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Open Borders Logo Contest

October 25, 2013

My entry in the Open Borders logo design contest.

Also, a t-shirt idea based on the design and a photo posted in the contest thread:

And another:


Creative Commons License
Freedom of Movement by Niklas Blanchard is licensed under a Creative Commons Attribution-ShareAlike 3.0 Unported License.
Based on a work at

Lefties Treading on HBD Territory

May 8, 2013

I suppose I could have also titled this post “Victory Lap”.

In any case, via Kevin Drum (Matt Yglesias as well), today I learn that teaching kids critical thinking skills, and working to eliminate hyperbolic discounting is very effective for preventing violent crime:

We find that participation reduced violent crime arrests by 8.1 arrests per 100 youth….Arrests in our “other” (non-violent, non-property, non-drug) category decreased by 11.5 arrests per 100 youth….Participation also led to lasting gains in an index of schooling outcomes equal to 0.14 standard deviations (sd) in the program year and 0.19sd in the follow-up year….We estimate our schooling impacts could imply gains in graduation rates of 3-10 percentage points (7-22 percent). With a cost of $1,100 per participant, depending on how we monetize the social costs of violent crime, the benefit-cost ratio is up to 30:1 just from effects on crime alone.

Study is here. Many of my own comments that conveniently line up well with the results of the study are here.

What I find really interesting about this is that the HBD guys have been making the case for teaching poor children what they term “middle class values” (and here) for years. Needless to say, this particular frame of the issue is certain to rub lefty-liberals the wrong way…but the results of the study are certainly consistent with what HBD’ers have been preaching.

I’ve gotten a lot of flack in various circles for suggesting that poor people suffer from hyperbolic discounting and poor critical thinking skills…but I’m glad to see this line of thinking gaining traction among the lefty intellectuals. Unfortunately, while these type of interventions are very cheap (so should be provided), they are very likely unscalable in a free society because of selection effects. The criminal justice system could circumvent that problem to a point — but often one bad mark can haunt someone forever, so that could be too late. HBD’ers get around the issue by advocating that this type of intervention be mandatory for poor people, but I’m not comfortable with that.

On a completely unrelated note, Kevin Drum also has an uncharacteristically bad post on medical care costs in which he seems to put on his “uncritical lefty rhetoric” hat to make an invalid point:

This doesn’t explain everything, but it explains a fair amount. The private sector, we’re told, is always more efficient than the public sector. Competition, you understand. But that doesn’t seem to be the case in the healthcare industry. I will allow you to draw your own conclusions.

Now lets put aside the comment about the private sector, because it’s simply invalid. Imagine that you are in a situation where you are solicited to serve two people. The first, because of varying circumstances, you are informally obligated to serve, but can only charge a fixed amount (by law) that is narrowly above profit margin. The second has a much less elastic demand curve (possibly perfectly inelastic?). As a rational businessperson, what do you do? Of course you make up the lost margin on person A by overcharging person B…

Now, I’m not saying this is what is happening (though I would say that it is almost certainly part of the issue). What I am saying is that the obvious answer isn’t the one that Drum is insinuating.

Could Alan Reynolds Have Been More Right?

May 2, 2013

Brad DeLong recently debated Alan Reynolds at Kansas State, which I’m not too interested in.

However, I was interested in this (h/t Brad DeLong):

In any bank crises, the public wants to hold more currency rather than bank deposits, and banks also want excess reserves as insurance against bank runs. Japan’s central never adequately accommodated that demand for bank reserves and currency before 2001 (if then) nor did the Fed in 1929-33. But that does not mean (as the liquidity trap implies) that monetary policy was impotent and merely “pushing on a string.”…

Reynolds was certainly wrong about Ireland, and is definitely wrong in his belief that cutting spending for its own sake is the correct policy response to a recession…but at least in his analysis of two supposed “liquidity trap” episodes, he is spectacularly right.

