I think that Megan McArdle has put her finger on what we should be most concerned about in Barney Frank’s announced retirement: Maxine Waters will now be the ranking Democratic member of the House Financial Services Committee.

If anybody believes that all of the crazy people in the House are Republicans, Maxine Waters should provide evidence enough to disabuse them of the notion. Which brings up a good point. What I write around here might be taken as a “plague on both your houses” sort of thing but that’s not it at all. I think that the present structure of the House lends itself to fostering radicalism. And I’m against it.

Moderation is the fundamental virtue of a democracy. It is what makes democracies possible.

I wonder if Alex Tabarrok is aware of just how prevalent small sample size statistics is in medical research? Or that it was originally developed for use in analyzing beer?

I think there’s a great book to be written on all of the things that Guinness has given the world. I’d certainly be willing to do the research.

This morning I found an odd sort of synergy among a cluster of posts in the econblogosphere. Arnold Kling notes an interesting claim in Bill Keller’s recent NYT editorial:

“Nobody who is taken seriously as an economist is going to say ‘cancel the Fed,’ ” said Glenn Hubbard, the dean of Columbia Business School, chairman of the Council of Economic Advisers under George W. Bush, and now Mitt Romney’s chief economic adviser. “I find it very disturbing that the media is giving equal time to some ideas that are just crazy.”

Meanwhile, Robin Wells, Paul Krugman’s wife, makes a case for taking demands of OWS protesters seriously:

On Nov. 2nd, a group of students in Harvard University Ec10, the introductory economics class taught by Greg Mankiw, staged a walk-out. In an open letter, the students lambasted Greg’s course and his textbook for “espous[ing] a specific – and limited – view of economics that we believe perpetuates problematic and inefficient systems of economic inequality in our society today…..There is no justification for presenting Adam Smith’s economic theories as more fundamental or basic than, for example, Keynesian theory.”

I am sure that many of us who have taught introductory economics or who have written an intro economics textbook (a much smaller subset, and I fall into both) felt a pang of sympathy for Greg when we heard about the walk-out. If you have ever faced a large lecture hall of restive intro econ students, or coped with a voluble student with an ax to grind, you can feel some solidarity: we are Greg Mankiw too.

But just how far should that sympathy extend? Is Mankiw simply the target of fuzzy-minded youth who are more intent on making a statement than engaging in reasoned inquiry? Or, is Mankiw – and much of the profession, for that matter – getting a needed reality check about the need to re-orient the way we teach economics?

However, Eric Falkenstein points out that one of the demands of OWS protesters is ending the Fed (to replace it with a fully nationalized and public institution).

A rush of questions come to mind:

• Is Robin Wells crazy?
• Does Bill Keller think that Robin Wells is crazy?
• Does Robin Wells believe that the protesters’ demands with respect to microeconomics have merit while their views on macroeconomics don’t?
• How could we make that determination?
• Are Glenn Hubbard and Bill Keller right? Is wanting to end the Fed unworthy of serious discussion?

and another series of questions on the Federal Reserve:

• Should we end the Fed?
• Should the Fed be replaced by a fully public institution?
• Abolished entirely?
• Maintain its current structure but be required to make its proceedings public?
• Be required to maintain a rules-based regime (a la John Taylor)?

For the record in answer to the question that titles this post I emphatically do not believe that Robin Wells is crazy. I also think that Bill Keller is mistaken about the Fed: abolishing it or changing its structure or operations drastically are subjects worthy of discussion including by serious economists. As to whether or how its structure or operations should be changed I’m uncertain. I definitely find a rules-based regime very appealing but I also think you’d need rules about when, how, and how often you change the rules. I also like the idea of openness but I’m not sure to what degree that would impede the Fed’s effectiveness.

With respect to the OWS movement, I think that it’s ironic, tragic even, that it’s lurching dangerously near becoming a movement about the right to camp indefinitely and without let in municipal parks.

I find the graph above, courtesy of the New York Fed via Calculated Risk, pretty evocative. It illustrates total household debt from 1999 to the present broken out into its various subclassifications with student debt added in the two bars on the right. As a sidebar and to place indebtedness into slightly better perspective according to the Department of Education student loan indebtedness has more than tripled since 1999 compared to home loan indebtedness which had just about tripled from 1999 to its peak in 2008.

If, as economist Richard Koo has averred, we are in a household balance sheet recession and that whatever other measures are taken economic growth won’t resume at anything resembling a healthy level until “deleveraging” has taken place, i.e. household aren’t holding as much debt, we may have a very long time to wait. To my untutored eye it appears that indebtedness is moving sideways, like so much else in the economy.

