He says they are:

Now, you could and should be worried if this thing looked like a great bubble -- if long-term rates looked unreasonably low given the fundamentals. But do they? Long rates fluctuated between 4.5 and 5 percent in the mid-2000s, when the economy was driven by an unsustainable housing boom. Now we face the prospect of a prolonged period of near-zero short-term rates -- I don't see any reason for the Fed funds rate to rise for at least a year, and probably two -- which should mean substantially lower long rates even if you expect yields eventually to rise back to 2005 levels. And if we're facing a Japanese-type lost decade, which seems all too possible, long rates are in fact still unreasonably high.

Yours truly, meanwhile, is betting against the markets.

Brad DeLong offers me a bit of consolation.

The long Treasury market is thinner than many people think: it is not completely implausible to argue that it is giving us the wrong read on what market expectations really are because long Treasuries right now are held by (a) price-insensitive actors like the PBoC and (b) highly-leveraged risk lovers borrowing at close to zero and collecting coupons as they try to pick up nickles in front of the steamroller. And to the extent that the prices at which businesses can borrow are set by a market that keys off the Treasury market, an unwinding of this "carry trade"--if it really exists--could produce bizarre outcomes.

Bear in mind that this whole story requires that the demand curve slope the wrong way for a while--that if the prices for Treasury bonds fall carry traders lose their shirts and exit the market, and so a small fall in Treasury bond prices turns into a crash until someone else steps in to hold the stock

PBoC I translate as "People's Bank of China."

And what about the possibility of a fall in prices forcing speculators to sell and causing a further drop in prices? If you think that is implausible, I've got some houses to sell you at 2006 prices.

Thanks to Tyler Cowen for the pointer.

I just completed an interview with Moe Ansari of Market Wrap. We talked about the current recession, the health care bill, and various other things. If you want to listen (I think you'll hear an edited version but they might use the whole thing), go here at about 4:30 p.m. PST (7:30 p.m. EST). It will also be played later on KABC 790 A.M. in Los Angeles between 6:00 and 6:30 p.m. PST.

Josh Lerner writes,

Upon Singapore's independence in 1965--three years after Jamaica's own establishment as a nation--the two nations were about equal in wealth: the gross domestic product (in 2006 U.S. dollars) was $2,850 per person in Jamaica, slightly higher than Singapore's $2,650. Both nations had a centrally located port, a tradition of British colonial rule, and governments with a strong capitalist orientation. (Jamaica, in addition, had plentiful natural resources and a robust tourist industry.) But four decades later, their standing was dramatically different: Singapore had climbed to a per capita GDP of $31,400 (2006 data, in current dollars), while Jamaica's figure was only $4,800.

Lerner, an economist who studies entrepreneurship, writes,

While much of the initial growth in Singapore can be attributed to sound macroeconomic policies, political stability, and various other factors, the nation's entrepreneurship initiatives have played an increasingly important role in stimulating growth.

Read the whole thing. Lerner points to the sorts of institutional factors that Nick Schulz and I talk about in From Poverty to Prosperity. However, I would not advocate any sort of government "entrepreneurship initiatives." As Lerner points out, it is the overall business environment that matters, not whether government has programs specifically designed to support entrepreneurs.

Will Wilkinson writes,

Ygesias says, "I believe that absent the [TARP] bailout, we'd be looking at even higher unemployment today."

I think this is a plausible claim. But I don't know of a satisfactory way to evaluate it. It's plausible because some plausible theories about the nature of the financial economy and its interaction with the real economy imply its truth. But other plausible theories do not. My problem is that I don't know of a satisfactory way to evaluate these theories. I'm not saying that there is no way to evaluate them, only that I don't know what it is. It would be nice to form a responsible opinion about this sort of thing. Can someone please help?

One of my strongest beliefs about the financial crisis is that the narrative that we come to accept about it will matter much more than the crisis itself. I see a strong parallel between the narrative "TARP prevented a Great Depression" with the narrative "The New Deal ended the Great Depression." The latter narrative has very little economic support, even among economists who avidly support the New Deal. However, it is the dominant narrative because it supports progressive ideology.

