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July 31, 2010

Latest Posts from Economist's View

Latest Posts from Economist's View

Greenspan and Empathy

Posted: 31 Jul 2010 01:08 AM PDT

From an interview of Alan Greenspan:

Lunch with the FT: Alan Greenspan, by Alan Beattie, FT: ...He has admitted to having been "30 per cent wrong" in his time as Fed chairman, particularly in assuming that banks and financial institutions would closely monitor the creditworthiness of the people with whom they were doing business. But his present plan for preventing a recurrence of the global financial crisis still shows a predilection for the light touch: make banks hold more capital to back their lending, demand higher collateral that can be seized if financial transactions go wrong, and keep more cash on hand in case of emergencies.

In extremis, he says, banks might have to be broken up by law if they become too big to fail without bringing down the whole financial system. But he makes clear that he regards such an intervention as a last resort. He retains faith in markets and doesn't even think that US-style finance capitalism will lose ground to the softer, more regulated model of European social democracy... It is a question of making precise technocratic adjustments. ...

His approach to everything is the same. Look at the data; calculate the probabilities; make a dispassionate calibrated decision. Just before we leave, he bemoans the calls on "poor Obama" to be seen to be caring more about the oil spill in the Gulf of Mexico. "I complained when people were saying he's not showing enough empathy," he says. "I said, 'That's not what I want to see.' I want to see cold, cool, deliberative action. Empathy is not going to solve this problem." ...

I don't think I want to hear Obama say "I feel your pain," but there may be a reason to combine "cold, cool, deliberative action" to solve a problem with empathy for those affected by it. Empathy shows that you understand the significance and urgency of the problem, and that you are willing to devote the resources needed to find a solution. Perhaps a Fed chair, unlike a president, can get away with cold dispassionate calculation, but a little more empathy might have served Greenspan well.

"The Business of Spying on Internet Users"

Posted: 31 Jul 2010 12:39 AM PDT

Tracking technology is becoming more sophisticated and pervasive:

The Web's New Gold Mine: Your Secrets, by Julia Angwin, WSJ: Hidden inside Ashley Hayes-Beaty's computer, a tiny file ... consists of a single code— 4c812db292272995e5416a323e79bd37—that secretly identifies her as a 26-year-old female in Nashville, Tenn. The code knows that her favorite movies include "The Princess Bride," "50 First Dates" and "10 Things I Hate About You." It knows she enjoys the "Sex and the City" series. It knows she browses entertainment news and likes to take quizzes. ... Ms. Hayes-Beaty said when told what that snippet of code reveals about her. "The profile is eerily correct." ...

One of the fastest-growing businesses on the Internet, a Wall Street Journal investigation has found, is the business of spying on Internet users. The Journal conducted a comprehensive study...

• The study found that the nation's 50 top websites on average installed 64 pieces of tracking technology onto the computers of visitors, usually with no warning. A dozen sites each installed more than a hundred. The nonprofit Wikipedia installed none.
• Tracking technology is getting smarter and more intrusive. Monitoring used to be limited mainly to "cookie" files that record websites people visit. But the Journal found new tools that scan in real time what people are doing on a Web page, then instantly assess location, income, shopping interests and even medical conditions. Some tools surreptitiously re-spawn themselves even after users try to delete them.
• These profiles of individuals, constantly refreshed, are bought and sold on stock-market-like exchanges that have sprung up in the past 18 months.

The new technologies are transforming the Internet economy. Advertisers once primarily bought ads on specific Web pages—a car ad on a car site. Now, advertisers are paying a premium to follow people around the Internet, wherever they go, with highly specific marketing messages. ... "It is a sea change in the way the industry works," says Omar Tawakol, CEO of BlueKai. "Advertisers want to buy access to people, not Web pages." ...

The top venue for such technology, the Journal found, was ... A visit to the online dictionary site resulted in 234 files or programs being downloaded onto the Journal's test computer, 223 of which were from companies that track Web users. ...

The information that companies gather is anonymous, in the sense that Internet users are identified by a number assigned to their computer, not by a specific person's name.  ...

Targeted ads command a premium. Last year, the average cost of a targeted ad was $4.12 per thousand viewers, compared with $1.98 per thousand viewers for an untargeted ad ...

Wittingly or not, people pay a price in reduced privacy for the information and services they receive online. ... executives say the trade-off is fair for their users, who get free access to its dictionary and thesaurus service. "Whether it's one or 10 cookies, it doesn't have any impact on the customer experience, and we disclose we do it," says spokesman Nicholas Graham. "So what's the beef?"

The problem, say some industry veterans, is that so much consumer data is now up for sale, and there are no legal limits on how that data can be used. ...

Media6Degrees Inc., whose technology was found on three sites by the Journal, is pitching banks to use its data to size up consumers based on their social connections. The idea is that the creditworthy tend to hang out with the creditworthy, and deadbeats with deadbeats. "There are applications of this technology that can be very powerful," says Tom Phillips, CEO of Media6Degrees. "Who knows how far we'd take it?"

links for 2010-07-30

Posted: 30 Jul 2010 11:03 PM PDT

GDP Growth Slows to 2.4%

Posted: 30 Jul 2010 09:09 AM PDT

I'm on the road, but have a few comments on the GDP report:

GDP Growth Slows to 2.4%, CBS MoneyWatch

There are also links to other discussions of the report.

July 30, 2010

Latest Posts from Economist's View

Latest Posts from Economist's View

Paul Krugman: Curbing Your Enthusiasm

Posted: 30 Jul 2010 12:42 AM PDT

The president's "snubbing of those who made him what he is" may be costly:

