Too Big to Fail Banks are "Crony" Capitalism.

One phrase that became a household word as a result of the last financial meltdown is "too big to fail". Many have insisted that we need to break up all such banks while others have argued that the real issue is not one of size but one of interdependence i.e. a bank becomes more crucial to the economy when its failure will bring about a systemic failure and not only because it is large. The following article is a summary of the views of the president of the Dallas Federal reserve Bank who is a strong supporter of the view that the US does not have to put up with banks that are too big to fail. Read and comment.

************************************************************************************

The largest U.S. banks are "practitioners of crony capitalism," need to be broken up to ensure they are no longer considered too big to fail, and continue to threaten financial stability, a top Federal Reserve official said on Saturday.

Richard Fisher, president of the Dallas Fed, has been a critic of Wall Street's disproportionate influence since the financial crisis. But he was now taking his message to an unusual audience for a central banker: a high-profile Republican political action committee.

 

Fisher said the existence of banks that are seen as likely to receive government bailouts if they fail gives them an unfair advantage, hurting economic competitiveness.

"These institutions operate under a privileged status that exacts an unfair tax upon the American people," he said on the last day of the annual Conservative Political Action Conference (CPAC).

"They represent not only a threat to financial stability but to fair and open competition … (and) are the practitioners of crony capitalism and not the agents of democratic capitalism that makes our country great," said Fisher, who has also been a vocal opponent of the Fed's unconventional monetary stimulus policies.
Fisher's vision pits him directly against Fed Chairman Ben Bernanke, who recently argued during congressional testimony that regulators had made significant progress in addressing the problem of too big to fail. Bernanke asserted that market expectations that large financial institutions would be rescued is wrong.
But Fisher said mega banks still have a significant funding advantage over its competitors, as well as other advantages. To address this problem, he called for a rolling back of deposit insurance so that it would extend only to deposits of commercial banks, not the investment arms of bank holding companies.

"At the Dallas Fed, we believe that whatever the precise subsidy number is, it exists, it is significant, and it allows the biggest banking organizations, along with their many nonbank subsidiaries - investment firms, securities lenders, finance companies - to grow larger and riskier," he said.

Fisher argued Dodd-Frank financial reforms were overly complex and therefore counterproductive.
"Regulators cannot enforce rules that are not easily understood," he said.

(Reporting by Pedro Nicolaci da Costa; editing by Gunna Dickson)

Microeconomics of Scarcity

Hose tripe

Banning hosepipe use is a poor solution to a water shortage

How should we respond to scarcity? Should we increase the price or should we issue rationing coupon? An interesting real world article from the Economist.

 

*********************************************************************************

SPRAY the begonias or flout the law? That is the dilemma facing gardeners in England after a hosepipe ban came into force on April 5th. Another dry winter means that water is in short supply: anyone caught using a hose to refresh a parched lawn or clean a dirty car faces a £1,000 ($1,600) fine. And if you happen to own an ornamental fountain, forget it.
The ban's aim is off. It targets how water is transported, not its consumption—which metering would do. The obsessive car cleaner can use hundreds of buckets of water without fear. Nor is the ban likely to be strictly enforced. The last time hoses were widely forbidden, in 2006, two in seven people ignored the rule. Water firms have abandoned plans to set up hose hotlines enabling customers to shop their neighbours. There is no sign yet of hose vigilantes.

The economics of the ban are all wrong, too. With low supply and high demand, prices in an unregulated market would rise. But the hose ban aims to reduce the quantity of water consumed while maintaining a cap on the price. In a forthcoming article, Jeremy Bulow of Stanford Business School and Paul Klemperer of Oxford University use theory to show that such price caps mean those who value a good most do not necessarily get it. And because they can't pay for it, consumers commit effort to finding other ways of obtaining what they want.

Indeed, the kind of behaviour predicted by theory is already visible. Dedicated websites provide lots of ideas for sidestepping the ban by exploiting loopholes in the law. Power-washing the patio is acceptable if motivated by health-and-safety concerns—to blast away potentially slippery moss, for example. Fountains may be allowed to flow, as long as they lead into ponds containing goldfish.