The claim that the economy would be much worse off now without TARP has been repeated so many times that I must infer that it has as much ideological significance as the claim that the New Deal ended the Great Depression. And yet, the claim is rarely backed by evidence.

Some further comments.

1. I will certainly respect you in the morning if you say that we cannot possibly know what would have happened without TARP, because history does not provide us the opportunity to run controlled experiments. But I think that one must try to make intelligent guesses, even though we can not know with high confidence.

2. Textbook macroeconomics would tell you that we did not need TARP. Textbook macroeconomics says that fiscal and monetary policy can deal with a recession. If jobs programs are a third-best policy for dealing with unemployment, then bank bailouts are no more than a fourth-best policy.

3. Ben Bernanke studied the Great Depression, and he found that the loss of banking institutions mattered, because borrower-lender relationship capital was destroyed. But even if we stipulate that his view was correct for the 1930's, it was not necessarily correct for today's economy. What we had last year was not a crisis in ordinary banking, but a crisis in securitization. In my opinion, we can do without securitization. Instead, in my view we can, and probably should, return to ordinary banking.

4. WIthout TARP, policymakers could have focused on the parts of finance that do not relate to securitization. Providing a temporary guarantee for money market fund deposits was probably a good idea. It was probably a good idea to make sure that the commercial paper market kept functioning for ordinary businesses--but not for funding structured investment vehicles filled with mortgage securities.

My view of history is that what TARP accomplished is that it saved the firms that were involved in securitization. If you think that the institutional capital embedded in that industry is really, really valuable, then TARP had benefits that might offset its costs. My own view, having seen first hand how securitization worked when I was at Freddie Mac, is that it relies too much on government guarantees, and old-fashioned banking is a viable alternative. So I would not have been willing to put much effort into saving securitization.

Furthermore, I think that saving securitization produced no short-term benefits for dealing with the recession. If anything, it diverted tax resources from other uses that could have done more to maintain full employment.

When you play with fire, you get burned.  And when you philosophize with hypotheticals involving Nazis, you get misrepresented.  In the Caplan-Hanson debate, I began:

Let me begin with a disclaimer: Despite his moral views, Robin is an incredibly nice, decent person...

Nevertheless, Robin endorses an endless list of bizarre moral claims.  For example, he recently told me that "the main problem" with the Holocaust was that there weren't enough Nazis!  After all, if there had been six trillion Nazis willing to pay $1 each to make the Holocaust happen, and a mere six million Jews willing to pay $100,000 each to prevent it, the Holocaust would have generated $5.4 trillion worth of consumers surplus.

Let's consider another example.  Suppose the only people in the world are Hannibal the millionaire, a slave trader, and 10,000 penniless orphan slaves.  The slave trader has no direct use for his slaves, but likes money; Hannibal, on the other hand, is a ravenous cannibal.  According to Robin, the "optimal outcome" is for Hannibal to get all 10,000 orphans and eat them.

When the Faith Heuristic responds to this transcript, he seems to take my side: Contrary to a lot of economists, there's more to right and wrong than efficiency.

Consider slavery. There is an unavoidable tradeoff between letting slaves keep the fruits of their own labor and having that go to the slave owners. How does the Law and Economics crowd respond?

I've always assumed, wrongly it appears, that they would argue that the slaves could never be the least cost avoider. But I stand corrected. I learned in the debate that they would bite the bullet and accept slavery and genocide.

The last paragraph is strange.  If you tell a person, "Your view implies that if slaves were the least cost avoider, then slavery would be justified," the non-bullet-biting response is "My view doesn't imply that."  Contrary to Faith Heuristic, "Slaves could never be the least cost avoider," is an example of bullet-biting.

Still, I wouldn't say that FH is misrepresenting either side in the Caplan-Hanson debate.  It is unfortunate, then, that Brad DeLong excerpts and edits the last paragraph to make it sound like Robin and I both accept the very position I attacked Robin for holding!  Brad's version:

I've always assumed, wrongly it appears, that [libertarians] would argue that the slaves could never be the least cost avoider. But I stand corrected. I learned in the debate that they would bite the bullet and accept slavery and genocide...

