Economists Talk About Crises

It's what we do. Now, I in no way consider myself an expert on financial markets, nor do I consider myself peculiarly well informed about the current situation or the Treasury's plan to fix it. But I know the jargon of economics well enough to get a picture of what's actually debatable here and what's political posturing.

To get a pretty good (and I think remarkably clear from a non-economist perspective) understanding of what is currently being debated in congress, I'd like to direct you to Harvard economist Greg Mankiw's blog:

The Case Against the Paulson Plan

There are only two things I'd prefer to add to Dr. Shimer's characterization there. In reference to paragraph 7 of the letter, I think it's inaccurate to say the plan won't deal with banks and other institutions fears that they will end up buying bad assets (Akerlof's 'lemons' mentioned in the letter is taken from the term for a used car that is no good, but the buyer can't know in advance). The contention of the administration is that if the government voluntarily buys the assets containing the bad debt, then what firms later offer to sell other banks will be mostly good assets, and the buyers will know that. The government can afford, as the argument goes, to take the hit from the bad debt and then sell what's left of the assets, good debt, later on. These companies can't afford to wait it out, but the government can. That's the argument in favor of this plan.

On the other hand, the number one problem with the plan, in my view, is that in order to prevent panic (which this plan will likely do, I think), we are failing to allow mismanaged firms to suffer their losses. An alternative plan that allows insolvent institutions to take losses while still preventing panic and alleviating the lemons problem would be better. However, in order to prevent panics / bank runs / etc. there may not be time to design a better plan.

Ideally, what we want to see is firms taking risks, and if things go well they get all of the reward (the benefits don't get syphoned off to someone who wasn't at risk), and if things go poorly they suffer all the loss. Clearly this is not the way these markets are currently operating, regardless of the plan chosen now. The public is going to suffer a loss because of these financial companies decisions one way or another. Henry Paulson and Ben Bernanke seem to think their plan is the best way to cut the public's losses. Robert Shimer and many others disagree. But that's what this debate is really about. It's not about helping the rich at the expense of the poor or which party takes money from whom. It's about finding the best way to balance panic prevention, sound incentives, and public pursestrings, all recognizing that the first puts serious constraints on how long congress gets to make a decision.


...or maybe it's like this:

Deimos and Phobos

"What are we doing here?"
Sergeant Leon Romero ignored the question for a brief moment as he kicked the door open, raised his pistol, and stepped into the next room. He swept the beam of light emanating from his gun up and down the dark laboratory.
"We're getting medical supplies and research equipment for Joan and Cassie," Leon said.
"Yeah, but what I don't get is why we're getting them from a dark, abandoned hospital in the dead-center of the city," Jonah said.
"Ha," Leon said, obviously thrilled by Jonah's pun.
"No, really, how many times can we risk going through the most zombie-infested part of town without losing somebody?" Jonah asked.
"As many as we have to, I guess," Leon said. He continued sweeping the room, finally checking inside the storage closet before approaching a door at the back of the lab. "Reed still wants to follow the plan if we can make it work, but we need a lot more gear to make that happen."
"We need to find survivors if we're gonna do that," Jonah said.
A voice came down the hallway behind them. "Guys? Have you got that lab clear?"
"Stay back, Cassie, gotta check the next room," Leon shouted back. "Jonah, hit the door."
Jonah did, and shined his ridiculously powerful FBI-style flashlight into the room.
The zombies must have been sitting down, staring at the wall. Zombies fixate on the strangest things. They stood suddenly, a quicker motion their usual, and they turned shuffling towards the survivors. Their faces and clothes were covered in blood, although they did not appear wounded on the surface. One of them grabbed at Jonah as he stumbled back.
Four loud reports from Leon's gun, and two dull thuds from the back room. Zombies are not really that threatening in small numbers, at least not when you're expecting them.
"GUYS?!?" Came Cassie's shout from down the hallway.
"We're OK," Jonah yelled.
Leon checked the back room for more. "We're clear here, Cassie."
Cassie wheeled into the lab with truck dolly in tow. She carried her gianormous flashlight in her lap. "You scared the crap out of me," she said.
"Just partying like it's 1999," Leon said. "What do you need us to load up?"
"Most of it should be here, and then there will be a couple of items from the morgue," Cassie said.
"The morgue?" Jonah asked.
"If I'm gonna try to figure out why dead zombies didn't stay dead the last time, I'm gonna need some stuff from the morgue, yeah," Cassie said. "You scared?"
"Bring it."

