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    Maxine's Essays

    • 21st Century Regress
      Sometimes it seems like the world is going to hell and there's absolutely nothing a girl economist can do about it.
    • What Exactly Are We Crowding Out?
      The current economic downturn isn't a random draw of a black ball from an urn containing white balls and black balls. There's no sampling distribution. Very specific policies and actions landed us here. Now we must decide not only what policies need to be put in place to prevent it happening again, but also what policies would best drive us out of the ditch faster and sustainably.
    • I Wish It Were Only Butter
      We should be giving up some butter if we must. We should not give up education or health investment (or infrastructure or the environment (hello, BP). They may be the only legacies of any value that we pass on to our children and grandchildren.
    • Rational Health Investment?
      The obvious "market solution" is to improve the long run return on investments in health among the disadvantaged through meaningful and effective publicly funded education. The obvious short run "market solution" is to reduce the costs of investment and the shadow price of health for the disadvantaged by providing health insurance cover and reduced out-of-pocket costs.
    • The Socrates Parameter
      To the extent that our limbic systems respond to such engineering by over-riding the judgment of our frontal lobe and to the extent that our frontal lobe is deprived of the information it requires to make a rationally self-interested judgment, we are not only pigs and fools, we are slaves.
    • The Economic Rewards of Virtue
      If individual virtue tempers our "piggy" desires and conditions our choices to something that is both individually and socially better, then the economic rewards of virtue as embodied in and promoted by societal norms and institutions are far greater than we have ever suspected. As economists, we would do well to recognize this when we teach U max.
    • The Market for Morals
      Markets then are places where more is exchanged than goods and services, labor and product, credit, and interest. They are places where we also develop the personal virtues of temperance and prudence and the social virtues of benevolence and justice. When they function well, they produce trust, loyalty, and sympathy among those who trade there.
    • Post-Modern Applied Economics: It’s the Error Term, Stupid
      Maxine believes it’s time to refocus attention and discussion on the error term. It is often where much of the action is in our models. It is where unexpectedly catastrophic events dwell resulting in fat tails. It is where our animal spirits manifest and cause us to do the right thing or the wrong thing or the thing everyone else is doing rather than the self-interested, fully-informed rational thing. It is where God and miracles and chance dwell.
    • Intergenerational Win-Win: Health Insurance, Education, Environment, Infrastructure
      So when we’re talking about fiscal stimulus packages and we’re borrowing from our grandchildren to finance them, we should be thinking about how to use stimulus monies to create value for those grandchildren AND stimulate our economy.
    • Short-term Private Payoffs, Long-term Social Costs
      The real health reform discussion, the one we should be having, is “What must we do to create a health system that is both efficient and fair?” The answer will almost certainly include relegating the private sector to markets where market forces or regulation are effective at aligning short-term private incentives and goals with long-term societal interests. If such markets are scarce or non-existent in health, then the private health sector will be of limited value.
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    unleashed again!

    of course, i had been unfamiliar with the history behind the FDA, but the reaction of the drugmakers to attempts to strengthen it seem to me to be remarkably similar to the reaction of the banksters in this time magazine article it seems i was reading only yesterday...,9171,745617,00.html#ixzz0lqeB5Ghm

    Unleashed, indeed, rjs, and VERY glad to be back. :-)

    Wonderful link. I took the liberty of changing out my original Wikipedia link to Glass-Steagall for the one that you provided. Thank you very much.

    It's interesting how regs opposed by the industry often benefit the industry (but not all firms) once they are adopted. In the case of the FDA pre-1938, HJ Heinz was developing methods to produce better ketchup with fewer additives, which there was some evidence that consumers preferred. The methods included fresher tomatoes, more sterile conditions, higher temps, etc. More costly, but a better, safer product. Heinz pushed for adoption of industry standards (which would have given them considerable market share at least at first so I doubt they were motivated by altruism in this). It was opposed by other firms because of the higher costs and the fear that they would be unable to compete successfully, losing mkt share. Since quality could not be easily observed, and in the absence of regulatory standards, competition on price resulted in a race to the bottom in food and drugs. I know Robert Frank has written about this. I hadn't given it much thought until I did the research for this blog. Your link seems to provide further evidence that firms are not necessarily the best judges or prognosticators of regulation effects.

