Sewell Chan: Economists consider ethics code

It's about time.  I do think it is a good thing when economists participate in both business and policy--such things inform both teaching and research.  But disclosure is important.  We may all think of ourselves as forthright and objective, but we are in fact shaped by experiences (and as economists never cease to remind us, by our paychecks).  Gary Becker's line in Chan's piece about replicability curing all ethical problems doesn't really hold up, because lots of economic theory has never been or has been inadequately tested against data (George Akerlof does a very good job demonstrating this in his AEA Presidential Address from 2007).

We seem as a profession to have a difficult time dealing with ethics--it makes us squeamish, because mainstream economics often celebrates avarice.  But one of Adam Smith's earth shattering works was called The Theory of Moral Sentiments, so he wasn't squeamish about thinking about such things as all.

I have within this blog from time-to-time disclosed my relationships when such things might matter to what I am writing.   The two most important are with Realtors (when I was a graduate student I worked for the Wisconsin Realtors Association, and I was a consultant on Existing Home Sales in the late 1990s and early 2000s) and with Freddie Mac (where I worked for less than a year and a half in 2002-03).  My center at USC has a large number of donor members.   I have also consulted for the World Bank.  These relationships have been rewarding to me financially and intellectually, and while I like to think I play things straight, I would be foolish to pretend that these experiences have had no influence on my outlook.  I leave it to readers to determine the impact of such influence on the validity of what I write.

How the NCAA undermines the academic enterprise

I love major college sports; I have enjoyed having athletes in class--they actually tend to run the gamut in terms of how well they do, and I appreciate the time management skills required to be a varsity athlete while performing well in class.

But part of the academic enterprise is instilling in students the importance of not bullshitting.  The NCAA undermines this when it states things like:

Money is not a motivator or factor as to why one school would get a particular decision versus another. Any insinuation that revenue from bowl games in particular would influence NCAA decisions is absurd, because schools and conferences receive that revenue, not the NCAA.

But who are the members of the NCAA?  The schools!  This statement meets Harry Frankfurt's criteria for bullshit, and is an example of why bullshit is harmful.  Frankfurt:

Someone who lies and someone who tells the truth are playing on opposite sides, so to speak, in the same game. Each responds to the facts as he understands them, although the response of the one is guided by the authority of the truth, while the response of the other defies that authority and refuses to meet its demands. The bullshitter ignores these demands altogether. He does not reject the authority of the truth, as the liar does, and oppose himself to it. He pays no attention to it all. By virtue of this, bullshit is the greater enemy of the truth than lies are.

It seems to me that those of us who have anything to do with colleges and universities have an obligation to avoid bullshit.

My colleague Lisa Schweitzer gently scolds me, and then teaches me something about LA Metro project management

In response to my post, she starts by writing:

First off, it’s a bad idea to conclude anything about work effort based on what you observe by walking by. That’s like the people who judge professors by saying we “only teach two hours a week.” It’s not a valid sample, and it’s very had to evaluate other people’s work effort when you have never done the job yourself— and that’s particularly true of white collar workers passing judgment on blue collar workers engaged in dangerous and often tiring work–during a recession, no less, where anything that extends their work hours has direct implications for their family’s ability to eat and pay rent (unlike salaried work).


More to the point, Richard is mistaken when he concludes that people are not upset. The LA Weekly recently published a story called L.A.’s Light-Rail Fiasco which eviscerates the CEO of the Exposition Metro Line Construction Authority, Rick Thorpe, for salary and his conduct. Rick Thorpe is exactly the sort of transit guy who becomes a free agent and CEO: relentlessly self-promotional and confident, any previous successes get attributed to his leadership. So he picks up stakes, gets recruited away, commands an enormous salary, and builds a brand for himself that he delivers projects on time and on budget.

It is worth reading the whole thing.

Suddenly, some members of the GOP realize they actually will be part of the government

Alan Zibel writes in the Wall Street Journal:

Earlier this year, leading House Republicans proposed to privatize mortgage giants Fannie Mae and Freddie Mac or place them in receivership starting in two years.


Now, as Republicans prepare to assume control of the House next week, they aren't in as big a rush, cautioning that withdrawing government support in the housing market should be gradual.

"We recognize that some things can be done overnight and other things can't be," said Rep. Scott Garrett (R., N.J.), incoming chairman of the House Financial Services subcommittee, which oversees Fannie and Freddie. "You have to recognize what the impact would be on the fragile housing market as it stands right now."

I actually don't think the mortgage market will ever be truly a private sector enterprise.  Suppose Fannie and Freddie were to go away: the most likley entities to step into the residential finance market would be banks.  Would this be privitization?  Not really.  Banks receive explicit guarantees (FDIC) and, as we know from recent events, implicit guarantees as well (TARP was nothing if not the execution of an implicit Federal guarantee). 

The conservative complaint about Fannie and Freddie is that they privatized profit while socializing risk.  This is doubtless true.  I just don't see how it is any less true for banks.

