Monthly Archives: June 2013

I’m no big Rand Paul fan. I think his politics of abortion are fundamentally inconsistent with his otherwise Lockean definition of property, I think he would make a bad president, but I do not think he is racist. And I am perhaps duped into thinking he is more sincere than your average senator. I think, net-net, I am glad Rand Paul is an elected member to Senate. (By the way, I feel no sympathy for his father who is devious and racist).

So I (think I) disagree with Brad DeLong. Eliot Isquith’s critique of Conor Friedersdorf’s (sometimes rambling) defense of Rand was not satisfying. Friedersdorf argues that it’s natural to question democracy:

If a scholar of political thought said of ancient Athens, “I’m not a firm believer in democracy — it required slavery, war, or both, to subsidize the lower classes while they carried out their civic duties,” no one would think that a strange formulation — it is perfectly coherent to talk about democracy in places that didn’t extend the franchise universally, given how the term has been used and understood for two thousand years of political history.

To which Isquith responds:

Well, here’s the thing: Rand Paul is many things, but he is not “a scholar of political thought.” And he’s certainly not the senator from Athens. What he is, though, is a man who still can’t give a straight answer as to whether or not he finds the Civil Rights Acts constitutional, though he’s proved happy to brandish Jim Crow as a kind of shield against further inquiry.

Even on its own terms, the Jim Crow example falters. If you listen to Friedersdorf or Paul, you’d almost think that majoritarian democracy is what led to Jim Crow. One imagines it as if, after the Civil War, there was a big meeting in every city, town, and holler of the South, and there was a show of hands. Jim Crow: yea or nay?

But, of course, that’s far from the truth. Jim Crow wasn’t a product of a democratic process — of the kinds of democratic processes we think of as our own in the United States. Those institutional channels were the ones that passed the laws that broke Jim Crow. The American apartheid, on the other hand, was the product of terroristic violence, white supremacy, and Northern indifference; of the kind of evil Rand Paul’s father’s newsletters trafficked in.

So as I’m reading it, Isquith’s contention with Friedersdorf is predicated on the following:

  1. Rand Paul is no Aristotle and his expression of doubt makes him illegitimate as a critique of democracy (?)
  2. Jim Crow America was not Democratic
  3. Direct legislature is the only facet of modern democracy.

I’m not sure if I parsed (1) correctly (needless to say the comparison with Ancient Greece or Aristotle is confusing), but (2) and (3) are certainly wrong. And to the extent these are true, it is America’s least representative component of democracy that struck Jim Crow at its heart in Brown vs. B. of Education.

If you consider alienation of civil rights as inherently undemocratic, you will find (2) a natural statement. But taken to its logical conclusion, Isquith must accept that America 2012 is somehow not “democratic” because of DOMA. Perhaps he will make that argument, indeed he would be wrong. Democracy is a self-correcting system. As Bill Clinton put it, “there is nothing wrong with America that cannot be fixed by what is right with America”. An act of justice, like the Civil Rights Act, is not a sudden emergence of democracy, but a confirmation thereof. Those who take a discrete approach to political systems find themselves in a quite a quandary.

At first approximation, democracy in America – to use another man’s phrase – is defined not just by majoritarian elections (as Isquith has you believe) but by a vibrant, activist, and independent judiciary. Indeed, it would be fundamentally less democratic if majoritarian will had crushed the civil rights movement. The Constitution via the justice system, and not direct election, started the movement.

It is, therefore, entirely appropriate that we may disdain a system that perpetuated racial discrimination for so long. We may disdain the fact that American democracy was too representative. That it did not give sufficient emphasis to natural rights, a concept to which Rand Paul presumably subscribes.

Therefore, I read Rand Paul’s skepticism of American politics in the mid-20th century not as a referendum on democracy, as much as one on a democracy divorced from classically liberal beliefs. I am a harsh statist if next to Rand, but I can appreciate a more nuanced depiction of democracy.

Indeed, I do not doubt that my grandchildren may one day wonder the failures of a democracy that let George Bush lie his way into war. I will imagine the Isquith’s of tomorrow tell us no, that was the outpour of too little democracy, too little oversight. And yet, the media – a robust organ of any democracy – played sucker to an evil war effort. Directly elected representatives, chose to cede good judgement in favor of god knows what.

I believe that if America instituted a universal draft, Iraq would not have happened. I also believe universal draft is at its core undemocratic. It is evil, but only the lesser of two.