    Always nice to hear from you, rjs. :-)

    A big part of framing the message here is that those millions of unemployed Americans don't really resonate with the public sentiment vis a vis financial reform to the extent that 107 poisoned consumers did in 1906 with regard to the pharmaceutical industry. Unfortunately establishing a causal relationship between poorly designed financial products and deficient regulatory paradigm leading to lost wages and increased mortality rates is less obvious, (master of understatement am I), than that of bad drugs/food is with the food and pharmaceutical industry. Somehow, that relationship needs to be defined or described, if only in qualitative terms to drive this point home in terms, that might appeal to the sensationalism the press finds so irresistible in the drama of the tea-bagging contingent.

    strangely enough, maxine, right after i posted the above comment i went to a site where they were complaining about this FDA action:

    i really didnt want to take you off the change the rules for the banksters topic, but im curious how you'd view this kind of enforcement...with the lax oversight on some more serious problems (ie, salmonella outbreak caused by tomato imports from Mexico) you'd think their resources could be better deployed...

    (full disclosure: im in an Amish neighborhood)

    rjs, I will be the first to admit that regulation is at best second best and I'm generally not in favor of it when markets work. On the other hand, what little I know about raw milk makes me think that restricting sales to the public might not be such a bad idea. As you point out, though, policing produce imports (and I'll add Chinese pharmaceuticals to the list) might be a better use of publicly funded time and money. Maybe domestic producers are easier, cheaper targets?

    I keep wondering if maybe we have to admit we need guvmint oversight of some things before we can develop effective and efficient oversight methods? As long as we think it's the problem, we're not likely to get very good at it. Your link suggests we may have a ways to go. :-)

    Miguelito, good to hear from you! You are right. I was hoping that by drawing an analogy between toxic patent meds and toxic financial assets, it might provide a framework for non-economists to think about financial regulation, the causal links you mention, and to recognize the importance in this case of changing the rules of the "game."

    Great article. I'm glad I clicked through to here.

    I find the need for regulation to be self-evident. I hear complaints about regulation limiting profit, but every time regulations are relaxed, people die or economies crash.

    Thanks, K.A. Click through anytime. :-)

    Good link, rjs (as always). Is it Jimmy Stewart or George Bailey who is dead, I wonder? Jimmy's dad owned a hardware store in a small town and Jimmy, the actor, is indeed dead. I think we need George Bailey. :-)

    re Friedman's beliefs - does an informed quick glance around the world - or even the US - of now suggest more or less diversity than, say, 40 years ago?

    One can believe in "markets", "biological destiny"", "the one true church" or whatever. I really have no problem with the belief. But any and all do not substitute for reality.

    of course there are a lot of bloggers advocating reform and breaking up the banks, but knowing the Mr Potter / George Bailey metaphor was part of your repertoire, i couldnt resist linking you to that the question becomes, if we change the rules of the game, how do we get enforcement of those rules if everyone is bought and paid for?

    Amen, Peter.

    And speaking of reality...thanks for the link rjs. I had seen it. It's funny how you can agree with someone on the fundamentals and disagree on the conclusion. I seem to remember things deteriorating as we deregulated, esp repealing Glass-Steagall, and that they got worse as we experienced 8 years of laissez-faire regulation. I seem to remember that before Glass-Steagall was passed, we had more "volatility" in markets. (I'm practicing understatement here.) Interestingly, while I agree that capture is a problem and I worry about it, I keep thinking of people like Brooksley Born and Elizabeth Warren. I have trouble imagining them captured. If capture is the problem, maybe it's just a matter of picking the right regulator. O'Driscoll seems to be hoping we can call forth or transplant an "impartial spectator" within the breast of all accountants, raters, traders, CEO, loan officers. I actually think that over time that might be possible with significant changes in our cultural norms and narrative. (Don't ask me how that would happen.) To rely on an "inner regulator" as a strategy now seems unrealistically Utopian in light of recent experience. I think I would have to take a short position on it. :-)

    sorry, maxine, im back with more reality; something i was just reading made me recall this:

    The person who may be responsible for more food-related illness and death than anyone in history has just been made the US food safety czar. This is no joke.