Curbing Your Enthusiasm, by Paul Krugman, Commentary, NY Times: Why does the Obama administration keep looking for love in all the wrong places? Why does it go out of its way to alienate its friends, while wooing people who will never waver in their hatred?
These questions were inspired by the ongoing suspense over whether President Obama will do the obviously right thing and nominate Elizabeth Warren to lead the new consumer financial protection agency. But the Warren affair is only the latest chapter in an ongoing saga.
Mr. Obama rode into office on a vast wave of progressive enthusiasm. This enthusiasm was bound to be followed by disappointment, and not just because the president was always more centrist ... than his fervent supporters imagined. Given the facts of politics, and above all ... lock step Republican opposition, he wasn't going to be the transformational figure some envisioned.
And Mr. Obama has delivered in important ways. Above all, he managed (with a lot of help from Nancy Pelosi) to enact a health reform... But progressive disillusionment isn't just a matter of sky-high expectations meeting prosaic reality. Threatened filibusters didn't force Mr. Obama to waffle on torture; to escalate in Afghanistan; to choose, with exquisitely bad timing, to loosen the rules on offshore drilling...
Then there are the appointments. Yes, the administration needed experienced hands. But did all the senior members of the economics team have to be protégés of Robert Rubin, the apostle of financial deregulation? Was it necessary to install Ken Salazar at the Interior Department over the objections of environmentalists who feared, rightly, that his ties to extractive industries would make him slow to clean up a corrupt agency? ...
What explains Mr. Obama's consistent snubbing of those who made him what he is? Does he fear that his enemies would use any support for progressive ... ideas ... to denounce him as a left-wing extremist? Well, as you may have noticed, they don't need such excuses...
Mr. Obama's attempts to avoid confrontation have been counterproductive. His opponents remain filled with a passionate intensity, while his supporters, having received no respect, lack all conviction. And in a midterm election, where turnout is crucial, the "enthusiasm gap" between Republicans and Democrats could spell catastrophe for the Obama agenda.
Which brings me back to Ms. Warren.
The debate over financial reform, in which the G.O.P. has taken the side of the bad guys, should be a political winner for Democrats. Much of the reform, however, is deeply technical...
But protecting consumers, ensuring that they aren't the victims of predatory financial practices, is something voters can relate to. And choosing a high-profile consumer advocate to lead the agency providing that protection ... is the natural move, both substantively and politically. Meanwhile, the alternative — disappointing supporters yet again by choosing some little-known technocrat — seems like an obvious error.
So why is this issue still up in the air? Yes, Republicans might ... filibuster..., but that's a fight the administration should welcome.
O.K., I don't really know what's going on. But I worry that Mr. Obama is still wrapped up in his dream of transcending partisanship, while his aides dislike the idea of having to deal with strong, independent voices. And the end result of this game-playing is an administration that seems determined to alienate its friends.
Just to be clear, progressives would be foolish to sit out this election: Mr. Obama may not be the politician of their dreams, but his enemies are definitely the stuff of their nightmares. But Mr. Obama has a responsibility, too. He can't expect strong support from people his administration keeps ignoring and insulting.

What Would Republicans Do for the Economy?

Posted: 30 Jul 2010 12:33 AM PDT

What's the Republican's strategy for getting rid of the uncertainty they (as opposed to businesses) are so worried about? This is from an interview of Paul Ryan on what the Republicans would do to help the economy:

What would Republicans do for the economy? An interview with Rep. Paul Ryan., by Ezra Klein: ...Paul Ryan: I know uncertainty is a new economic buzzword, but for good reason: If we can reduce it, we'll unlock capital. I'd revisit some of the major issues over the last year. Health care, energy, taxes, financial regulation. I'm not saying these aren't important issues. We need to reform the health-care system. But these are the wrong solutions. I would advance different solutions with an eye toward international competitiveness and encouraging saving and investing and encouraging certainty.

Ah, so his solution to uncertainty is to create even more uncertainty about the policies that will be in effect next year? Later in the interview he tries to get out of this box:

... let me clarify one thing:... You can say I'm offering more uncertainty by redoing these laws. I'm saying it's the quality of these laws that's the problem. ...

But this assertion has no substance to back it up. When he does reach for examples, he reverts to:

People are just too nervous, they don't know what the economy will be, what the regulations will be, what the taxes will be...

So the "quality of these laws" argument it pretty hollow, especially since one of the issues we are dealing with is Republican legislation that was rigged to avoid hard choices about the deficit. That is, the low quality of the Republican legislation is causing quite a bit of uncertainty right now about whether the Bush tax cuts will be extended.

Moving along to another part of the interview discussing the tax cuts, again from Paul Ryan:

If the Obama guys said there'll be no tax increases for two years, it would make a big difference fast. Look at the original [Christina] Romer-[Paul] Romer paper. She'd agree this is not the time to raise taxes.

Not all of the Obama people are "guys," but more to the point, what does Romer actually say? This is from a White House blog post by Christina Romer:

President Obama has made it clear that he favors extending the 2001 and 2003 tax cuts for middle-income families, but letting those for high-income earners expire as called for in current law. Recently, some have argued that extending the high-income cuts is necessary for the economy. This is simply wrong.

People have been trying to use the Romer-Romer paper incorrectly to rebut the policies she supports since the idea of stimulus was first raised by the administration. She has protested, but that doesn't stop the message machine from making the assertion anyway. On this point, back to Romer:

The view that tax cuts focused on the middle class can be important to the recovery is consistent with a wide range of research, including a paper that I wrote with David Romer before coming to government

Another gem from Paul Ryan:

These short-term stimulative things ... pump up some money in the quarter where they occur. ... These short-term stimuli ... don't change aggregate demand
There's more, but you get the idea. Read it if you want, but the rest of the interview isn't any better. It's mostly the standard austerity line that doesn't make a whole lot of sense in our present circumstances. But it does advance the conservative ideological agenda.

Forty Years after the Grape Boycott

Posted: 30 Jul 2010 12:24 AM PDT

Forty years later, how much has changed?:

Forty years later, grape boycott still a huge accomplishment, by Alvaro Huerta, The Berkeley Blog: Forty years ago, workers in the United States won a great victory.
On July 29, 1970, the United Farm Workers of America (UFW) ended its successful grape boycott when the growers agreed to sign the first contract with the union.
It seemed like an improbable outcome, as the battle pitted a mostly Mexican as well as Filipino immigrant workforce against powerful agricultural growers in California.
Led by the late Cesar Chavez and tireless Dolores Huerta, the UFW was founded in the early 1960s in response to the inhumane working conditions for farmworkers in California and other states...
In an effort to seek justice, dignity and respect in the rural fields of America, UFW leaders, its members and sympathizers organized and joined picket lines and marches, signed petitions, supported labor laws, lobbied elected officials, distributed educational flyers, produced documentaries, penned songs, performed plays, held teach-ins and generally supported the nationwide boycott.
The charismatic Chavez ... engaged in numerous and lengthy hunger strikes to draw attention to the cause.
As was the case with the civil rights movement, many UFW activists were beaten up and a few were killed for the simple act of supporting the right of farmworkers to organize a union and negotiate for fair labor contracts. But the rightness of their cause prevailed.
So inspirational was it that Barack Obama, when he was a candidate for president, adopted the group's slogan: "Si, Se Puede" ("Yes, We Can").
Now, 40 years later, farmworkers continue to toil under harsh working conditions. ...
The best way to honor this 40th anniversary of the UFW's landmark success would be to support humane labor law reform for farmworkers and to strengthen the right to organize.
Si, Se Puede!

