Justice and Economic Growth

Michael Sandel is a professor of government at Harvard who teaches a popular course on justice. He now has published a book based on the course and it was reviewed in Sunday's New York Times. The reviewer, Jonathan Rauch, notes that many public policy disagreements are really differences about justice. I suspect he is correct, although Tom Sowell's book, A Conflict of Visions, remains a better discussion of his point. But Rauch begins his review by recalling a conversation with a prominent conservative commentator who railed against the Obama administration's handling of General Motors and Chrysler. Rauch states that he found the fury of the commentator puzzling. He asks, "Was it such a crime for the government to treat differently situated stakeholders differently, even if doing so was unorthodox?" Clearly, Rauch thinks the answer is no, but I must respectfully disagree.

When economists give advice about how a poor country can encourage economic growth a common part of the answer is the importance of the rule of law. When decisions about who owns productive resources are left to the whims of the reigning government, few people make long-term investments in the resources. A predictable constancy is necessary if investments are to be made. Or, as Mancur Olsen put it--the wealth of a society depends on its ability to make long-term investment commitments. Such investments will not be made when the fruit of the investments may be confiscated at a later date. To alter bankrutpcy proceedings for the sake of political expediency is to move away from the rule of law. Rauch is aware that the rule of law is involved, but dismisses it when he writes, "Is justice absolute and process-driven, so that we should stick to rules come what may? Or is it situational and outcome-aware, so that we should sometimes imporise to take account of special circumstances?" Rauch seems to favor the latter. I favor the former, along with Hayek, Sowell, and Milton Friedman (to name a few).

We may be moving into a period of slower growth rates for the country. The focus on the short term that exists in Washington, the alteration of rules due to the emergency of a recession, and probably health care reform will reduce somewhat incentives to invest. For the latter, David Brooks offered an interesting discussion of health care reform as a trade-off between vitality and security. The social safety net will be enhanced but marginal tax rates will increase. The latter will reduce growth rates in the future.

Living in a liberal democracy means that decisions about trade-offs like those just mentinoed are decided through political processes. If society prefers less growth but bigger safety nets, then who am I to say society is wrong? Most Europeans I have met prefer their society to ours. But I am not certain most Americans prefer European economic and social systems to ours. Time will tell.

China and the U.S.

Tyler Cowen's article in today's New York Times is worth reading. Cowen refers to the symbiotic relationship between the U.S. and the U.S., as noted also in Niall Ferguson's term, "Chimerica." At the heart of the problem is the exchange rate policy of China--pegging the dollar-yuan rate so that Chinese exports remain cheap in the U.S. China maintains the exchange rate by borrowing heavily in the U.S., which helps keep interest rates low in the U.S.

Since the financial crisis and the full-fledged recession began, I fear that the U.S.-Chinese relationship has not been getting enough attention. Part of the reason may be simple--what can the U.S. do about the relationship unilateraly? The U.S. cannot China to revalue its currency. But the bail-outs of Wall Street, the continued propping up of housing markets by the U.S. government, and the call for a "jobs bill" by many Democrats, along with the push for health-care reform, drops the China-U.S. relationship down on the Administration's to-do list. I hope Cowen's article can help raise concern over the China-U.S. relationship higher on the to-do list.

HUD Saved Us from a Depression

An article in today's New York Times concerns the Federal Housing Administration. FHA provides insurance for homebuyers who don't meet traditional criteria for conventional loans. In othe words, the FHA is part of the government support and encouragement of homeownership. During the subprime craze, many buyers bypassed the FHA, but in the last year or so the FHA has backed a lot of mortgages. Their reserves are low--0.53 percent of the total porfolio, and some think that the FHA will need a bailout before too long. Yet, they also had faced pressure from Congress to open their doors to a broader group of applicants, i.e., applicants with lower down payments and poorer credit ratings. Brian Montgomery, a former head of the FHA, said that even if a bailout is needed, people should still feel gratitude. The article ends with a quote form Mr. Montgomery, "They should be going over to the H.U.D. building and frankly thanking the career staff for saving them from a depression."

So, government subsidization and pressure on lenders to encourage broader homeownership led to the run up in housing prices. When the housing bubble burst, we entered a severe recession. The FHA has continued to prop up housing markets, evidently saving us from a depression. But the collapse in prices that followed the run-up in prices is due, to a considerable extent, to government policy. Does that make sense?

Are Football Hemets Risky?

An article in today's WSJ raises an interesting question about head safety. Concussions are common among pro football players, and retirees often experience head and brain issues later on in life. Would they be better off without helmets? Obviously, no helmets would change the game. When I was in graduate school, a classmate thought about doing his dissertation on whether safer football equipment actually reduced injuries. His expectation was no--as the equipment gets better, the behavior of the players changes. This fits into a well-known article written by Sam Peltzman concerning automobile safety mandates and whether they resulted in saved lives. Peltzman hypothesized that as people drove safer cars, their driving behavior would change. People would drive less defensively. The probability of dying in a car accident is the probability of being in an accident times the probablity of death given you were in an accident. Safer cars--mandatory seat belts, collapsable steering columns and so on, reduce the probability of death given an accident. But changed driving behavior may increase the probability of an accident. Peltzman's empirical analysis found that few drivers and passengers in cars died but more pedestrians and motorcycle riders died. This is consistent with the behavior change. (See Sam Peltzman, "The Effects of Automobile Safety Regulation," JOURNAL OF POLITICAL ECONOMY, 1975, 83 (4), pp. 677-726).