In similar vein, Rand Paul believes the redistribution of income, and forced regulation are evil. But he also believes forcefully in natural rights. It is cheap to argue that John Locke would forbid discrimination in defense of “life, liberty, and property”. Indeed, Paul believes in the virtues of negative, over positive, liberty.

Therefore, it is entirely legitimate for Rand Paul to support a very active, somewhat undemocratic, judiciary that protected at all costs the right to life, liberty and property. It is further legitimate for him to see a divorce between contemporary perceptions of democracy and classical liberalism. And therefore, it is legitimate for him to oppose Jim Crow on grounds of a democratic excess.

(P.S. What makes him a quack, however, is his idiotic approach to the relationship between women and womb, and his inability to apply his own Lockean logic thereof. I do not respect those who selectively choose classical liberty, and of this Rand Paul is guilty. But less guilty than his fellow republicans).

Evan Soltas is right, the United Kingdom needs to adopt a nominal income target, and Mark Carney is the man for this job. This is an idea that caught the blogosphere by fire, and has enlisted hints of support from Carney himself. Maybe most importantly, an NGDP target has deep support from across the political spectrum. Everyone sees it as a way to increase immediate employment. Conservatives argue that if the central bank is targeting aggregate demand, all other macroeconomic factors become classical in nature, shifting the priority onto supply-side growth. Liberals see higher inflation during deep recession as a way of easing the burden on debtors and reducing hysteresis by increasing the opportunity cost of leaving the labor force.

Before we further the case for a NGDP target, it’s important to consider the elegance of inflation targeting, a regime existent in the United Kingdom in its current form since 2003. Unlike many other potential targets (like monetary base) once the central bank anchors inflationary expectations at the target, its job becomes a self-fulfilling prophecy. The logic is simple, if I expect 2% annualized inflation I will sign a contract that increases my wage rate accordingly. But my wages are my employer’s inflation, which will be reflected in higher price levels across the nation. More importantly, nominal income is a measurable – and publicly understandable – figure unlike monetary base, inflation, or even real income. They call it the “money illusion” for a reason.

Without a futures market (which has many criticisms of its own), an NGDP target is unlikely to be so simple and beautiful. However, it may be one of the only ways for monetary policy to gain traction at the zero lower bound. Paul Krugman, now famously, argued that successful monetary policy today must “credibly promise to be irresponsible” tomorrow. An NGDP level target will convince the market that inflation will only fall after income is on its previous trend, or full employment. Granted, it is unlikely that during roaring booms or deep recessions, contract formation will be as simple as with inflation targeting.

So far, Carney’s one objection to an NGDP target does not hold water: “As potential real growth changes over time, either the nominal target will have to change or else it will force an arbitrary change in inflation in the opposite direction”. Evan notes that this is a “small price to pay”, but I don’t see it as a “price” at all. Changes in potential growth reflect only supply-side movements and, hence, Carney’s statement would imply that the current inflation targeting regime is robust during supply shocks.

But it’s not. Consider a central bank targeting 2% inflation in a country that’s going through a shale gas revolution. Prices levels are naturally bound to fall as energy is a critical component of pretty much all output. However, if the central bank is to meet its mandate, it must artificially inflate the economy. The consequences from a negative supply shock are even worse. If the OPEC agrees to an oil embargo, a pre-shale United States faces risk of recession. Making matters worse, because general price levels are increasing, the central bank must deliberately deflate the economy in a recession.

In both cases, at least a nominal GDP target would allow the supply-side inflation to compensate for deceleration in growth rates. Carney is right that over time current proposals of approximately 5% NGDP growth might be suboptimal. But even, or perhaps especially, in a supply-shock NGDP trumps inflation.

It is overwhelmingly clear that rich world economies need more inflation. But arguments to this effect, especially from a central banker, are not popular. Arguing for more income, however, makes intuitive sense and should hold broad appeal from the general public. Of course, the latter implies the former as my wages are your inflation, but it’s just a question of semantics…

Now is the time, if any, for Carney to strike a bold new mandate. Inflation expectations in Britain are already dislodged. Indeed, with poor productivity growth, the United Kingdom is undergoing a negative supply shock with the worst system thereof. It’s about time for the country to try something bold. Something fresh.

Have you been advocating that fiscal stimulus is unnecessary for the past four years? Do you want help in defending your position? Are you a die-hard monetarist? Are you annoyed at how right Paul Krugman has been? What follows is your best shot at disproving him. Tread with trepidation.