links for 2010-07-29

Posted: 29 Jul 2010 11:04 PM PDT

"John Stewart Mill vs. the European Central Bank"

Posted: 29 Jul 2010 10:10 AM PDT

Brad DeLong:

John Stewart Mill vs. the European Central Bank, by J. Bradford DeLong, Commentary, Project Syndicate: One of the dirty secrets of economics is that there is no such thing as "economic theory." There is simply no set of bedrock principles on which one can base calculations that illuminate real-world economic outcomes. We should bear in mind this constraint on economic knowledge as the global drive for fiscal austerity shifts into top gear.
Unlike economists, biologists, for example, know that every cell functions according to instructions for protein synthesis encoded in its DNA. Chemists begin with what the Heisenberg and Pauli principles, plus the three-dimensionality of space, tell us about stable electron configurations. Physicists start with the four fundamental forces of nature.
Economists have none of that. The "economic principles" underpinning their theories are a fraud – not fundamental truths but mere knobs that are twiddled and tuned so that the "right" conclusions come out of the analysis.
The "right" conclusions depend on which of two types of economist you are. One type chooses, for non-economic and non-scientific reasons, a political stance and a set of political allies, and twiddles and tunes his or her assumptions until they yield conclusions that fit their stance and please their allies. The other type takes the carcass of history, throws it into the pot, turns up the heat, and boils it down, hoping that the bones will yield lessons and suggest principles to guide our civilization's voters, bureaucrats, and politicians as they slouch toward utopia. ...[continue reading]...

July 29, 2010

Latest Posts from Economist's View

Latest Posts from Economist's View

Placing the 2006/08 Commodity Price Boom into Perspective

Posted: 29 Jul 2010 01:17 AM PDT

This was controversial at the time, particularly the role of speculation: What caused the 2006-2008 commodity price boom?:

Placing the 2006/08 Commodity Price Boom into Perspective, by John Baffes: The 2006-08 commodity price boom was one of the longest and broadest of the post-WWII period. The price boom emerged in the mid-2000s after nearly three decades of low and declining commodity prices (see figure). The long-term decline in real prices had been especially marked in food and agriculture. Between 1975-76 and 2000-01, world food prices declined by 53 percent in real US-dollar terms. Such price declines raised concerns, especially with regard to the welfare of poor agricultural producers. ... Starting in the mid-2000s, however, most commodity prices reversed their downward course, eventually leading to an unprecedented commodity price boom.

Source: World Bank, Development Prospects Group

Between 2003 and 2008, nominal prices of energy and metals increased by 230 percent, those of food and precious metals doubled, and those of fertilizers increased fourfold. The boom reached its zenith in July 2008, when crude oil prices averaged US$ 133/barrel, up 94 percent from a year earlier. Rice prices doubled within just five months of 2008... The price surge led to a various heated debates on its causes and its consequences, including the role of biofuels, speculation, policy reactions, and, most importantly, whether high agricultural prices are beneficial or harmful to the poor. A paper we just published revisits the causes of the boom...

Apart from strong and sustained economic growth, the price boom was fueled by numerous factors including low past investment in extractive commodities, weak dollar, fiscal expansion and lax monetary policy in many countries, and investment fund activity. On the other hand, the combination of adverse weather conditions, the diversion of some food commodities to the production of biofuels, and government policies (including export bans and prohibitive taxes) brought global stocks of many food commodities down to levels not seen since the early 1970s, created a "perfect storm" further accelerating the price increases that eventually led to the 2008 rally. The weakening and/or reversal of these factors coupled with the financial crisis that erupted in September 2008 and the subsequent global economic downturn induced sharp price declines across most commodity sectors. Yet, the main price indices are still twice as high compared to their 2000 real levels, begging once more the question about the real factors affecting them.

The paper concludes that a stronger link between energy and non-energy commodity prices has been the dominant factor in the boom of agricultural and food prices, and is likely to be the dominant influence on developments in commodity, and especially food, markets. The analysis shows that demand by emerging economies, often cited as a key factor behind the food price surge of 2008, in fact it was much less of a factor than is often sited. The paper also argues that the effect of biofuels on food prices has not been as large as originally thought. On the other hand, the use of commodities by financial investors (the so-called 'financialization of commodities') may have been partly responsible for the 2007/08 spike. Finally, econometric analysis of the long-term evolution of commodity prices supports the view that price variability overwhelms price trends. This conclusion implies that suggested policy actions essentially aiming to alleviate the impacts of price spikes on developing countries through reliance on some level of buffer stocks ... risk reproducing the failure of previous collective measures designed to prevent the decline or reduce the variability of prices.

"The Weight Watchers"

Posted: 29 Jul 2010 12:42 AM PDT

Should government "vilify" unhealthy products?:

The weight watchers, by Edward L. Glaeser, Commentary, Boston Globe: ...Should public policy respond to our expanding waistlines with benign neglect, traditional taxes and regulation, or sophisticated psychology?
Benign neglect is the policy preference of libertarians who argue that what we eat is our own business and that there's a lot to like about a steak or a sundae. ...
I share the libertarian faith in personal freedom, but there are good reasons for public health-related interventions. People don't bear the full costs of illnesses, which drain the public coffers and impose hardship on friends and relatives. ... Some anti-obesity policies can also be justified as a counterweight to the diabetes-supporting subsidies of cheap corn syrup.
The oldest, simplest, and most extreme alternative to the libertarian approach is an outright ban, which unfortunately also promotes a black market. The modern, more moderate variants of prohibition are place-specific, such as restricting the sale of junk food in schools... That intervention is easy to defend since the state has a responsibility for the well-being of children..., and public schools are already public space.
But widespread bans on soda sales are neither feasible nor desirable, which leads us to sin taxes, like those on tobacco and alcohol, that attempt to balance individual freedom with public health. ... Taxes are a relatively efficient means of limiting activities that impose costs on others, but since poorer people consume more unhealthy food,... taxing that food is regressive.
It is more difficult and expensive to prepare food that is both tasty and healthy than unhealthy tasty food (ladle on the fat, salt and sugar), which helps explain the link between poverty and obesity. ...
The political unattractiveness of taxation has led some to support subsidizing ... the magic of Madison Avenue to make people shun unhealthy products. New York City embraced these counter-consumption policies with graphic anti-smoking signs and vivid ads that make it seem as if soda drinkers are gargling down fat. ...
Encouraging exercise makes sense, but there is much less to like about public programs that vilify activities practiced by thousands of citizens. In a sense, these public announcements are just revenue-less taxes... — the fact that the higher cost is psychological rather than financial is purely accidental.... Stigmatizing the food choices of the poor is no less regressive than taxing them. ...

