Archive | Political Economy

The Fed’s QE3 lives on

qe3hatAnd so does my hat!

Much has already been written about the economic implications of yesterday’s pedal to the metal decision by the Fed: The Fed’s open market committee will continue to pump money into the economy, contrary to expectations that an improving economy would lead the Fed to slow the pace of its bond purchases.  Leaving the economics to others, I offer just a few quick thoughts on the political implications of the surprising (for many) decision.

First, I was struck (though hardly surprised) by Chairman Ben Bernanke’s response to a reporter’s question about the potential impact on the Fed of the political contest over Bernanke’s successor.

CHAIRMAN BERNANKE: “I think the Federal Reserve has strong institutional credibility, and it is a strong institution, highly competent institution, and it’s independent, it’s nonpartisan, and I am not particularly concerned about the political environment for the Federal Reserve. I think the Fed will be—continue to be an important institution in the United States and that it will maintain its independence going forward.”

Bernanke often emphasizes the Fed’s non-partisanship, as he should given the widely held norm of central bank independence. But yesterday’s news drives home a different way of thinking about the impact of political context of the Fed’s decision-making.  Far from its claims of immunity to politics, the Fed is acutely aware that partisan congressional politics shapes the Fed’s conduct of monetary policy.  That was precisely Bernanke’s point in detailing one of the reasons why the Fed would put off tapering its asset purchases:  “If these actions [threats to shutdown the government and to default on the nation’s debt] led the economy to slow, then we would have to take that into account,” Mr Bernanke said.  The Fed yesterday opted to duck out of the partisan winds and let them pass over while the Fed takes stock of the economic impact of events on Capitol Hill.

Second, the Fed’s decision to keep QE3 in place potentially grants more leeway to Bernanke’s successor  (presumably Janet Yellen). This assumes that the Fed will continue to hold off trimming its bond purchases until after the Senate confirms Bernanke’s successor.  The sooner the Fed begins its exit, the less the discretion of the incoming chair.  Hard to know of course whether the Fed intentionally held off in anticipation of the change in leadership or whether this is just an unintended consequence of keeping the Fed’s punch bowl filled to the rim.   Either way, the timing of the taper will no doubt take center stage when the Senate Banking panel begins confirmation hearings for Bernanke’s successor.

Finally, I am reminded of something Bernanke said a year ago at his September 2012 press conference when the Fed formally launched a third round of quantitative easing.  Bernanke noted that the consensus on the committee was so broad that “even as personnel changes going forward, this will be seen as the appropriate approach and we will have created a reserve of credibility we can use in subsequent episodes.”   The difficulty the Fed has had in communicating its policy intentions since last spring complicates the Fed’s ability to build a “reserve of credibility.”  And as hard as the Fed seems to be trying to get monetary policy right, partisan politics in Washington (particularly within the House GOP conference) continues to confound the Fed’s progress.  The Fed will likely continue to face both of these challenges—communications and fiscal headwinds—for some time.  Hope I don’t lose the hat in the wind.

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Would today’s captains of industry be happier in a 1950s-style world?

In a post about “rich whiners,” Matthew Yglesias argues that what richies really want is respect. Yglesias writes:

I think rich businessmen would be happier if we could go back to 1950s-style, more egalitarian distribution of pre-tax income. The richest people around would still be the richest people around, and as the richest people around they would live in the nicest houses and drive the nicest cars and send their kids to the best schools and in other respects capture the vast majority of the concrete gains of being rich. But they’d also have a much better chance of gaining the kind of respect as civic and national leaders that they crave. They want to be seen as the “job creators” and the heroes of the economy, not the greedy exploiters of the masses. But in order to have heroes of the economy, you need a broadly happy story about the economy—one where living standards are rising across the board and prosperity is broadly shared.

This is an appealing argument but I’m skeptical. My impression is that, back in the 1950s, the culture heroes included sports starts, authors, broadcast and movie stars, etc. Some politicians and union leaders too, and various others. But nowadays, lots of rich people are heroes of one sort or another: Steve Jobs, those guys at Google, various gossip about tech billionaires, Donald Trump. Even the supervillians at Goldman Sachs get some respect—-it’s kinda cool to be a supervillian. There’s the Forbes list of billionaires. Not to mention Michael Bloomberg and Mitt Romney. And it’s not just cos these rich guys have done cool things like Google maps. Warren Buffett is a hero too, mostly from doing a very good job at accumulating money.

