In the current environment of automotive plant shutdowns, the pursuit of economic adaptation and revival has become urgent for many communities whose livelihoods largely depend on the automotive industry. On April 15, knowledge experts, policymakers, and community representatives gathered at a conference event in Chicago. Its purpose was to explore opportunities to sustain and build on automotive assets in such communities, attract foreign direct investment, support automotive and energy-related research and development (R&D), build advanced manufacturing facilities, and diversify into other related industries. One notable audience participant was Ed Montgomery, newly appointed (National) Director of Recovery for Auto Communities and Workers.

The conference’s morning sessions addressed the forces impacting the Midwest automotive region, along with lessons midwestern communities might draw from the South. Sean McAlinden of the Center for Automotive Research presented a graphic overview of the region’s auto-intensive counties, as well as the market position and outlook for the North American auto industry. Over the past ten years, payroll jobs in the automotive sector have been halved because of wrenching industry restructuring. Communities in Michigan have experienced an outsized share of these declines. Moveover, McAlinden’s long-term analysis and forecast of automotive sales suggests that U.S. light vehicle sales are currently in the early stages of a deep cyclical trough.

The afternoon program asked how communities are responding and adapting to the loss of automotive activity. At one of the afternoon sessions, four economists offered their observations and advice to those communities that are transitioning to a post-automotive economic base. George Fulton, research professor at the Institute for Research on Labor, Employment, and the Economy at the University of Michigan, highlighted the sharp dependence of Michigan’s economy on the Detroit Three automakers (Chrysler, Ford, and General Motors). By his measure, economic concentration in the Detroit Three is 16 times greater in Michigan than the remainder of the United States. In that light, it is perhaps not surprising that Michigan’s overall employment growth has closely tracked Detroit Three domestic automotive sales since 1991, up to and including the recent plunge in sales. For Michigan, Fulton predicts that the sales plunge will be accompanied by a loss of 239,000 jobs from the end of 2008 to the end of 2009—the largest job loss since at least 1956. By the end of 2010, Michigan’s automotive industry will employ barely one-half of its 2007 work force.

In assessing Michigan’s longer-term prospects, Fulton offered a detailed industrial analysis that showed that a fair number of industries have been growing recently. Despite the fact that 641 industry sectors experienced falling job levels in Michigan from 2002–07, 298 industries not only had net hiring outcomes but actually outperformed their counterparts in the overall United States. However, a downside to his findings are that average wages in declining industries outweighed average wages in growing industries by $14,000 per year. In searching for Michigan’s industries of the future, Fulton recommended not only those offering high wage jobs but those having a strong export component, long-term growth potential, and regional advantage (or assets) in providing products or services. In Fulton’s opinion, the automotive industry fulfills these criteria except for its long-term growth potential in Michigan. Instead, Fulton grouped Michigan’s promising industries into three categories: knowledge-based industries (including auto engineering and R&D), tourist-oriented industries, and those sectors supporting higher-income retirees.

Another helpful perspective was presented by George Erickcek, of the W. E. Upjohn Institute for Employment Research. For Michigan and many other Midwest communities, what has been happening in the Detroit-Three-related automotive industry is too big to ignore; in particular, the recent negative experience is much more magnified in intensity, and what that portends for the long term weighs heavily on them. Car and light truck sales reached 16.1 million units in 2007, but are now forecast to go as low as 11 million units in 2009. In responding to plunging sales, Detroit Three producers have curbed year-over-year production by over 60 percent, and the top Three Asian-domiciled producers (Honda, Nissan, and Toyota) have done so by over 50 percent. The long-term outlook for the Midwest reflects structural decline rather than a swift return to activity. As recently as 2001, the Detroit Three controlled 74 percent of U.S. auto sales. By 2008, the share had fallen to 48 percent.

The employment size of the domestic auto supplier industry exceeds that of auto assembly by a factor of three. Domestic auto parts suppliers have been especially impacted by falling orders from the Detroit Three, and they widely report that long-term relations with the Detroit Three have soured in disputes over pricing and delivery terms. In seeking survival strategies, many domestic auto parts makers have attempted to diversify away from the Detroit Three to Asian- and European-domiciled assembly companies with production facilities in North America. More generally, Erickcek referenced the recent Klier and Rubenstein book which outlines three survival strategies available to parts suppliers: They must survive as 1) producers who integrate automotive systems of other suppliers and deliver them to assembly plants, 2) high-tech module developers, or 3) low-cost parts makers.

Given the recent upheaval in the automotive industry, Erickcek noted, displaced workers face strong headwinds in terms of expected earnings losses upon re-employment, slow expected recovery in job openings in the coming years, and age discrimination for older workers as they seek re-employment. Still, even in these difficult times, job opportunities exist because new products are being introduced, new markets are being serviced, and aggressive companies are taking market share from their competitors. To illustrate, Erickcek noted that over the current decade, net job creation in Grand Rapids, Michigan, has typically been negative but that new job openings have tended to exceed net job loss by wide margins.

