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December 5, 2014

Latest Posts from Economist's View

Latest Posts from Economist's View

Paul Krugman: Democrats Against Reform

Posted: 05 Dec 2014 12:24 AM PST

Despite the political difficulties it has caused, Obamacare was not a mistake:

Democrats Against Reform, by Paul Krugman, Commentary, NY Times: It's easy to understand why Republicans wish health reform had never happened.... But it's more puzzling — and disturbing — when Democrats like Charles Schumer, senator from New York, declare that the Obama administration's signature achievement was a mistake.
In a minute I'll take on Mr. Schumer's recent remarks. But first, an update on Obamacare..., which continues to rack up remarkable (and largely unreported) successes ... with more than 10 million people gaining coverage since last year. ... And ... a huge majority of the newly insured are pleased with their coverage...
What about costs? There were many predictions of soaring premiums. But... Premiums for 2014 came in well below expectations...
In short,... as a policy intended to improve American lives, it's going really well. Yet it has not ... been a political winner for Democrats. Which brings us to Mr. Schumer.
The Schumer critique — he certainly isn't the first to say these things... — calls health reform a mistake because it only benefits a minority of Americans, and that's not enough to win elections. What President Obama should have done ... was focus on improving the economy as a whole.
This is deeply wrongheaded in at least three ways.
First, while it's true that most Americans have insurance through Medicare, Medicaid, and employment-based coverage..., but what happens if you're fired, or your employer goes bust, or it cancels its insurance program? What if you want to change jobs for whatever reason, but can't find a new job that comes with insurance? ...
Second, whenever someone says that Mr. Obama should have focused on the economy, my question is, what do you mean by that? Should he have tried for a bigger stimulus? I'd say yes, but ... especially after 2010 scorched-earth Republican opposition killed just about every economic policy he proposed. Do you think this would have been different without health reform? Seriously? ...
Finally, we need to ask, what is the purpose of winning elections? The answer, I hope, is to do good — not simply to set yourself up to win the next election. ....
And one related observation: If more Democrats had been willing to defend the best thing they've done in decades, rather than run away from their own achievement and implicitly concede that the smears against health reform were right, the politics of the issue might look very different today.

Links for 12-05-14

Posted: 05 Dec 2014 12:06 AM PST

'Who Pays for the Minimum Wage?'

Posted: 04 Dec 2014 10:09 AM PST

Via Owen Zidar:

Who Pays for the Minimum Wage?: From Attila Lindner and  P├ęter Harasztosi:
This paper analyzes the effects of a large (~60%) and persistent increase in the minimum wage instituted in Hungary in 2001. We propose a new approach to estimating the employment effects of a minimum wage increase that exploits information on the distribution of wages before and after the policy change. We infer the number of jobs destroyed by comparing the number of pre-reform jobs below the new minimum wage to the excess number of jobs paying at (and above) the new minimum wage. Our estimates imply that the higher minimum wage had at most a small negative effect on employment, and so the main effect was pushing up wages. We then use data on a large panel of firms to evaluate the economic incidence of the minimum wage increase. Contrary to theoretical models that attribute the small employment effects of minimum wage changes to monopsonistic wage setting, we find no evidence that the rise in the minimum wage led to lower profitability among low-wage employers. Instead, we find that the costs of the minimum wage were largely passed through to consumers.

'Maths and Morals, Economics and Greed'

Posted: 04 Dec 2014 09:44 AM PST

Tim Johnson, "a mathematician who works on financial problems":

Maths and morals, economics and greed: ... Mathematics has always been part of finance but with the re-introduction of derivatives markets in the 1970s and their growth in the nineties, 'quants', trained in engineering, physics and mathematics, came to dominate the 'casino banking' that is widely criticised. My concern is that the quants are not amenable to questions of morality, and so the problems of finance are going to be difficult to resolve without finding the right way of communicating with the bankers who see themselves as scientists. ...

The Chartered Institute of Bankers are working on Professional Standards but are struggling to engage with the quants, who operate the casino branch of banking, because the quants believe science is value neutral; it delivers truths beyond morality. ...
This brings to mind Alasdair MacIntyre's 'disquieting suggestion' that modern society has completely lost the ability to make moral judgements and I see it as the brick wall that most attempts to reform banking will crash into.

I believe the brick wall can be dismantled relatively easily: by recognising that many of the practices of contemporary finance associated with 'casino banking' were widespread before the eighteenth century. Unlike today, they were undertaken in the context not of consequentialist or deontological ethics, but of virtue ethics that focuses on good practice. It might seem surprising that I suggest this is a relatively easy approach. What make it easy is that rather than criticising modern finance on the basis that it is degraded from a mythic golden age of finance, the starting point is the doux-commerce thesis that finance is civilising. Rather than characterising bankers as amoral spivs, they are presented as paragons of rational morality and the approach gives the bankers the opportunity to carry on their activities while, critically, reconstructing their own ethos.  I developed this representation in my paper Reciprocity as a Foundation of Financial Economics.

The hurdle this approach needs to cross is that of the dominant ideologies of markets. The market ideology holds that the market mechanism will deliver optimal solutions to society, while anti-market ideology argues that profits are degrading and markets are destructive. The hurdle can be crossed by ignoring both these ideologies and analysing the role that money and markets have played in forming both Western science and democracy. We need to represent markets as centres of communication and deliberation, not as competitive arenas driven by profit maximisation. The clue is in the word forum, which defined both the market place and the political centre of a Roman city.

As I noted after a speech by William Dudley on the same topic, I am not so sure this will work, but it's interesting how much of the recent commentary on the problems in financial markets are focused on changing the ethics of the financial industry. I'd rather focus on regulation and enforcement -- real regulation and real enforcement, not what we had before the financial crisis -- and more importantly putting circuit breakers in place that will limit the damage should problems reoccur, as they surely will at some point now matter how much we regulate or what ethical structure is in place (e.g. limits on leverage and interconnectedness).

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