Another paper, by Tim Leunig of CentreForum, a think-tank, argues that heavy water users should be offered flexible contracts which would reward them for reducing usage in times of drought (farmers could plant less water-intensive crops, for example). They would be paid for each litre they forgo. That would leave the water company out of pocket but with more water. It could then sell this surplus to those that want it, at a higher price. An alternative would be to meter all water users, and to vary the price according to availability. That would, of course, mean installing meters in every house—which would be expensive, but probably a good idea anyway.

Does Daylight Saving cost More Energy?

It is interesting to read the following and learn that there are some seious studies that have concluded that Day Light Savings does in fact cost more energy. Read and comment.



For decades, conventional wisdom has held that daylight-saving time reduces energy use. But a unique situation in Indiana provides evidence challenging that view: Springing forward may actually waste energy.

Ben Franklin may not having been saving much candlewax by springing forward.

Up until two years ago, only 15 of Indiana’s 92 counties set their clocks an hour ahead in the spring and an hour back in the fall. The rest stayed on standard time all year, in part because farmers resisted the prospect of having to work an extra hour in the morning dark. But many residents came to hate falling in and out of sync with businesses and residents in neighboring states and prevailed upon the Indiana Legislature to put the entire state on daylight-saving time beginning in the spring of 2006.

Indiana’s change of heart gave University of California-Santa Barbara economics professor Matthew Kotchen and Ph.D. student Laura Grant a unique way to see how the time shift affects energy use. Using more than seven million monthly meter readings from Duke Energy Corp., covering nearly all the households in southern Indiana for three years, they were able to compare energy consumption before and after counties began observing daylight-saving time. Readings from counties that had already adopted daylight-saving time provided a control group that helped them to adjust for changes in weather from one year to the next.

Their finding: Having the entire state switch to daylight-saving time each year, rather than stay on standard time, costs Indiana households an additional $8.6 million in electricity bills. They conclude that the reduced cost of lighting in afternoons during daylight-saving time is more than offset by the higher air-conditioning costs on hot afternoons and increased heating costs on cool mornings.
“I’ve never had a paper with such a clear and unambiguous finding as this,” says Mr. Kotchen, who presented the paper at a National Bureau of Economic Research conference.

A 2007 study by economists Hendrik Wolff and Ryan Kellogg of the temporary extension of daylight-saving in two Australian territories for the 2000 Summer Olympics also suggested the clock change increases energy use.

That isn’t what Benjamin Franklin would have expected. In 1784, he observed what an “immense sum! that the city of Paris might save every year, by the economy of using sunshine instead of candles.” (Mr. Franklin didn’t propose setting clocks forward, instead he satirically suggested levying a tax on window shutters, ringing church bells at sunrise and, if that didn’t work, firing cannons down the street in order to rouse Parisians out of their beds earlier.)

Minimum Wage

An excellent must read article about minimum wages. I usually would not post back to back on the same issue but this is an exception. Enjoy the treat.

*********************************************************************************

Economic View

The Business of the Minimum Wage

By CHRISTINA D. ROMER

Published: March 2, 2013

RAISING the minimum wage, as President Obama proposed in his State of the Union address, tends to be more popular with the general public than with economists.

Enlarge This Image

Mark Allen Miller

I don’t believe that’s because economists care less about the plight of the poor — many economists are perfectly nice people who care deeply about poverty and income inequality. Rather, economic analysis raises questions about whether a higher minimum wage will achieve better outcomes for the economy and reduce poverty.

First, what’s the argument for having a minimum wage at all? Many of my students assume that government protection is the only thing ensuring decent wages for most American workers. But basic economics shows that competition between employers for workers can be very effective at preventing businesses from misbehaving. If every other store in town is paying workers $9 an hour, one offering $8 will find it hard to hire anyone — perhaps not when unemployment is high, but certainly in normal times. Robust competition is a powerful force helping to ensure that workers are paid what they contribute to their employers’ bottom lines.

One argument for a minimum wage is that there sometimes isn’t enough competition among employers. In our nation’s history, there have been company towns where one employer truly dominated the local economy. As a result, that employer could affect the going wage for the entire area. In such a situation, a minimum wage can not only make workers better off but can also lead to more efficient levels of production and employment.