How can the communities that have been affected by the downturn in the automotive industry help match their recently displaced workers with the new jobs? First, Erickcek recommended that they base their initiatives on a firm understanding of the local labor market and on the particular skills and abilities of displaced workers. Local efforts to identify a newly emerging industry sector and to subsidize its growth in the community is an extremely risky strategy. Instead, communities should determine their community investments in infrastructure and work force training by identifying interactions (and the intersection) of three key elements: the effects of the regional economic structure, global factors, and technological factors on the community and its economic base. In closing, Erickcek cautioned communities from jumping on the bandwagon in trying to attract the “next best thing,” such as life sciences, without a strong foundation for success. Competition is fierce for such prospects, and these industry sectors are often strongly anchored to existing clusters. Importantly, many of such industries are top- heavy with highly educated professionals so that “job chains” may not reach the community’s unemployed and underemployed work force.

Ned Hill, Professor and Distinguished Scholar of Economic Development at Cleveland State University, offered his considered assessment of the realities facing communities with strong ties to the automotive industry. Hill reported trends in automotive production from North America showing that much automotive work will continue to be done in the U.S and North America in the coming years. While world automotive production has grown rapidly since 1999, North American production remains sizable, with modest shrinkage and import penetration.

For companies and plants, Hill emphasized that the keys to survival have changed little from recent years. Successful plants and companies are those that operate with flexible work force policies and that employ workers who labor with flexible work force rules. In the current environment, low debt levels and ready access to capital are important factors in survival. On the national and global stage, Hill argued that the long-term value of the dollar also influences the health of assembly plants. According to Hill, the pending “card check” of the proposed Employee Free Choice Act (EFCA) that is under consideration in the U.S. Congress may exert a pernicious effect on automotive investment in the Midwest, north of Interstate 70. If passed, Hill contended that new plants will gravitate as far as possible from those communities that tend to support labor union representation.

In advising Midwest communities that are being impacted by automotive plant closings, Hill noted that a lot has been learned from the region’s steel plant closings in the 1980s and from defense plant closings. One lesson, said Hill, is that legacy costs—such as overly generous pension benefits and health care—must be shed if new companies are to survive and invest. Hill also cautioned towns and states and the federal government to avoid “lemon socialism.” That is to say, governments are especially inept at knowing which plants and companies that can survive; heavy subsidization of chosen “winners” is usually wasteful and prolongs the agony of readjustment.

In looking to assist new industries, plants, and investments, there is no silver bullet. Yet, communities must mobilize quickly and move toward new realities and opportunities. In doing so, communities must pay attention to market trends and forces, and reinvigorate the assets of their people (their skills) and their infrastructure. In identifying assets to protect when a plant has closed, Hill emphasized that land is the critical asset. Communities would do well to bring land back to the market for redevelopment through brownfield cleanup and land banking. In contrast, towns should be skeptical of fads. Who isn’t targeting wind, bio, solar?

Even with good practices, said Hill, we still have much to learn about community revitalization. The experiences involving mass worker layoffs in the 1980s were not kind. Approximately, one-third of workers retired, one-third successfully adapted, and one-third fell into poverty. Redevelopment has not always been successful. And when it has been, revitalization has often taken a long time—up to 20 years.

In my concluding presentation, I observed that each community has somewhat unique opportunities, assets, and challenges. For this reason, a “one size fits all” revitalization strategy will surely fail. All communities must start with a sound factual assessment of its own situation. In charting its policy course of action, a community must draw on credible information concerning the many demographic and economic trends that are at play. In choosing among policy actions, a community must be cognizant of the successes and failures of similar choices that have been made by others.

Even in a democracy, it is believed that certain government functions should be placed beyond the control of democratic politics. The usual example is the judiciary (though most state judges in the United States are elected, this is a considerable anomaly). But another example is the central bank, which in the case of the United States is the Federal Reserve. A central bank has considerable, often decisive, influence over short-term interest rates, and, through them, over long-run interest rates as well. Typically (and to oversimplify), a central bank reduces short-term interest rates by buying short-term government securities, which pumps cash into the economy when the cash is deposited in bank accounts and then withdrawn and spent. Interest is the price that people or firms demand to part with cash–the more cash there is in the economy, the lower that price will be. In addition, by increasing the demand for these securities, the purchase increases their price, which in turn reduces their yield–the interest that they command. The central bank increases short-term interest rates by the reverse operation–selling short-term government securities, which sucks cash out of the economy, since the central bank can retire the cash rather than having to spend it.

Long-term rates tend to follow the path of short, both because of substitutability and because the more cash the banks have to lend, and so the less they have to pay for the capital that they lend, the lower the interest rates at which they will lend, including lending long term, because competition will tend to keep the spread between the banks’ borrowing and lending costs from increasing just because their borrowing costs are falling.

The reason for making the central bank politically independent is that the bank’s power over interest rates could be abused for political ends. Suppose the economy, though not in recession, is somewhat sluggish, and the government, perhaps because an election is looming, wants to juice it up. So it orders the central bank to reduce interest rates by buying government securities, thus pumping money into the economy. Reduced interest rates will stimulate lending, borrowing, and therefore economic activity, but the increase in the money supply can (since the economy is merely sluggish, and not in recession) create inflation. Very low interest rates in the early 2000s in the United States caused asset-price inflation, with destructive consequences, as we know.

