End March Links

# Green Keynesianism, de-siloed

# Joachim Voth provides an interesting example of how technology and incentives can combine to lower economic output and growth: Click here

# Fantastic post by Chris Dillow in defence of property taxes

# I love this argument by example (ultimately in favour of NGDP targeting): Restaurants will pass on costs by going out of business, or Why macroeconomics matters in real life

# Interfluidity has a great series of posts (dating from way back) about what's both right and wrong with financial services. The idea is basically that complexity in finance is a way to convince investors that they are not on the hook for losses from aggregate (as opposed to idiosyncratic) shocks. There are spillovers from investment that are realised by society so we are all better off if this investment is made, but individually, none of us would contribute to this investment project if we knew the risks. The classic example of societal benefits and investor losses is the 19th century development of the railways. Complexity in finance therefore has aggregate benefits and serves a legitimate purpose. However it also provides cover for rent seeking and theft, and so the regulatory balance has to be stuck that allows this investment to occur but minimises the theft. Complexity in this light is a feature and not a bug since only with complexity will we be convinced as potential investors that we will not be on the hook: "finance as placebo. Financial systems are sugar pills by which we collectively embolden ourselves to bear economic risk. As with any good placebo, we must never understand that it is just a bit of sugar. We must believe the concoction we are taking to be the product of brilliant science, the details of which we could never understand."
It's a fascinating thesis:
   - "Opacity creates a very serious technical problem: as we allow finance to be opaque and complex, it may become difficult to police and impose good incentives. So we may, as a society, face an unpleasant tradeoff. Tolerating more opacity may help mobilize capital for useful purposes, but any benefit may be offset by a diminishment of our capacity to regulate and police. At one extreme of opacity, financial intermediaries simply steal everybody else’s wealth. That’s no good. At the other extreme, if we insist on perfect transparency (without big changes in how we organize our affairs), the result will be extreme underinvestment. Which is no good either."
   - "On capital allocation, status quo finance could do better and could do worse. Let’s call it a glass half full. But on systematic risk allocation, I think it unquestionable that status quo finance is completely terrible. When losses cease to be occasional, all that ex ante tranching turns out to be little more than prelude to continuing conflict, “tranche warfare”. In the recent crisis, the behavior of mortgage servicers — agents of banks working to avoid existentially threatening loss allocations — has been entirely perverse with respect to ex ante expectations that they would serve as agents of investors. Throughout the financial system, intermediaries and their erstwhile “clients” continue to struggle over who will bear costs. More broadly, the financial system, including its public and private elements, has by and large protected the nominal and real value of opaque “low risk” investments by shifting costs to the marginally employed (who relieve pressure on the price level by becoming unemployed) and to taxpayers (including people who hold few financial claims and those who are outright in debt). In other words, it is clear ex post that the risk of the aggregate portfolio has been borne by those who were least able to bear it (a circumstance that is unfortunately correlated with political weakness). In my view, there is no reasonable case that status quo finance did a remotely good job of allocating systemic risk to those best able to bear it in the recent crisis. And this shifting of costs to diffuse taxpayers and the marginally employed is hardly unusual. As allocators of systematic risk, opaque financial systems are very much worse than sugar pills. Opacity serves to delay and obscure conflicts, which are almost always resolved in favor of the powerful and at the expense of the weak. Status quo financial systems certainly do help us manage our idiosyncratic risks. And you can sum up the benefit of this insurance against idiosyncratic risks to argue they improve our aggregate welfare by some amount. But from a systematic perspective their main contribution is that they persuade us not to hold our wealth as canned goods and ammo. They embolden us to jump."

# An interest of mine, written about by Noah Smith: The end of growth wouldn't be the end of capitalism