Monday Reads: Of Dismal Differential Equations and angry old men

Good Morning!

I’m still trying to get my thoughts together about the number of bomb throwers in both political parties that seem to want all levels of government to go to wreck and to ruin. They are being led by some of the most ignorant politicians I’ve ever had the displeasure to observe.   Some folks are angry and eager for easy and very wrong answers.

It’s really easy for most people to confuse their personal pet experience with reality for the rest of the country as a whole. I get really tired of having anecdotal information put on the same level of seriousness as a peer-reviewed, published study. As an economist, I can tell you the number of people ignorant of generally well-known outcomes discovered through research and built up into theory in my field is highly limited. I shared this article by economist Greg Mankiw down thread over the weekend. I thought it was worth highlighting its main points.

I’ve said this a lot of times but the entire Sanders/Trump shtick on trade and the Sanders shtick on “big” banks is seriously out of step with reality. Mankiw succinctly writes about a few things that economists know that populist, anger-spewing office seekers don’t take time to learn. Now, Mankiw worked on the CEA for Dubya.  He’s not the least bit politically Democrat but what he’s written here are things that economists and policy wonks know to be true from decades of study. Economists generally don’t argue on the facts on the ground or on theory.  It’s how the policy should reflect that information that is usually a source of contention. There’s a lot of myths out there this election cycle. Here’s a few of them.

American manufacturing has disappeared.

The presumptive Republican nominee, Donald J. Trump, says, “We don’t make things anymore.” Judging from the surprising success of Mr. Trump’s campaign, this theme apparently resonates with many voters. But it is just not true.

When do you think manufacturing output reached its peak in the United States? The answer: right now. Manufacturing output achieved a record high in the most recent quarter of data. The nation’s manufacturers are now producing 47 percent more than they did 20 years ago.

What has declined is manufacturing employment, which is 29 percent lower than it was 20 years ago. Producing more output with fewer workers is called higher productivity, which in turn is driven by technological innovation. This change is hard on displaced workers, but it is good for the economy over all. Rising living standards are possible only if productivity increases.

Bad trade deals are what ails the economy.

Mr. Trump says he would negotiate better trade deals. Bernie Sanders brags about voting against the trade deals of the past. Hillary Clinton has split with President Obama and withdrawn her support for the Trans-Pacific Partnership.

The experts have a different view. Among those who devote their lives to studying the economy, there is a broad consensus about the overall benefits of free trade and trade deals. Of course, trade hasn’t been a boon for people who have lost their jobs because of foreign competition. But in 2014, the University of Chicago’s IGM Panel surveyed prominent economists about whether “past major trade deals have benefited most Americans.” A few respondents were uncertain, but most said yes. Not a single economist responded in the negative.

The economy is rigged.

To be sure, we live in challenging times. Meager growth and rising inequality have resulted in stagnant incomes for much of the working class and declining incomes for those with the lowest levels of education.

But to say that the economy is rigged, as Mr. Sanders and Mrs. Clinton have done, assumes that some small group of oligarchs planned this outcome. Clearly, the wealthy and powerful try to protect their interests, and they sometimes succeed. But the economy is a complex, decentralized system. Many outcomes are under no one’s control.

The biggest problem is that the devil is very much in the details which is where the challenges of policy exist.  It used to be–back in the day when I entered the business which is 1980 if you don’t count my undergrad stint as a teller–that every list of the top largest banks in the world had nothing but US banks.  That hasn’t be the case for some time.  China has now replaced Japan in the list but you’ll see that US banks have a presence on the list but don’t comprise the entire list. Australia, Canada and the UK also have some very large banks.

Countries and multinational corporations are huge and the amount of money they need to bank, borrow and use transactionally can only be handled by huge banks.  The thing that makes them systematically dangerous is not their size.  It’s the amount of ownership vs. deposits and their investing behaviors all of which are regulated internationally through the Bank of International Settlements and the Basil Committee recommendations. 

Nationally, we have the Federal Reserve Bank where I have actually worked with regulating huge regional banks in the south.  We have a number of laws on the books–most notably Dodd-Frank–that reflect international standards and our own goals for keeping systemic risk down in the financial system. It’s certainly not perfect and we do see many banks fighting some changes.  We need to build on all of that and we need to pay better regulatory attention to the shadow banking industry.  I’ve written extensively about that here since the Financial Collapse.  Any one that suggests that it’s only size that matters needs to go back to school. We’ve discussed this before but the Clinton policy is subtle, nuanced, and up to the job if her administration can get it through a belligerent congress. I have more faith that she can do that than the bomb throwers who have challenged her for office.