    My dear, dear rjs, There was a reason why I included the following in the above blog: "That it led to other problems is a topic for another blog." Your link demonstrates one of the problems: capture.

    I in no way meant to imply that the FDA was perfect. The 1938 act was a marked improvement over the contemporaneous state of the world (much as the House and Senate finance reform bills would be an improvement over what we (don't) have now IMHO).

    Capture, of course, creates regulatory inertia, makes it unlikely that any regulatory changes that do manage to be effected will benefit the consumer, and results in foxes appointed to guard the hen house. So what should we do? We're in a second best world, so it's going to have to be some combination of regulation, law, market forces when they work, and a personal commitment to ethical principles. (As I said above, I'm shorting the last.) Personally, I think it would help if people paid attention, but that's probably as Utopian as yearning for an impartial spectator to start whispering ethics to investment bankers in their sleep.

    So my second best solution is regulation, now, before the next crisis.

    Sorry if I left you with the impression that I think the FDA is a paragon of regulation. Thanks for the link. :-)

    Excellent analysis & well written. As for the implications for and challenges to implementation, the consequences of Public Choice (theory) and political contributions reform may dwarf financial industry reform.

    A couple of weeks ago in reaction to this post over at Baseline Scenario, I started this:

    When I read stuff like this I can't help but think that it will never be enough to hem this game in with regulation. We need, to take a figurative phrase and apply it literally, a game changer. The game itself is wrong. These guys don't need to worry about blocking whatever regulatory scheme is proposed, all they need are a couple of little pinholes and regulation is a party balloon.

    I keep coming back to something Wayne Gretzky said, “A good hockey player plays where the puck is. A great hockey player plays where the puck is going to be.” I have no idea (and the regulators are pretty much in the same boat) what kind of schemes these guys will come up with to game the system, but I know what they are after, and for me, when all of the pluses and minuses have been tabulated, I would be willing to deny it to them by fiat. Let's just put a cap on income.

    This is admittedly a draconian solution, and I am not even sure I like it much, but I like the simplicity of it. I like the idea of creating counter incentives, as opposed to rewards, for market distorting activity. I know there are lots of legitimate exceptions, but I do not see in general that at the high end of the income distribution curve there is that much meritocracy. If that is true, and I'm not entirely sure that it is, the question is, does the harm done to the exceptions outweigh the benefit to society of putting an effective end to this culture of malfeasance.

    The standard argument against highly progressive tax schemes is that it destroys the incentive to work hard. I really cannot buy this argument. In the first place, if 500K isn't enough to get you up out of bed in the morning and doing your best, you are either a.) not motivated by money at all, b.) so jaded I don't want you anywhere near the finances of my nation, or c.) enough past it that it is time you focused on your begonias. But more importantly I don't believe that people who are passionate about accomplishing some worthwhile goal are going to be dissuaded by the fact that the financial upside is not infinite. If your goal is the acquisition of money for its own sake, without actually producing something of value, then it would be much more of a disincentive, and personally I'm just fine with that.

    It's not even that I would object to a few people making an inordinately large fortune playing these kinds of games if the net effect was to accomplish something vital that is consistent with the concept of the general welfare. Instead though, what we have is a system that by its very nature poisons and distorts the ethos of the larger society. The term investment has for most become synonymous with speculation and ethical behavior in business has been redefined as just avoiding prison.

    I'm not sure I'd be willing to stand by it in a technical sense, but I wanted to throw it out there to stir the pot. Perhaps put another way it makes more sense. Would you be willing to forgo the possibility of ever becoming an oligarch in exchange for a guarantee to live in a world freed from oligarchy?

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