Soda taxes, bans on junk food in schools, and even reform of the food stamp program are all serious responses to the obesity problem. But there is plenty to dislike about public attempts to demonize different types of consumption..., we are better served by a government that keeps to taxation rather than vilification.

I think there are two things here that need to be kept separate in the arguments Glaeser is making. First, there is the use of taxes to correct for market failure due to the presence of externalities in the consumption of legal goods. If people are imposing substantial costs on others, and if taxes, regulation, and the like are ineffective corrections, then perhaps vilification should be considered as a remedy, but only as a last resort. Second, taxes are used to discourage the use of products we'd like to make illegal, but don't due to worry that an outright ban will the create problems such as black markets that are even more troublesome than the banned activity itself. Here, since we'd like to make the good illegal but don't due to practical concerns, vilification does not seem to be as objectionable as a means of discouraging the behavior.

There are instances, e.g. anti-littering campaigns, where vilification does seem to be the best approach. In part, this is because it's difficult to police and hence difficult to stop through traditional policing and penalties. But littering is illegal, so there doesn't seem to be much of an issue with demonizing this activity. The question is about vilifying legal goods, should the government do that? If it's something that is difficult to tax monetarily or to police effectively, e.g. not letting people into traffic on the freeway which slows traffic generally and causes external effects, then perhaps social vilification of the behavior is the best solution to the problem.

I'm not sure I have this right, but it's late and I'm supposed to be on vacation so I'll leave it at that. My gut instinct is against government ever demonizing anything, so I'm not fully comfortable with calling for government to start nagging people about what they choose to eat, etc. What do you think? Is vilification ever okay? If so, when?

links for 2010-07-28

Posted: 28 Jul 2010 11:04 PM PDT

Day after Day

Posted: 28 Jul 2010 10:35 AM PDT

When I first started this blog, I had no expectations at all. I thought a few people might visit, family and acquaintances mostly, and I wasn't so sure about them, but nothing more than that. But, surprisingly to me, it slowly began gathering more and more visitors after some noteworthy help from other bloggers that brought it to people's attention. I was lucky to get that help, and entering the econoblogosphere earlier rather than later didn't hurt either.

As the number of visitors started growing, I became afraid that if I missed a day posting, the traffic growth would somehow stop, the regulars would go away, etc. I'm not sure what the fear was exactly looking back now, but being relatively risk averse I posted every day, always promising myself that once the traffic growth leveled off and things stabilized, I'd take a break. At least for a day or two.

As far as I can recall, I haven't missed a single day in the five and a third years that I've been doing this. Maybe there was a day somewhere, but I can't remember one. Mostly I don't mind, this has been the most surprising thing I've ever done and there's always something new and unexpected around the next corner, some good, some I'd rather not have to deal with, but it does pass the time. I have trouble pulling myself away from blogging rather than having to force myself to do it, but there are days now and again when posts are a bit forced and I tell myself that I really, really need a break from this. Especially, when, as lately, I find myself getting pretty cranky at small provocations (and the things I don't say...).

Traffic is still growing, though the pace has slowed, particularly since the financial crisis has eased, but the fear that somehow it would all evaporate if I miss a day or two, or whatever it was I was afraid of, is not as strong as it once was. But I still can't do it. I still can't bring myself to voluntarily miss a day (I know, I know).

However, I need to get away for a bit, at least from the usual surroundings. In part it's because I've agreed to be Associate Department Head for the next two years and that will keep me plenty busy. It's about to begin, so this is the last chance to get away before that happens.

So I am leaving Eugene today. Where am I going? I have no idea, I just decided to do this, so I am simply going to get in the car and see where I end up. The most likely direction initially is east, maybe south, but that's about all I know. I did this once before and it turned out well, so I'll just go where I feel like it each day and see what happens, starting with today.

I'll do my best to keep posting every day, but I may end up doing a lot of "echo" posts, i.e. a very short here's whatever followed by excerpts (as I do generally when time is short). I'll try to keep up on daily links. We'll see how it goes.

"Making Sense of the Climate Issue"

Posted: 28 Jul 2010 10:17 AM PDT

Jeff Sachs:

Making Sense of the Climate Impasse, by Jeffrey D. Sachs, Commentary, Project Syndicate: All signs suggest that the planet is still hurtling headlong toward climatic disaster. ... Yet still we fail to act.

There are several reasons for this... First, the economic challenge of controlling human-induced climate change is truly complex. Human-induced climate change stems from two principal sources of emissions...: fossil-fuel use for energy and agriculture (including deforestation...). Changing the world's energy and agricultural systems is no small matter. ... We need a practical strategy for overhauling two economic sectors that stand at the center of the global economy and involve the entire world's population.

The second major challenge in addressing climate change is the complexity of the science... This scientific understanding is incomplete, and there remain significant uncertainties about the precise magnitudes, timing, and dangers of climate change. The general public naturally has a hard time grappling with this complexity and uncertainty, especially since the changes in climate are occurring over a timetable of decades and centuries...a

This has given rise to a third problem in addressing climate change, which stems from a combination of the economic implications of the issue and the uncertainty that surrounds it. This is reflected in the brutal, destructive campaign against climate science by powerful vested interests and ideologues, apparently aimed at creating an atmosphere of ignorance and confusion.

The Wall Street Journal, for example,... has run an aggressive editorial campaign against climate science for decades. ... Major oil companies and other big corporate interests also are playing this game... Their general approach is to exaggerate the uncertainties of climate science and to leave the impression that climate scientists are engaged in some kind of conspiracy to frighten the public. ...

If we add up these three factors – the enormous economic challenge of reducing greenhouse gases, the complexity of climate science, and deliberate campaigns to confuse the public and discredit the science – we arrive at the fourth and over-arching problem: US politicians' unwillingness or inability to formulate a sensible climate-change policy. ...

When Barack Obama was elected US president, there was hope for progress. Yet, while it is clear that Obama would like to move forward on the issue,... special interest groups have dominated the process, and Obama has failed to make any headway.

The Obama administration should ... try ... an alternative approach. Instead of negotiating with vested interests in the backrooms of the White House and Congress, Obama should present a coherent plan to the American people ... for phasing in ... changes over time, and demonstrate that the costs would be modest compared to the enormous benefits.

Strangely, despite being a candidate of change, Obama has not taken the approach of presenting real plans of action for change. His administration is trapped more and more in the paralyzing grip of special-interest groups. Whether this is an intended outcome, so that Obama and his party can continue to mobilize large campaign contributions, or the result of poor decision-making is difficult to determine – and may reflect a bit of both.