Inflation can have other political objectives besides stimulating the economy in order to improve a government’s popularity. It is a method of taxation. Suppliers are required by law to accept the official currency in payment of debts, so government can buy goods and services just by issuing money to its employees and other suppliers without having to raise the money by borrowing or by (explicit) taxation. The suppliers will respond by raising prices, but if the government refuses to pay (for example, refuses to raise wages), then the suppliers, to the extent dependent on the government for business (or employment), will have to accept the cheapened money.

In addition, inflation can be used to benefit some groups in society at the expense of others. Inflation benefits debtors, when debt is not indexed for inflation, and hurts creditors. A strongly pro-creditor central bank might even engender deflation, which would mean that debtors would be repaying their debts in dollars worth more in purchasing power than when they took out their loans. A central bank might do that (reduce the money supply, so that the purchasing power of a given quantity of money increases) in order to strengthen its currency, which would enable the country to buy imports more cheaply and increase the return on its foreign investments. (That was the ground on which Britain deflated by returning to the gold standard after having gone off it in World War I. That was a government decision; there was no independent central bank.)

Since the harms of inflation are now widely recognized, a central bank that focuses on limiting inflation will be reasonably popular; and since the value of its being independent of political influences so that it will limit inflation (and deflation) will be recognized, its independence will not be challenged. But the independence of the central bank in the United States, as in other countries, is not guaranteed by the Constitution, as the independence of the federal judiciary is. It is a matter of statute, and Congress could eliminate or reduce the Federal Reserve’s independence from the normal political process at any time. Its independence is therefore legally precarious.

That is part of the reason why the modern Federal Reserve has focused on controlling inflation, and, specifically, why it did not prick the housing bubble of the early 2000s, as it could have done at any time by pushing up interest rates, until the bubble got completely out of hand in 2006 and 2007. Had it pricked the bubble earlier, precipitating a fall in housing prices with consequent defaults and foreclosures, at a time when it was unclear that the run up in housing prices was a bubble, it would have been blamed for causing a recession, because proof of a bubble is difficult.

But in retrospect the hit that the Federal Reserve would have taken by pricking the bubble would have done less damage to its prospects for continued independence than the current depression, and the Fed’s response, may be doing. Had the Fed merely pushed down interest rates when it became apparent last summer that the economy was sliding into a recession or worse, it would have been doing something that it was expected to do: the converse of raising interest rates to prevent inflation is lowering interest rates to prevent recession, and this is consistent with stabilization, which is part of the Fed’s explicit statutory mandate. The Fed did lower the federal funds (overnight bank lending) interest rate, which has become the conventional way in which it influences interest rates. That rate is now virtually zero, yet the reduction has not done the trick. The reason is that the impairment of the banks’ capital (because of their heavy involvement in home mortgage lending) has discouraged the banks from lending, since lending is risky. And so the fact that they can borrow from one another at essentially a zero rate of interest to meet loan demands has not incited them to lend in amounts necessary to maintain economic activity at a normal level.

The Fed in some desperation therefore began last fall lending substantial sums to banks in an effort to increase their safe capital to a point at which they would increase their lending by relaxing their credit standards and reducing interest rates on their loans. The Fed also began buying up private debt (as distinct from government securities), for example credit card debt, in the hope that the sellers of the debt would use the cash they received for their debt from the Fed to issue more debt, that is, to lend more. It even has begun buying long-term private and public (Treasury) debt.

The dangers to the Federal Reserve’s independence that are created by such activities are twofold. First, the scale of the Fed’s intervention is so great as to create a serious risk of a future inflation, albeit a risk that, at present, the bond markets (judging from long-term interest rates) do not consider large. The Fed in the last year has expanded the supply of money by about a trillion dollars, and is intending to expand it further. In principle, it can reverse the expansion process by selling Treasury securities (and the other debt that it has bought) and retiring the cash it receives from the sale. The problem is that a sudden large withdrawal of cash from the economy could cause interest rates to spike, bringing on a recession, as when the Fed reduced the money supply in 1979-1982 to break the 1970s inflation, which was getting out of hand (it reached 15 percent in 1979). A gradual withdrawal might be too slow to prevent inflation.

It is true that when the Fed buys short-term debt, such as credit-card debt, the transaction unwinds naturally in a short time: the debt is paid by the debtors, and the cash received from them can be retired. But this assumes that the debt is paid in full, which it may not be, and that the Fed does not immediately buy more short-term debt, and perhaps feel obliged to continue doing so, because the market has become dependent on its participation. And the Fed as I said is buying long-term as well as short-term debt, and that does not unwind automatically in the short term; it can be sold but it might be sold at a loss, depleting the Fed’s balance sheet and leaving excess cash in the economy to create inflation.

