Fed Independence: Too Important to Verify

David Boaz has a good post on the economists petitioning against an audit of the Fed on the grounds that its independence from politics is so precious. David concludes:

The Fed can be independent and unaccountable and undemocratic, or it can be subject to the political whims of elected officials; neither is a very attractive prospect.

I don’t see the choice as quite so binary. There are degrees of independence, accountability, and politicization. One reason to want an audit of the Fed is to establish whether or not it has actually been acting with sufficient independence. The question is already in the air. To attempt to impede an inquiry into the question by stressing the high value of independence is obviously to beg the question. Those who prize independence, if they really do, ought to be all the more keen on an inquiry. The importance of Congress asserting the authority to inquire is that, otherwise, the Fed can use the ideal of independence as cover for what may be in fact extremely political decisions.

There is a big difference between mundane countercyclical central banking and the liberal use of emergency powers. The distributive consequences of the Fed response to the financial crisis are enormous, and I don’t think it’s unreasonable to demand  a justification for the fact or the details of the response. Was there really an emergency that called for the Fed’s action? There weren’t WMD in Iraq. Maybe the financial crisis wasn’t going to blow up the entire economy.

The question of which firms got how much of what kind of transfer through the Fed’s excercise of discretion is inherently political, not in the sense of “partisan,” but in the sense that the Fed was picking winners and losers. I want an account of why these decisions were made the way they were.

Is the worry that no inquiry or audit could be designed that would not devolve into delegitimizing populist point-scoring or policy-warping political armtwisting? I suspect a main worry is that the Fed’s use of discretion was not independent of who in the Fed system knew whom on Wall Street, of who had what kind of pull, etc. And revealing this, even in a sober and responsible manner, would expose the Fed’s failure to act with the sort of impartiality and objectivity at the heart of any useful notion of independence. Of course, the art of central banking is the art of telling lies so that they will come true. Telling the truth about the Fed may create expectations of future partiality that will hinder the central banker’s ability to manipulate expectations in a theoretically ideal way. So the theorists band together to defend the Fed’s right to lie, or at least to stay mute when citizens are owed some justification, about its suspected partiality in the use of emergency discretion. To make this kind of defense of the importance of independence is really to defend the economic importance of maintaining the perception of independence. But this is to assume the legitimacy of useful lies, an assumption that cannot be granted merely on the basis of the self-asserted authority of “experts.”

The attitude of many macro and monetary economists about the operation of the Fed reminds me more than a little bit of the attitude of neocons about defense and foreign policy. Something with the flavor of: “You people are too stupid to understand the real existential threats out there–to understand how we, the big boys, are keeping you safe. You should be grateful, but we don’t ask for gratitude. We’re just asking you to shut up and believe what we, The Serious People, tell you to believe. Or else.”

I have to admit that this doesn’t sit well with my liberal sensibility.

The Path to Corporate Welfare is Paved with Essential Legislation

I had meant to blog about this passage in the New York Times, but I’m a lazy blogger these days and Tyler got to it and ably noted the “Nice place you got here. Would be a shame if something happened to it,” tone of Daschle and Baucus. I want to mention one further thing. When I talk to folks on the left, a lot of them really earnestly claim to deplore corporate welfare. But, when it came down to it, a lot of those same folks wanted to brag about promising to deliver corporate welfare to Wal-Mart. What gives? It makes me wonder how they think corporate welfare happens? Do they think it’s usually not as part of some legislative quid pro quo? Maybe the idea is that Wal-Mart publicly backing a coverage mandate in exchange for nixing a requirement to kick in for employees on Medicaid does not count as corporate welfare because the overall legislative aim is worth it. But, of course, once you count in the full set of deals, the actual legislation probably won’t be worth it for anybody but the parties to the deals. You can see Daschle and Baucus as craftily strong-arming corporations and interest groups into getting with the plan. (I guess that’s how they like to see themselves.) Or you can see corporations and and interest groups strong-arming Congress (or manipulating the vanity of congressional powerbrokers) for advantageous regulation. It is, of course, both. When corporations see that politicians plan to get their pound of flesh, they maneuver to give half a pound in exchange for a deal where their competitors give two.