But I suspect that few people, including economists, find this argument compelling today. Company towns are largely a thing of the past in this country; even Wal-Mart Stores, the nation’s largest employer, faces substantial competition for workers in most places. And many employers paying the minimum wage are small businesses that clearly face strong competition for workers.

Instead, most arguments for instituting or raising a minimum wage are based on fairness and redistribution. Even if workers are getting a competitive wage, many of us are deeply disturbed that some hard-working families still have very little. Though a desire to help the poor is largely a moral issue, economics can help us think about how successful a higher minimum wage would be at reducing poverty.

An important issue is who benefits. When the minimum wage rises, is income redistributed primarily to poor families, or do many families higher up the income ladder benefit as well?

It is true, as conservative commentators often point out, that some minimum-wage workers are middle-class teenagers or secondary earners in fairly well-off households. But the available data suggest that roughly half the workers likely to be affected by the $9-an-hour level proposed by the president are in families earning less than $40,000 a year. So while raising the minimum wage from the current $7.25 an hour may not be particularly well targeted as an anti-poverty proposal, it’s not badly targeted, either.

A related issue is whether some low-income workers will lose their jobs when businesses have to pay a higher minimum wage. There’s been a tremendous amount of research on this topic, and the bulk of the empirical analysis finds that the overall adverse employment effects are small.

Some evidence suggests that employment doesn’t fall much because the higher minimum wage lowers labor turnover, which raises productivity and labor demand. But it’s possible that productivity also rises because the higher minimum attracts more efficient workers to the labor pool. If these new workers are typically more affluent — perhaps middle-income spouses or retirees — and end up taking some jobs held by poorer workers, a higher minimum could harm the truly disadvantaged.

Another reason that employment may not fall is that businesses pass along some of the cost of a higher minimum wage to consumers through higher prices. Often, the customers paying those prices — including some of the diners at McDonald’s and the shoppers at Walmart — have very low family incomes. Thus this price effect may harm the very people whom a minimum wage is supposed to help.

It’s precisely because the redistributive effects of a minimum wage are complicated that most economists prefer other ways to help low-income families. For example, the current tax system already subsidizes work by the poor via an earned-income tax credit. A low-income family with earned income gets a payment from the government that supplements its wages. This approach is very well targeted — the subsidy goes only to poor families — and could easily be made more generous.

By raising the reward for working, this tax credit also tends to increase the supply of labor. And that puts downward pressure on wages. As a result, some of the benefits go to businesses, as would be the case with any wage subsidy. Though this mutes some of the direct redistributive value of the program — particularly if there’s no constraining minimum wage — it also tends to increase employment. And a job may ultimately be the most valuable thing for a family struggling to escape poverty.

What about the macroeconomic argument that is sometimes made for raising the minimum wage? Poorer people typically spend a larger fraction of their income than more affluent people. So if an increase in the minimum wage successfully redistributed some income to the poor, it could increase overall consumer spending — which could stimulate employment and output growth.

All of this is true, but the effects would probably be small. The president’s proposal would raise annual income by $3,500 for a full-time minimum-wage worker. A recent analysis found that 13 million workers earn less than $9 an hour. If they were all working full time at the current minimum — and a majority are not — the income increase from the higher minimum wage would be only about $50 billion. Even assuming that all of that higher income was redistributed from the wealthiest families, the difference in spending behavior between low-income and high-income consumers is likely to translate into only about an additional $10 billion to $20 billion in consumer purchases. That’s not much in a $15 trillion economy.

SO where does all of this leave us? The economics of the minimum wage are complicated, and it’s far from obvious what an increase would accomplish. If a higher minimum wage were the only anti-poverty initiative available, I would support it. It helps some low-income workers, and the costs in terms of employment and inefficiency are likely small.

But we could do so much better if we were willing to spend some money. A more generous earned-income tax credit would provide more support for the working poor and would be pro-business at the same time. And pre-kindergarten education, which the president proposes to make universal, has been shown in rigorous studies to strengthen families and reduce poverty and crime. Why settle for half-measures when such truly first-rate policies are well understood and ready to go? 

Christina D. Romer is an economics professor at the University of California, Berkeley, and was the chairwoman of President Obama’s Council of Economic Advisers.