012, at the Federal Reserve Board of Governors facilities in Washington D.C. Participants will hear presentations by Chairman Bernanke and from Fed staff experts, will tour the Fed facilities, and will take part in Socratic discussions of pre-conference reading selections, including classical and contemporary thought on central banking.

The readings for the conference:

Lombard Street: A Description of the Money Market.

Bank Runs and Private Remedies Gerald P Dwyer, Jr. and R. Alton Gilbert

Lessons Learned? Comparing the Federal Reserve's Responses to the Crises of 1929-1933 and 2007-2009. David Wheelock

What Powers for the Federal Reserve? Martin Feldstein

Martin Feldstein's balancing (equivicating?) view of the Fed concludes:

There is no doubt that the Federal Reserve deserves some of the
blame for the monetary policy that contributed to the mis-pricing of risk and
the asset bubbles that caused the downturn. There is also no doubt that
the Federal Reserve, like the other financial supervisors, did not give
adequate attention to the capital position and asset quality of the
institutions that they supervised.

But the reforms that are adopted now should aim to strengthen the
performance of the Federal Reserve rather than to reduce its powers. The
Fed should continue to manage monetary policy as it has in the past,
should act as the nation’s lender of last resort, should supervise the large
bank holding companies, and should be given resolution authority over the
institutions that it supervises. While a council of supervisors and regulators
can play a useful role in dealing with macro prudential risks, it should not
replace the central role of the Federal Reserve.

The virtually unlimited lending powers that the Fed has exercised in
creating credit and in helping individual institutions during the past few
years should now be restricted in duration and subjected to formal Treasury
approval backed by Congressional pre-authorization of funds. The Fed’s
capital rules for commercial banks need to be strengthened by replacing
the existing risk-based capital approach with a broader definition of risk and
the introduction of contingent capital. A broader range of Fed regulations
can contribute to overall stability, particularly in mortgage lending. Stronger
Fed powers in dealing with non-bank creators of mortgage products and
other lending authority would be better than the creation of a new
consumer financial protection organization.

The Federal Reserve has made many mistakes in the near century
since its creation in 1913. Fortunately it has learned from its past mistakes
and contributed to the ongoing strength of the American economy. Further
reforms at this time can continue that tradition.
Cambridge, MA
December 2009

Sunday, March 4, 2012

From MR on Murray

Adam Smith on Charles Murray
by Tyler Cowen on March 4, 2012 at 3:38 am
From The Wealth of Nations Book V, chapter I:

In every civilised society, in every society where the distinction of ranks has once been completely established, there have been always two different schemes or systems of morality current at the same time; of which the one may be called the strict or austere; the other the liberal, or, if you will, the loose system. The former is generally admired and revered by the common people: the latter is commonly more esteemed and adopted by what are called people of fashion. The degree of disapprobation with which we ought to mark the vices of levity, the vices which are apt to arise from great prosperity, and from the excess of gaiety and good humour, seems to constitute the principal distinction between those two opposite schemes or systems. In the liberal or loose system, luxury, wanton and even disorderly mirth, the pursuit of pleasure to some degree of intemperance, the breach of chastity, at least in one of the two sexes, etc., provided they are not accompanied with gross indecency, and do not lead to falsehood or injustice, are generally treated with a good deal of indulgence, and are easily either excused or pardoned altogether. In the austere system, on the contrary, those excesses are regarded with the utmost abhorrence and detestation. The vices of levity are always ruinous to the common people, and a single week’s thoughtlessness and dissipation is often sufficient to undo a poor workman for ever, and to drive him through despair upon committing the most enormous crimes. The wiser and better sort of the common people, therefore, have always the utmost abhorrence and detestation of such excesses, which their experience tells them are so immediately fatal to people of their condition. The disorder and extravagance of several years, on the contrary, will not always ruin a man of fashion, and people of that rank are very apt to consider the power of indulging in some degree of excess as one of the advantages of their fortune, and the liberty of doing so without censure or reproach as one of the privileges which belong to their station. In people of their own station, therefore, they regard such excesses with but a small degree of disapprobation, and censure them either very slightly or not at all.

Saturday, March 3, 2012

Does the free market corrode moral character?


Does the free market corrode moral character?

This is the fourth in a series of conversations among leading scientists, scholars, and public figures about the "Big Questions."

Thursday, March 1, 2012

Chairman Ben S. Bernanke will deliver a four-part lecture series

In March 2012, Chairman Ben S. Bernanke will deliver a four-part lecture series about the Federal Reserve and the financial crisis that emerged in 2007. The series begins with a lecture on the origins and missions of central banks, followed by a lecture that will discuss the role and actions of the Federal Reserve in the period after World War II. In the final two lectures, the Chairman will review some of the causes of, and policy responses to, the recent financial crisis, focusing specifically on the actions of the Federal Reserve.
The lectures are being offered as part of an undergraduate course at the George Washington University School of Business.

Live video of each lecture will be available to the public at . Transcripts and video recordings will be made available following each lecture.