Ryan Avent's Innovations in the Game Theory of International Relations?

In response to my point below about the transparently inconsistent reasoning about public goods employed by many defenders of the woeful cap and trade bill, Ryan Avent writes:

This seems almost deliberately dense. In particular, it makes no distinction between the world of billions of daily, anonymous transactions and the world in which a handful of great powers attempt to hammer out a diplomatic agreement. Unsurprisingly, it’s very difficult to get millions of urban denizens to voluntarily come together to build and fund a road network or transit system in the absence of a coercive mechanism. The benefits are too broadly shared, and the incentive to free ride too great. But the smaller the number of players, the more concentrated the benefits, and the easier it is to find a mutually beneficial agreement.

I certainly wasn’t being deliberately dense. Ryan is, as always, quite charitable in allowing that my denseness might have been involuntary. I am grateful. Perhaps it is this very denseness that prevents me from grasping how I was being dense. I persist in thinking that the standard mode of reasoning about collective action problems applies. So I patiently await instruction.

Ryan evidently believes it is almost obvious that the structure of the strategic problem in securing global climate policy coordination is less complex than the problem of putting together standard-issue public goods, like a system of roads. In the case of global climate policy coordination, we’re talking not about diffuse millions but a mere “handful of great powers,” who will enjoy such concentrated benefits from an agreement that the normal worries about credible commitment, assurance, free-riding, and so forth do not really apply. So the absence of a coercive enforcement mechanism is pretty much irrelevant. Not only shouldn’t we worry about the standard logic of interdependent strategic action, but it’s almost deliberately dense to do so. My bad.

If only we’d known that global coordination problems among “a handful of great powers” was such a breeze, we’d have arrived at Kant’s global federation of perpetual peace centuries ago. Come to think of it, why were there two massive World Wars and a Cold War last century? It’s almost as if the great powers were being deliberately dense. But I guess we now know the trick of aligning the perceived interests of great powers: just make some kind of effort to cooperate. Go ahead and move unconditionally, even if your own country’s move actually signals quite clearly that there is next to zero political will to bear the costs of an agreement with teeth. And then what you do is you wait for other great powers to be impressed and encouraged and convinced by the immense advantages that will accrue to them once they jump on board. It’s easy once you know how.

Or maybe that’s not how Ryan thinks it goes. But then how does it go? I still don’t get it.

Other things I don’t get:

(a) The idea that “great powers” are headed by some kind of unified intelligence or agency that can make agreements and just stick with them. I thought the governments of states–even authoritarian ones–were semi-stable coalitions of various and often conflicting interests subject to the vagaries of mass public opinion.

(b) The idea that the benefits of global climate policy coordination — which will not be realized for many decades — will accrue to the relevant state decisionmakers and so provide them with sufficient incentive to make and stick to an agreement, but that the costs of coordination — which will be significant and immediate — will somehow not be borne by those decisionmakers (e.g., “the people” will not complain about these costs in a politically threatening way) and so will not overwhelm the posthumous payoff in the political accounting.

(c) The triviality of time inconsistency problems. I had thought that time inconsistency problems–that the government now cannot really bind the government later–were endemic to politics. This makes it almost impossible for a current government to credibly promise that a policy will persist over time. I had thought you needed some kind of mechanism (which we do not appear to have) to align the incentives of the parade of future decisionmakers to sticking with it over time.

(d) The option value of empty gestures. The Waxman-Markey bill appears to everyone–even advocates like Ryan–to be mostly a bust, if not a complete bust. It remains unclear to me why a transparently bad bill does more to improve the U.S.’s bargaining position than no bill.

I don’t see that Ryan addresses any of this as he goes on:

[T]here are fewer than ten relevant players, and only two really relevant players not already committed to reductions — the US and China. Given that climate negotiations are part of a repeated game between the two great powers (that is, they’re more or less constantly talking about one economic or political issue or another), it seems very likely indeed that an American pre-commitment to emission reductions would facilitate a similar Chinese commitment.