If you’re superrich and your goal is to be viewed as a hero, I’d say that the current era from the mid-90s through now has been a good time to do it. They call this the New Gilded Age for a reason. In contrast, I have the sense that the 1950s was a great time to get respect for local rich guys: the owner of the local factory, the proprietor of the local newspaper, etc. Back then, if you were running a moderate-sized business, you could be a real big shot.

I’m not quite sure how this could be studied more systematically but maybe it’s worth looking in to.

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Power to (Altruists Concerned With) the Poor?

Ezra Klein wants you to know that the “conventional wisdom on Washington,” that “corporations win every fight and everyone else—particularly the poor—gets shafted,” is “wrong, or at least incomplete.” The “comforting” fact, according to Klein, is that the ”altruists” who champion the poor have “quite a lot” of political power, “at least in recent years.” Not the poor themselves, it goes without saying, but “the people, and the political party, most concerned” with improving their lot.

If this is an indirect way of saying that Democrats have accomplished some important things in the past five years, fair enough. In support of his view, Klein notes that Obamacare is scheduled to deliver a lot of very expensive health care to poor and working class people over the next decade, paid for partly with new taxes on top income earners. That’s true, and hugely important (though a significant slice of that expense reflects solicitude for insurers and health care providers—corporations).

Klein also notes that spending on food stamps has increased a lot. That’s also true, but less relevant, since the escalating cost is due to escalating need, hardly evidence of anyone’s political clout.

What Klein seems to me to be missing here is the big economic and political context in which class politics has played out “in recent years.” Here is what has happened to the net wealth of people at different points in the U.S. wealth distribution over the past decade (from a recent paper by Fabian Pfeffer, Sheldon Danziger, and Robert Schoeni):


Stop a moment to think about what those numbers are telling us. Millions of people in the bottom tier of the working class have lost, on average, 85% of their net worth. (Their average net wealth, which was already falling before the onset of the Great Recession, went from $6700 as recently as 2007 to $1500 in 2011). People even lower in the wealth distribution don’t appear in the graph because their net worth was negative all along; but in real terms, they have been hit even harder (at the 5th percentile, $39,000 in debt in 2011 as compared with $13,000 in 2007). Meanwhile, those near the top of the wealth distribution have been held harmless.

The story with respect to income is less dramatic, but qualitatively similar. From 2007 to 2011, the average real income of households in the bottom four income deciles declined by 9% (from $22,234 to $20,222), while the average income of households in the top 5% of the distribution plummeted from $311,524 to $311,444.

Against that background, it seems  more than a little bit obtuse to celebrate the “often overlooked” power of “the people, and the political party, most concerned with directly improving the lot of the poor.”

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Beyond the Horse Race to Lead the Fed

fedboardMaybe I spend too much time in the Library of Congress Prints and Photographs Catalog.  But this is a nice one.  In an undated photograph taken before 1945, we get a good glimpse of the nation’s central bankers, presumably hard at work in Washington.

Now that’s a lot of gravitas.

As the horse race for Fed chair continues, I thought I’d take a second stab at trying to put the campaign for the Fed into perspective.  I offered a few thoughts the other day; here are a few more observations.

First, keep in mind that advice and consent for the chair of the Fed is a relatively new phenomenon.  The now familiar four-year term for the chair of the Federal Reserve Board of Governors dates to reform of the Federal Reserve Act in 1935.  But requiring Senate confirmation of the president’s nominee for service as chair is a product of Democratic-led reforms of the Fed in 1977, which included the imposition of the Fed’s dual mandate (directing the Fed to maximize both employment and price stability).  Requiring confirmation of the chair provided an avenue for the Senate to try to indirectly influence the course of monetary policy.   But given the newness of the requirement and given multiple terms for recent Fed chairs, there are relatively few chair “contests” against which to judge this open contest: there have been just four chairs since the reform in 1977.  And of course, even if there were more cases, it would be tough to compare the selections over time given the expansion and change in the Fed’s responsibilities over the past three plus decades—let alone the rise in political conflict over the Fed’s unconventional policies.  (As I suggested the other day, though, the public nature of the “campaign” is unprecedented.)