P.S. On Twitter, I resolved to refer to the “liquidity trap” as the “lolquidity trap”.

In the Future, I Will Have Been Proven Correct

April 12, 2013

How I missed this, I don’t know, but here is Barry Eichengreen on the future of economics textbooks:

Will future generations do better? One of the more interesting exercises in which I engaged at the recent World Economic Forum in Davos was a collective effort to imagine the contents of a Principles of Economics textbook in 2033. There was no dearth of ideas and topics, participants argued, that existing textbooks neglected, and that should receive more attention two decades from now.

Economists working on the border of economics and psychology, for example, argued that behavioral finance, in which human foibles are brought to bear to explain the failure of the so-called efficient markets hypothesis, would be given more prominence. Economic historians, meanwhile, argued that future textbooks would embed analysis of recent experience in the longer-term historical record. Among other things, this would allow economists-in-training to take the evolution of economic institutions more seriously.

Development economists, for their part, argued that much more attention would be paid to randomized trials and field experiments. Applied econometricians pointed to the growing importance of “big data” and to the likelihood that large data sets will have significantly enhanced our understanding of economic decision-making by 2033.

Naturally, everyone’s specialty is underrepresented, and the world would be better off if that were not the case. I pity the economics students of 2033 if these people get their way…for while the textbook that they carry around might not weigh as much as a cinder block, it will certainly be a sprawling mess. To conclude, Eichengreen makes this odd statement:

Something similar is likely to happen to textbooks, especially in economics, where everyone has an opinion and first-hand experience with the subject. Textbooks will be like wikis, with faculty adopters and students modifying text and contributing content. There still may be a role for the author as gatekeeper; but the textbook will know longer be the font of wisdom, and its writer will no longer control the table of contents.

Is Eichengreen saying that in the future, the current role of a (good) instructor will take place in textbooks themselves? That seems really confusing, and certainly a poor way to shepherd a student through subject matter. Textbooks should be an anchor, presenting fundamental concepts. The value-added of an instructor is to bring those concepts to life, and adapt them in ways they deem to be useful. If you’re learning any subject straight from a textbook, do yourself a favor and find a new teacher (or school). Ultimately, I guess none of this speculation matters if we’re able to simply upload concepts to our brains.

h/t Saturos

One M2 to Rule Us All

March 27, 2013

In a series of articles brought to my attention today, Matthew C Klein has been building the case for separating lending institutions from depository institutions. In Klein’s estimation, the function of banks — to fund long-term liabilities with short term assets — makes banking inherently unstable. Due to this fact, it is important to separate popular myth of what most people think of as banking — warehousing deposits — from lending.

What banks do — sell short-term debt (like deposits) to fund long-term loans — is inherently risky. In theory, shareholders bear this risk. In practice, much of it is dumped on citizens, even though they’ve no claim on the returns associated with the risk-taking.

The problem is that banks have too little capital to absorb losses without going bust. Even the new, stronger Basel III rules mandate a bare minimum ratio of bank equity to bank assets of just 3 percent. This means that a bank that loses more than 3 percent of its portfolio becomes insolvent.

The rub is that the equity side of a bank’s balance sheet is funded mostly by insured deposits. That exposes the public (at large) to various types of risk incurred by banks. This risk is magnified by the fact that banks have a tendency to load up their balance sheets with serially correlated liabilities. As I have mentioned before, this sort of homogeneity reduces the ability of a system to deal with shocks by reducing a systems’ reserve capacity.

So the first line of disagreement that I have with Klein is whether we can consider bank instability truly endemic, or the emergent result of incentive structure. I would say that the problem is incentive-driven. Far from being inevitable that a bank is going to blow up, as a society we have subsidized and encouraged the actions banks take on that path. In the absence of explicit and implicit public subsidy (through deposit insurance, the GSA’s, HHS, TB2F, etc), the vast majority of the market for securitization would probably whither and die.