India? Cheap talk?

The repeated game between the U.S. and China looks to me trickier than this. First, it’s better for China in the short and medium term if we tax carbon emissions and they don’t. They sure will be happy to see us go first. (It will, among other things such as encouraging capital flight to China, give them more slack with which to clean up things like SO2 that really do matter to them in the short term.) So then what do we do if they don’t play along? Impose carbon tariffs? Then we have probably just started a trade war with our chief source of inexpensive manufactured goods. Is this the repeated game Ryan has in mind?

Ryan sums up:

Will Wilkinson works for Cato, and Jim Manzi writes for National Review, two great outposts of climate change denialism and do-nothingism. It occurs to me that if more of their compatriots were willing to discuss the issue responsibly, then upwards of 90% of the GOP might not be committed to a policy based on utter stupidity, and a better bill might be feasible. Instead, they’re busily arguing against Waxman-Markey. That’s their right, but it certainly says quite a bit about their priorities.

I wonder if Ryan would like to be more explicit about what he thinks my priorities are. I’ll tell you what I think my priority is: to make people, especially poor people, better off. I am against this bill because I honestly believe it will leave many people worse off and make almost no one other than politically-connected domestic interest groups better off. I think Ryan has a different assessment of its likely effects, but I don’t see any need to slyly impugn his motives. If he thinks his argument is so winning, then it might benefit him to drop this kind of well-poisoning rhetoric, which is beneath him, and start actually winning the argument.


IMO, Jim Manzi continues to own defenders of the preposterous cap and trade bill. His latest assessment of the state of play:

So let’s review the overall bidding, at least as I see it:

1. Everybody agrees that if Waxman-Markey becomes law, and it does not lead to a global, binding and enforced agreement to severely reduce global greenhouse gas emissions, then it makes U.S. taxpayers worse off economically.

2. I have presented an economic argument that even if such a global agreement were achieved it would accomplish in the best case a net increase in NPV of global consumption of 0.2%, and a practical argument that it would almost certainly reduce global economic welfare. These specific arguments remain undisputed.

3. Those who argue that Waxman-Markey would lead to a global agreement have provided no evidence that it would have this negotiating effect, and are presenting what is, at best, a pretty idiosyncratic negotiating premise that by giving away our leverage as one participant in a collective action problem we will somehow increase our ability to get others to sacrifice on our behalf.

The thing is, Jim’s arguing from the basis of extremely generous assumptions.

Many of the people making a big deal about the bargaining value of this bill rarely (never?) use similar logic in similar circumstances. The idea is that coordinated international action toward carbon reduction is a global public good, and that the probability of effective coordination increases significantly if the U.S. acts unilaterally. HOW DOES THIS WORK? Standard statist-liberal reasoning about public goods is that they will not be provided unless there is a  coercive mechanism in place (e.g., a state) to solve the assurance problem. But there is no state with global jurisdiction. So am I to understand that folks making the argument about the crucial role for Waxman-Markey in solving the international collective action problem don’t really believe the standard story about the need for coercion in assuring compliance? Because that would sure change a lot of debates about a lot of things! To put it another way: if you think that the probability is low that smaller-scale public goods can be provided through voluntary mechanisms without government, shouldn’t you think the probability is even lower the larger the scope of the coordination problem?

Pulped Intentions

The Nation’s Chris Hayes has written a great story illustrating how Washington and environmental policy work together to create wasteful stupidity. 

Thanks to an obscure tax provision, the United States government stands to pay out as much as $8 billion this year to the ten largest paper companies. And get this: even though the money comes from a transportation bill whose manifest intent was to reduce dependence on fossil fuel, paper mills are adding diesel fuel to a process that requires none in order to qualify for the tax credit. In other words, we are paying the industry–handsomely–to use more fossil fuel. “Which is,” as a Goldman Sachs report archly noted, the “opposite of what lawmakers likely had in mind when the tax credit was established.”