If there’s one rational expectation in economics, it’s that Paul Krugman is an inflationarydollar-debasingausterity-thumpingirresponsiblefiscalist imp that needs to be controlled. And over a decade ago in 1998, the good doctor wrote:

The way to make monetary policy effective, then, is for the central bank to credibly promise to be irresponsible – to make a persuasive case that it will permit inflation to occur, thereby producing the negative real interest rates the economy needs.

Back then, he had to end that phrase noting that “this sounds funny as well as perverse”. That’s a sea change from today, where this is taken as a foregone conclusion in wonkonomics. I see petitions for Larry Summers, Janet Yellen, and Christina Romer as great Fed chairs. That’s wonderful, and I’d be happy with any one of them (particularly Romer). But someone has to give me a detailed explanation why there isn’t a roaring movement – from Scott Sumner to Brad DeLong – calling on Barack Obama to nominate Paul Krugman for the most prestigious job in the country.

In January, Krugman politely declined a loud calling for his nomination as Treasury Secretary, preferring to remain an outside man. A latter-day Socratic gadfly, if you will. I agree, Paul Krugman in high political government would be a very bad thing. As I see it, such a position is best filled by a technocrat who can organize a willing coalition to frame the President’s economic policy into law. Paul Krugman is not that man.

Jack Lew is not involved with markets on an daily basis. We don’t much care how thick his briefcase might be. On the other hand, the Fed chair has the incredible burden of forming the most important expectations across international finance. We’ve all written many articles about how better monetary policy would slash deflationary expectations. We’ve talked about helicopter drops and QE infinity. We’ve talked about 4% inflation, and nominal targets.

Krugman is the intellectual father of irresponsibility, quite literally. If there is one man in this world who can convince markets that America will tolerate above-trend inflation, it is Paul Krugman. If there is one man in this world who can falsify Krugman’s own theory that we need more fiscal stimulus, it is Paul Krugman. Indeed, if Paul Krugman cannot credibly commit to be irresponsible, no one can.

Markets will smoke if he is shortlisted. If he is nominated, they will all but go on fire. So if you are interested in disproving Paul Krugman’s many calls for fiscal policy in a liquidity trap, you best champion for his nomination as Fed Chair.

(P.S. I did promise you “notes” plural. Your next best shot is to abdicate the scientific method, and choose to believe in hyperinflation, hard money, and short run superneutrality. This has been the option of choice for most.)

P.P.S Comon, is there a better “expectations channel” than

Helicopter money has received a lot of praise, from left and right, as sound monetary policy. Some have gone as far as to say a universal basic income, or broad tax cuts, should be financed by printing money. I don’t like this as an argument for monetary policy for several reasons:

  • Financing tax cuts or a basic income is decidedly political, and blurs central bank independence.
  • It’s very difficult to granularly tune any such “drop”, or broader financing plan. They must either be discrete choices – a onetime expansion of the monetary base by emailing $1000 to each household (stimulus), or a coordinated policy decision.
  • Cash handouts that are big enough can have perverse consequences.

But there’s something much better device that can be finely tuned: the credit card. James Tobin remarked that the “the linking of deposit money and commercial banking is an accident of history”. It is this “accident”, to say the least, that compelled the United States to waste billions feeding AIG bonuses. Banks would not be “systematically important” if their collapse did not cause deep ruin.

Just like the Bank of America and Citigroup, I propose that the Federal Reserve issue each citizen of majority a lifetime credit card. During boom times, the daily interest rate on credit will be pegged to the inflation rate with default risk premium – users will prefer their normal card that offers a 30-day paying block.

However, if nominal GDP ever falls off path, the Fed directly lowers the rate until the FOMC’s forecast hits the target (also, board salaries are docked by the extent to which their forecast misses the target and the actual result misses the forecast). In the counterfactual, after Wall Street imploded, TARP would be completely unnecessary because the Fed would be providing incredibly cheap credit directly to consumers to reflate the economy (otherwise they get no salary!)