Outside the hospital, Rose walked to the front of the delivery truck to get a look around. She lifted the shotgun in her hands wearily. After glancing up and down the deserted streets, she turned around and chuckled at what she saw. Paulo cut a dashing figure on the loading ramp with his feet planted at staggered heights, hands on his hips and Hawaiian shirt with three buttons undone. As he gazed into the midday sky, he looked like a superhero on vacation.
Paulo noticed Rose's snickering. "What?" He asked. "This is the fashion on all the runways in Italy, I'll have you know."
"No, absolutely," Rose said, still smiling. "You just look like the most relaxed zombie hunter ever."
"È vero," Paulo said.
Roger, who had been sitting in the cab of the truck looking uncomfortable, climbed out. "Kurt's team just radioed, their on their way out," Roger said.
Paulo opened the back of the truck. A minute later, three people came out of the hospital pushing equipment and boxes. In the lead, Kurt Russell (!) quickly handed his box off to Roger. Kurt then drew a pistol and went to the front of the truck where Rose was.
"OK, guys, be careful with this stuff," said Joan, the second person to exit the hospital. "The little doggies and kitties won't be happy if I have to zap their brains with defective equipment."
"Dogs and cats?" Roger asked, clearly dismayed. "They can't even get zombified! Why would you pick on them?"
"Kinda the point, Roger," Joan said. The jangling of glass bottles drew her attention to the tall, lean man behind her. "Walter. Seriously. Do not drop that on your foot!"
Walter handed the box to Paulo, who peaked at it inquisitively. "Why is this one so special?" Paulo asked.
"Morphine," Walter said. "Aside from the fact that we have a serious lack of pain killers at the stadium, I think if I broke those on my foot I'd collapse like one of those fainting goats."
"And you've got a long way to fall," Paulo said.
"It's a gift. And a curse," Walter, a good deal taller than Paulo, said. "I think you're just jealous." Walter didn't actually think that Paulo was jealous.
"OK guys, come on," Joan said. "We've still got another load of gear to get out of there. More if Cassie needs help in the morgue."

The daylight spilled down the stairs beside the wheelchair ramp. Jonah and Leon walked down the stairs as Cassie wheeled down the ramp.
"You guys hang back here," Leon said. "I'll sweep the morgue."
"Okie-dokie, but just check the main room, Leon," Jonah said. "Let's get in and get out."
Leon kicked the morgue double-doors open and stepped into the room. It would have been more dramatic if the left door hadn't swung back and hit him in the shoulder. It would have still been dramatic if there had been any zombies to shoot.
"Follow me," Leon said.
"Alright, guys," Cassie said as Jonah held the door. "First, I need... some of those!" Cassie wheeled toward the examination table by the cold chambers. "Jonah, give me a hand with this. Yeah, push that out of the way."
Jonah pushed the post mortem utensil cart aside, and began lifting a box with the tools Cassie was looking for.
To rephrase an important rule from physics, when stuff gets pushed, it tends to keep going unless something gets in the way. In this case, the stuff is a post mortem cart. The something in the way is a cold chamber.
The loud bang reminded the whole room that physics was still working.
"What the hell was that?!?" Leon, who was a cop back when there were cops, shouted. Cops get to talk like that (Should I be bleeping foul language?).
"Sorry," Jonah said.
The second bang was not as loud, but it let them know about a lot more than physics.
bang. Bang bang.
Bang, bang--from another chamber. And BANG! from yet another.