Government as Co-Conspirator

In my previous post I cited a WSJ op-ed piece, in which the author argued that the government has been a co-conspirator with many on Wall Street in running up debt that led to the financial and economic crises. I think the article still focuses too much on Wall Street and not enough on the government. It does note that the recent actions of the government, both the Fed and the Treasury, are similar to actions taken several times over the last thirty years. The most surprised and disappointed man in America had to be Dick Fuld, CEO of Lehman Brothers, when the government didn't resuce them the way it did so many others in the past. Given what happened afterwards, it is very doubtful the government will ever let any large financial institution go under again. So, the moral hazard issues continue. The short-term approach followed by the Fed and Treasury also continues.

Government as Co-Conspirator in Financial Meltdown

Interesting op-ed piece in today's WSJ. Am busy so no time to comment today but will do so soon.

More on "Jobs Saved"

Former colleague Victor Claar sent me a link to a news story about errors in the counting of saved jobs, including the treatment of raises as equivalent to saved jobs.

There is another dimension I had not considered as yet. There has been a disruptive construction project on an intersection in Holland through which I often drive. Signs indicated that funds came, at least in part, from the stimulus package. The firms that worked on the job then must estimate how many jobs the project saved or created. The project lasted three months. Will the companies report these jobs saved or created as if they were year-long jobs or will the length of the project be considered? In earlier blogs I wrote about how the methodology used by the government to estimate jobs created or saved focused on job-years. I believe the average citizen reading about jobs saved or created believes that the number of unemployed falls or at least doesn't increase by the number of jobs saved. But, that clearly is wrong, and there is really no way to tell by how much.

Things That Can Be Explained by the Bell Curve

My previous post on Ed Lazear brings to mind a lecture I often give in class on the Bell curve. The tails of the Bell curve never touch the axis. So, if intelligence is measured on the axis and a pretty intelligent person is two standard deviations above the mean, there are still some people farther out--three, four, five standard deviations. In percentage terms, the probability of someone being five standard deviations above the mean is small, but when you consider that we live in a country of 300 million people, there can be a number of people at that level of intelligence. No matter how smart I may think I am, there are lots of people a lot smarter.

What if we measure something like sexual deviency on the axis? In a country of 300 million people there may only be five or six people at five or more standard deviations away from the mean. But that is enough people to fill up an episode of Jerry Springer. And, they all want to be on TV. So, some of these TV shows don't prove that the country is going to pot; they just verify the Bell curve.

Are Economists Insensitive?

I posted yesterday about an op-ed piece by Ed Lazear. I met Lazear over twenty years ago at Lousiana State University. A colleague had visited at the University of Chicago and was able to bring a couple of economists from Chicago to LSU for a few days. Lazear came the day after he ran in the Chicago Marathon. He was hobbling around quite a bit. We took him to lunch at a restaurant in the student union, which was in the middle of campus. It was about a ten minute walk. The next day as we got ready to go to lunch, he asked if we could go somewhere by car. No one thought to take into consideration the obvious pain he was in when walking after the marathon. So my answer to the question in the title is, "Yes."

He presented a paper on "Sales". He began by talking about paying the bills and noticing that his wife's shoes were more expensive than his. She said that women's shoes tend to be more expensive. But why? he wondered. His shoes had more material in them, were more durable, and one would think would cost more. This is someting I had discussed with my wife on more than one occasion. Men's shoes should be more expensive but are not. What is going on? Lazear went on to develop a model to explain why, other things equal, women's clothes had higher prices than men's clothes. It made sense when he went through the model. It was published later in the American Economic Review. This anecdote illustrates one of many differences between economists who end up at the University of Chicago and economists who end up at places like LSU.

Salieri is my patron saint.

Jobs Again

There is an op-ed piece by Ed Lazear in today's Wall Street Journal. Lazear was chair of the Council of Economic Advisors under Bush. He writes that his final economic forecast while a part of the council predicted the economy would begin to recover in the third quarter, and this was without considering a stimulus plan. Of course, his forecast could have been overly optimistic, but it could also mean that the GDP growth in the third quarter was not due to the stimulus plan we have.

He also talks about the estimates of jobs created and the jobs retained as due to the stimulus. Recipients have to fill out a report providing the data. Lazear notes two problems with the reports. The first is reporting bias. A construction firm wanting additional funds may believe that it needs to err on the high side of estimates of jobs created or retained. Second, these programs are likely to count people who switch jobs as new hires.

I have written before on the methodology used by the government to estimate the jobs created and saved by the stimulus. It is a direct link to the spending, assuming so much money equates one job. It also measures job-years and not individuals. That is, a person who is hired as part of a two-year project would count as two jobs--one for each year. The Administration has been criticized for the way they are trying to estimate jobs created or saved, but they keep doing it. The process gives the illusion of precision that is only an illusion. The concept of a job saved is ok--grants sent to states that use the money as a stop-gap in cuts in schools will save some jobs of teachers. But to think we can measure these in a meaningful way is not legitimate.

Perhaps the members of the administration think that if you repeat something often enough, people will believe it must be true.