Monthly Archives: April 2016

The housing market started teetering sometime in 2006. The investment banking crisis climaxed in September 2008 after Merrill Lynch was acquired, Lehman Brothers failed, and Goldman Sachs became a bank. Over this week both the incumbent and future presidents would talk about the upcoming financial crisis. The commercial banking crisis became acute toward the end of 2008 through Citigroup’s second bailout in 2009. The unemployment rate starts ticking up in 2007, hits 6.5% in October 2008, and races through a 10% peak in October 2009. It’s not until 2013 that it falls back to where it was a month after Lehman. This was the opposite of overnight.

Yet you might miss that in consumer search activity.


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Sometime after September 15 Americans thought the world might burn. And sometime by October 10th they decided everything was fine. Notably most of the peaks in the charts above, typically between September 28 and October 11, were post Lehman. This isn’t a feature of lagged searching, searches about the Lehman bankruptcy peaked in on September 14. This is no coincidence. A little over a week after Lehman failed, Americans watched their Treasury Secretary warn of economic calamity if TARP wasn’t passed. By the end of September a chorus of other luminaries were threatening economic doom. TARP was finally signed into law on October 3.

What’s fascinating is the compression of fear over two weeks that wouldn’t turn out to be very relevant for the American consumer. The stock market was flat or up for at least two weeks after Lehman failed, and Americans were calm and would remain calm after the market decline started in earnest. Nor did concerns about financial stability really return in 2009, even though unemployment soared and the commercial banking system remained weak.

While September 2008 was an important moment for the investment banking crisis, it wasn’t particularly relevant to most Americans. Families didn’t have deposits at Lehman, and didn’t borrow from Goldman to fund their home. Even interest in the housing crisis, which was brewing for at least a year if not longer, surged as the investment banks failed. Nor did search interest in crisis return prominently towards the end of the year when the banking system was in shambles.

Even the moderate increase in interest for “bank bailout” and “banking crisis” in the first quarter of 2009 doesn’t nearly match the same for late September 2008, before the banking crisis really even started. Of course this might be a distinction most searchers ignore, but the spike in “banking crisis” we observe in January-March 2009 that we do not observe in “financial crisis” suggests there is some discrimination. Of course the big difference was that by 2009, America’s wise men stopped warning of economic doom.

I’m not going to pretend I understand this data, what this data means for consumer sentiment, or what consumer sentiment means for the economy. But it strikes me as quite plausible that the incredible fear American political leadership provoked at the end of September 2008 may have had repercussions magnifying the the economic downturn. The official chronicle of the crisis plays so much lip service to “stigma” and “confidence”. It’s peculiar that there were some people who probably tried to force Bill Gates to accept TARP funds to conceal the obvious fact that Citigroup was desperate – but not concerned that this parade increased search interest in terms like “is my money safe”, “is my 401k safe”, or “next depression” by 100-fold.

For some searches we don’t see an immediate return to normal.

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Within two weeks we observe a regime change in concern about a “great recession”. It’s hard to explain such a sharp change from September 15 to October 10 without considering the political theater that was considered necessary to pass TARP. It doesn’t strike me as unreasonable that the anxiety that follows from watching your Treasury Secretary talk about the next depression could have an acute impact on durable good and other luxury purchases, at a time when the economy was already underperforming.

I’m not suggesting that stress in the broker-dealer system was irrelevant to overall financial stability. But they weren’t directly relevant to most Americans. To the extent they were economically relevant, it would be indirectly felt through the commercial banking system. There are many times between 2007 and 2010 when Americans could have been reasonably scared – when house prices started falling, when subprime lenders started failing, when bank failures picked up, or when unemployment exceeded 10%, among others.  That this fear only appeared during September 2008 appears to be the outcome of a deliberate decision to scare people into legislating bailout.

This isn’t a criticism of the fairness or efficacy of TARP. Just the observation that a six sigma spike in “is my money safe” probably doesn’t lend much to credibility and confidence in the banking system.



In a recent post, Paul Krugman notes that there are simpler alternatives to a carbon tax that might get the job done. Though I don’t take too much issue with the principle – that there are other ways to reduce carbon emissions than a tax, the argument itself lacks content.


That said, there are reasons Econ 101 may not be right here. There is some evidence that consumers aren’t hyper rational when it comes to conservation, that they may pass up conservation opportunities even when it would save them money — and in that case rule rather than prices may be the right way to make them change. And to the extent that we’re talking about innovation, the Econ 101 case says nothing at all: the efficiency case for carbon pricing is about making best use of existing technology, not about providing incentives to develop better technology.