If the Fed’s actions precipitate inflation or have other untoward consequences, there is likely to be a political backlash against the Fed. We live at present in a blame culture, and really the Fed is lucky that so far most of the public’s and the Congress’s and the media’s ire has been directed at the bankers rather than at Greenspan or Bernanke.

Second, and perhaps more ominous, the types of intervention that the Fed is now engaged in can create an impression of politicization of financial policy or even of impropriety. If the Fed merely issues an offer to buy some specified quantity of Treasury bills, or an offer to sell some specified quantity of those bills, it is not picking and choosing among companies or industries. But if it decides, or participates in deciding, whether Bank X should be allowed to fail while Bank Y receives a huge bailout, or when it uses its position as a bank’s creditor to alter its management or influence its business decisions, it invites accusations of favoritism or worse. (Or when it decides to buy one type of private debt rather than another.) The latest portent is the allegation that Bernanke, the Fed’s chairman, participated with Henry Paulson, the then Secretary of the Treasury, in pressuring Bank of America last December not only to go through with its planned purchase of Merrill Lynch but also to conceal Merrill Lynch’s immense losses from Bank of America’s shareholders. I have no idea whether the allegation is true; but that it should be made at all is an example of the political danger to the Federal Reserve if it becomes involved in the operation of individual banks.

I am not suggesting that the Federal Reserve is wrong to take radical measures to combat a depression. The Fed’s “easy money” monetary policy may have warded off a deflationary spiral, which would have been disastrous (there is still a mild deflation–the Consumer Price Index for example is below what it was a year ago–and it could still get worse). And the Fed’s bank bailouts may well have limited the decline in lending touched off by the near collapse of the banking industry last September. I merely contend that such measures pose greater threats to the Fed’s political independence than would early intervention to prick the housing bubble and by doing so perhaps have prevented the grave economic situation in which the nation finds itself.

Emmanuel Saez, 36, a public economics expert teaching at the University of California at Berkeley, was awarded the 2009 John Bates Clark Medal last week. Nobody has done more to describe the broad changes in income distribution in the United States that have taken place during the last ninety years.

His most striking finding has been to confirm the widespread intuition that income inequality has been increasing – that one of the key regularities of post-World War II economics had fallen apart.  It was in 1955 that Simon Kuznets, then of the Johns Hopkins University, observed that  inequality in developing countries tended to describe an “inverted-U,” rising substantially for a time as workers moved from farms into industrial cites, then steadily diminishing as output grew and gains from increased productivity were more evenly distributed.

Saez demonstrated that the “U” had decisively turned right-side up – that inequality has been rising steadily for thirty years instead of falling. Working backwards from tax data to infer household income back to 1913, when the income tax was established (modern government income surveys came into being only in 1960), he found that families making up the top ten percentile of the income distribution had been steadily increasing their share of all income since the 1970s. This best off decile of earners had one heyday in the “Roaring 1920s,” when their share reached nearly 45 percent of national income.  There they remained until about 1940, when norms associated with the conduct of World War II apparently knocked them down to around 33 percent of the total. Their share remained remarkably stable for the next three decades, at around a third of national income, until the mid-1970s. Then the top decile’s share began to climb again, hitting 49.7 of national income in 2006, higher than any year since 1917 and surpassing its level in 1928, Saez found. It took $104,700 in market income for a family to make the top 10 percent in 2006.

Moreover, most of that improvement owed to record gains for families in the top one percent of income (earning more than $382,600).  It was the very rich whose fortunes seemed to have been at the center of the story of income distribution, Saez wrote in Striking It Richer in the Stanford Center for the Study of Poverty and Inequality’s Pathways Magazine – from nearly a quarter of the whole in the late 1920s, to less than 10 percent in the 1960s and 1970s, before climbing back to nearly a quarter by 2006.

(Matt Yglesias has a picture of this.)

Saez, a French citizen, was born in 1972, meaning that he is only slightly older than “the tax revolt,” a phenomenon which, in the United States, as in much of Europe, can be said to have begun in the mid-1970s. He is emblematic of a new generation that takes public finance seriously, devising more explicit and efficient tax codes, and measuring behavioral responses to tax changes about which political activists and their think-tank acolytes previously have only argued. (Do people work less or leave town when their taxes go up?). Much of his work has been done in collaboration with his countryman Thomas Piketty, of the Paris School of Economics; the two are co-directors of Public Policy program of the Centre for Economic Policy Research, the European counterpart of  the National Bureau of Economic Research in the US.

The American Economic Association citation accompanying the award stated, “Unlike many others who work in this area, Saez straddles the great divide between theory and empirics and brings the two noticeably closer together. His work usefully illuminates questions concerning issues such as the appropriate marginal tax rate for high income taxpayers, the structure of income transfer programs, the treatment of capital income, and the taxation of married couples.”

For all the emotional impact of the tax debate, however, there are clearly additional reasons for the increase in inequality of the past thirty years.  They include technological advances, increasing globalization, changing theories of compensation and altered public expectations of economic growth. It will be a long while before any of it is pinned down. But Emmanuel Saez and others of his ilk have dramatically raised the level of the debate from the days when the price of entry was no higher than a curve sketched quickly on a cocktail napkin and insistently reproduced in newsprint.