Notice: In Faith Heuristic's original post, "they" clearly refers to "the Law and Economics crowd," not libertarians in general.  (Earlier in the post, FH notes notes that Law and Economics is a "school of libertarianism," but that doesn't change the referent of the passage Brad quotes).

Still, isn't Brad correct to point out that at least one self-styled libertarian endorses monstrous actions in weird hypotheticals?  True, but it's awfully misleading.  It would be better to say that all consequentialists endorse monstrous actions in weird hypotheticals, and some libertarians are consequentialists.  The same is true, of course, of every other political philosophy I'm aware of.  Libertarians have our Robin Hanson, and social democrats have their Peter Singer.  These bullet-biters can sound pretty scary, but I've known my share.  In practice they're often thought-provoking and almost always harmless.

Sherry Glied, Ashwin Prabhu, and Norman Edelman do not think so.

The value of physicians' underlying human capital is estimated by forecasting an age-earnings profile for doctors based on the characteristics in youth of NLSY cohort participants who subsequently became doctors. Published estimates are used to measure the total cost (wherever paid) of investments in physician training. These data are combined to compute the societal cost per primary care physician visit. The estimated societal cost per primary care physician visit is much higher than the average co-payment per primary care service and generally higher than the current Medicare compensation rate per service unit

What I think they are saying is that Americans with the talent to be doctors but who choose other careers do at least as well financially, if not better, than those who become primary care doctors.

They are certainly going about answering the question in a more economically sensible way than just looking at doctor salaries compared to average salaries and contrasting this with other countries.

Reacting to my recent post on the analogy Robert Higgs drew between libertarianism and abolitionism, a commenter wrote,

Hans Hoppe, hardcore libertarian, once described what may be the crucial difference between a democratic state and slavery: the latter was private and thus unequal. It is a major departure from such private and unequal slavery to posit that everyone can own each other, (even if 'own' is not an attractive word to use, but for analogy's sake). In theory, in a democracy everyone is both 'slave' and 'slavemaster' to everyone else, rendering the concept of 'slave' basically meaningless.

Actually, I do not think that the point of Higgs' analogy is to claim that government is as immoral as slavery (although he might make that argument separately). Instead, the point of the analogy is that government shares with slavery the fact that many people see its elimination as unthinkable. That is, when slavery was widespread, people thought either that a world without slaves was inconceivable or that freeing slaves would lead to chaos.

Similarly, many people think that the abolition of government would be unworkable. I put myself in that camp. I think that humans are status-seeking animals, which gives them a tremendous propensity for disputes, most of which are wildly irrational apart from the status issues involved. In the absence of a hegemonic power, I believe that these disputes will escalate into violence.

I call myself a civil societarian. I believe that almost every problem that people look to government to solve could instead be solved by other institutions of civil society. I only want a government that can umpire disputes. The question for someone like me is what stops this umpire from claiming an ever-expanding jurisdiction.

Because I accept this umpiring role as necessary, as far as government goes, I am one of the rationalizers. If abolition of government is the libertarian ideal, then I am a hopeless reactionary.

On the other hand, I am nowhere close to being as romantic about democratic government as the commenter quoted above. Democracy does not mean that everyone is slave and slavemaster to everyone else, as if we have perfect political equality. In the United States today, democracy means that most people have essentially zero political power, and a relative handful of people have almost unimaginable power. The central point of Unchecked and Unbalanced is to call attention to the extreme political inequality that has emerged in the United States, particularly over the past fifty years.

Higgs' analogy appeals to me because I find it totally baffling that so many self-styled progressives are vociferously rooting for this political inequality to increase. They want technocrats making even more decisions, with even fewer political checks and balances. Given my opposition to this growth in political inequality, I find progressive ideology as jawdroppingly appalling as if I had been a 19th-century abolitionist encountering an ideology that says that what the world needs is a lot more slavery.

When a person with crummy but popular arguments says that "truth is relative," I understand their motives.  They're denying that anyone else's arguments are any better, and hoping that there's safety in numbers.  But when a person with clever but unpopular arguments undermines the notion of truth, I'm baffled.  Case in point: Scott Sumner remarking that:

I think the best way to approach this issue is to use Rorty's maxim "truth is what your colleagues let you get away with."  Truth is socially constructed.