Second, although we have just a limited number of previous confirmation cases, I think it’s important to put the appointments into the broader context of presidential track records in securing confirmation for non-judicial appointments.  The long-term story here is that the president typically gets his man.  (Woman? Susan Rice would beg to differ.)   It’s hard to know though whether the Senate ultimately confirms most nominees because senators tend to defer to the president or because presidents anticipate potential objections and select their nominees to avoid a Senate contest.  It’s hard to distinguish between these accounts of course because they are observationally equivalent: High confirmation rates either way.  This does suggest that despite the strong support for Janet Yellen’s nomination in the Democratic Caucus, Larry Summers might readily secure sixty votes on the road to confirmation (barring a GOP insurrection challenge). That at least is what Senate majority leader Harry Reid suggested this week after the president’s visit with Senate Democrats: “Whoever the president selects, this caucus will be for that person, no matter who it is.”

Third, the remarkable change in the Fed’s responsibilities since the financial crisis (stemming from Dodd-Frank, the Fed’s pursuit of unconventional monetary policies, and Congress’s stalemate over fiscal policy) should encourage us to think about the Fed chair appointment in a new light.  Ezra Klein, for example, makes the important point that “There just isn’t a perfect candidate to be both the nation’s top central banker and the top financial regulator.”  Some additional implications worth considering:

—The expansion in the Fed’s formal and informal roles might increase the president’s leverage in the confirmation process: The Fed’s broader role allows the president to define the position in a way that justifies his preferred nominee.  By reportedly seeking someone who has the “ability to manage complexity and crisis,” Obama sets the stage for nominating a Summers over a Yellen (and thus to rationalize missing the opportunity to break the glass ceiling in Fed leadership).   We’re talking about an N of 1 here.  Still, I think the power of the president to frame how we think about the responsibilities of the post D0dd-Frank Fed probably increases his leverage in securing his nominee’s confirmation.

—The debate over who would be best suited to lead the Fed presages a potentially more complicated relationship between Congress and the Fed, whoever the president nominates.  In theory, Congress is far more likely to grant the Fed autonomy in conducting monetary policy than in carrying out its regulatory responsibilities.  But my hunch is that it will be increasingly difficult to divorce the two realms (looking out for both the stability of prices and the stability of financial markets) as Dodd-Frank is implemented and as the Fed grows into its twin roles. As Bernanke noted last month in reviewing the first century of the Fed, “The complementarities among regulatory and supervisory policies…lender-of-last resort policy, and standard monetary policy are increasingly evident.”  The more intertwined the Fed’s roles, the harder it will likely be for the Fed to protect its autonomy in setting monetary policy.

Finally, the political challenges the Fed faces in unwinding its unconventional monetary policies will be tough, regardless of who Obama taps as chair.  Those challenges will play out both within the Fed’s open market committee, in the Fed’s communications with the markets, and on Capitol Hill when the Fed encounters congressional push back on the pace of its exit strategy (undoubtedly too slow for the GOP, too fast for the Democrats).   That’s not to say that the president pick doesn’t matter. But the start to the Fed’s second century will be interesting regardless who takes Bernanke’s chair.

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Off to the Races: The Contest to Lead the Fed

fedconstructAfter Congress revamped the Federal Reserve Act in 1935, construction began on a new home for the Fed—liberating the Fed from sharing quarters with Treasury.  This 1937 photo of the Eccles Buiding under construction reminds us that the original 1914 Fed was not set in stone and that it continued to evolve over its history.  (Squint, and you’ll see the crane dropping the Fed’s glass ceiling into place.)

This summer’s contest over the future leadership of the Fed signals the continuing development of the Fed.  As defenders of Larry Summers and Janet Yellen wage public and private campaigns for their candidates, it’s worth stepping back to consider the broader import of this battle over the leadership of the Fed.

