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May 16, 2014

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Latest Posts from Economist's View


Paul Krugman: Points of No Return

Posted: 16 May 2014 01:08 AM PDT

Can anything reverse the growing hostility to science within the Republican Party?:

Points of No Return, by Paul Krugman, Commentary, NY Times: Recently two research teams, working independently and using different methods, reached an alarming conclusion: The West Antarctic ice sheet is doomed. ... Even if we took drastic action to limit global warming right now, this particular process of environmental change has reached a point of no return.
Meanwhile, Senator Marco Rubio of Florida — much of whose state is now fated to sink beneath the waves —... confidently declared the overwhelming scientific consensus on climate change false, although in a later interview he was unable to cite any sources for his skepticism.
So why would the senator make such a statement? The answer is that like that ice sheet, his party's intellectual evolution (or maybe more accurately, its devolution) has reached a point of no return, in which allegiance to false doctrines has become a crucial badge of identity.
I've been thinking a lot lately about ... how support for a false dogma can become politically mandatory, and how overwhelming contrary evidence only makes such dogmas stronger and more extreme. ... To see how it works, consider a topic I know well: the recent history of inflation scares. ...
Inflation phobia has always been closely bound up with right-wing politics; to admit that this phobia was misguided would have meant conceding that one whole side of the political divide was fundamentally off base about how the economy works. So most of the inflationistas have responded to the failure of their prediction by becoming more, not less, extreme in their dogma...
The same kind of thing is clearly happening on the issue of global warming. ... As the evidence for a changing climate keeps accumulating, the Republican Party's commitment to denial just gets stronger. ...
And truly crazy positions are becoming the norm. A decade ago, only the G.O.P.'s extremist fringe asserted that global warming was a hoax concocted by a vast global conspiracy of scientists (although even then that fringe included some powerful politicians). Today, such conspiracy theorizing is mainstream within the party, and rapidly becoming mandatory; witch hunts against scientists reporting evidence of warming have become standard operating procedure, and skepticism about climate science is turning into hostility toward science in general.
It's hard to see what could reverse this growing hostility to inconvenient science. As I said, the process of intellectual devolution seems to have reached a point of no return. And that scares me more than the news about that ice sheet.

Links for 5-16-14

Posted: 16 May 2014 12:06 AM PDT

'Are Banks Too Large?'

Posted: 15 May 2014 10:14 AM PDT

I don't think this issue can be addressed without also considering the political power of large banks -- their ability to shape legislation in their favor in a way that increases the risk of financial meltdown:

Are Banks Too Large? Maybe, Maybe Not, by Luc Laeven, Lev Ratnovski, and Hui Tong, iMFdirect: Large banks were at the center of the recent financial crisis. The public dismay at costly but necessary bailouts of "too-big-to-fail" banks has triggered an active debate on the optimal size and range of activities of banks.
But this debate remains inconclusive, in part because the economics of an "optimal" bank size is far from clear. Our recent study tries to fill this gap by summarizing what we know about large banks using data for a large cross-section of banking firms in 52 countries.
We find that while large banks are riskier, and create most of the systemic risk in the financial system, it is difficult to determine an "optimal" bank size. In this setting, we find that the best policy option may not be outright restrictions on bank size, but capital—requiring  large banks to hold more capital—and better bank resolution and governance.
Large banks increase systemic, not individual bank risk
Large banks have significantly grown in size, and become more involved in market-based activities since the late 1990s..., the balance sheet size of the world's largest banks increased two to four-fold in the 10 years prior to the crisis. ...
Also, large banks appear to have a distinct, seemingly risky business model. They tend to simultaneously have lower capital..., less stable funding..., more market-based activities..., and be more organizationally complex..., than smaller banks. ...
In addition, our study confirms that large banks create most of systemic risk in today's financial system. ... Large banks create especially high systemic risk when they have insufficient capital or unstable funding. And, large banks create high systemic risk...
Too-big-to-fail and empire building
What drives the size and the business model of large banks? Our study suggests the following:
Implicit too-big-to-fail subsidies ... This predisposes large banks to use leverage and unstable funding, and to engage in risky market-based activities.
Possible empire building. ...
Economies of scale. While a good explanation for the size of large banks, recent studies suggest that they are modest. ...
Optimal bank size inconclusive
The evidence that large banks respond to too-big-to-fail and empire building incentives, and in process create systemic risk suggests that banks might become "too large" from a social welfare perspective. But there is an important caveat. We know too little about the value that large banks bring to their customers (e.g., large global corporations). The potential for economies of scale in large banks cannot be dismissed. As a result, we cannot draw conclusions as to the socially optimal bank size. And it also implies that outright restrictions on bank size or activities may be imprecise and hence costly. ...

'Why Inequality Lowers Social Mobility'

Posted: 15 May 2014 09:45 AM PDT

This was in the daily links, but thought it deserved additional highlighting. It's from Miles Corak:

Joseph Fishkin's book, "Bottlenecks," explains why inequality lowers social mobility, by Miles Corak: [The Brookings Institution has been having an online discussion of Bottlenecks: A New Theory of Equal Opportunity, a book by Joseph Fishkin. This post is a re-blog of my contribution, "Money: a Bottleneck with Bite."]
... So far, it has been politically convenient to focus on upward mobility of children from the bottom of the income distribution, measured in some absolute sense, because it puts broader issues of the influence of inequality to one side.
The mobility-only approach puts the onus of the problem on the poor—their incomes, their work ethic, their schooling, their fertility choices, their parenting strategies—and abstracts from the broader context within which they must engage, define themselves, and raise their children. The rich are not part of this story.
But Professor Fishkin is right: "anyone concerned with equal opportunity ought also to be concerned with limiting inequality of income and wealth." ...
The factors impacting on child development certainly include non-financial ones, including what social scientists clinically label the "unobserved parental characteristics", which are correlated with income.
But inequality alters the rules of the game. It narrows the goals we pursue as individuals, shapes values, and more importantly it turns our pursuit of the good life into an arms race over positional goods, and changes both incentives and opportunities. That is what makes money a bottleneck that bites.
Bottlenecks outlines a theory of opportunity that gives us good reason to worry about outcomes, because to some important degree unequal outcomes lead to unequal opportunities. ...
Money is a significant bottleneck. Facing that fact can only be healthy, if somewhat more challenging, for the way we think about public policy. ...

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