                                           xxx

The annual meeting of the Royal Economic Society is an advantageous window through which to view recent developments in mainstream economics. The preponderance of these developments unfold in North America, so the program committee flies a handful of lecturers across the Atlantic (or the Channel) every year to showcase the latest styles.

Last week at the University of Surrey, in Guildford, they included David Laibson, of Harvard University; Pinelopi Goldberg, of Princeton; Gilles Saint Paul, of the University of Toulouse and Birkbeck College; Chang-Tai Hsieh, of the Graduate School of Business of the University of Chicago; Mark Rosensweig, of Yale; and Esther Duflo and Michael Greenstone, of the Massachusetts Institute of Technology.  John Vickers, Warden of All Souls College, Oxford, gave the presidential address, on differing jurisprudential approaches in Brussels and Washington to competition policy and property rights – to intellectual property rights in particular.

The organizers also select fifty or so paper to showcase, from among the more than 100 that are contributed, mostly by up-and-comers in European and British universities. And all the while they maintain a running commentary among themselves about how best to use the United Kingdom’s advantages to compete for graduate students in a global market.

So it was good news that an International Benchmarking Review last autumn deemed the nation’s economics research faculties to be in robust good health, “more prominent” than those of any other country except the United States. In a nation where so much education is centrally funded, such studies (and the recent Research Assessment Exercise) are important.  Chaired by Harvard’s Elhanan Helpman, an outside panel of experts concluded that UK faculties ought to beef up their capabilities in macroeconomics (who shouldn’t?) but that otherwise things were in relatively good shape – development studies and microeconomic topics in particular. In general, the UK was gaining slightly on the US in economic research, the committee found, at least bibliometrically, gauged by the influence of its publications, while Australia, the Netherlands, France and Germany were gaining slightly at the expense of the UK.

Not so in Israel. Another committee, this one appointed by the quasi-governmental Israeli Council on Higher Education, again led by Helpman, including David Kreps, of Stanford; Joel Mokyr, of Northwestern; Ariel Pakes, of Harvard; and Robert Pindyck, of MIT.  The report’s conclusion: “The state of the discipline of economics in Israeli institutions of higher education is dire. There are, without question, some bright spots in the picture. But the picture is dismal overall.”  Hebrew and Tel Aviv universities were among the twenty best departments in the world fifteen years ago. “But today, Tel Aviv’s department is collapsing, and Hebrew University’s is teetering on the brink.”

Not that Israel’s universities aren’t turning out plenty of economics majors; there are more than ever before.  But while they know plenty of theory, they often fail to understand its connection to the world around them. And while the best of them have long gone to the United States for their graduate education, fewer than ever are returning to teach in Israel.  Instead they remain in the US to teach. Among assistant professors in the top ten American departments, 16 percent (18 professors) received their first degree in Israel, a contingent second only to the 28 percent whose undergraduate degree was earned in the United States.

What’s the solution?  A recognition, the committee urged, that Israeli economics must embrace the hiring and promotion practices of departments in Western Europe and the United States, and that more money is needed at every level.

                                          xxx

The American newspaper industry has fallen on hard times, and its authority has dimmed, at least for the moment. But the conservators of its traditions quietly took an admirable stand last week. The Pulitzer Prize Board passed over The New York Times columnist (and Princeton professor) Paul Krugman and gave its 2009 commentary award to Eugene Robinson instead, citing The Washington Post veteran for columns on the election of the first African-American president that exhibited “graceful writing and grasp of the larger historic picture.” Krugman and Regina Brett, of the Cleveland Plain Dealer, were runners-up.

Krugman is an economist of considerable distinction. He deserves the Nobel Prize for his work elucidating the mechanisms of international high-tech trade (though the Royal Swedish Academy of Sciences would have done better to wait another year and to honor his co-author Elhanan Helpman as well). But there is something about Krugman’s newspaper journalism that chafes. True, he gets half-a-dozen scoops a year. He has become a columnist of enormous influence. He is an energetic blogger, too. Yet he often cloaks his claims in professional authority, overstates them, omits arguments that undermine his case, and is a bit of a bully.

Besides, in a year when Krugman energetically supported the presidential candidacy of Hillary Rodham Clinton, it was Robinson who got the story.

Most richer nations nowadays, and many developing nations, have “independent” central banks, such as the European Central Bank and the Federal Reserve Bank. “Independence” cannot be precisely defined, but it is supposed to indicate that the central bank of a country has the freedom to make decisions which the government, represented by the Treasury in the United States, does not like. The purpose of independence is to allow monetary policy to be decided independently of fiscal policy, although obviously even independent banks and governments may respond in consistent ways to broad economic events, such as the present recession.

The motivation for having an independent central bank is the many occasions in the past when subservient central banks accommodated the government’s desire to spend more without raising additional taxes. Central banks accommodate fiscal authorities essentially by buying government securities that help finance government spending. In return for receiving government debt, a central bank would either directly print additional currency that governments can spend, or it would create reserves in commercial banks that lead to an expansion of bank deposits and monetary aggregates, such as M1. Either way, inflation would result from this monetization of the government debt, often severe inflation and even hyperinflation. Hostility to rapid inflation led to the political support behind giving central banks much greater independence from fiscal authorities.