First, let’s be clear: previous presidents have deliberated over short lists of potential Fed chairs.  Reagan (ironically) felt that Paul Volcker the Democrat was too hawkish, so he needed to appoint the Republican Greenspan.  George W. Bush selected Ben Bernanke over two competitors who had stronger political ties to the president.  But the public contest between advocates of Summers and Yellen is unprecedented.  The Atlantic’s Matt O’Brien captures it best:Screen Shot 2013-07-29 at 10.57.50 PMStill, we shouldn’t be surprised about the politicized selection of a new Fed chair.  Congress’s attention to the Fed tends to be counter-cyclical, rising and falling with the state of the economy.  When the Senate first confirmed Bernanke as chair in 2006—with inflation and unemployment hovering at four percent—the vote was unanimous and unrecorded.  Four years later, the Fed’s unconventional boldness in monetary policy and its forays into credit allocation generated a record level of Senate opposition to confirming Bernanke for a second term.  Today, with both inflation and employment below the Fed’s targets but with pressures mounting for the Fed to unwind its unconventional policies, it matters who gets the nod as chair. Given the centrality of the Fed to the state of the economy (and the fiscal headwinds caused by recurring Congressional stalemate), the Fed has never been more politically central (and thus less independent) than it is today. No wonder the Summers camp is trying to make his nomination a fait accompli; no surprise the Yellen camp has reacted by demonstrating that her macroeconomic chops and central bank experience are second to none.

Second, the division of opinion between Summers and Yellen appears to rest largely within the Democratic party.  Republicans are generally watching from the sidelines.  Interestingly, only six Republican senators remain from the Senate that in 1994 confirmed Yellen by a vote of 94-6 to a term on the Fed’s Board of Governors.  Five GOP, including Mitch McConnell and John McCain, voted to confirm—as did Richard Shelby, then still a Democrat.  The remaining Republican, Chuck Grassley, voted against confirming Yellen.

In many ways, the debate between Yellen and Summers captures an historic Democratic divide between its Wall Street and more liberal, Main Street wings.  Summers’ defenders emphasize his personal relationship with Obama (including tennis and golf) and his economic brilliance, but also his experience in the world of finance (implying an inner hawk).  The Yellen camp points to her distinguished career as a central banker and her leadership within the Fed.  Senate liberals also clearly prefer Yellen for her dovish macroeconomic stance in a period they believe still demands a dovish central bank.  (Breaking the Fed’s glass ceiling? Icing on the cake for Yellen’s boosters.)  The divide between the Wall Street and Main Street wings of the Democratic party is an old one for the party, recurring most recently in contests over Dodd-Frank and in reactions to Bernanke’s leadership of the Fed.  (Senators on the far left were clearly more suspicious than their Democratic colleagues of the Fed’s largesse in bailing out failing financial institutions at the height of the financial crisis.) It is tempting to portray the horse race as a contest of personalities (which, of course, it is), but the contest also taps an enduring Democratic divide unlikely to be patched over the course of a campaign to lead the Fed.

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“Meritocracy” is not what you think: don’t forget about the “ocracy”

This has come up before and before, but I think it’s worth explaining again.

In the context of a dispute with transit unions, public relations person Sarah Lacy writes:

People in the tech industry feel like life is a meritocracy. You work really hard, you build something and you create something . . .

Tell that to Sam “How To Party Your Way Into a Multi-Million Dollar Facebook Job” Lessin!

The larger point, as noted several years ago by IQ expert James “Effect” Flynn, is that meritocracy is self-contradictory. As Flynn puts it:

The case against meritocracy can be put psychologically: (a) The abolition of materialist-elitist values is a prerequisite for the abolition of inequality and privilege; (b) the persistence of materialist-elitist values is a prerequisite for class stratification based on wealth and status; (c) therefore, a class-stratified meritocracy is impossible.