Moving forward to the solution. Klein intimates in the second post in his series that we create “public utility banking”:

A genuinely radical approach would be to kill banking as we know it. Rip all banks, large or small, in two — separate deposit-taking from credit-creation. Back the deposits one-for-one with reserves at the central bank. Then fund loans not with deposits or other money-like liabilities but by tapping investors who understand they’ve put their savings at risk.

The real motivating idea here is to run “the” payments system as a low-margin public utility. I had mentioned on Twitter that I was skeptical of this idea, as it would make deposits more expensive, and the expense not absorbed by what amounts to demurrage on cash balances* would have to be subsumed by either public subsidy or fees for using the payment network. But then again, we have an entire new subsection of law on the books of the United States Federal register that attempts to move financial institutions to more explicit revenue-generating schemes, and away from swipe fees…although it is likely that the spread between deposits and IOR/IOER and deposits would mitigate fees from getting too wild. It may work, but I think we’re assuming extreme risk aversion/liquidity preference. Indeed, the idea of this proposal is to legislate away credit risk.

Furthermore, under this model of banking, depository institutions would immediately want to reflux creditor institutions’ liabilities back to them for monetary base (in the form of vault cash and reserves at the Fed). Otherwise, these institutions would be taking on too much risk. This implies an extreme outsized role for the monetary base, as something like M2 would end up likely consuming every other money aggregate. That would put the government at the forefront of consumer banking and the money system. You’ll, of course, notice where this is going.

*A tangent: I support the idea of taxing deposits. I’ve always had a strong aversion to the “store of value” role that was grafted onto money. Taxing deposits would force everyone to hold just the amount of money (cash and deposits) they need for transactions purposes, and then invest the balance in the continuum other assets. These would range from assets with a high level of liquidity (moneyness)/high risk — like stocks — to extremely low liquidity/safe assets, like houses or planting trees (or ski jumps!).

Market Monetarism at AEI

March 23, 2013

David Beckworth, Scott Sumner, and Ryan Avent discuss market monetarism at the American Enterprise Institute.

Notes on Currency and Recession

March 20, 2013

First up, Matthew Yglesias reports on the situation in Cyprus:

That’s not to say that departure from a currency union is the only scenario in which capital controls make sense. There’s a strong case that the move to free cross-border financial flows was a mistake. In theory, financial globalization could have been a good idea but in practice it did too much to undermine national-level bank regulation. But that’s still not the same as saying that you would have capital controls inside a currency union. After all, if a euro in a Cypriot bank account can’t be swapped for a euro in a Dutch bank account then in what sense are they really both the same currency? A Cypriot euro and a Dutch euro would in some sense be more different than a US dollar and a Canadian dollar.

Indeed, this bifurcation of currency units happened recently with BitCoin. The problem isn’t so much the capital controls in Cyprus, it is the subsequent runs that will happen in other weak EU countries as individuals and businesses flee (say) Greek or Portuguese banks to Germany (and maybe to dollar assets). Matthew gets this one horribly wrong:

To truly have a common currency you need common deposit insurance.

There is not really a compelling reason to publicly insure the asset side of the balance sheet unless you’re also insuring the liability side of the balance sheet (which we shouldn’t). The Euro shouldn’t be kept; but since it will be, there should be EU-wide enforcement of double liability. However, Yglesias does have the best short-term solution to the mess (and long-term solution to diplomatic relations).

Second, Paul Krugman reports history inaccurately:

The key point, however, is that when FDR tried to give voters what they thought they wanted [debt reduction and a balanced budget, per a Gallup poll], he plunged the economy back into recession, and paid a heavy political price.

Sometimes Krugman acknowledges this, and sometimes not; but attributing the 1937-38 recession to the contraction in fiscal policy is a big stretch, even given Keynesian multipliers. Even the oft-cited increase in reserve requirements seems too small to generate the downturn. The policy responsible for the brunt of the downturn was actually the Fed’s sterilization of gold inflows (and here).


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