"Kurt, we need you down here!" Leon's voice came over the walkie-talkie. Kurt glanced at Rose and Roger, the two remaining by the truck. Without a word, he drew his pistol and ran back into the hospital.
"Wait, what's going on??" Roger yelled after Kurt.
"Relax, Roger," Rose said. "Kurt's the strong, silent type. At least silent."
"Yeah but what if something goes wrong out here?" Roger said. "All I've got is a crowbar."
"Shh," Rose said. "We're pretending nothing could happen."
"Hello!!!" Rose and Roger turned suddenly toward the street past the movie theater. Several blocks away, a man was staggering toward them, followed closely by two dozen zombies. "HELP ME!"
"Bleep," Rose said. It was warranted, but I decided to bleep it anyway. "He's gonna draw them all right to us!"
They stumbled out of the theater. They walked out of the office buildings. For blocks around, dozens and dozens of zombies began wandering into the streets. It quickly became clear that the man would not make it to them before the zombies closed in around him.
Roger ran towards him. Not that Roger was a particularly heroic man, but this was a survivor, and survivors should stick together. As he reach the zombies ahead of the man, he came in swinging.
Rose reacted slower, but smarter. She moved toward the theater entrance and fired three shots at the zombies in the doorway, knocking them back. She then shoved her crowbar into the doorway, sealing about thirty zombies inside. She turned to see four zombies had turned toward her, and six more moving toward the truck.
"Roger, get to the truck!" She shouted. She continued to fire, cutting an opening for Roger and the injured man.
"AAAAARRRRGGHH!" Roger shouted. He fell to the ground with a zombie's teeth sunk into his left forearm.
The rest of the retrieval team came pouring out of the hospital. Leon and Kurt immediately began shooting zombies. More of them turned their attention on the truck.
"Let's get this stuff on the truck quick," Joan said, lifting boxes quickly.
Walter knew they had to move fast, but they couldn't afford to lose people. "Paulo, come on!"
The two men raced to Rose, Roger, and the injured man. Rose shot the zombie off of Roger, and Walter and Paulo helped the two men back to the truck.

And then they all got eaten by zombies. But not really.

"OOWWW! UUNNGHH!" Roger shouted.
"Hold him down! Cassie, hand me a bottle of morphine!" Joan said.
"Thank you for... saving me," the injured man said, wincing. "Did you say you have morphine?"
Walter slapped the man across the face. He was incensed.
"Joan, it's a zombie bite," Rose said. "He's going to turn."
"Thanks, pretty sure we got that," Joan said. "We're a little busy right now getting it under control."
"We can't bring anyone who's going to turn into the stadium," Jonah said. "That's the first rule. We can't take him in."
"You think we should have left him?" Paulo asked.
"We're taking him inside," Walter said.
"What are you talking about? Reed will never agree to that."
"He'll agree. I'll convince him," Walter said. He meant it.
"Walt, you're putting all of us at risk," Leon said. "Why would you do that?"
"Keep him unconscious, Joan," Walter said. "You won't just be studying cats anymore."
"What?"
"We'll keep both of them in the lab. If this new guy makes it a week without turning, maybe we'll put him to work," Walter said.
"I hate to say it, but Walter's right," Rose said. Kurt and Paulo nodded their agreement.
"But... but I haven't been bitten, I'm not infected," the man said.
"I guess we'll take your word for that, then," Walter said sarcastically. "If we show up with a couple of infected, the camp will collapse in panic and fear. If we have a plan, we survive."

With Due Respect to Harvard...

I have to respectfully disagree with Dr. Ed Glaeser. I haven't read the book by Goldin and Katz, but the article itself seems to miss some important facets of formal education. It's true, there is broad empirical evidence that more education yields significantly more lifetime income. There is also some evidence that more educated societies grow faster (although there is also ample evidence that education and growth are unrelated).

However, before we advocate throwing huge amounts of money or resources at education, we need to be a bit more sophisticated in our thinking. After all, there is some evidence that the primary benefit of secondary and college education is not the facts you learn or clearer thinking, but the signal a diploma or degree sends of your natural ability. Now, signaling is good. Signaling is important.

But what about those individuals with lower ability levels? We have placed so much emphasis on education that anyone without a college degree is considered low class, unimportant, approaching worthless. Aside from the psychological damage equating education with personal value can cause, we end up creating a significant economic problem as well: educational rent-seeking.

Rent-seeking, in an economic sense, means expending resources trying to win a prize, wasting real resources in the process. The book The Overachievers provides graphic examples of the wasted time and resources many high school students spend to get into Ivy League colleges, despite the fact that only a small fraction of them can even fit in the classrooms. Rent-seeking is a topic we've recently discussed in my economic development class, which is why I bristle at Ed Glaeser's article.

I'm all for education. But we need to provide schooling that actually improves the minds of students, without equating education, earnings, and human worth. I want to see a government that encourages education, not just school funding.