[The importance of a carbon tax] depends on the complexity of the required response. If reducing emissions really has to involve moving on many fronts, anything that looks like an administrative solution — telling, say, power companies what to do or not to do — is going to be much more costly than carbon pricing that exploits all the possibilities. But if a large part of the solution is going to involve a fairly limited set of measures — such as putting a quick end to the practice of burning coal to generate electricity — getting to broad-based carbon pricing is much less central.

And what I gather from reading various analyses of our prospects is that we’re closer to case #2 than to case #1: the problem of limiting climate change isn’t all that complex. End coal-burning and you’ve gone a significant way; a few other big things get you another substantial part of the way. Yes, comprehensive carbon pricing would be best, but it’s not the sine qua non of effective action.

There are many problems here. The argument doesn’t examine, or even make any indication of caring about, price. There is a price at which consumers don’t care, and a price at which they do. People aren’t rational about keeping the lights on because it doesn’t cost anything to keep the lights on. And that excludes the possibility that the irrational consumers actually have a rationale behind avoiding conservation opportunities that a researcher thought was cost-effective. Econ 101 also tells us to trust revealed preference.

More importantly, there’s a troubling circularity to the logic:

  1. Carbon taxes are better than the alternative because we can’t observe the tastes and preferences that drive the demand for carbon.
  2. But coal creates a lot of carbon, so lets ignore our initial premise and get rid of coal.

One might note the nonchalant way in which Krugman talks about “[ending] coal-burning” or “putting a quick end to the practice of burning coal to generate electricity”. If it was so easy we probably would have done it already.

There are problems. Some states are far more coal reliant than others. Some states need far more energy for winter heating. Some states are rich while others are poor. Some states have citizens more concerned about nuclear fallout. The entire point of a tax is to attempt to solve these issues in a more effective way than command and control.

The argument could be that “carbon tax is politically impossible whereas command and control is not” but that’s not the argument Krugman is making. To somehow suggest that we can isolate one important source of carbon and achieve most of what a carbon tax solves begs the entire question. It would be akin to noting suggesting “greenhouse gases seem to drive climate change – we could get bent out of shape over a greenhouse gas tax or just put a quick end to using carbon to move around and heat our houses”.

To the extent “a few big things get you a substantial part of the way”, each of the “few” things is going to suffer the same initial problem of command or market that it was intended to solve, or is actually going to be so large and complex that it can’t be effectively implemented. That’s not to say that banning coal can’t reduce emissions, but that’s obviously not the bar given that “Do whatever Somalia is doing is also a pretty good way to reduce emissions.” It’s also hard to check that the marginal users of coal increase net carbon impact. It’s hypothetically possible that coal growth is driven by electric cars which are may be net negative. Banning coal doesn’t help here. It’s also very possible that I’m wrong which is a perfect example why Econ 101 is actually fine and this isn’t a uniquely good candidate for control.

Furthermore, while it’s true that the Econ 101 case isn’t as much about innovation as it is about shifting supply and demand, it’s difficult to separate the two since innovation is a necessary component of the argument to begin with. Most people aren’t suggesting that we should become poor to end carbon emissions. Rather that with the right incentives innovation will fill some of the gap. Nor is the line between existing resources and future innovation so clear. It’s probably true that if investors with skin in the game put more money into clean technology, it will improve. The carbon tax just changes the calculus of whether that might be worth it.


There’s absolutely no way to know “whether we’re closer to #2 than to #1” without some sort of market incentive to test the claim. If all carbon was coal, claiming that we should ban coal obviously won’t work and we would need to figure out how to get there. Which would only return the original question.

I’m not saying that Krugman said something particularly offensive – that there may be conditions under which simple control gets the job done – but that this is always the case and not uniquely special in this situation. There needs to be some consideration of price, cost, and distribution – none of which find any attention in the column.

It’s also a moral question. If the government decides that we should reduce carbon emissions, we should be free in our execution of that plan. A vegetarian can choose not to start eating steak instead of buying government mandated lightbulbs and paying too much for heat. A commuter can choose to walk instead of drive instead of turning off the Christmas lights. It would be appallingly immoral to prescribe a set of values that we must use to achieve a certain goal.

Nothing in this column was incorrect per se. Everything was trivially true (“taxes aren’t the only way to reduce carbon output”), required some sort of a magic wand that begs the question (“end coal”), or suggested a false sense of confidence in what we know (“In my post favoring the effectiveness of limited measures I note that I’ve gathered this to be true”) even though the impossibility of knowing such is the premise of a tax to begin with.

Krugman probably knows this and may have been trying to motivate a broader point. Unfortunately the idiot politician that cites a Nobel Prize winning economist in a new “ban lightbulbs initiative” probably won’t call to ask.