This policy isn’t plagued by a “zero lower bound”, either. Instead of highly questionable quantitative easing, the Fed can choose to inflate its balance sheet by bringing direct credit rates below zero, to increase consumer spending. This has the following benefits:

  • QE works through “hot potato” and “wealth” effects, and the extent of monetary base expansion completely contradicts inflation and job growth figures. Mostly because a lot of QE ends up in interest paying reserves, or the Fed mangled expectations. Likely both.
  • Any and all expansions of the monetary base are directly increasing consumption or investment. There is ZERO debate among economists whether this increases nominal GDP.
  • The card will simply be banned from repaying other debts (this will encourage private creditors to artificially increase rates on expectation of a Fed decrease, and hence will be an indirect QE: that is more profit for banks).
  • It also can’t be used on the stock market, we don’t want average Joe to conduct a leveraged buyout with his card. It is a physical card, and has the same limitations. Can’t do any fancy finance stuff with it.

Ben Bernanke would have seen this year’s job reports, thought to himself “wow, this is shit”, and decreased the interest rate on direct credit. He would also have the New York TimesWall Street Journal, and ZeroHedge advertise this rate cut everywhere (because he can), and this would get consumers to go buy more stuff. If rates were -10% (and that’s consistent, for a period of time, with the kind of QE we have) who wouldn’t buy that new Mac Pro?

Note that, if I buy something nice I can’t just wait for the negative rates to cut my burden to zero. As the economy picks up – and it will much more rapidly with this policy – rates again hit market levels. This will allow the Fed to more naturally (than QE) wind-down its balance sheet. Here’s why I’m confident this has to bring NGDP, inflation, and hence unemployment back on track. If it does not, we’ve basically found a forever free lunch. Because this cannot happen, there will be a time when credit rates rise, and that’s good.

That’s prong uno. As we’ve noticed, credit crunches after financial crises leave small businesses without access to corporate bond markets asphyxiated. The Federal Reserve will offer special corporate cards to such entities earning less than whatever the tax code defines as “small business”. (I’ll pass on actually reading it). This will offer ultra low-rate (0% or maybe less) long-run credit for expansionary investment. Cities and states will be given special rates to finance infrastructure or education (the mayor and governor will get diamond-studded platinum cards with free Air America miles).

Feedback loops will reflate the economy. Not only does direct credit access now evade the rotten financial system altogether, but businesses will expect increased demand (because of consumer spending) that will decrease their fear of low profits, and hence convince them that expansion is necessary. Further, more people will be encouraged to open new businesses, and this will keep markets competitive in a recession.

(Okay, there’s a big problem I’m not talking about, which is default. I used to be against this stuff, but since this is the opposite of predatory lending, I’d say the government has your social security number and way more information than normal companies, and can withhold tax returns or income (and even threaten penalties) for default. A little is okay and good.)

Finally, this plan can be augmented with its own Evans Rule (call it the Rao’s Rule?): “So long as unemployment remains above 5% or inflation under 3%, the Federal Reserve will decrease direct financing rates by k*(u-5)% a month” where k is some multiplier, and u is the unemployment rate.

This does a few things the Evans rule does not. First it provides a condition for easing not tightening, which is what we need in a recession. It also achieves what I call “informational neutrality” good news on the job market won’t scare investors into “TAPER TAPER!!!”, because any and all tightening of policy will be linked with proportional decrease in unemployment, and hence increase in aggregate demand. Also, this is not linked to the stock market in the way QE is. That’s a good thing, in case you were wondering.

Under this, the Fed can much more easily commit to be irresponsible (that is, tolerate above-trend inflation in the future), which is the only thing that can gain traction in a liquidity trap, as Paul Krugman famously puts it. All Bernanke needs to do is promise to keep credit card rates negative, or very low, until NGDP is on level (not growth). He needs to bully the FOMC into saying the same thing (and gag Richard Fisher) and there is no way markets won’t believe it.

Problem solved. Oh and the best thing? We could have let the damn banks fail in 2007. Competitive finance, here we come! We even managed to slip in a bit of sneaky fiscal policy with credit financed bridges and education. Might I even say this would end the phrase “zero lower bound”. (The economy’s not picking up? Well lower the rate to -500%, for god’s sake!) Or, if you want to be safe, just stick with Rao’s rule.

P.S. A rather obvious omission is, of course, a credit limit. This would likely be determined by income. The standard refrain might be queasiness at the idea that rich people get access to more cheap (negative) credit, but just consider this compared with the dynamics of QE. Further, most of the rebalancing of the Fed’s balance sheet during the recovery and boom will come from the “rich”.