Same with trade deals.  There are many many aspects to trade that are good and it far outweighs the damage it can do to a few domestic industries.  It’s a form of progress.  Really.  Every single consumer on the planet gets access to things cheaply that they never would which helps every one’s standard of living. I don’t think it’s a good idea to argue that jobs should only exist within your borders and every one else can just starve trying to make a living.  We’re all better off through trade but there are people that are hurt by it. Again, it’s policy details that can see that trade does not ruin folks’ lives who are on the losing end.. It’s similar to what Clinton argues about transitioning Kentucky coal miners to clean energy industries.  Technology is still a huge factor in job lose.  Those folks in industries that lose domestically need to be helped by all levels of government.  Even they will eventually see their paychecks access more  as long as we can ensure they can still earn livings.

The problem that we see here is that we have a party that does not believe in a role for any form of government in anything and it stymies the kinds of policy details that ensure stability in big banks and ensure that our workers can find jobs and are trained properly for new industries if need be. None of this will happen if we elect politicians who are insurrectionists of one type or another.

Paul Krugman’s Op Ed today in the NYT calls Donald Trump an Ignoramus.

Last week the presumptive Republican presidential nominee — hard to believe, but there it is — finally revealed his plan to make America great again. Basically, it involves running the country like a failing casino: he could, he asserted, “make a deal” with creditors that would reduce the debt burden if his outlandish promises of economic growth don’t work out.

The reaction from everyone who knows anything about finance or economics was a mix of amazed horror and horrified amazement. One does not casually suggest throwing away America’s carefully cultivated reputation as the world’s most scrupulous debtor — a reputation that dates all the way back to Alexander Hamilton.

The Trump solution would, among other things, deprive the world economy of its most crucial safe asset, U.S. debt, at a time when safe assets are already in short supply.

Of course, we can be sure that Mr. Trump knows none of this, and nobody in his entourage is likely to tell him. But before we simply ridicule him — or, actually, at the same time that we’re ridiculing him — let’s ask where his bad ideas really come from.

Well, read the answer because it’s easy.  It comes from republican lawmakers like Paul Ryan and Ted Cruz.  Some of these Trumpisms even come from Romney.  Krugman states that Trump’s “blithe lack of knowledge largely follows from the know-nothing attitudes of the party he know leads.”  He concludes by being very complimentary to Clinton who’s economic policy is the only one rooted in reality and in accepted economic theory.

One of the wackiest things I’ve read in a long time is this story about how American Airlines handled an economist working on one of its flights.  I fully admit to doing pretty much the same thing on long flights.  I drag out my work.  I’ve never thought you could be considered terrorizing a seat mate will doing Differential Equations, but I guess you can in the paranoid world of angry white people.  Here we have an Ivy League economist of Italian descent causing panic in the skies. 

What do you know about your seatmate? The agent asked the foreign-sounding man.

Well, she acted a bit funny, he replied, but she didn’t seem visibly ill. Maybe, he thought, they wanted his help in piecing together what was wrong with her.

And then the big reveal: The woman wasn’t really sick at all! Instead this quick-thinking traveler had Seen Something, and so she had Said Something.

That Something she’d seen had been her seatmate’s cryptic notes, scrawled in a script she didn’t recognize. Maybe it was code, or some foreign lettering, possibly the details of a plot to destroy the dozens of innocent lives aboard American Airlines Flight 3950. She may have felt it her duty to alert the authorities just to be safe. The curly-haired man was, the agent informed him politely, suspected of terrorism.

The curly-haired man laughed.

He laughed because those scribbles weren’t Arabic, or another foreign language, or even some special secret terrorist code. They were math.

Yes, math. A differential equation, to be exact.

Had the crew or security members perhaps quickly googled this good-natured, bespectacled passenger before waylaying everyone for several hours, they might have learned that he — Guido Menzio — is a young but decorated Ivy League economist. And that he’s best known for his relatively technical work on search theory, which helped earn him a tenured associate professorship at the University of Pennsylvania as well as stints at Princeton and Stanford’s Hoover Institution.

So, here’s a few other policy issues that you may want to read about today.  More and more cities are realizing that AirBnb is just a way to get around local zoning and commerce laws.  It’s pushing up rent and creating homelessness in all the major tourist destinations of the world.

A 20-year resident of San Francisco, Tarin Towers lived in a rent-controlled apartment in the Mission District. Her building, a six-unit Victorian, was home to people who had stayed in the Mission for decades as the neighborhood changed around them. Some of her neighbors were multigenerational families, some were elderly, some were disabled. As long as the building remained rent-controlled, they should have been protected from the city’s skyrocketing housing market. But in 2013, the building was bought by well-known real estate speculator Fergus O’Sullivan, who saw he could make more — a lot more — with new tenants. But first, he had to get the old ones out.

