- Links for 02-06-2013
- Arguments For and Against the Use of Machines
- 'Are Immigrants Taking Your Job?'
- The Case For and Against Too-Big-to-Fail Banks
Posted: 06 Feb 2013 12:03 AM PST
Posted: 05 Feb 2013 05:40 PM PST
A repeat from the past: Arguments for and against the use of machines:
Leeds Woollen Workers Petition, 1786, Modern History Sourcebook: This petition by workers in Leeds (a major center of wool manufacture in Yorkshire) appeared in a local newspaper in 1786. They are complaining about the effects of machines on the previously well-paid skilled workers.
The number of Scribbling-Machines extending about seventeen miles south-west of LEEDS, exceed all belief, being no less than one hundred and seventy! and as each machine will do as much work in twelve hours, as ten men can in that time do by hand, (speaking within bounds) and they working night-and day, one machine will do as much work in one day as would otherwise employ twenty men.
Posted: 05 Feb 2013 02:44 PM PST
Are Immigrants Taking Your Job? A Primer, by Catherine Rampell: Immigration reform is back on the table, reviving debates about whether immigration is good or bad for American-born workers.
There are a lot of competing studies (and pundits) out there, but the general takeaway from conservative and liberal economists is that immigration is good for Americans' living standards over the long run. That's because immigrants raise the wages of native-born workers (and also lower the cost of immigrant-dense services like child care and cleaning). ... [I]mmigrants and native-born workers are generally complements, rather than perfect substitutes... As a result, immigration creates new job opportunities for the native-born... There is some disagreement about whether the wage benefits of immigration are evenly distributed among all workers, though. ...Then what are people afraid of?:
Tendency to fear is strong political influence, EurekAlert: It's no secret that fear is a mechanism often used in political campaigns to steer public opinion on hot-button issues like immigration and war. But not everyone is equally predisposed to be influenced by such a strategy, according to new research ... published in the American Journal of Political Science.
By examining the different ways that fear manifests itself in individuals and its correlation to political attitudes, the researchers found that people who have a greater genetic liability to experience higher levels of social fear tend to be more supportive of anti-immigration and pro-segregation policies. Thus far, research examining the link between fear and political attitudes has seldom accounted for trait-based fear, with transitory state-based fear being a more common focus area. ...
The research indicates a strong correlation between social fear and anti-immigration, pro-segregation attitudes. While those individuals with higher levels of social fear exhibited the strongest negative out-group attitudes, even the lowest amount of social phobia was related to substantially less positive out-group attitudes.
"It's not that conservative people are more fearful, it's that fearful people are more conservative. People who are scared of novelty, uncertainty, people they don't know, and things they don't understand, are more supportive of policies that provide them with a sense of surety and security," McDermott said. ...[RBSF summary of work on immigration.]
Posted: 05 Feb 2013 10:09 AM PST
I've been asking for some time now what amounts to a simple question, "What is the minimum efficient scale for financial institutions?" Unfortunately, the answer is much harder to formulate than the question, and there hasn't been anything convincing (at least to me) on this topic. Here's the latest on this topic from Neil Irwin:
The case for the too-big-to-fail banks, by Neil Irwin: ...[I]n the last few months, there's been a new wave of calls to break up the "too big to fail" banks that were at the center of the crisis — and the beneficiaries of a massive wave of bailouts.
So, is splitting those banks up the answer? ... The move ... has a growing list of powerful allies. ... But what is the counterargument? ... A new paper from Patrick Sims of Hamilton Place Strategies, a policy and communications firm led by Bush administration White House and Treasury official Tony Fratto, amounts to a case for the big banks. (Hamilton Place counts major banks and their trade associations among its clients)..., here are some of the arguments that I believe have the most merit.
The first argument is also the simplest. This is a huge and complex global economy. With trillions of dollars in global trade and companies with hundreds of billions in assets, it takes giant banks with a global reach to supply them with the financial products they need to do business. ...
This is related to a second line of argument: That without huge, regulated banks, companies will turn to the unregulated "shadow banking" sector to meet their financial needs... The collapse of the shadow banking system was a crucial factor in the 2008 crisis... If a bank break-up sparked a vast expansion of shadow banking, it would make the financial system more vulnerable.
I find less persuasive Sims's argument that we shouldn't worry too much about concentration in the banking system because it's not quite as severe in the United States as in other countries. One of the paper's tables notes that the largest U.S. bank, JPMorgan Chase, has assets that amount to 15 percent of U.S. GDP...