What is clear is that we are courting disaster as a result. Nature ... is telling us that our current economic model is dangerous and self-defeating. Unless we find some real global leadership in the next few years, we will learn that lesson in the hardest ways possible.

July 28, 2010

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A Triple Dip?

Posted: 28 Jul 2010 01:17 AM PDT

Michael Boskin:

...Double-dip downturns are more the rule than the exception. If we focus on real GDP and define a double dip as a historical sequence in which a period long enough to be declared a recession is followed by a period of recovery, and then quickly followed by a second outright recession, the 1980-1982 period in the US is a classic example. In fact, defined more loosely as a sequence that includes periods of growth followed by periods of decline, followed by further periods of growth and decline, the 1973-1975 period in the US, with eight quarters of alternating gains and losses in real GDP, was one quadruple-dip recession.
These are not rare occurrences. Around the same time, Germany had this type of double dip and the UK a quadruple dip. In the early 1980's, the UK, Japan, Italy, and Germany all had double dips. America's 2001 recession was one brief, mild double dip. Within the current recession, we have already had a double dip; a dip at the beginning of 2008, then some growth, then another long, deep dip, then renewed growth. If the economy declines again – a highly plausible prospect – we would have a triple dip, although perhaps not an outright second recession. ...
Double dips, triple dips, and quadruple dips have been America's recessionary experience since WWII. And similar episodes have been common in many other countries. ... While the baseline forecast seems to be slow global growth – in the US around 3%, about half the usual pace following deep recessions – history suggests that another decline would hardly be surprising before sustained stronger growth emerges.

Martin Feldstein:

Recent US data have clearly raised the probability that the economy will run out of steam and decline during the next 12 months. The key reason for increased pessimism is that the government stimulus programs that raised spending since the summer of 2009 are now coming to an end. As they have wound down, spending has declined. The government programs failed to provide the "pump-priming" role that was intended. They provided an early spark, but it looks like the spark did not catch. ...
Although annual GDP growth was 3% in the first quarter of this year, almost all of it reflected inventory accumulation – some of which, no doubt, was unwanted build-up caused by disappointing sales. When inventory accumulation is excluded, first-quarter growth of "final sales" was just 0.8% in annual terms – and 0.2% compared to the fourth quarter of 2009.

The second quarter benefited from a surge in home purchases, as individuals rushed to take advantage of the tax subsidy for home buyers that expired in April. But what will happen in the third quarter and beyond now that that program has ended? While it would be rash to forecast a double dip as the most likely outcome..., many of us are raising the odds that we attribute to such a downturn. ...

To reduce the chance of this happening, policymakers should have already put policies in place to provide additional stimulus as insurance against this outcome. But they will wait until another dip actually happens before even beginning to deliberate seriously, and by then it will be too late for policy to do much to offset the dip in the economy. Thus, even though it will be too late to get insurance once the economy is already evidently sick -- insurance that is a bargain due to low interest rates -- we have decided to go forward uninsured, and hope for the best.

Do Kindergarten Teachers Matter?

Posted: 28 Jul 2010 01:08 AM PDT

I can barely remember anything about kindergarten, even the teacher's name:

The Case for $320,000 Kindergarten Teachers, by David Leonhardt, Ny Times: How much do your kindergarten teacher and classmates affect the rest of your life? ... Great teachers and early childhood programs can have a big short-term effect. But the impact tends to fade...— which raises the demoralizing question of how much of a difference schools and teachers can make.
There has always been one major caveat, however, to the research on the fade-out effect. It was based mainly on test scores, not on a broader set of measures... As Raj Chetty ... says: "We don't really care about test scores. We care about adult outcomes."
Early this year, Mr. Chetty and five other researchers set out to fill this void. They examined the life paths of almost 12,000 children who had been part of a well-known education experiment in Tennessee in the 1980s. The children are now about 30...
On Tuesday, Mr. Chetty presented the findings — not yet peer-reviewed — at an academic conference... Just as in other studies, the Tennessee experiment found that some teachers were able to help students learn vastly more than other teachers. And just as in other studies, the effect largely disappeared by junior high... Yet when Mr. Chetty and his colleagues took another look at the students in adulthood, they discovered that the legacy of kindergarten had re-emerged.
Students who had learned much more in kindergarten were more likely to go to college than students with otherwise similar backgrounds. Students who learned more were also less likely to become single parents. As adults, they were more likely to be saving for retirement. Perhaps most striking, they were earning more. ... Over time, the effect seems to grow, too. ...
Now happens to be a particularly good time for a study like this. With the economy still terribly weak, many people are understandably unsure about the value of education. ...  But.... Education itself can make a difference. ...
Mr. Chetty and his colleagues ... estimate that a standout kindergarten teacher is worth about $320,000 a year. ... This estimate doesn't take into account social gains, like better health and less crime. Obviously, great kindergarten teachers are not going to start making $320,000 anytime soon. Still, school administrators can do more than they're doing. ... Given today's budget pressures,... that's all the more reason to focus our scarce resources on investments whose benefits won't simply fade away.

links for 2010-07-27

Posted: 27 Jul 2010 11:02 PM PDT

Income Inequality, International Payments Imbalances, and Crises

Posted: 27 Jul 2010 06:03 PM PDT

Robert Wade argues that national income inequality and international payments imbalances played a significant role in the financial crisis, and if these issues are not addressed, the problems are likely to reoccur:

We Must Go beyond Microeconomic Regulation to Stabilize the Financial System, by Robert Wade: Responding to Jeff Madrick's recent post on the US financial regulation legislation, Triple Crisis guest blogger Robert Wade argues for the need to consider "external" causes of the global financial crisis.
I agree with and admire the lucidity of Jeff Madrick's post... But ... the focus on [microeconomic] financial regulation obscures the important role of "external" causes in contributing to financial instability (external to national financial systems), and obscures the pressing need for policy reforms to curb these external causes. I highlight two external causes: (1) national income inequality; and (2) international payments imbalances. I argue that if high income inequality and large international payments imbalances are not curbed,... microeconomic efforts to re-regulate and re-structure national financial systems will be eroded or swamped by the force of these more macroeconomic external causes.
On the role of income inequality, in the United States between 1976 and 2007 the top 1% of income recipients received almost 60% of ... real income growth. The figure is even more stunning if one takes just the 2000s: the top 1% received more than 70% of the total increase. On the other hand, through the 1990s and 2000s incomes in the bottom half of the American income distribution have stagnated.
One channel by which this soaring inequality contributed to financial instability is reasonably well known. The great bulk of the population on stagnant or near-stagnant incomes tried to increase their consumption and investment by borrowing. With easy access to credit they provided a rising demand for non-prime mortgages, car loans and the like. Their demand pushed up house prices, which enabled them to borrow against the rising value of their houses – to reach levels of debt completely unsustainable ... in the event that house prices stopped rising. ...
The other channel has received less attention, and it relates to the direct effect of the concentration of income and wealth at the very top. People at the top – high net worth individuals, investment funds, pension funds and the like – greatly increased the demand for complex financial products as they searched for ways to store their wealth. The proliferating billionaires around the world pressured organizations like Goldman Sachs and JP Morgan to supply them with complex financial securities. The investment banks generated huge fee and commission revenues by obliging, and neoliberal economic principles allowed the regulators to believe that the surging growth of complex financial instruments must be to the social benefit.
As long as this external pressure to supply complex financial securities for the super-rich to store their wealth continues, the financial system will remain prone to generate bubbles, followed by crashes. We know that modern capitalism can flourish with a much more equal distribution of income and wealth than in the United States, Britain and many other OECD countries. Reformers should use this argument to press for globally coordinated policy action to close down tax havens (to prevent tax avoidance), and to make the tax burden progressive rather than regressive, as it now tends to be, including capital gains.
The second deep external cause of financial instability is global payments imbalances. The key point is that the present system of international financial transactions ... tends to make finance the "master" and the real sector its "servant"... This relationship is a key driver of financial crises, and the key policy question is how to make the real sector the master and the financial sector its servant.
For example, Iceland (from where I write) over the 2000s had a floating exchange rate and unrestricted capital inflows. The result was something which the economics textbooks said should not happen:... huge trade deficits and at the same time the krona appreciated in value... According to the textbooks, the krona should have depreciated, so that ... the trade deficit would go down. But it did not. The government allowed free inflows of capital, and capital surged in to take advantage of Iceland's high interest rates compared to rates in Japan, Switzerland and elsewhere (the central bank set high interest rates to try to curb the inflationary pressure caused by the money inflow). The inflow of capital pushed up the value of the krona, and the government assured the people – quite wrongly — that the high value of the krona reflected international confidence in Iceland, including in its banks.
In our present international financial system a country can be flooded with capital inflows (like Iceland), and must then let its currency appreciate or (if the exchange rate is fixed) suffer inflation; or both. Either way the trade deficit will worsen as exports fall and imports increase. Hence capital flows become the master and the trade flows become the servant, rather than the other way around. The toxic effect is to make many economies around the world vulnerable to a sudden withdrawal of capital, as happened in East Asia in 1997-98 and in Iceland, the Baltics and east and central Europe in 2008-09.
Without reforms to curb both these causes of financial instability we will likely experience further serious crises over the next decade. The sheer magnitude of the demand for complex securities in which the swelling ranks of the super-rich can store their wealth will swamp efforts to keep banks within prudential limits; as also will the sheer magnitude of cross-border capital flows (which are also a function of high income and wealth inequality at the top). ... The question is how progressive forces can exercise countervailing pressure, and what policy and structural changes they should advocate. Progressive tax reform and restrictions on capital flows in unstable times (and at least blue sky discussion of how a mechanism of coordinating exchange rate changes might be established) should be high on the agenda.

"Government as Deux Ex Machina"?

Posted: 27 Jul 2010 04:50 PM PDT

Dave Henderson has responded to my post earlier today (responding to a post of his), and I probably did overreact to the title of his initial post -- the title I chose for my post was clearly motivated by his title choice. The title was based upon what seemed to me to be a mischaracterization of my views, and that was a large part of what prompted my response (so in his description below, if annoyed=hurt feelings, he has it right). Also, the feeling that he was trying to paint me into an ideological corner led me to return the favor, but I was overly stark in my characterization.

So I appreciate this:

Government as Deux Ex Machina, by David Henderson: The above title should have been the title of my previous post. The title I gave it, "Mark Thoma Doesn't Get It," was unnecessarily provocative, as one of my co-bloggers has pointed out. I know the myth of male power, and part of it is that we men are not supposed to have feelings. We do have feelings. I think, based on his reaction in a subsequent post, that I hurt Mark Thoma's feelings. I didn't mean to. It was thoughtless of me to think that with that title, I wouldn't upset him. What I really meant to do is talk about the following:
When people advocate government intervention, they rarely, maybe never, tell us how the incentives will be set up so that government will do the right thing. Think about how asymmetric the argument is. Incentives in the private sector are such that someone will do something in his interest that hurts others in society, but he doesn't take account of that hurt in his decision. Or, someone could take action that would benefit others a great deal but it isn't in his interest to take the action. Notice the use of reasoning about incentives to show why the market fails. Therefore, continues the argument, we should have government intervene.
Did you catch the non sequitur? The argument proceeds at first using standard economic tools. We show that the incentives are such that the private actors make the decision that leads to sub-optimal results. Then we (not really we, but many of us) conclude that government should step in. But there's no analysis of government incentives. Why would government do the right thing? That's the unjoined debate. The late George Stigler once said it's like a judge at a beauty contest seeing just the first contestant and then awarding the prize to the second contestant.
I wasn't naive enough, as Mark Thoma suggests in his response, to think that he has "unqualified support for regulation." Also, he has been critical of specific regulations. One of the things that makes his blog interesting is his eclectism. I was just saying that although I read his blog a fair bit, I've never seen him, when he advocates a regulation or a government program, explain why he thinks the incentives will be set up so that it works. I had hoped to get him to address this. It would still be nice if he would. ...

I don't have time to deal with this directly at the moment by writing something new, but the implicit suggestion that I have ignored these issues is also part of what prompted my initial reaction. Here's one example that comes to mind showing that the suggestion that these issues are "never" discussed doesn't hold up. This relates to his call to discuss how the incentives associated with a government program, and how the incentives will be set up so that it works:

To look at the economics of this proposal, I decided to examine a fairly standard textbook treatment of the topic where a tax on each gallon of gas consumed is imposed along with a lump-sum tax rebate to consumers on an equal per capita basis. (I hope the microeconomists won't mind a macro guy stumbling around in their territory. This proposal is discussed in Pindyck and Rubinfeld 5th ed., pgs. 114-115.)
Here's a graph of what happens before and after the tax, and after both the tax and the rebate.
Click on figure to enlarge
The consumer starts out at point A consuming QA gallons of gasoline and has a utility level of U2. After the tax, which rotates the budget line downward as shown by the dashed budget constraint, the consumer moves to point B which is on a lower indifference curve U1, and consumption falls to QB. Finally, after the rebate which shifts the budget line outward, the consumer moves to point C and consumption increases to QC (the tangent indifference curve at point C is omitted for clarity).
Overall, the consumption of gasoline has fallen, as intended, and the consumer is worse off because the level of utility attainable at point C is below the level U2 at point A. Even though the money comes back to consumers in the form of a rebate, the reason consumption falls from A to C is because the income elasticity of demand for gasoline is relatively low (around .3 by some estimates) so that the substitution effect dominates the income effect.
In this example, a low-income household would be made worse off by the tax and rebate proposal (because indifference curve U2 is no longer attainable), but it's still possible for some low-income individuals, those who consume less gas than the value of the lump-sum rebate, to benefit. However, the substitution effect induced by the tax makes the average household worse off. To aid low income individuals, other proposals such as linking the size of the rebate to income could be examined as well.
Finally, this highlights the costs to households, but there are also potential benefits. To assess the proposal, the costs must be compared to the benefits from reduced dependence on foreign oil and the additional security that brings about, and the environmental and other benefits from lower consumption of gasoline.