So I guess all of Scott's complaints about the recent folly of central bankers and the economists who apologize for them are false, because their colleagues are certainly letting them get away with it.

The Kauffman Foundation conducted a survey of entrepreneurs. The findings can be inferred from the table of contents.

Experience, Management, and Luck: The Keys to Success
Professional Networks, Education, Funding, Personal Networks: Important
Location, Investor Advice, Alumni Networks, and Regional Assistance: Not so Important
Entrepreneurs Perceive Very Few Obstacles for Themselves.
Entrepreneurs Believe Entrepreneurship is Very Risky and is Hard Work
Using Personal Savings is the Norm, Venture Capital Comes to the Experienced, and Friends and Family are Always There
Other Success Factors
Entrepreneurship is Believed To Be Stressful, With Unanticipated Challenges

As an issue of methodology, the survey is assuming that entrepreneurs are correct in their perceptions of the sources of their success. Self-deception and the lack of a control group could be problems.

I personally would emphasize a desire to sell. If you cannot overcome your fears and insecurities about selling (and who doesn't have those fears and insecurities?), then you are very unlikely to be successful. The notion that you can have such a great idea that it will sell itself (or "go viral," as they say) is very seductive and in my view almost always wrong.

From Poverty to Prosperity turned out to have a big focus on entrepreneurialism, in part because of interviews with Edmund Phelps, Amar Bhide, and William Baumol. I created a list of entrepreneurial temperaments and found that when I reversed them--creating an "anti-entrepreneur"--the resulting personality is in fact a typical bureaucrat, colorless and rigid.

Simon Johnson writes,

There is no question that passing the TARP was the right thing to do. In some countries, the government has the authority to provide fiscal resources directly to the banking system on a huge scale, but in the United States this requires congressional approval. In other countries, foreign loans can be used to bridge any shortfall in domestic financing for the banking system, but the U.S. is too large to ever contemplate borrowing from the IMF or anyone else.

I watched over the Internet some of the hearing at which Johnson and others spoke. At one point, several speakers pointed out that in trying to suggest an alternate history without TARP, one has to assume some alternative. This leads me to think about the policies that have been followed and my proposed alternatives. These are alternatives that I proposed at the time.

1. Existing Mortgages and home owners.

Actual policy: attempts to implement loan modification programs

My policy: pay the moving expenses of homeowners who default on their mortgages. But do not interfere with the foreclosure process.

2. Mortgage Markets

Actual policy: keep Freddie Mac and Fannie Mae going, and we now have 90 percent of mortgage loans made by federal agencies.

My policy: Limit Freddie Mac and Fannie Mae to their existing oook of mortgage loans (I wrote this in September of 2008) and not allow them to purchase any new mortgages. Let banks take up the slack in mortgage lending.

3. AIG

Actual policy: creditors bailed out 100 percent.

My policy: Send in a "stern sheriff" to protect the liquid assets of AIG from creditors making "collateral calls." I was thinking of a government-suggested mediator, perhaps a former bankruptcy judge. If the parties did not like it, they could go to court. But my guess is that the parties would have preferred a mediated solution.

4. Big banks

Actual policy: bailouts of nearly all of them

My policy: Triage. Shut down the ones that have clearly failed, using FDIC procedures. Those that are clearly solvent should be allowed to proceed. Those that are neither clearly failed nor clearly solvent should be given forbearance, but with tight supervision to ensure that they do not use this forebearance to expand their risk-taking. Again, this was what I advocated in September of 2008.

Conclusion

Overall, the goals of actual policy were to try to achieve a much less painless outcome than what my policies were intended to achieve. In terms of goals, my policies were inferior in that sense.

But what about results? I am struck by the fact that even though banks seem to be doing well, taxpayer losses are going to be high and the recession has been quite severe. From the standpoint of the typical American, the results of the financial rescue policies represent what to me seems like a pretty low bar. Surely, alternative policies could have done better for the average American. I think mine would have.