I would also make the claim that efforts to date like the Car Allowance Rebate System AKA “Cash for Clunkers” and the first time homebuyers tax credit are vain attempts at reinflating the bubble, doomed to failure and, in fact, counterproductive while pump-priming measures like the infrastructure spending provisions in the ARA are at best only effective very indirectly. More direct measures, an ocean of alphabet soup of them, e.g. HAMP, haven’t been effective largely because they haven’t attracted lenders to them.

Let’s assume, arguendo, that we are, in fact, experiencing a balance sheet recession which won’t remit until household indebtedness is substantially reduced. What policy measures would effect that? Taking into account the large proportion of household debt held by the topmost quintile of income earners, are these measures likely to be implemented?

I have one more rather argumentative question. Which model comports better with reality? That policymakers have been striving to fix what’s wrong with the economy or that they have been more or less indifferent to what’s wrong with the economy and have been focused like Bill Clinton’s laser on measures that would please prospective contributors and/or voters?

Yesterday we bade farewell to our last houseguests, sending with them a couple of pounds of turkey each. Our 2011 Thanksgiving is now in the past.

We had 16 for dinner: three siblings, two of their spouses, five of my nephews and nieces, one of my nephews’ girl friends, a dear old friend, the daughter of dear old friends and a friend of hers, my wife, and me. Three of my nephews were unable to join us, a combination of family and work obligations.

I love a full house for Thanksgiving. My siblings and their spouses stayed with us. The young folks stayed with my niece who lives in town. Quite a slumber party!

Above is a picture of my nephews and nieces who were in attendance and my nephew’s girl friend. All exceptionally bright, personable, attractive, hard-working, accomplished young people. I believe you’d be hard put to find a nicer group anywhere.

For what we have received may we be truly thankful.

There’s quite a bit of kerfuffle in the econblogosphere today about Wolfgang Münchau’s FT piece in which he begins the countdown to the collapse of the euro—at this point by his reckoning just ten days away:

The eurozone really has only days to avoid collapse: In virtually all the debates about the eurozone I have been engaged in, someone usually makes the point that it is only when things get bad enough, the politicians finally act – eurobond, debt monetisation, quantitative easing, whatever. I am not so sure. The argument ignores the problem of acute collective action. Last week, the crisis reached a new qualitative stage. With the spectacular flop of the German bond auction and the alarming rise in short-term rates in Spain and Italy, the government bond market across the eurozone has ceased to function.

The short version of his prescription is that the EMU must:

1. Get the IMF to underwrite its needs to tune of several hundred billion euro.
2. Implement eurobonds.
3. Implement a fiscal union.

A pretty tall order pragmatically, not to mention politically. As an American I object to this because it puts the U. S. on the hook for dealing with a purely European problem that the Europeans are quite capable of dealing with themselves. They just don’t wanna. The particular ignominy is that the euro is, at its core, a U. S. attack vehicle. Otherwise, they could just have adopted the dollar as the common currency. Consequently, we’d be paying to prop up a currency that exists to stick a thumb in our collective eye in order to avoid risking trade with an economic zone with which we have a $70 billion trade deficit. There is something wrong with this picture.

As I’ve been saying for some time, under any European fiscal union that actually worked, every year Germany would send some proportion of its GDP to Greece, Ireland, Portugal, etc. just as California, New York, and Illinois sends a portion of their GDPs to Wyoming and Mississippi (just to name two). That is anathema to the Germans.

What we’re seeing in Europe is the working out of the implications of the Articles of Confederation here in the States. For the ethnic states of Europe abandoning nationalism will be significantly harder than it was for us: they are different countries with markedly different traditions, senses of justice, and shared experience. For us that required a civil war and two-thirds of a million dead. What will it take in Europe?

Most of all Germany would need to abandon its mythic view of thrifty, hard-working Germans vs. spendthrift, lazy southerners. I see no prospect whatever of that happening within the timeframe required.

Consider the chart posted by Felix Salmon, illustrating Morgan Stanley’s borrowing from the Fed from 2007 through the end of 2010. I don’t object to the borrowing. As Mr. Salmon correctly notes, that’s the Fed’s job:

On September 16, 2008, Morgan Stanley owed $21.5 billion to the Fed. The next day, that number doubled, to $40.5 billion. And eight working days later, on the 29th, the bank’s total borrowings from the Fed reached $107 billion. The Fed didn’t blink: it kept on lending, as much as it could, to any bank which needed the money, because, in a crisis, that’s its job.

The Fed likes to say that it wasn’t taking much if any credit risk here: that all its lending was fully collateralized, etc etc. But it’s really hard to look at that red line and have a huge amount of confidence that the Fed was always certain to get its money back. Still, this is what lenders of last resort do.