The history of the Federal Reserve’s transition in and out of independence is illuminating (see Allan Meltzer’s book, A History of the Federal Reserve, 2003). The Fed fully and enthusiastically compromised its independence from the Treasury during World War II. It bought large quantities of government debt to help the government finance the large wartime deficit. Inflation from the resulting big expansion of the money supply was suppressed through wage and price controls. This inflation became open after removal of these controls at the end of the war.

For a half dozen years after that war was over, President Truman and the Treasury pressured then much more reluctant Fed officials into maintaining the Fed’s subservience. Eventually, however, the Fed regained its independence in the famous Accord reached in March 1951. Nevertheless, the Vietnam War, the Great Society Program, and the reinstitution of wage and price controls by Richard Nixon in the early 1970s led to later erosions of the Fed’s independence.

Even during normal times, central banks, whatever their nominal independence, are under strong pressure to accommodate expansionist fiscal policy, especially as elections approach. During extraordinary times, whether in peacetime or during wars, this pressure usually becomes too powerful to resist. So the rather complete bending of the Fed to the Treasury’s wishes during the present worldwide recession is not surprising. Still, that does not make it right, and I have some doubts about the Federal Reserve’s recent behavior.

One concern is the somewhat arbitrary choices the Fed made about which banks to bailout and which ones to close or merge into other banks. This added significantly to the enormous uncertainty already prevalent in financial markets. I am also worried about the Fed’s support of the huge federal deficits generated by the sharp expansion in federal spending. I understand such actions are necessary to help governments fight wars, but why help finance so much spending during this recession, particularly spending that has dubious stimulating potential? One example is the almost $800 billion so-called stimulus package that will do little to stimulate the economy, but will greatly raise long term government spending in directions desired by the President and Congress (see the posts on January 11 of this year). Another example of dubious government spending that the Fed seems willing to help finance is the ill thought out Treasury plan for hedge funds and other financial institutions to buy toxic bank assets (see the criticism of this plan in my posts on March 29 and 31).

The huge increase in bank reserves is a major consequence of the Fed’s monetization of the government’s large spending programs. Reserves went from about $8 billion in early Fall to around $800 billion, or a hundred fold increase in only 6 months. The recession rather than the wage and price controls imposed during prior periods is keeping inflation suppressed at present. Once the economy begins to recover, the inflationary risks will be enormous. In order to soak up these reserves, the Fed would have to sell large quantities of its government securities back to the private sector. These sales would put downward pressure on security prices- that is, upward pressure on interest rates- that will slow the economy’s expansion at that time. For this reason, any government in power then, whether Democratic or Republican, will vigorously resist such Fed actions.

Hence it is not obvious that the Fed will be able to conduct these sales sufficiently smoothly to prevent either a recession or a serious bout of inflation. These are not pressing concerns when a serious recession is the immediate problem, but they will become major challenges down the road.

Spoiler Alert: Don’t read past this point if you’re planning on reading this book.

Also, a warning: this blog post is only slightly less disjointed than Atlas Shrugged. I am just going through point by point the complaints that I have with this book.

Well it only took me about four months, but I finally and begrudgingly finished Atlas Shrugged. Clocking in at 1,070 agonizing pages, with tiny type, it was a pain to read. I wanted to read it because it is such an influential book, especially for many neocons.

The “heroes” were not heroes at all. What kind of hero simply gives up and lets their world go down the drain? That is what all of the characters have done when they went on strike. This is what they have done when the acquiesce to a corrupt government. This is what they have done when they refuse to actively and effectively fight back. How is John Galt a hero when he tells the President that he will say anything and do anything that he is ordered to do? He is presented as a hero because he says he won’t volunteer to do what he is ordered to do.

For a book that has at its core the concepts of reality, reason, and logic, Atlas Shrugged remarkably lives in a fantasy world. Sure, the setting is the United States. But it isn’t the United States that exists anywhere outside of Ayn Rand’s head (and maybe some neocons, too).

Somewhere in the book someone is describing the hard work and honesty that the United States was founded on. Give me a break. The United States was founded on dead Indians, dead African slaves, indentured servants, exploited workers, racism, sexism, and other forms of exploitation. Ayn Rand would have done well to take a decent history class.

Rand would have us believe that when a few dozen industrialists disappear, the world descends into chaos. I contend that if the leading industrialists disappeared, we would live in a slightly better world. (Only slightly, because there would be people to replace the disappeared industrialists. This new stock would be slightly worse at exploiting people for profit, hence, a slightly better world.)

Rand also would have us believe that socialism is akin to zero productivity. What would she say today when presented with some European states that are much more socialistic than the United States and still productive? What would she say when presented with countless cooperative businesses, such as Rainbow Grocery here in San Francisco? What did she say about the anarchism that was successful in Spain during the Spanish Civil War?