In response to Bryan's post, readers posed some interesting questions to ask in a survey of members of the American Economic Association.

Is there any reason besides a desire to learn, or to make entry into a Ph.D. programme easier to do a Masters in economics that would not be better served by an alternative option?

I think that the typical AEA member would not endorse going for a Masters if it were his own son or daughter asking about it. My own view is that if you want to pursue something at a Masters level, then I would recommend statistics over economics. I would add that I doubt very much that getting a Masters helps you get into a PhD program (foreign students might be an exception to that).

I'd be interested to learn the average economist's opinion of net neutrality.

I think that the typical AEA member would have no opinion. Those of us with a public choice bent see "net neutrality" as cover for rent-seeking on the part of those seeking a particular form of regulation of telecommunications companies.

If any, what are your top 3 favorite economics blogs.

I think that the typical AEA member does not read blogs. My favorites are Marginal Revolution, Economist's View, and then a whole bunch that are tied for third: Econbrowser, Aidwatch, Baseline Scenario, Keith Hennessey, and The Money Illusion.

What is the one finding or principle in economics that you believe is so strongly supported by evidence and logic that you're shocked that so many other economists disagree with it?

Fascinating question. My guess is that the typical AEA member would say something like "people are irrational" or "markets fail." I would say something like "public choice" or "governments fail."

To me, the problem is that economists want to describe markets that only work imperfectly in some easily-modeled way, which can be corrected by the assumed-to-be disinterested omniscient technocrat. My own view is represented by the epigram, "Markets fail. Use markets."

Paul DeGrauwe writes,

My contention is that the rational expectations models are the intellectual heirs of these central planning models. Not in the sense that individuals in these rational expectations models aim at planning the whole, but in the sense that, as the central planner, they understand the whole picture. These individuals use this superior information to obtain the "optimum optimorum" for their own private welfare. In this sense they are top-down models.

The first sentence is one to ponder, as Tyler would say. But the rest of the paper did not excite me. Pointer from Mark Thoma. [UPDATE: More de Grauwe here. Thanks to a commenter on another post for the pointer.] In another post, Mark points to two other interesting pieces.

From The New York Times:

"Hindsight is a wonderful thing," said Timothy W. Long, the chief bank examiner for the Office of the Comptroller of the Currency. "At the height of the economic boom, to take an aggressive supervisory approach and tell people to stop lending is hard to do."

Another sentence to ponder. When I say that there is difference between the personality of an entrepreneur and the personality of a bureaucrat, this is an illustration. Entrepreneurs take ownership of mistakes and seek to learn. Bureaucrats makes excuses and seek to deflect blame.

Maynard writes,

I don't think there's any mystery here. The reason that unemployment was slower to fall after the last two recessions than in previous recoveries was that GDP growth was anemic.

He says that Okun's Law, which relates GDP growth to unemployment, has held up consistently over the past forty years. No structural change to see here. Move along.

However, Okun's Law results from two relationships--productivity and labor force participation. Both of these relationships have changed dramatically. We are seeing much higher post-recession productivity growth (reducing the ratio of jobs to GDP) and a larger decline in labor force participation (cushioning the impact on the unemployment rate). Those of us who see the latest two recoveries as jobless recoveries are not idiots. If you look at the unemployment rate, sure, there is nothing unusual to see. But if you look at payroll employment and hours worked, they support the jobless recovery story.

How can any economist - even Krugman - advocate job subsidies and work sharing?  Krugman's answer is that it's a "third-best" solution.  His top three:

1. Sumnerian monetary policy.  Seriously, but without the hat tip.

2. More fiscal stimulus.

3. Job subsidies and working sharing.

His rationale is political: Since politicians are too evil/stupid/cowardly to do #1 or #2, #3 is all we have left.*  Scott Sumner's got a typically great reply:

This is a foolish game to play.  There is zero chance Congress would spend enough money on these "third-best" options to make a dent in unemployment.  God only knows what his 4th best option is.

I'm willing to take a guess.  Since Krugman's largely forgotten his free-market labor economics, I fear that his 4th best option is going to be protectionism.  If Krugman's idol Keynes could warm up to protectionism during the Great Depression, why couldn't Krugman do the same?