[update: just to be clear, I am all for FDIC, and I think on net TARP left the country better off.  The point is that we will always rely on the public sector to some extent, whether some people like it or not].

Keynes on the "Psychology of Society"

My wife gave me a Kindle for Christmas.  The first thing I should say is that it is really great: my eyesight isn't what it once was, and I find it very easy to read..  The second is that I will continue to buy books at Vroman's (a Pasadena bookstore), because I want them to stay in business.  Third, I downloaded the Economic Consequences of the Peace, which I hadn't read in four or five years.  It has a section early on that really struck me:

Europe was so organized socially and economically as to secure the maximum accumulation of capital.  While there were some continuous improvements in the daily conditions of life of the mass of the population, Society was so framed to to throw a great part of the increased income into the control of the class least likely to consume it.  The new rich of the 19th century were not brought up to large expenditures, and preferred the power which investment gave them to the pleasures of immediate consumption.  In fact, it was precisely the inequality of the distribution of wealth which made possible those vast accumulations of fixed wealth and of capital improvements which distinguished that age from all others.  Herein lay, in fact, the main justification of the Capitalist System.  If the rich had spent their new wealth on their own enjoyments, the world long ago would have found such a regime intolerable.  But like bees they saved and accumulated, not less to the advantage of the whole community because they themselves held narrower ends in prospect.

The immense accumulations of fixed capital which, to the great benefit of mankind, were built up during the half century before the war [WWI], could never have come about in a Society where wealth was divided equitably.  The railways of the world, which that age built as a monument to posterity, were, not less than the Pyramids of Eqypt, the work of labor which was not free to consume in immediate enjoyment the full equivalent of its efforts.

Thus this remarkable system depended for its growth on a double bluff or deception.  On the one hand the laboring classes accepted from ignorance or powerlessness, or were compelled, perusade or cajoled by custom, convention, authority, and the well-established order of Society into accepting a situation in which they could call their own very little of the cake that they and Nature and the capitalists were co-operating to produce.  And on the other hand the capitalist classes were allowed to call the best part of the cake theirs and were theoretically free to consume it, on the tacit underlying condition that they consumed very little of it in practice.

Is the Mortgage Interest Deduction a "Middle-class" benefit?

Yesterday, I was on the Larry Mantle program on KPCC debating Lawrence Yun about the merits of the mortgage interest deduction.  Lawrence is the chief economist of NAR, and is, as such, not disinterested about the issue, but he is an honest advocate (full disclosure: when I was a graduate student, I worked for Wisconsin Realtors, and I consulted on benchmarking the Existing Home Sales series in the late 90s and around 2002 or so ).

He said a couple of things, however, that bothered me.  He sort of dissed renters, by saying they pay only five percent of federal income taxes, ignoring the fact that they pay FICA, state and local taxes.  One would think Realtors would like renters, since they do, after all, pay rent to property owners.  But he also characterized the mortgage interest deduction as being a "middle-class" deduction.  This all depends on the defintion of "middle-class."

Let me turn to Eric Toder and colleagues:

The percentage reduction in after-tax income from eliminating the deduction would be largest for taxpayers in the 80th to 99th percentiles of the distribution. These upper-middle-income households would be affected more than tax units in the bottom four quintiles because they are more likely to own homes and itemize deductions and because the higher marginal tax rates they face make deductions worth more to them than to lower-income taxpayers. The very highest income taxpayers, however, will experience a relatively small drop in income (about 0.4 percent on average) because, at the very highest income levels, mortgage interest payments decline sharply as a share of income.

So it is probably correct to characterize the mortgage interest deduction as an "upper-middle-class" deduction.  The very rich don't benefit that much from it, because they don't really need mortgages.  The bottom 80 percent don't benefit much, because their marginal tax rates are low, they are more likely to be renters and perhaps don't itemize their tax deductions.  My guess is that people between the 80th and 99th percentile don't need a lot of encouragement to become homeowners.

Small reasons that government drives people crazy

A light rail line going by USC--the Exposition Line--has been under construction for some time now.  For a considerable time, the site featured a sign that said the line would open in 2010.  Now the estimates are that it will open some time in 2011 or 2012.  At the same time, when I walk by the project, I can't say that the workers building it show a great deal of, shall we say, urgency about getting the thing done.

At the same time, I don't hear a lot of people who are upset about how far behind schedule the project is. Maybe this is because no one is planning to take the Expo Line.  Maybe it is because peoople have such low expectations of LA Metro that they are not surprised, and therefore not outraged.  Either way, it suggests a problem.

I continue to believe that we need government to do certain things (rail tunnels under the Hudson and a more modern power grid, for starters) for the economy to perform well.  But when government doesn't perform well, it turns positive NPV projects into negative NPV projects, and it undermines political consensus for the necessity of government.

Bethany McLean on the GOP "primer" on the financial crisis

She writes:

This narrative isn't completely wrong—but it is shockingly incomplete, which makes it, in the end, a ludicrous distortion of what happened.