In some ways, San Francisco renters are lucky. Their city has rent-control laws, unlike most places in the U.S., where your landlord can get rid of you as soon as the lease ends. In San Francisco, in many cases, a landlord must pay for the privilege of kicking you out — sometimes handsomely. As Towers’ landlord started renovations on her building, turning it into an all-day construction site, her neighbors started taking buyouts — some as high as six figures. But when Towers looked around at San Francisco real estate, she realized that after splitting a buyout with her housemates and paying taxes and lawyers’ fees, the amount she would get for leaving wouldn’t enable her to pay higher rent elsewhere in the city.

Towers held out as her old neighbors left and new tenants started moving in. Unlike the old neighbors, these new people were young, mobile, transient. And there were a lot of them. O’Sullivan, it turned out, had leased the building to a startup called the Vinyasa Homes Project. Towers soon discovered that Vinyasa had listed her building on Airbnb, advertising it as a “co-creative house.” The listing made it sound almost like a commune. “You want to join a community of like-minded peers who are doing inspirational things?” it read. “This is the place for you.” Unlike in the communes of yesteryear, however, each bed is going for more than $1,500 a month — and these are bunk beds in shared rooms. That means each apartment could now be bringing in $10,000 a month in rent.

ca. 1958, Cambridge, Massachusetts, USA — Dr. Norbert Wiener Standing at Blackboard — Image by © Bettmann/CORBIS

Ben Rhodes has been under fire this election for his role in negotiating the Iran Deal.  Here’s his response.

In recent years, few things have been as exhaustively debated or written about than the Iran deal.

That debate reignited this week after a long article about me included a section about the Iran deal. There are many issues raised in an article of this length, and I’m sure I’ll have plenty of opportunities to respond to those topics in the weeks and months to come.

However, given the importance of the questions raised about the Iran deal over the last few days, I want to make several points about one issue: how we advocated for the deal.

First, we never made any secret of our interest in pursuing a nuclear deal with Iran. President Obama campaigned on that position in 2008. We pursued several diplomatic efforts with Iran during the President’s first term, and the fact that there were discreet channels of communication established with Iran in 2012 is something that we confirmed publicly. However, we did not have any serious prospect of reaching a nuclear deal until after the election of Hasan Rouhani in 2013. Yes, we had discussions with the Iranians before that, but they did not get anywhere. After the Rouhani government took office, our confidential negotiations with the Iranians accelerated, and quickly led to public negotiations within the P5+1 process that began at the United Nations General Assembly in September 2013. Whatever your analysis of the relative weight of moderates or hard-liners in the Iranian system, there is no question that we were able to achieve a deal only after a change in the Iranian Administration.

Second, we did aggressively make the case for the Iran deal during the congressional review mandated by statute last summer, as it was imperative that the facts of the deal be understood for it to be implemented. Opponents of the deal had no difficulty in making their case — through commentary, a paid media campaign, and the distribution of materials making a variety of arguments against the deal. Tough and fair questions were raised; sometimes, there were also inaccuracies about the nature of the deal.‎ Given our interest in making sure that any misinformation was corrected, and that people understood our policy, we made a concerted effort to provide information about the deal to any interested party, including to outside organizations and any journalists covering the issue. This effort to get information out with fact sheets, graphics, briefings, and social media was no secret — it was well reported on at the time. Of course the objective of that kind of effort is to build as much public support as you can — that’s a function of White House communications.

You can read more about Ben Rhodes and the controversies at these links.  The NYT link at the top is the article that kicked off the latest controversy.

From the NYT: “The Aspiring Novelist who became Obama’s Foreign-Policy Guru”.

From Politico: “White House aide Ben Rhodes responds to controversial New York Times profile”

Jaws dropped in Washington’s tight-knit foreign policy community when Ben Rhodes, a deputy national security adviser and one of President Barack Obama’s closest aides, was quoted in the New York Times Magazine deriding the D.C. press corps and boasting of how he created an “echo chamber” to market the administration’s foreign policy.

Marbled with the kind of overly candid observations that sank Gen. Stanley McChrystal, the wartime general who was quoted mocking Vice President Joe Biden in a 2010 Rolling Stone profile, the article, written by David Samuels, hit like a bomb. It portrayed Rhodes as a real-life Holden Caulfield, a prep-school brat with literary pretensions whose greatest work of fiction was crafting the White House’s “narrative” to defend the Iran nuclear deal from its critics.

It’s really a shame that you can’t write analysis of complex policies like these on the back of a cereal box and expect every one to have enough background in the material to actually grasp it.  It does seem to me, however, that as responsible voters in a democratic society that people could at least try to get better information. It’s not like it’s not easily accessible these days.

So there’s a few things on wonky policy to get us started today.

What’s on your reading and blogging list?