Flynn also points out that the promotion and celebration of the concept of “meritocracy” is also, by the way, a promotion and celebration of wealth and status–these are the goodies that the people with more merit get:

People must care about that hierarchy for it to be socially significant or even for it to exist. . . . The case against meritocracy can also be put sociologically: (a) Allocating rewards irrespective of merit is a prerequisite for meritocracy, otherwise environments cannot be equalized; (b) allocating rewards according to merit is a prerequisite for meritocracy, otherwise people cannot be stratified by wealth and status; (c) therefore, a class-stratified meritocracy is impossible.

In short, when people talk about meritocracy they tend to focus on the “merit” part (Does Kobe Bryant have as much merit as 10,000 schoolteachers? Do doctors have more merit than nurses? Etc.), but the real problem with meritocracy is that it’s an “ocracy.”


In a meritocracy, the whole point of having “merit” is that you can run things (“ocracy”), and the point of running things is that you can get good jobs for your family and friends.

As Sarah Lacy might say: You work really hard, you build something and you create something, and then you sock a couple million dollars in the bank, connect your friends to some amazing opportunities, and settle down and make sure that your kids have every possible opportunity to succeed in a competitive world. Nothing wrong with doing that—-it’s what meritocracy is all about—-but the result is you’ll have more and more Sam Lessins running around.

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Elinor Ostrom: The Legacy and the Challenge

Continuing our collaboration with the APSA Political Economy newsletter, today we present the final of four obituaries of prominent political economists who recently passed away, with George Mason University political scientist Paul Dragos Aligica writing on Nobel laureate Elinor Ostrom.


Elinor Ostrom, co-founder with Vincent Ostrom of the Bloomington School of Political Economy, has left behind a fascinating intellectual legacy, currently a source of inspiration in fields as diverse as political philosophy and the environmental sciences. Yet, the core of her work has always been in the field of political economy. The Ostroms’ distinctive approach was considered from the very beginning an evolving part of the “Public Choice Revolution” that exploded in the 1960s.  As William C. Mitchell put it in his 1988 Public Choice article, “Virginia, Rochester, and Bloomington: Twenty-Five Years of Public Choice and Political Science,” three distinct schools of thought, each associated with particular scholars, have shaped the basic public choice assumptions. In each case “one or two dominant figures led … the effort to construct theories of collective choice: Riker at Rochester, Buchanan and Tullock at various Virginia universities, and the Ostroms at Indiana.”

The Ostroms began in the 1960s with a theory of collective action based on a theory of goods, a theory that was emerging at that time from the mantle of neoclassical economics as a major building block of the new, modern political economy. In time, their work on governance created one of the main channels of the transition from public choice to the new institutionalism. The fact that Elinor Ostrom was a recipient of the 2009 Nobel Prize in Economics was a telling recognition of Bloomington School’s important contributions. Yet, in the celebratory and retrospective mood created by such honors and public recognition, it is important to note that the Bloomington agenda is far from making its closing arguments. In fact, Elinor Ostrom’s work remains an enterprise of unassuming radicalism that persistently invites us to reconsider the very foundations and significance of our scientific efforts. Following the logic of institutional diversity, social heterogeneity, and value pluralism to their epistemic and normative implications, Ostrom’s work both closes a cycle of research on collective action, institutions, and governance and frames the next stage or the next cycle of research.

The depth and boldness of the Ostrom project are revealed when we single out the specific assumptions and perspectives it challenged. We should also take full measure of the way in which those challenges constitute a radical departure from powerful ideas that tacitly framed a vast part of modern political economy. The list of these tacit assumptions is long, but a cluster of related candidates rises to the top in any account: agent and institutional homogenization as a theoretical and methodological default position, centralization and monocentrism as key principles of governance, and “seeing like a state” as an acquired forma mentis in thinking about political and economic affairs. Let’s take these core assumptions that the Ostrom project challenged one by one.