“There are rents. Look around.” would inaugurate my ideal essay. Since I learned about the economic definition of supernormal profit, I’ve been fascinated by the idea of rentiers. This informs my admiration for David Ricardo and Henry George, as well as my broad disdain towards aspects of Wall Street. When I recently heard that Thompson Reuters sells its report early to elite traders, where Paul Krugman and Kevin Drum see a vindication of wasteful finance, I see the model for an extremely effective tax on rents. I want markets to work, and I see this as a robust financial transactions tax. I’m excited! 

My previous post, arguing for the sale of government information as a tax on rents has received some attention. I left the idea half-baked, and I want to clarify specifically why this would be socially beneficial. Roughly, I want firms to “buy” their rents. Think about a government-issued permit sold for $p that promised you $n in risk-adjusted profit. By definition, (p-n) is your rent. If the permit provides access to early information, an increased demand for the permit does two things, increases p (because other things equal, an upward shift in demand raises the market price) and decreases (because other things equal, if someone else has access to early information, your access is that much less valuable).

If somehow, the demand for such permits was a positive feedback loop – that is, increased demand induced a further increase in demand – then a competitive market would clear at a point where p = n, eliminating all rents from the information. However, there are two components of profit from a government-issued report:

  1. The value of the information itself – perhaps the implication of a payroll jobs report on the state of aggregate demand.
  2. The value of knowing the information before the market. We know that for the University of Michigan consumer sentiment report, this is at least in the millions.

It’s curious that people think (2) is more morally questionable than (1). Actually (2) is just firms eating each others profit in a way that doesn’t really hurt or help society. (If J.P. Morgan pays off Barack Obama to learn who the next Fed chair will be, this will just increase their relative profits to Goldman Sachs). On the other hand, (1) allows highly-scaled trading firms – with access to cutting, proprietary algorithmic and technological edge – to earn a profit on publicly financed information.

Think about the jobs report, which costs money, and scares some Republicans about privacy and individual rights. The value of its publication is quite minuscule to the average American. But it is highly valuable to Wall Street which will then bet on things like overall market health or chances of a QE taper. It’s a classic example of Mancur Olson’s “dispersed costs and concentrated benefits”.

What if we can design a mechanism that uses (2) to capture the rents from (1). Enter the following information auction:

  1. The SEC will run two auctions on the open market. One for permits granting the right to early information, and the other for the extent by which each permit-holder will be granted said early information.
  2. Call the second auction the “market for milliseconds”. The SEC secretly sets the maximum number of “milliseconds” by which someone can access information before the public release. Traders then compete to buy the number of milliseconds that maximizes expected profit.
  3. Then the SEC auctions a limited number of permits, for which there is a captive demand as milliseconds are useless without at least one permit. (Rents from the rentiers).
  4. The difference between this and a classic auction as (somewhat sarcastically) supposed by Neil Irwin is the ability to buy the precise extent of information expedition. This is critical in automatic rent elimination.

While the dual-auction may seem like an unnecessary complexity, it both increases revenues and is required to bind profit from information to profit from early information, which is in some way rivalrous, though not technically (the value of my time premium is inversely proportional to the extent of yours). It “discretizes” the market into “buy” and “don’t buy” rather than “buy a little”, as if you bought just one millisecond you would then realize it is not worth it to buy a whole permit. But, if you buy a millisecond at the margin, it is ceteris paribus more worthwhile for me to follow-suit. This is the necessary positive feedback loop. Firms will now keep buying milliseconds until the profit of the information itself is lost. But between “buy” and “not buy”, the former will be the dominant strategy.

This is a prisoner’s dilemma for traders. Ideally, they would all collude to ignore the auction altogether, waiting for the public release of information. But if everyone else colludes, it’s extremely lucrative for me to buy many milliseconds and just one permit. They will all “defect”, creating a competitive market for early information.

The government can do this for the release of every bit of market-important information:

  • Job numbers
  • Barack Obama’s nomination for Treasury Secretary
  • Who will replace Ben Bernanke?
  • Would Obama have signed Obamacare? Dodd-Frank?

I don’t think the market should earn profits from government reports or policy decisions. You can think of this as an automatically-tuned financial transactions tax. This would ideally be very low during most times, but whenever the government releases information, all trades induced by said release should be taxed at a firm’s Bayesian prior that it is accurate. (From the government, this would naturally be certain). The dual auction accomplishes precisely this.