* Of course, if Krugman were truly a political animal, he wouldn't propose bold new ideas and then immediately insult them as "third-best."  Dare I hope that the good Krugman could still make a comeback?

An economist I know just emailed me:

I anticipate participating in a survey project of a sample of AEA members.

Such a survey is an opportunity for throwing in extraneous questions of interest.

Can you think of question or two you think we should throw in? Your thoughts and suggestions are most welcome.

Please share your suggestions in the comments.

The webpage for my spring, 2010 Graduate Public Choice II course is now up, including the syllabus, complete lecture notes, and homeworks.  About half of the material is from my Graduate Public Finance I course; the rest is new.  Highlights of the new material include an extra week on voter motivation and religion, personality, and genes; a full week on behavioral political economy; and one week each on dictatorship, constitutions, and anarchy.  I've also re-done all of my party identification and ideology regressions using the GSS (I used to just use the smaller, more obscure SAEE for the sake of convenience).

By the way, in my entire career, I have never turned away a student from one of my courses.  In fact, I've never turned away anyone who wanted to attend any of my lectures.  The class meets every Thursday from 4:30-7:10, beginning on January 21.

Robert Higgs writes,

Slavery existed for thousands of years, in all sorts of societies and all parts of the world. To imagine human social life without it required an extraordinary effort. Yet, from time to time, eccentrics emerged to oppose it, most of them arguing that slavery is a moral monstrosity and therefore people should get rid of it. Such advocates generally elicited reactions ranging from gentle amusement to harsh scorn and even violent assault.

He goes on to list ten rationalizations for slavery that he has found from defenders of the institution. The punch line: in Higgs' view, the rationalizations for slavery are parallel to the rationalizations for

government as we know it--monopolistic, individually nonconsensual rule by an armed group that demands obedience and payment of taxes

In Unchecked and Unbalanced, I also argue against monopoly government. However, I stop short of advocating wholesale abolition. Instead, I describe ways in which individuals could be given more choice of the jurisdictions under which they live. As Higgs recognizes, any approach that envisions something other than our large monopoly government looks pretty radical, given how steeped we are in rationalizations for government as we know it.

In Bryan's excellent recent post on why most economists aren't Bayesians, he writes that the position of economic theorists is:

If no one has proven that Comparative Advantage still holds with imperfect competition, transportation costs, and indivisibilities, only an ignoramus would jump the gun and recommend free trade in a world with these characteristics.

I agree with the thrust of Bryan's comments--which is why I said his post is excellent--but I think he used, in the quote above, the worst example he could have chosen. His minimum wage example is much more appropriate. What I have found, first studying under international trade economists as an undergrad, then studying them, then talking to them and reading their work over decades, is that they "get" it. They understand that the world would have to be a weird place indeed for free trade not to work.

Here's what I wrote about that issue in my book, The Joy of Freedom: An Economist's Odyssey, in a section where I discussed what I learned in some advance undergraduate courses at the University of Western Ontario:

The first lesson I learned was that the rules for the debate between freedom and government intervention varied from one economic subdiscipline to another. Take international trade. My professor, J. Clark Leith, appeared to be a complete free trader, as were the other trade economists in a school that was thought of as having the strongest international trade group in Canada, a country known for producing economists who are strong in trade. In a large part of the course, Leith considered the various arguments that had been made for tariffs rather than free trade. In each case, he would lay out the argument clearly and then show the problems: Imposing tariffs would cause other countries' governments to retaliate with tariffs of their own; in rare circumstances, tariffs could benefit a country, but the information a government needed to set tariffs at the "right" level was information it was unlikely to have; governments with the power to set tariffs would abuse it because the government officials involved didn't have the right incentives. These were not just Leith's views but were--and are--the dominant views of international trade economists around the world. An international trade economist who advocates tariffs or import quotas is about as rare as a whooping crane.

I then went on to discuss how the rules for debate differed from those in welfare economics. Now maybe Bryan would respond that that makes his point: the hands-on economists "get" it and the theorists (such as those in welfare economics) don't. In that case, then, as Saturday Night Live's Emily Litella, played by Gilda Radner, said, "Never mind."