That sure seems like a "textbook" analysis of the incentives and outcomes surrounding a potential government policy to me, including why it works to reduce consumption. And, though that was the first example to come to mind and it's a bit dated at this point, there's plenty more where that came from (e.g., today's post called "Puzzled" brings up the topic of market-based regulation which gets at the heart of the incentive problem -- I've explained in the past why I favor a market-based regulatory approach -- and this version of the original post from Schmalensee and Robert Stavins has an extensive set of links to research on the topic). Should I ask to see his blog entries going into this much detail when he objects to government programs? Nah, I won't do that. But I will keep the suggestion to discuss the incentives in mind as I write about these issues in the future. So thanks for that.

Update: A comment suggests:

mark the knock is on regulators motives and incentives
not on the impact on citizens

I thought the challenge included government policies as well, and since this is getting tiresome -- I didn't start all this and I'd like to do something else today -- I thought I'd stop there. But ok, I'll briefly address this. One of the points of market-based regulation mentioned above is to help with the regulator incentive problem, and I've talked about the incentives of regulators many times in the past. This may not be the best example, but a very quick search brings up:

regulators of these markets were captured by powerful forces that wanted the game to continue. The power of regulators, and the will to enforce the regulations, must match - in fact exceed - the will and power of those being regulated to resist having constraints placed on their behavior. I've talked about why ideology may have eroded the will of regulators, but their will is partly a function of their power. So long as we allow huge, clearly over-sized financial institutions to exist, this problem will potentially be present. Therefore, if the current anti-trust legislation is adequate to the task, then yes, let's give regulators the power to enforce it, and ensure we have people in place with the will to do so. ...

It's perhaps not expressed as clearly as I'd like, and may not talk enough about how to solve the incentive problem, but the term "will" is meant to refer to the incentives regulators face along with their underlying regulatory philosophy. And it does suggest that breaking up politically powerful banks under existing or, if necessary, new legislation will help to prevent regulatory capture and improve incentives (by removing bad ones). So a solution to the incentive problem isn't altogether ignored either. Anyway, that's enough time on this. Once again, even though I'm convinced I've addressed these issues in the past, I will keep this in mind as these issues come up in the future.


Posted: 27 Jul 2010 12:33 PM PDT

Robert Stavins and Richard Schmalensee are puzzled by conservative opposition to cap and trade:

The Power of Cap-and-Trade by Richard Schmalensee and Robert Stavins: Last week, the Senate abandoned its latest attempt to pass climate legislation... In the process, conservative Republicans dubbed the cap-and-trade system "cap-and-tax.'' Regardless of what they think about climate change, however, they should resist demonizing market-based approaches to environmental protection...
In fact, market-based policies should be embraced, not condemned by Republicans (as well as Democrats). After all, these policies were innovations developed by conservatives in the Reagan, George H. W. Bush, and George W. Bush administrations (and once strongly condemned by liberals). [gives several examples, e.g. Reagan's use of cap-and-trade system to phase out leaded gasoline, and George H. W. Bush's use of cap-and-trade system to reduce acid rain] ...
To reject this legacy and embrace the failed 1970s policies of one-size-fits-all regulatory mandates would signify unilateral surrender of principled support for markets. If some conservatives oppose energy or climate policies because of disagreement about the threat of climate change or the costs of those policies, so be it. But in the process of debating risks and costs, there should be no tarnishing of market-based policy instruments. Such a scorched-earth approach will come back to haunt when future environmental policies will not be able to use the power of the marketplace to reduce business costs. ... Market-based approaches to environmental protection – including cap-and-trade – should be lauded, not condemned, by political leaders, no matter what their party affiliation. Demonizing cap-and-trade in the short term will turn out to be a mistake with serious long-term consequences for the economy, for business, and for consumers. ...[full article with added links]...

Mike Rorty is puzzled by Megan McArdle's attack on Elizabeth Warren:

Megan McArdle's Hack Post on Elizabeth Warren's Scholarship, by Mike Rorty: So Megan McArdle wrote a long post attacking Elizabeth Warren as a scholar. What's surprising is how little "there-there" there is to her critique. I would love to see nomination hearings based around how expansive of a definition to use for medical bankruptcies and watching Warren rip the face off of Senators when it comes to empirical methods. I doubt it is going to come to this, but I'll go ahead and respond. (I've been waiting for part two to respond, which I assume may not show up.)
Because that isn't what this is about. It's about giving the impression that Warren is a weak scholar. Given that Warren is considered "the leading authority in the country on bankruptcy law," being called a hack by McArdle, of all people, is something. Especially when we get a gem of a major screwup like this right out the door in the post: ...[continue reading]... 

Jeff Frankel is puzzled by conservative opposition to extending tax cuts for those making less that $250,000 per year:

Will Republicans Really Block Tax Cuts Because They Go Only to Earners Below $250K?: President Obama proposes allowing the Bush tax cuts to expire next year — as they are scheduled to do if nothing is changed — for those earning more than $250,000, but changing the law so as to extend the tax cuts for those earning less than that amount. Republican politicians are opposing the proposal. I don't understand what they are thinking. Their position doesn't make sense to me, regardless whether they are thinking about short-term stimulus, long-term fiscal conservatism, good economics, or even pure politics. ...
Jeff Frankel's criticism has more elements than this (and I disagree with his Social Security point), but I want to note this part of his argument:
If you were going after stimulus, and believed that only tax cuts created stimulus, the priority should be in other areas like extending the Making Work Pay provisions for low-income workers, which are also set to expire. This proposition holds regardless whether (i) your idea of stimulus is Keynesian demand expansion (the lower-income workers have a higher marginal propensity to consume), OR even if (ii) your idea of stimulus is purely enhanced incentives to work (lower income workers face overall effective marginal tax rates that are often higher than the rich face, when one factors in payroll taxes, etc.) Alec Phillips of GS US Global ECS Research points out that the amount of revenue (and stimulus) that is at stake in the expiration of Making Work Pay is greater than in the expiration of tax cuts for those over $250,000, and yet the latter question is getting all the attention and the former question is getting no attention. ...
If we want to achieve short-term fiscal stimulus from the viewpoint of good economics, then we should realize that well-chosen spending programs give far more bang-for-the-buck than most tax cuts. ... Examples of well-chosen spending programs include aid to the states (which Republican congressmen have been voting down) so that the states don't have to lay off firemen, policemen, bus drivers and teachers. Examples of tax cuts with much less bang for the buck include not just those for the rich (e.g., the abolition of the estate tax), but even garden-variety income tax cuts, because they are largely saved. Don't take my word for it. Martin Feldstein (whose work on taxes and incentives led to the supply side revolution, and who was the Chairman of Reagan's Council of Economic Advisers) argues that virtually all of the income tax cut that George W. Bush passed in 2008 was saved by households rather than spent, and predictably so, and that government spending would bring more short-term stimulus. ...[read more]...

Brad DeLong is puzzled by Ross Douhat's gig as an opinion writer for the NY Times:

Why Is Ross Douthat on the New York Times's Editorial Page?, by Brad DeLong: Why oh why can't we have a better press corps?
Is there any respect--any respect--any respect at all in which the New York Times would not be a better publication if Ross Douthat were removed, and replaced by David Leonhardt?
I cannot think of any.
Here's David Leonhardt explaining why what the New York Times prints from Ross Douthat on its op-ed page is worse than tripe: ...[continue reading]...

Niall Ferguson is (or ought to be) puzzled by his own arguments:

Matthew Yglesias and Ryan McNealy: Niall Ferguson Debates Himself: I've been known to remark on the conservative movement's strong adherence to Keynesian arguments as a justification for tax cuts in the wake of the mild 2001 recession, adherence that seems puzzling in light of their contrary rhetoric in the wake of the cataclysmic 2008-2009 downturn. Brad DeLong observes that one particularly hilarious example of this is historian-turned-pundit Niall Ferguson who wrote a December 12, 2003 article on the Bush administration that's in considerable [disagreement] with his contemporary take on things. DeLong requests a Ferguson v Ferguson debate, and with assistance from Ryan McNeely I'm prepared to unveil one. 2003 Ferguson is in boldface, 2010 Ferguson is in italics: ...[continue reading]...

Paul Krugman is puzzled by the editorial process for conservatives:

When I quote someone in my column, I supply the source material, and my copy editor checks, not just to be sure that the quote is accurate, but that it's not taken out of context. But I guess such rules don't apply if you're a conservative.

Tyler Cowen is puzzled by the tone on econoblogs lately (and though I see no need to back off at all, I may have contributed):

The economics blogosphere is getting decidedly testier lately, especially today.

What are you puzzled about?

David Henderson Proves He Can't Read

Posted: 27 Jul 2010 09:18 AM PDT

A response to Dave Henderson:

I knew Dave Henderson was challenged at times in breaking out of the pre-determined conclusions that his ideology gives him, but I thought he could at least read. Turns out he can't. He says:

Mark Thoma Doesn't Get It, by Dave Henderson: Government as Deux Ex Machina

Almost all economists recognize that there are some market failures that must be corrected by government intervention, the disagreement is over their prevalence. Some economists see widespread and costly market failures, and that government can intervene effectively to overcome them.
This is from Mark Thoma.

Notice a category missing? The category includes me. It's economists who do "see widespread and costly market failures" but don't see how "government can intervene effectively to overcome them." The debate between advocates of government intervention like Mark and critics like me is still unjoined--by Mark. What he has not shown us and, more upsetting, what so few advocates of government intervention even try to show us, is how a government regulator will have the right incentive to do the right thing. Will the government regulator be fired if he screws up? Not typically. Will he get a huge bonus if he does something right? Not typically. And how, with a centralized information system, will he get the information needed to make a good decision, something I wrote about in the context of dealing with terrorism? I don't read Thoma as much as Arnold does, but I read him a fair bit and I've never seen him deal with these issues. Have you?

Notice first that Henderson left this out:

More libertarian types tend to both see fewer market failures and, more importantly, believe that government is not very effective in intervening to correct problems. It's only very large, very obvious cases where government can help, and those are far and few between. Some never see them at all.

The "more importantly" part was intended to acknowledge precisely the point Henderson is making. So the first point to make in response is that Henderson seems to have tried to intentionally mislead people by only quoting part of what I said, or he didn't read carefully. I'll take the charitable interpretation that he cannot read. After all, it was hidden in the very next sentence.

Given that he's misrepresented what I said, I see no need to respond to the rest of his criticism, but the idea that I have never discussed the limitations and incentives regulators face is flat wrong. I don't have time to dig out more, and criticism from Henderson is not really worth devoting much time to it, so I'll just choose the very last thing I wrote on this topic a couple of days ago (the first entry in the "market failure" category):

The fact that Fannie and Freddie were allowed to follow private sector into risky markets when they began losing market share to private sector firms, and the failure to adequately regulate the risk that private sector institutions could take undermines faith in regulators and makes the case for Fannie and Freddie murky.
I still think that, overall, having Fannie and Freddie was beneficial, and I'll give lukewarm support for these institutions. But that support is conditional upon the expectation that regulators will do a better job of monitoring and regulating the amount of risk that is present in financial markets. ... We need to do a better job than we have in the recent past of regulating the amount of risk that banks can take in response to the insurance that they get from the implicit government support of Fannie and Freddie. If we can't, then the case for the existence of Fannie and Freddie is much harder to make.

That doesn't look like unqualified support for regulation to me, and, in fact, I think this will be a very hard case to make.

Oh, and about the "I don't read Thoma as much as Arnold does" part. I don't much read him much either, and quit linking to his writing altogether (I used to link to a few of his pieces at an anti-war site he contributed to, but that's it). For the most part, as I noted above, Henderson cannot break out of the ideological box he has placed himself in. Thus, what you see in his writing is often an ideological argument disguised as analysis. You already know what he will say before he says it, there's never any doubt, so why even bother to read? Am I surprised that he thinks that government cannot intervene and effectively overcome market failures? (Ever???) Not in the least. Am I surprised that he thinks everyone else is as ideologically rigid as he is and hence cannot allow for, say, the fact that regulators face poor incentives? No, I'm not surprised that he believes that, even when it's clear that it isn't true.