Archive for the ‘Political Economy’ Category

More Fed Transparency?

November 14, 2007

I just finished reading this articleover at Yahoo! Finance that the FOMC has moved to increase both the frequency and long-term outlook of the Fed’s publicly released economic forecasts.  All this, Chairman Bernanke says, will make it easier for the Fed to do its job by increasing the lines of communication between the central bank, investors, and consumers. 

So to a certain extent I can buy that greater transparency on the part of the Fed is good.  When markets are able to make more reliable predictions of interest rate activity, firms and consumers can adjust their investment and spending decisions accordingly.  This will decrease the intensity of a policy shock on the economy, insofar as the latter can impose growth-mitigating volatility on the economy.  It should also increase accountability, which I’m sure makes some people quite happy. 

However, I think there are some important drawbacks to still greater transparency on the part of the monetary authority.  For one thing, when the Fed does not act as expected, the adjustments that markets will make will be far more drastic as participants – firms and governments (both international and domestic) and consumers – will have likely developed more unflexible forecasts – explicit or implicit – of interest rates;  that is, greater transparency may reduce the flexibility of market participants thereby creating the risk of high degrees of volatility when the Fed does not act as suspected.

The other problem, which I think is less understood and perhaps therefore more insidious, is that as the Fed increases transparency it risks its position a source of nominal changes in the economy and instead becomes nothing more than an instrumental variable in market decisions.  In econometric-speak, Fed actions may lose their causal link to economic activity and instead become only highly correlated with it.  To the extent then that households now rely, with justification, on changes in Fed policy to make investment and spending decisions, they will become unmoored from this bastion of economic stabilization.  Might the federal funds rate go the way of the yield curve as those who have come to rely on it to make safe bets on the economy will at some point in the future find themselves suffering huge losses due to their suddenly-unfounded faith?  I think it’s possible. 

Greater transparency is a victory for the free-marketeers at Cato (which is where, incidentally, Bernanke announced this decision), but it may have unintended consequences the magnitude of which we can only begin to guesstimate.  One I can think of off the bat is that more impetus may fall on government to affect the economy through fiscal policy.  That’s not going to make Cato, Bernanke, or any other free-market advocate, very happy. 

Currently Reading – Greenspan’s “The Age of Turbulence”

October 14, 2007

I am not quite halfway through Alan Greenspan’s “The Age of Turbulence,” the central banking legend’s part memoir, part treatise, which was published just a few weeks ago.

It really is a fascinating book.  I am reading it not as someone who is of a particular political mindset, nor as someone who would feign to have the highly developed skill set that would be necessary to target the man with either criticism or approbation for his term as the chairman of the Federal Reserve.  Instead, I am reading it as a student of economics, and I am finding Greenspan to be a surprisingly lucid writer with a dry wit, a reasonably humble personality, a keen intellect, and a single-minded fascination with all that his field of study has to offer.  Whether or not he paints a rosy picture of himself, his techniques, or his attention to detail, at the very least I find his portrayal of a man devoted to uncovering the driving forces in markets to be both inspirational and educational. 

I am inclined to recommend this book as assigned reading in a classroom.  I think his methods are exemplary, and in that sense, certain chapters would give students a sense of the importance, limits, and possibilities for collecting and interpreting data.  At the same time, he has been on the front line of most economic booms and busts for the past 50 years, and as such much of the first half of his book would be an excellent supplement to more in-depth analyses and/or class discussions.  The latter half of his book (though I have not finished it yet, but I will be sure to comment on it later), provides a normative assessment of the world around him and the present and future of the global economy.  It is, as such, an excellent conversation starter for any class discussion on economic issues or policy for students at any level in the field.

I would not mind hearing the opinions of others on their take of this book, but regardless of how one feels about the man’s policies, he strikes me as a prolific thinker and an astute observer, and his thoughts are worth the trip to the library or the bookstore.   

Proposal Accepted

September 10, 2007

Today, Becca and I had our first meeting with my thesis committee:  Humphrey, Greenlaw, and Hansen.  I admit feeling a bit worried about how it would turn out because I have never had a class with Hansen before, and I had a feeling he would be the person that needed the most convincing.

In a strange twist, Hansen effectively talked us into doing precisely what we proposed to do:  develop a methodology.  Not to say he and the other professors did not help us narrow down the topic a bit more, rendering it more manageable; rather, the qualitative difference between what was proposed and what was decided would be a worthy thesis topic was not very significant. 

The thesis proposal, in its nearly final form, did not spend a great deal of time developing a model because that was never the intended focus of my thesis on political corruption.  The intention was to develop a schematism for translating the heavily descriptive work of anthropologists into the language of, at the very least, political economy, for the purposes of working out the ways in which social networks come into conflict with the state.  Humphrey, my main advisor for the thesis, seemed to think that the basis for desiring to develop this methodology needed more clarity, and so suggested that I spend more time formally developing and critiquing the model that characterizes the mainstream literature. 

It would appear, however, that this distracted unnecesarily from the main point: an alternative model is useless if it can not be tested, and since alternative models of corrution based on social networks appeared to lack an associated methodology, to even talk about testing  is premature.  We were proposing to develop that methodology, but with half the pages of the proposal devoted to developing models, the focus of the thesis was rendered unclear.  It struck Becca and I both as funny that in the end, Greenlaw, and Hansen especially, cared a lot less about models and a lot more about methods, and effectively talked us into focusing on the latter (our original plan), rather than the former.    

I have been warned, as mentioned before, that developing methodology does not provide the fame and fortune that an ambitious economist might seek.  Certainly my economics education these past four years has not explored alternative approaches (not so much a complaint – methods are rightly secondary to concepts in undergraduate work, methinks, and traditional methods are more than adequate for most of the problems that undergrads will take up).  Still, there is something to spending a class period or two to demonstrate that great strides are not always made in the synthesis of new concepts, but also in new approaches to familiar problems.  Stagnation of or dogmatic commitment to either concepts OR methods will doom any quest for knowledge.     

Property Rights, Government, and Development

August 1, 2007

Prior to my decision to focus on corruption for my honor’s thesis, I was focusing on property rights (the topic of this post, previously left incomplete).  I leave it as is without further development, but I think the questions at the end merit attention. 

My readings of late have focused on the nature of property rights and the importance of their role in indigenous societies.  Some focus on the mythology that has sprouted up about the harmonious relationship that societies have with nature and their neighbours.  Others have focused on how indigenous groups located within developed societies, and which have experienced a long history of oppression, are now adopting certain rules of private property in order to “opt-in” to the national or global economy.  Most recently, I read a paper whose author argues that a system of formalized property rights enforced by the state – a proposed solution about which most mainstream economists find themselves quite enamored – is neither a necessary nor sufficient condition for the rise of efficient markets for land. He suggests instead that the government work only to broker intercommunity agreements to ensure that no conflicts arise from alloting land rights to strangers (either by rental or sale or other measures).

It is this last point that I would like to take up.  Such a proposition does not, in my humble opinion, sync up with the Hobbesian view of government that most economists are so prone to accept as given.   If we assume that theory, then it is impossible to expect a government to fairly broker such deals.  Indeed, the differential power of the parties to any sort of deal-brokering will inevitably play an important role in how the government moderates any such proceedings. 

Two questions, then, are important to answer:  1) Is the Hobbesian and/or Machiavellian theory of government adequate?  2) If so, can we honestly expect a government to fairly broker intercommunity agreements on property rights?