Another problem with Rand’s argument is that she has no concept and no mention of externalities – the concept that people don’t always pay for the negative effects that they have on society. The cost of these effects are not reflected in the price of their products or the price of doing business. An example would be a power plant that sickens the surrounding community, such as in Richmond, California, and doesn’t have to pay for the resulting medical bills. In fact, several times in the book, Rand describes disasters that happened to the Taggart Railroad. Many people died in these disasters, but there was no implication that their families were compensated. In fact, it was implied that it was the fault of the socialists that the accident happened. Well, guess what? No matter who creates the unsafe conditions for a railroad, you can’t just run the train anyway. The “heroes” were essentially taking the same position as the villains without actually saying it: the position of “It couldn’t be helped! It’s not my fault!”

Yet another disgusting part of the book was when Hank Rearden’s family was begging him to not let them starve in the coming economic collapse. Letting your mother starve is evidently OK she has disrespected you. Eye for an eye, right?

I would have liked Atlas Shrugged a lot more if it had at least partially represented the opposing argument. Instead, this book was the worst misrepresentation of an opposing argument that I have ever read. The left was portrayed as “looters” who only stole the productivity of others. The leftist characters in the book never attempted to present a credible philosophy, supposedly because they had no philosophy. They were portrayed as being the worst kind of nihlists.

The absolutely most grueling part of the book to get through was the 70-page rant by John Galt. It was rambling, incoherent, poorly written, and disorganized. I did manage to get through it, skimming part of it.

All of the characters were portrayed as pure good or pure evil; there is no inbetween. It takes a remarkable lack of creativity to write a book with completely interchangeable characters.

At one point, a train explodes in a tunnel. Rand painstakingly goes through the passenger list, describing how dozens of people were part of the leftist problem that she sees. She implied that those who died in the crash deserved to die. This included children. Ayn Rand really must have been an awful person.

At the end of the book, the judge adds an amendment to the constitution saying that business is a fundamental right. A clause such as this in reality would ruin the environment and destroy the lives of workers.

Ayn Rand is a wanna-be great philosopher. I think she has deluded herself into thinking that her theories must be true due to a world that she sees as black and white, ones and zeroes. Unfortunately, her theories only work in the fantasy worlds that she creates. I find myself thinking this a lot about different people (mostly people, I suppose, who buy into Rand’s BS, like Dick Cheney et. al.): I wish I could see Noam Chomsky debate Ayn Rand.

As the current lease on our rented condo rolls towards the end of the contracted dates, some of our friends are asking us, once again, when we plan to stop renting and buy our next home. When I share my findings that renting is still cheaper than owning in our town, some suggest we “should” move into a larger home. When I ask, “Why should we move to a larger home?”, responses usually include a quick shrug of the shoulders, a time-stalling “uhhhh”, then perhaps something like “your daughter will need more space as she gets older”, or “don’t you want to grow a bigger garden?”

I’ve learned that everything you own owns you. Several years ago, we chose to free ourselves from the handcuffs of STUFF. We downsized our lifestyle almost 50% by moving from a 2450 square foot home into a condo with about half as much floor space. In doing so, our housing and utility bills dropped dramatically. We sold half of our belongings and made over $13,000 in cash. Decreasing our monthly expenses caused our net worth to grow exponentially.

More importantly, our minds are more at peace, and we live a more culturally rich life. We have more time and energy to consume experiences rather than things. We play more with our child, talk more with each other, and enjoy more of life.

Less space gives us more of everything we value most.

According to David Wann, bestselling author of Affluenza: The All-Consuming Epidemic, many of today’s three-car garages occupy 900 square feet, which is about the average size an entire home was during the 1950’s. Today, most people use the extra garage space to store things they own but seldom use.

The number of “very happy” people peaked in 1957, and has remained fairly stable or declined ever since. Even though we consume twice as much as we did in the 1950s, people were just as happy when they had less! 86% of Americans who voluntarily cut back their consumption feel happier as a result.

This recession is putting the squeeze on many families. Perhaps it’s time to consider downsizing your biggest budget buster– your housing expense.

Renting is NOT throwing your money away

Whether you pay mortgage payments to the bank or rent payments to your landlord, you are paying for SHELTER. Contrary to what most people used to believe (but now we know better, right?), homes do NOT always go up in value. Your home is your shelter — not an investment. Often it is less expensive to rent a home than to buy one. Consider renting and investing your down payment savings and your monthly savings into income-producing real estate, businesses, stocks and bonds, your education, etc. instead. You will often come out ahead financially in the long run.

And you might find yourself happier for it, too.

Hey AIM Users!

We’re excited to present AIM 6.9! This newest version of AIM has a bunch of new features that we know you’ll love.

• Get status updates from your friends on Twitter, Bebo and YouTube. AIM 6.9 allows you to get updates from your friends who are on AIM, and from other social networks. These updates come straight from your Buddy List and Buddy Info.

• Missing someone from your Buddy List? Find them easily with simple look up tools. Enter a friend’s email address and the new friend finder tool will look up their Screen Name for you.

• Send IMs directly to your friends’ cell phones using AIM and forward messages to your cell phone when you go offline.