What happened?! Read the whole thing. It’s a terrific example of unintended consequences. Chris says, “I’ve come to expect that even nobly conceived laws will be manipulated and distorted for private ends. But once in a while I hear a story that gives me the queasy feeling that I’m nowhere near cynical enough.”

'Green' Energy Needs a Big Leap

That’s the headline on this LA Times piece on Energy Secretary Steven Chu’s aim to produce “revolutionary” breakthroughs. Incrementalism? Highlights added for your convenience and pleasure:

When Energy Secretary Steven Chu talks about how Americans can break their addiction to oil and coal, he starts with his hi-fi amplifier. It’s so old that the on-off light burned out long ago. But inside lies a technology that — in its day — was as revolutionary as the changes needed to solve the nation’s energy problems.

Radios, telephones and other electronics once depended on fragile vacuum tubes the size of small light bulbs. Then scientists pioneered a smaller, cheaper and more durable replacement called the transistor, opening the way to trans-Atlantic phone calls and a host of other marvels, including Chu’s stereo.

Chu, a Nobel Prize-winning physicist, and other experts say similar [revolutionary] scientific breakthroughs are needed to make renewable power sources such as wind, solar and biofuels as cheap and easy to use as costly, environmentally damaging oil and coal. Toward that end, President Obama’s stimulus package contains $8 billion for energy research, including $400 million targeted for game-changing technology.

I’m glad the Times knew enough to add this:

The problem is that over the last three decades, the U.S. has spent many times that much on energy research and development — with nothing like a transistor to show for it.

“It’s very easy to say we should spend more” on research, said Jeffrey Wadsworth, chief executive and president of the Battelle Memorial Institute, which manages several Energy Department laboratories. “What really needs to happen is more effective use of the money.”

As Wadsworth is quick to acknowledge, that’s easier said than done.

Clap harder everybody!

Anyway, if Obama’s Nobel Prize-winning physicist Secretary of Energy says the plan is to shoot for revolutionary, game-changing technology, will folks admit that Obama is in fact shooting for revolutionary, game-changing technology?

[HT: Glen Whitman in comments below]

On Non-Magical Government Investment

It’s pretty frustrating for libertarians to argue about government investment in science and technology because one is constantly confronted with the problem of the seen and not seen. One is bludgeoned with every government initiative that ever happened to pan out while all the wasted trillions and the private investment therefore foregone is lost to memory. 

My position is not that government investment in technology has zero returns. My position is that on average it does worse than returns to private investement. This should not be controversial. It is the consensus view of economists who study innovation and growth. If you think average returns to government-directed investment are higher than average returns to private investment, then you really do believe that the state has special generative powers. And you should formalize your findings, collect your Nobel Prize, and forever change the world. Or you should chill out about how awesome the Internet is.

I do want to distinguish between government spending on the development of particular technologies and government financing of basic scientific research. I’m convinced that a lot of valuable basic research would not be conducted without state subsidies, and that much of this research is the basis for later technological innovation that leads to increased growth. So here’s one area where I think well-conceived government spending can pay its way by boosting growth. Despite ample motivation to be persuaded, I’ve remained unpersuaded by most libertarian arguments to the effect that scientific research without obviously marketable future applications would be sufficiently funded. There is a lot of waste, and some truly objectionable politicization, in government grant-making. But my sense is that, on the whole, much of American science policy is a good deal.

However, I get skeptical pretty quickly as we move downstream toward engineering and the development of technological applications of science. Here’s where I see government subsidies responsible for a huge amount of misallocated human and financial capital.  People who think that we will tend to do better rather than worse when the government tries to pick winners in technology really do bear the burden of proof here and should stop simply assuming that landing a man on the moon has made us better rather than worse off. 