The typical strategy of dealing with the challenge of heterogeneity is easily one of the main assumptions that the Ostrom project challenged. The homogenization by assumption of social agents, the rhetorical trick by which homogeneity is nominally recognized as a fact and a problem but then, in the next move, reduced to a modal profile, a homogenous “representative agent,” with minimalist formal features, is both popular and influential. Versions of this strategy, operating at different levels and on different aspects of heterogeneity, are prevalent, from economics and public choice to political science and social philosophy. The logic of Ostrom’s perspective challenges that approach. Furthermore, it explicitly links the problem of heterogeneity to that of institutional diversity: Because institutional arrangements in any society emerge largely as a response to heterogeneity, and in their turn are conditions of heterogeneity, institutional diversity should be a central (if not the central) theme of institutional theory.  Yet, that doesn’t seem to be the case in much of the literature. Models of “markets and hierarchies” remain pivotal, although the theoretical lenses of the theory of the market or the theory of the state are obviously incapable of capturing and illuminating the wide diversity of existing and possible institutional arrangements. A replacement of the classical dichotomous typology (markets and states) with a new trinity (markets, states, and networks) is not an adequate solution. By refusing to accept such solutions, the Ostromian approach looks commonsensical. Yet, when compared to the prevalent views, it is radical. Bloomington institutionalism is ready to take institutional diversity seriously – “beyond the Market and the State,” “beyond Hobbes and Smith” – and to follow to the end its analytical and normative logic.

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How Cities Compete For Business

Local economic development theory argues that it’s usually a bad idea for cities to offer special incentives to try to attract businesses. These incentives weaken the fiscal position of the city, but often provide freebies for location decisions that the businesses would have taken anyway. So why do cities do it? In a new paper, Nate Jensen, Edward Malesky and Matthew Walsh argue that these bad decisions are driven by voters. Voters know enough to want to vote for politicians who take active steps to attract business to the city, while not knowing enough to realize that the costs of these active steps often outweigh the benefits. Jensen et alia argue that this theory is supported by evidence of real differences between cities run by elected mayors, and cities run by managers responsible to a council. They argue that managers are more insulated from electoral politics than mayors, and hence less likely to take wasteful decisions to offer incentives.

We test the impact of electoral institutions on a dataset of over 2,000 project-level incentives ( 2013), finding significant support for our electoral pandering hypothesis. Elected mayors: offer 14% more money than council-managers overall and 20% on a per-firm basis($822,000 on the average project); are 16% more likely to offer an incentive to an individual firm; and are 7.6% less likely to have an oversight program in place for the use of investment incentives. The larger generosity of elected mayors is facilitated by the fact that they face less oversight in the targeting of incentives and requirements on the size of incentives than comparable cities subject to council-manager systems.
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The New Political Bubble

At the end of this summer, the world will mark the fifth anniversary of the beginning of the worst financial crisis since the Great Depression.  Some commentators will undoubtedly tout the many lessons learned and the progress made towards financial reform.  After all, Congress passed the Dodd-Frank Financial Reform bill to lower the risk financial instability and to better deal with its consequences.  To end the “Too-Big-Too-Fail” (TBTF) dynamic, regulators were given new authority to monitor and regulate systemically important financial institutions and to liquidate, rather than bailout, those that get in trouble.  Markets for complex derivative securities such as credit default swaps were to be made more transparent by requiring more standardization and trading over exchanges.  Finally, a new agency, the Consumer Financial Protection Bureau (CFPB), was created to protect consumers from manipulative credit products.

Despite these reforms, the evidence continues to mount that Crisis of 2008 was a crisis wasted.  Consider the following:

  1.  Since the financial crisis and Dodd-Frank, the largest banks have only gotten larger.  JPMorgan Chase’s London Whale reveals that these firms continue to take very risky bets.

  2. Large financial firms appear to continue to benefit from lower credit costs because investors believe that the government will once again come to the rescue should a systemically financial institution get in trouble.  Until we are in the midst of the next financial crisis, there is no way of knowing whether these beliefs are wrong.

  3. Many of the efforts to regulate derivatives and other financial products have been delayed or diluted.   According to the law firm Davis Polk, more than 60% of the regulatory rules required by Dodd-Frank have yet to be finalized – and more than 35% have not even been proposed.

  4. The rulemaking of the CFPB is in legal limbo because President Obama was forced by Republican opposition to appoint its director during a very brief Senate recess.