Three points.  First, I have never, ever, seen Peter Wallison suggest that banks are ever anything by morally upright and wise, despite lots of evidence to the contrary (I would welcome a correction on this point). 

Second, to say that the Affordable Housing Goals were major contributors to the crisis is silly, because as people like Wallison liked to point out, the GSE's continually lagged the market when it came to advancing mortgages to low income borrowers and underserved areas.  Wallison specifically said in 2006 that GSEs were "not doing the job they should for low income borrowers.  Finally, the Community Reinvestment Act did not cover many of the financial institutions that originated the most toxic loans.

What bothers me about the entire Republican narrative is that it continues a pattern of argument that suggests that when it comes to finding fault, borrowers are always more culpable than lenders; low income people are always more culpable than high income people; and underrepresented minorities somehow have gotten an unwarranted good deal. 

Update: Barry Ritholtz has 10 questions for the GOP members of the commission.

Jonathan Weinstein on Fairness in Tax Policy

It is worth reading the whole thing; here is the conclusion:

As a 1st approximation, someone in a highly scalable profession would keep roughly

half their income, since they enter the game with, on average, half the population

present. (See a more carefully worked out example in the appendix.) There are

many possible adjustments to this estimate; for one, if the inventor or entertainer

is extracting rents from network e ects and they are not actually much better than

a replacement, their Shapley value might be much less than half their income. On

the other hand, someone in a non-scalable profession creates roughly the same value

regardless of the size of society, so they would keep more of their income. Whether

these considerations re
ect fairness is, of course, ultimately a value judgment, but a

50% top marginal tax rate is well within the historical range, so such an outcome

would not be radical.

The great intellectual advances that illuminated the enormous bene ts of the free

market, starting with Adam Smith and continuing into the 20th century, have long

since been assimilated into our political discourse. The danger is that in some circles

the lessons have been learned just a bit too well. The free market then becomes a

21st-century deity whose dictates are perfectly fair and should not be questioned,

lest its manna of prosperity cease to rain down upon us. Warning about this is, of

course, unnecessary for economists, who, whatever their political stripe, understand

perfectly the limits of core equivalence and welfare theorems. Keeping any nuance

is very di cult when intellectual advances are distilled for a larger population, so

responsible academics always have to be very careful in how they discuss the practical

impact of abstract results.

(Full disclosure: Jon is my cousin).

Yves Smith gives Five Rules for Private Label Mortgage Securitization

They are:

1. Mortgages must be seasoned 12 months before they can be securitized

2. The originator must retain at least a 5% interest in the credit risk of the assets sold

3. The interest of all parties to a transaction must clearly be disclosed, along with their fees

4. Re-securitizations (meaning CDOs) are severely restricted (note a disconnect here; the e-mailed and verbal reports suggested they were banned entirely; the language at the FDIC website seems to indicate that they are allowed in limited circumstances, but any use of synthetic assets, meaning credit default swaps, in a asset-backed CDO is verboten)

5. Compensation to servicers will include incentives for loss mitigation

The mortgage securitization industry apparently opposed this, which is odd, in light of the fact that it is doubtful securitization will return in the absence of such rules.

Yesterday's NYT: A Secretive Banking Elite Rules Trading in Derivatives

In the aftermath of The Big Short, one would think we would try to stop this kind of thing.  It is one thing to be OK with some people making a lot of money; it is another thing to think it is OK for people to make lots of money because of a rigged game in their favor.  I worry that the extraordinary increase in unevenness in wealth is not the result of merit, but the result of the game being more and more rigged.

Density and the use of public transportation

I am grading papers from students in my Advanced Urban course, and a number are reviewing literature on density and use of public transport.  The literature suggests that doubling density is associated with something like an eight percent increase in public transit use, but of course, it is difficult to tease out cause and effect: I suspect those who like living densely are also more likely to want to use public transportation.

I can't help but think about a trip I made to a UN conference on urban issues.  The conference took place in Barcelona, which has among the easiest to use transit systems in the world--more than half the people there live within walking distance of a metro stop.  As it happens, I went to dinner with some officials from the Bush Administration, and when I suggested we use the metro instead of cabs, my companions were, well, stunned at the very idea.  I pursuaded them to go, and learned that a bunch of people who lived in a city which has an excellent metro, Washington, never used public transportation.

I could be wrong, but my sense was that taking the metro in Barcelona was a foreign adventure for them in all kind of ways, and one that they did not particularly wish to repeat at home.

Some facts about Wisconsin: Presentation to Wisconsin Realtors Executive Conference

I see that the Adminstration's deal on taxes is being characterized as a "compromise"

It is not a compromise.  It is a capitulation.

The Residences at LA Live may become LA's icon

After the Hollywood sign, of course.  I heard Victor McFarlane give a talk last night; MacFarlane Partners did the Residences at LA Live:

The picture comes from the LA Architecture Awards web site.  I drive by this building every day, and enjoy it every day.  The place still needs to stand the test of time, but I love the fact that the building is distinctive and doesn't relay on mass or extreme height to be striking.