Daron Acemoglu writes,

People need incentives to invest and prosper; they need to know that if they work hard, they can make money and actually keep that money. And the key to ensuring those incentives is sound institutions -- the rule of law and security and a governing system that offers opportunities to achieve and innovate. That's what determines the haves from the have-nots -- not geography or weather or technology or disease or ethnicity.

Thanks to Tyler Cowen for the pointer.

I disagree with some of Acemoglu's essay. He makes it sound as though American hostility toward authoritarian regimes and support for democratic revolutions would produce big improvement. Instead, I think more highly of Douglass North's work, particularly with John Wallis and Barry Weingast, on the difficulty of making the transition from the "natural state" to an "open access order."

The economists who are interviewed in From Poverty to Prosperity, including Doug North, Robert Solow, and Bill Easterly, agree with Acemoglu that institutions (what we call the "operating system" of the economy) are major determinants of prosperity. However, these economists share my view that institutional evolution is a complex phenomenon, and that there is no simple way to transplant institutions that work well in one country to another country.

Simon Johnson, who has been a co-author of Acemoglu's, gave us a blurb for the back of the book.

Edward J. Kane writes,

Regulation is best understood as a dynamic game of action and response, in which either regulators or regulatees may make a move at any time. In this game, regulatees tend to make more moves than regulators do. Moreover, regulatee moves tend to be faster and less predictable, and to have less-transparent consequences than those that regulators make.

Sounds like what I call The Chess Game of Financial Regulation. Pointer from James Kwak.

Kwak, his co-blogger Simon Johnson, and I are all deeply frustrated that regulators think that next time they will be able to get it right in regulating big banks. Our view is that big banks are inherently more difficult to regulate, if nothing else for political economy reasons. When the political system can neither regulate you nor allow you to fail, things are really messed up.

Hasty readers of happiness research often conclude that kids are a disaster for happiness.  If you actually look at the size as well as the sign of standard estimates, however, the right conclusion is that kids ever-so-slightly reduce happiness.  I then go on to point out that a great deal of parental unhappiness is unnecessary, so it is reasonable to think that kids combined with scientifically literate parenting would increase happiness.

A recent paper in the Journal of Happiness Research  ("Children and Life Satisfaction" by Luis Angeles) suggests that I'm overly pessimistic.  Contrary to most of the literature, it finds that kids often increase overall life satisfaction.  I was tempted to dismiss this as a typical academic "man bites dog" result, but I was pleasantly surprised when I carefully read the piece. 

The article begins by replicating the standard patterns in a big British data set, the British household panel survey (BHPS): If you run a multiple regression with typical controls, kids slightly reduce happiness.   But then the paper takes advantage of a key feature of the BHPS: It follows the same people over time, so you can re-run the standard equations with fixed effects.  In English, this means that you can see whether individuals' happiness changes when their number of kids changes.

This simple and intuitive adjustment wipes out the standard results.  The data set is so massive (almost 89k observations) that it should be possible to detect even microscopic effects of kids on happiness.  None detected.

To get from this non-result to the "kids increase happiness" punchline, the author makes one last eminently sensible adjustment: It allows the effect of children on happiness to vary by marital status.  This makes a lot of sense - it's a lot easier for a married coupled to raise a child than a single mom.  When you re-run the results this way, you find that as long as they're married, having children makes people happier than they were before.  And contrary to one of my earlier mea culpas, moms gain more than dads.

I have to admit: Based on personal experience, I'm skeptical.  When I run optical fixed effects regressions (="I check whether the people I know seem more or less happy after they have kids"), people almost always seem less happy once they become parents.  But Angeles' paper suggests one way to reconcile research with first-hand experience: Even when kids raise overall life satisfaction, they reduce area-specific satisfaction - particularly for socializing and leisure.  Now consider: Where do I get the chance to observe others' happiness?  In social and leisure situations, naturally!

All things considered, this paper's got a surprisingly plausible story.  I wonder how it will fare against the attacks it is almost sure to provoke.