As the too-big-to-fail debate heats up, these are the questions... What real value do megabanks create for the world? Do they need to be this huge to fulfill their roles? Can regulation be enough to tame their inherent risks, or do they need to be split up? ...Here are some past posts on this topic. This was a response to a speech by William Dudley on the too big to fail problem (November, 2012):
Solving the Too Big to Fail Problem: ...One thing we really need to understand better is the minimum efficient scale for various financial activities. Whenever the topic of breaking banks into smaller pieces is raised, we hear that a "much reduced size threshold could sacrifice socially useful economies of scale and scope benefits." The key word is "could." As far as I can tell, the evidence on this point is very shaky -- we just don't know for sure what size is necessary to exploit efficiencies. My own view is that the minimum scale is likely smaller than many firms today, and hence there would be no harm in reducing firms size. This may not help much with stability, but there are still perhaps many benefits (e.g. reduced political and economic power) from reducing firm size and increasing the number of institutions engaged in important financial activities.A response to Tyler Cowen's alternative to breaking up big banks (February, 2012):
Break Up the Banks? Here's an Alternative: ... Some notes: First, there's an implicit assumption in this article about the minimum efficient scale for a bank. Tyler worries that breaking up banks will result in less efficient banking operations (i.e. higher cost) causing the smaller banks to fail altogether, or be less competitive with foreign banks.
However, I have not seen convincing evidence that banks need to be as large as they are for efficiency reasons (here's some evidence, but as I noted, I am not convinced by it). I am not advocating a per se rule here -- we shouldn't break them up just because. But if there's evidence that the size leads to undue political or economic power that is being exploited in the banks' favor, and if mega-mega-size is not necessary for efficiency, then there is definitely a reason to break them into smaller pieces. From my perspective, there is quite a bit of evidence that these banks have far too much political influence, and I think a case can also be made that it's unhealthy for the economy to have firms with such a large market share in particular segments of financial markets.
So I think that, absent of strong evidence that there actually are economic efficiencies associated with size (in which case they ought to be treated more like a regulated monopoly than a competitive marketplace), and the evidence that these banks are highly influential politically -- to the point where regulatory capture is more than a passing worry -- we should break these banks into pieces that are closer to the "minimum efficient scale" for financial institutions. ...
But we shouldn't fool ourselves into thinking that breaking up big banks into smaller pieces will necessarily make the financial system more stable. We had bank runs and financial meltdowns in eras where there were predominately small banks, think of the Great Depression for example. That's because it's the interconnectedness of banks that causes the problems, and smaller banks can be just as interconnected and hence just as vulnerable to a systemic shock as large banks. Perhaps there's a bit more diversification in larger banks that offers some protection, but the evidence is not strong on this point and big banks appear to be just as vulnerable as small banks to systemic troubles (and vice versa). ...
But whatever we do, we need to get on with it. Despite the Dodd-Frank financial reform bill and its directive to address this issue, the problem of bank runs in the shadow system -- a key factor in the financial sector collapse -- has not yet been solved. Work on this is underway, and new regulations are in the works, but for now the problem has not yet been resolved.And a response to Bernanke's "smaller banks are not necessarily the answer" (October, 2009):
Bernanke: Smaller Banks Not Necessarily the Answer: ... Ben Bernanke does not want to lose "the economic benefit of multi-function, international (financial) firms," so he is hesitant to break large banks into smaller sized institutions. I don't have much problem with the economics, if there are efficiencies that come with bank size we should exploit them, especially if breaking up banks into smaller entities does little to reduce systemic risk but instead simply fragments the problem into many more pieces (though I'd still like to know where the minimum efficient scale is, anything larger than that is unnecessary). Obtaining resolution authority for banks in the shadow system is also very important, so I don't disagree with the emphasis on this in Bernanke's remarks.
But there seems to be the view that if they have resolution authority, higher capital requirements, etc., that will make the probability of a major breakdown small enough so that the expected benefits of size outweigh the expected costs. While I agree that obtaining resolution authority and other regulatory change is extremely important, I wouldn't bet my house, or housing and asset markets more generally, that this will eliminate the chance of a major breakdown, or make the chance small enough to justify huge, powerful, market-dominating institutions.
I would like to see more effort to measure and regulate connectedness within the system (which can be very high even with banks broken into smaller pieces) since that would add another layer of protection, the degree of leverage should come under scrutiny as well, and I would also like to see more attention to the political risks (e.g. capture of legislators and hence regulation) posed by large financial firmsFinally, A response to David Altig (this is the entire post from April, 2009):
Breaking Up Big Banks: As Usual, Benefits Come with a Side of Costs: David Altig warns that breaking up big banks could reduce efficiency:One final note. Even if the scale economies are there, we may still want to restrict the size of banks. The benefit from larger scale must be balanced against the increased risk to the financial system and the increased risk of political/regulator capture that comes with size and power. If the costs of size outweigh the benefits, then size should be restricted below the minimum efficient scale (How much risk comes with size depends, in large part, upon your faith in resolution authority discussed above. I am not fully convinced it will work.)
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