What I object to are the bonuses. Any dividends it’s paid since then. Sales of stock by top management. Basically, those are looting. The top management of banks that are wards of the government need to be paid like the civil servants they are.

There are generally two protests to this. The first is that such restrictions would make it difficult for these banks to hire or retain talent. How much talent does it take to lose the kind of jack these banks did? That talent deserves to be lost. It’s what would have happened in a market.

The other objection is legal, i.e. that the banks had contracts with various employees that required them to pay such and so. My reaction to that is something that an old boss of mine used to say: make it happen. If the banks had failed they wouldn’t have collected anything.

In the small hours of Saturday night James Joyner’s wife, Kim, died in her sleep. She had not, apparently, been ill. No one knew of any life-threatening condition. At this point the cause of her death is not known.

I can’t imagine James’s shock and dismay when he woke to find his wife dead or, possibly, came to bed late (as I frequently do) to find her dead. James has not revealed these intimate details and I would not expect him to. He did leave one poignant observation in the post he left and to which I linked above: his regret that their two little daughters, just three years of age and five months, respectively, would in all likelihood have little or no recollection of their mother.

His decision to post even the briefest of posts under these sad circumstances is testimony to the role that his blog, Outside the Beltway, has played in his life. Those who post at OTB, like Doug Mataconis, Steven Taylor, Alex Knapp, and the others as well as those who comment regularly there are his friends, his neighborhood, his tribe. The large number of comments left on his post by well-wishers are a testament to the regard in which they and we hold James and our shock at the loss he has experienced.

What can one say under circumstances like this? Everything seems inadequate, sadly hollow. Suffice it to say that my condolences go out to James and his family.

Eternal grant unto her, O Lord, and may perpetual light shine upon her. I recognize that doesn’t conform with James’s beliefs but it does with mine and that’s the best I can offer.

With the “Occupy” movement, the demonstrations, and all of the various news and analysis articles that have been written over the last couple of months, it being the Thanksgiving holiday, and recognizing the manifest blessings that many of us continue to enjoy I thought it might be interesting to revisit the issue of income inequality in the United States (something I posted on with maddening repetition long before it became popular). Let’s look at some graphs. I don’t think there can be any doubt that income inequality has increased in the U. S. over the last 40 years viz.:

To fill in some of the blanks in that graph, the “Gini coefficient” is a measure of income inequality that can be thought of as the ratio of the area between the “line of equality”, a 45° line that represents perfect equality, and the Lorenz curve which plots the proportion of the total income of the population (y axis) that is cumulatively earned by the bottom x% of the population. I don’t know whether that make it any clearer or not. Suffice it to say that the Gini coefficient fits an intuitive notion of inequality: Norway’s Gini coefficient is 25.0, Brazil’s is 53.9 (the U. S. Gini coefficient is 45.0—we’re relatively unequal).

I find that chart alarming. It certainly doesn’t reflect the America that I expected to see or that I’d like to see. I also think it’s interesting how, over the period of the last sixty years, the Gini coefficients of the U. S. and Mexico have converged.

Here’s a chart of U. S. taxes to GDP:

and, courtesy of Paul Krugman, a chart of real per capita tax revenues:

See the relationship between taxes and income inequality? Me, neither. In a brief digression does Dr. Krugman’s chart look like a graph of the business cycle to you? It sure does to me.

Even in the post-war parousia I don’t see any clear relationship between tax revenues to GDP, tax revenues per capita, tax rates, or any other simple relationship. Why the emphasis on taxes as a mechanism for addressing income inequality?

Part of it, I guess, is the sort of Robin Hood-ish notion: you take from the rich to give to the poor. I think that reflects a fundamental misunderstanding of how the U. S. government has functioned over time. I see very little evidence that there was ever a notable policy trend to redistribute power or money from the highest income earners to the lowest. What I see is pretty strong evidence of redistributing power and money among the highest income earners.

I think that income inequality is one of those issues, like global warming (which I’m now told we’re calling “climate change”), in which the dialogue is completely misdirected. Rather than arguing about whether it’s taking place we should be talking ways and means. Do the measures that are being proposed actually accomplish what’s being advertised?

As in the instance of climate change, with respect to income inequality I don’t see it.

Update

I remain extremely skeptical of the prescription of education as a solution for income inequality for two reasons. First, the on-time high school graduation rate has remained stubbornly high in New York, Chicago, Los Angeles, and most other major cities for a half century or more—around 50%. As my wife says “You can lead a horse to water but that won’t make him into a duck”. If we can’t get more than half of the kids to graduate from high school, how will we convince them to get associates or bachelors degrees?

Second, consider this:

If there’s any relationship between income inequality and higher education, it would have to be a positive one, no?