Last night, Kerry and I were reading Louis Menand’s excellent essay “The Last Emperor: William S. Paley,” about the long-time CBS chief. In the middle of the piece, Menand argues persuasively that almost all of the television technologies that reached American households by 1990, aside from satellite transmission and the VCR, were available in the 1950s, but that regulatory collusion between incumbent businesses and government stifled innovation. “What we might have had for the last forty years is what, almost everywhere we have only had since around 1990: a mixture of local and national programming and commercial-free pay services on a hundred channels — and all in living color,” Menand writes. When government picks winning technologies it creates, as a matter of course, vested interests that will seek to, and often succeed in, creating barriers to further innovation — even if the “winner” the government picked turns out to be a loser. If you generalize the case of the TV lobby — which prevented or delayed innovation at every turn — to hundreds of other heavily regulated industries, one can start to see how government can have a systematically dampening effect on the pace of innovation.

Consider ethanol. Here’s Michael Levi in an excellent article on “green jobs” in Slate:

For many environmental advocates, of course, these discussions [of whether green initiative will on net increase employment] are of secondary importance; what matters most is that green jobs will help the planet. They’d be wise to be careful there, too. Indeed, the most successful green jobs program to date is one that no environmentalist wants to brag about: the conversion to corn-based ethanol. A recent United Nations report estimated that the heavily subsidized U.S. ethanol industry provides employment for 154,000 Americans, about five times as many as the wind power industry and nearly 10 times as many as the solar industry. That goes a long way to explaining why, despite mounting evidence showing that corn ethanol is a failure (some would say a disaster) on the environmental front, U.S. policy appears to be on cruise control. At its base, corn ethanol is not a green policy so much as a jobs policy—and its success in that respect has made it almost impossible for the government to change course. 

And this is just the way it works. How much money has been sunk into this? Lots. That’s money that could have been spent more productively, but wasn’t. So we’re poorer. And all the tens of thousands of folks right here in Iowa working in corn ethanol are misallocated human capital. So we’re poorer. These are skilled, hardworking people whose diligence and effort is, thanks to the government, making the world worse. And the case of ethanol is no anomaly. It is completely typical.

Judging from some of my comments, one would think all the government ever does is land men on the moon and invent the Internet, and therefore libertarians are blinkered idiots. Now, I truly don’t see the point of the moon landing, which strikes me as nothing more than a 20th-century version of grotesque pyramid-building waste. The Internet, like many other things based initially in government projects, probably helps account for the fact that returns to government investment are above zero. But it is truly hard to honestly identify the relevant comparison when trying to tote up the net benefits of government investment. What has been foregone in the process? (And don’t forget to include the casualties of regulatory sclerosis that so often accompanies winner-picking.)

We cannot glimpse the nearby possible worlds in which the government did not for many decades help incumbents in telephony and television block basically every new innovation. Could we have had something like the Internet earlier had regulation not so effectively locked out any new thing that threatened well-connected interests dependent on the status quo regulatory dispensation? Menand writes that “[t]here were  subscriber-supported cable systems for radio as early as 1923, and television networks have always used coaxial cable, leased from phone companies, to transmit their pictures to broadcasting stations.” I don’t know if this is true, but I have no reason to doubt it.  A well-developed early cable infrastructure might have been able to interface with emerging computer technology in inventive ways that we simply cannot imagine. Who knows what the present might have been had government gotten out of the way? I don’t and neither do you. To simply assume that the value of the seen is greater than the value of the foregone unseen is a most elementary intellectual error. Yet some of you seem very proud of yourselves when you make it.  

Now, if you think Obama’s centralized push toward a “green economy” doesn’t assume one or two great leaps forward, then you should be clear about the fact that the very considerable centralized pushing up until now has taken us to a point where the cost of a unit of energy produced by “alternative” sources is still remarkably high relative to the cost of a unit produced by a carbon-based source. And it looks like this is going to be the case for a good while into the future. The green transition will either require a massive temporary increase in the cost of energy through some combination of taxes and subsidies, or some major leaps in green energy generation that swiftly brings prices in line with prices of energy from coal, natural gas, oil, and so forth. Subsidies may accelerate breakthroughs, but they can just as easily draw a huge amount of money and talent into dead ends, such as ethanol, and create heavily-invested corporate interest groups who will seek to block more promising breakthoughs in areas the government overlooked when first passing out the lucre. 