  5. The financial regulatory agencies have not been given budgets sufficient to carry out the tasks they were delegated in Dodd-Frank.

  6. And despite all of the shortcomings of the reform effort, there is a growing bipartisan movement in the House to repeal much of Dodd-Frank.

Why has financial reform unraveled so dramatically?  It is because the reform efforts were too focused on the proximate economic causes of the crisis and completely ignored the more fundamental political causes.  In our new book, Political Bubbles:  Financial Crisis and the Failure of American Democracy,  Keith Poole, Howard Rosenthal, and I argue that behind each financial crisis lurks a “political bubble” — a set political biases that foster market behaviors leading to financial instability. Rather than tilting against risky behavior, in political bubbles politicians and regulators aid, abet, and amplify the risks created in financial markets.  These biases are deeply embedded in the constellation of ideology, institutions, and interests that define the American political system.  We not only trace how a political bubble led to the U.S. deregulatory and monetary policies propped up the asset bubbles that generated the 2008 crisis, but how similar dynamics have played out in the recurrent financial crises in U.S. history.

Unfortunately, little has happened over the past five to eliminate the ingredients of the political bubble.  The Republican Party and much of the Democratic Party remain ideologically committed to financial deregulation.   Congress remains polarized, gridlocked, and dysfunctional.  Fragmented regulatory agencies remain under-resourced, yet authorized to formulate and enforce hopelessly complex rules for hopelessly complex markets.  And most importantly, the political clout of the financial sector has scarcely diminished.

Let’s hope this new political bubble doesn’t pop as violently as the last.

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The Synergy of Practice and Theory: Niskanen’s Contribution to the Study of Bureaucracy

Continuing our collaboration with the APSA Political Economy newsletter, today we present the third of four obituaries of prominent political economists who recently passed away, with University of Wisconsin political scientist David L. Weimer writing on William A. Niskanen, Jr.


My first encounter with William A. Niskanen, Jr. was in 1973 at my graduate school orientation at the University of California, Berkeley.  Although I cannot remember a word spoken that day by any of the other faculty members, I remember what Niskanen said verbatim: “My name is William Niskanen.  I hold a B.A. from Harvard College and a Ph.D. in economics from the University of Chicago.  Chicago won.”  Indeed it did.

Niskanen’s doctoral study in economics was followed by work as a policy analyst at the RAND Corporation, the Department of Defense, the Institute for Defense Analyses, and the Office of Management and Budget.  He joined the faculty of the Graduate School of Public Policy at the University of California in 1972 and became the Chief Economist for Ford Motor Company in 1975 and briefly joined the UCLA faculty in 1980.  He served on President Reagan’s Council of Economic Advisors until leaving to become chairman of the board of the Cato Institute.

His training in economics and exposure to the deficiencies of bureaucracy during his early career as a policy analyst prepared and prompted Niskanen to write one of the classics of public choice, Bureaucracy and Representative Government.  He first set out his thoughts on the topic in “The Peculiar Economics of Bureaucracy,” which was published in the American Economic Review in 1968, and later modified them in important ways in “Bureaucrats and Politicians,” which appeared in the Journal of Law and Economics in 1975.

The standard approach of welfare economics at the time was to assume that government and its officers selflessly intervened to correct market failures.  In Bureaucracy and Representative Government, Niskanen joined the emerging public choice movement in assuming that public officials acted upon self-interest.  Throughout the book, the head bureaucrat seeks to maximize the budget allocated to the bureau by the “collective organization,” or budgetary sponsor, as a lump-sum payment for the output it produces.  He began by assuming passive budgetary sponsors, but later allowed “officers” of the collective organization to act according to self-interest.  Although the assumption of the budget-maximizing bureaucrat is today its primary intellectual trace in the political economy literature, the book is much richer in its treatment of bureau behavior, factor suppliers, and oversight by the budgetary sponsor.  Analytically, it employs comparative statics to assess the relative efficiency of bureaus, competitive supply, monopoly (discriminating and non-discriminating), and nonprofits (discriminating and non-discriminating).  It thus provides a systematic comparison of institutional arrangements, an approach that is now one of the strengths of modern political economy.

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