The maximum time period by which the information can be expedited is the total milliseconds on the open market. But it will always be less than that unless one person purchases the whole market. In this case, the government can still capture all rents. On the second market for the permit to use that information, the SEC should just keep purchasing permits from itself driving the market price to the point where the buyer is indifferent. (The structure of an auction makes it quite possible to determine the reservation price). Of course, this is highly unlikely to happen, but is a good illustration of the reason why two markets are required.

It is natural that the government should command the quantity, and not the price, of information. Given a certain price, the government cannot limit the maximum time by which information can be expedited, which is not a desirable uncertainty. Further, auctions in this case better lend themselves to market-controlled rent elimination.

I hope this clarifies the process, and I’m eager to see where else a similar methodology can be used to cancel rents.

Several bloggers over the past week have commented on lethargic labor market movements as cause of economic decline. Adam Ozimek here argues that the docile job market is possible cause of stagnation. More acutely, Evan Soltas suggests that slow churning increases economic frictions and deepens the long-term unemployment crisis. Most interestingly, Ryan Decker notes that “churning is costly [and] if churning is declining for good reasons, we should applaud it. But that may not be the case.”.

What is see lacking across this discussion – in the long view – is a consideration of how new structures and and Internet have permanently altered what “economic dynamism” is, and how it can be measured thereof. We might call the switch to this new world a “reset”, as per Tyler Cowen. As I discuss here, the most notable economic development seems to be an increase in the stock (as opposed to bond) component of human capital.

To understand the potential impact of the Internet, start with this seemingly irrelevant 2007 paper from Hoyt Bleakley and Jeffrey Lin, “Thick Market Effects and Churning in the Labor Market: Evidence from U.S. Cities”. Bleakley and Lin suggest thick labor markets encouraging deeper and broader churning are causally-linked with agglomeration effects and hence wealth:

These results provide evidence in favor of increasing-returns-to-scale matching in labor markets. Results from a back-of-the-envelope calibration suggest that this mechanism has an important role in raising both wages and returns to experience in denser areas. 

I don’t see many bloggers considering the Internet as an urban agglomeration. In the old days of manufacturing, agglomeration markets derived primarily from physical proximity. However, the idea of urban scaling is theoretically captured (see the Santa Fe Institute on cities or Geoffrey West on the surprising math thereof) with the idea that as the number of inhabitants double, the total number of interactions more than doubles. This generates a superlinear scale on opportunities for innovation, creativity, and dissemination of information (as well as violence and pollution). 

But we don’t need physical proximity for creative collaboration, anymore. Twitter murders the intellectual distance between two parties, allowing for rich propagation of information, as well as creative speculation thereof. I see job offerings for remote positions advertised on my timeline, and too see the violence and incivility one would expect of a large physical gathering.

Cities allowed grand old factories to capitalize on economies of scale. But as the factory share of our economy shrinks, the Internet will become the driving force of most economic agglomeration. (I’m not as confident that the Internet will ever replace San Francisco or Manhattan as the hubs of social agglomeration).

Take I live in India, and know someone that weaves traditional handicrafts here and sells them for a good markup to an American market. The distributed apparatus handles shipping, handling, and any similar frictions. Outlets like this are making labor as mobile as capital. Indeed, part of Tyler Cowen’s “reset” world is deep factor price equalization in some industries. (A plumber’s service is not mobile, for  example).

But as the labor market moves online, jobs are sourced through Craigslist the concept of quitting, firing, and hiring is shaken completely. Ozimek’s measure of dynamism through labor market churn will begin to capture an increasingly smaller aspect of the American economy. If you read the Harvard Business Review, you’re probably familiar with “supertemps” who are high-end professionals by definition in constant churn. Networked labor markets (on steroids via the Internet) make this a reality.

That’s the top 1%. But I believe cheap forms of Craigslist service are on rapid rise among the poor, too. Incorporated self-employment is on the decline, but what of forced entrepreneurship and dogsitting made possible because of the Internet? What of the sharing economy?

There are both cyclical and structural policy implications:

  • Flexible labor markets suffused with social insurance should take the form of strong unemployment benefits and reemployment credits, the latter scaled by length of unemployment.
  • Minimum wage restrictions will become increasingly irrelevant. A basic minimum income, on the other hand, less so. (This is another post, but I don’t think America is yet rich enough for the UBI we need, but will be soon).
  • Increasing frictional unemployment encouraged by a discount version of unemployment benefits offered to “quitters”.
  • The emergence of government-handled job auction markets as a means of depression management.