Also, if advocates of a centralized push toward a green economy (which you have to admit is a pretty radical and romantic thing to even think plausible) aren’t counting on big technological leaps borne of subsidies, then they should be more open about the fact that their plan is really just to make energy incredibly expensive until incrementally developing green energy sources finally become competitive with carbon-based sources. Ten years? Twenty years? Thirty? And they need to explain why they think government winner-picking in green technology is likely to have a better record than government winner-picking generally. 

I predict green energy will pan out and that we’ll have incredibly cheap, clean energy within my lifetime. And I think we’ll get there faster, with much smaller costs to growth and human welfare, if the government continues to subsidize basic scientific research, but stays out of subsidizing technologies. I sincerely wonder why it is so clear to so many people that the big government push is the less risky path.

The Color of Government Money

I’m reprinting this in full from Chris Good at the Atlantic. Someone please tell me how this is supposed to work, even in theory. And someone please tell me how speeding up the process of picking winners doesn’t simply make well-prepared regulatory capture specialists like T. Boone Pickens (whose PR blitz seems to have worked to get him into the DoE inner circle) richer simply because they’ve got the resources to hoover up contracts. 

Chu Works to Get the Green Cash Flowing

After environmentalists and mainstream politicians alike succeeded in dedicating a good chunk of President Obama’s stimulus package to green energy, Obama’s new energy secretary has been working on ways to make that happen more efficiently. Last week, Energy Secretary Steven Chu (who holds a Nobel Prize in physics) announced a slew of reforms to how the department doles out money, and a department official says more are on the way. The goal: streamlining the process so stimulus dollars can get spent sooner.

Many have posed the economic crisis as an opportunity for green revolution, and at a roundtable discussion on energy yesterday at the Newseum, the economy/energy/environment nexus was on the tip of many tongues.

“We have a plan going forward where we can reduce what could have been years down to months, and we feel very strongly that this thing will work,” Chu said of DoE spending as luminaries such as Bill Cinton, Al Gore, T. Boone Pickens, Senate Majority Leader Harry Reid, and House Speaker Nancy Pelosi listened.

Chu’s reforms include rolling appraisals of applications for loans and funding, using outside contractors to underwrite loans, more staff and resources to process applications, and simplifying application paperwork. Chu has appointed Matt Rogers, a former senior partner at consulting giant McKinsey & Company, who also worked on energy procurement reform as part of Obama’s transition team, to implement these reforms and oversee the stimulus money.

The stimulus placed $38.7 billion in the department’s hands, with heavy emphases on alternative energy, efficiency, and infrastructure modernization. DoE says it will start offering loan guarantees under stimulus provisions early this summer, and that 70 percent of the stimulus cash will be spent by the end of next year.

To hear politicians and activists talk about the timing of stimulus cash flow, “now” seems to be the only acceptable answer. A significant part of Chu’s job, so far, has been changing the way the department operates in order to make that happen.

How Much Are GM's Labor Costs?

Felix Salmon says it’s not 70$ an hour per worker. 

The average GM assembly-line worker makes about $28 per hour in wages, and I can assure you that GM is not paying $42 an hour in health insurance and pension plan contributions. Rather, the $70 per hour figure (or $73 an hour, or whatever) is a ridiculous number obtained by adding up GM’s total labor, health, and pension costs, and then dividing by the total number of hours worked. In other words, it includes all the healthcare and retirement costs of retired workers.

A number of Felix’s commentators argue that he’s missing the point. I don’t know whether he is or not. I put up the number because it came from thinkers I trust, and if I was wrong to do that, I’m happy to admit it. Anyway, it looks like we all agree that GM has extraordinary liabilities, even if some of them are being shifted onto the UAW, and that it continues to waste a ton of money that could be put to better use elsewhere.