The Internet is a city that’s growing faster than New York or Mumbai ever did or will. This is the reset. For not much longer will quits+separations be a reliable statistic on job market health. Indeed, the Beveridge curve shows a weak economy in need of rejuvenation, but this is the dreamtime for the old labor market. Something new is coming. I think for the better.

Update: Just realized Neil Irwin considers a somewhat-similar idea here, though I think they’re ultimately quite different in design, I discuss it more at the end.

Earlier this week, we learned that the University of Michigan sells its popular consumer sentiment figures to Thompson-Reuters which delivers the elite customers the information 5 minutes before it is made public, and the super-elite 2 seconds earlier still. As you might imagine, the liberal blogosphere is up in arms. “Insider trading” is trending, at least on my timeline.

But this is a blessing and opportunity in disguise. So long as traders are just rational and not super-rational (also known as renormalized rationality; no one thinks they are) the prisoner’s dilemma will trap them in a brilliant bind. The United States government through the Bureau of Labor Statistics, Federal Reserve, and deep network of public universities frequently and freely releases rich and extremely valuable information. Take the payroll report that is released the first friday of every month, and available to all free of charge. As a rational human being, it is almost worthless to me. However, for a trader on Wall Street, the report conveys crucial information on aggregate demand and forms expectations on Federal Reserve action.

This asymmetrical response generates significant rent, in the form of incredible consumer surplus to the financial services, especially high-frequency traders. How much would you pay for the unemployment figures? I’d pay no more than $5 a month, and that’s for personal interest. For a trader, on the other hand, the value is far greater – and more so the earlier he receives it relative to his fellow traders.

One ought to wonder why the public purse is used for information gathering which creates surplus for a small segment of society. The government stands to make deep profit which can finance progressive redistribution and increase both private and social welfare. But it requires an abdication of our gut aversion towards “financialization” or “insider trading” as if that’s something yucky.

Rather, I suggest a process that will work thusly:

  1. Some practical time period, t, before an important government report is released an electronic auction house opens. The SEC (secretly) decides how many “early” permits auctioned would maximize revenue. =
  2. The SEC further runs an auction selling “milliseconds”. You can buy as many “milliseconds” as you want, from the regulated auction market. The SEC does not disclose how many such segments are being auctioned.
  3. Key: The “milliseconds” auction starts before the primary “early permit” auction.

So, the secondary auction starts and a bunch of traders buy their fancy little milliseconds. Mechanism design tactics must be employed to prevent collusion, and the SEC will hire Al Roth to figure something out. A millisecond is rivalrous (not technically, but in principle), that is if I know information one second earlier, it becomes less valuable if you do as well. But no one knows how many total milliseconds there are, and hence will buy what the expect will maximize revenue.

Then the primary auction for “early” permit starts, without which milliseconds are useless. Because many traders have purchased milliseconds, the government has created a captive demand for “early” permits, increasing demand and revenue thereof (and also decreasing rent).

Traders cannot opt to wait for the public information arrival because they know their competitors will just buy it up front. It would be most profitable if they all just waited for the public announcement, but since they all stand a huge benefit from defecting, they will all default. Therefore, their rents are lost because of their own rationality.

I suggest all important economic reports are auctioned this way, like:

  • FOMC minutes,
  • The Beige Book,
  • News of Osama Bin Laden’s death
  • Income reports,
  • Anything and everything markets will like, including,
  • Election results.

just realized Neil Irwin suggests a similar idea, but I ultimately feel they’re quite different. Mine is designed in a way to snare rentiers into a prisoner’s dilemma into a captive demand of information, rather than nice auctions, per se. Irwin ultimately thinks this violates the responsibility of a government; but I think all this data collection is useless for the whopping 99.9% of us that don’t look at trading terminals all day. And yet our tax dollars finance this boring nonsense, creating rents for a small minority. I like Jeremy Bentham a lot, and he’s always inspired my tax philosophy. I say, when in need of revenues, just create artificially new property rights and auction them to the highest bidder.

P.S. Some have responded that traders do indeed collude, as in Libor. This is a failure of SEC criminal (= jail) enforcement. Anyway, mechanisms like this where defecting is so probably is unlikely to create a collusive equilibrium. Trust between traders would need to be too significant. If demand for permits crashed, someone would buy many for a pittance to make a huge profit. Collusion is not stable.

But say they all did collude not to buy until the public disclosure. Well, that’s not too different from today…