• Enjoy all the features you’ve grown to depend on from AIM like cool expressions, picture share, video chat and plugins.

Want to send your feedback? Please go to (Buddy List > Help Menu > Feedback) and the AIM team will try to answer your questions. When filling out the form please complete the email portion of the feedback field, so the AIM team can respond if applicable.

Download the New AIM 6.9 Now!

Thanks!

The AIM Team

Permalink | Email this | Linking Blogs | Comments

Repayment of Tarp Bank Loans-Becker
Six months ago essentially all large American banks and many smaller ones received loans from the federal government to help shore up their capital base as they tried to weather the financial storm. Some banks would likely have failed during the severe strains in the capital market last September and October were it not for these loans. This past week, however, the two strongest large banks, Goldman Sachs and JPMorgan Chase, indicated that they wanted to, and were able to, repay their loans. Should they be allowed to do so?
It appears that not all banks wanted to take government loans in October, but some large banks were apparently “forced” to as part of the TARP loan program devised by then Secretary of the Treasury Henry Paulson. According to some accounts, the government exercised this pressure in order to avoid disclosing which banks were the weakest and needed these loans to survive.
This explanation of the government’s behavior is strange since generally participants in financial markets do not have an excess of information about the financial viability of different banks, but rather they do not have enough information. It is wrongheaded for the government to try to mislead markets about which banks are weak. Indeed, the purpose of disclosure requirements mandated for banks and other companies is to raise the degree of public information available about different companies in order to assist participants to make wiser decisions. In any case, most firms and individuals active in financial markets already had a fair idea of which banks were stronger and which ones were weaker.
Many of the banks worse fears about the strings attached to these loans have been realized. The resulting government intervention in bank managerial decisions include the well-publicized restrictions on bonuses and other pay to executives, restrictions on banks’ ability to hire foreigners, and frequent demands to appear before Congressional committees to justify what they are doing. Less onerous interventions include Congressional and the media’s opposition to banks holding expensive golf and other outings, bank use of private planes, and meetings at luxurious resorts. Goldman, JPMorgan, and other banks want to repay their government loans primarily to eliminate these and potentially other government restrictions on managerial decisions. I see no compelling reason why they should be prevented from repaying their loans.
One argument made against allowing them to repay is the same one used to justify requiring the relatively strong banks to take the loans in the first place; namely, that the weaker banks would be exposed if the stronger banks repaid at this time. However, they are already exposed since the major participants in financial markets already know that banks such as Goldman and JPMorgan are much stronger than say Citi and Bank of America.
A more sophisticated version of this argument is that if the strong banks were allowed to repay now, the weak banks would also try to repay, and thereby become still weaken, since they do not want to appear weaker than their competitors. However, weak banks are unlikely to try to repay if that would so further weaken them that they would soon require even larger government bailouts before long. Moreover, repayment by strong banks would be a good motivator if it gave weaker banks stronger incentive to get into a financial position whereby they too could repay without damaging their viability.
Another argument advanced against allowing any repayment at this time is that this would weaken the capital position of repaying banks (even those that claim to have enough capital to repay). Yet especially the stronger banks would not want to repay the Tarp loans if that means that before long they have to ask the government for additional loans. Goldman has raised an additional $5 billion in equity to help finance their repayment, and the company has reduced its assets to 14 times its capital compared to 26 times at the end of 2007. JPMorgan claims to be able to repay their loan without having to raise any more capital.
In any case, the Treasury is soon releasing results of the stress tests they have given to all major banks. We will then have better information to determine if the banks that want to repay now can comfortably pass these tests. I am confident that these banks will rank quite high, which would help explain why they are eager to repay.
If Goldman and JPMorgan were simply allowed to repay their TARP loans, they would still have the sizable benefits of the Temporary Lending Government authority (TLGP) that provides FDIC guarantees on bonds issued by covered banks. These guarantees stem from Goldman ’s conversion into a bank holding company last fall-JPMorgan was already such a company. Goldman has borrowed about $28 billion under TLGP. This would be the right time to start reducing these guarantees for Goldman and JPMorgan as a condition for these banks being allowed to reduce government controls over their decisions.

Last fall the federal government lent hundreds of billions of dollars to major banks and other financial intermediaries pursuant to a program called the Troubled Asset Relief Program (TARP). Some of the recipients, notably Goldman Sachs and JPMorgan Chase, want to repay the money. Essentially that means buying back the preferred stock that the government received in exchange for the loans; they thus were loans without a maturity date.

I do not know whether, as a matter of law, the government’s consent to repayment is required, although it would not be surprising if it were, since, as I said, the government received preferred stock for the loans rather than just a promise to repay. But maybe there’s something in the loan contracts that entitles the banks to repay when they want to; I do not know, but I’ll assume that the government’s consent is required and consider whether that consent should be given.

The answer depends in part on an understanding of why the loans were made. Last September it appeared that most of the nation’s major banks and related financial intermediaries were either insolvent or in danger of becoming so; TARP was designed to save them. Had the banks been allowed to go broke, the depression in which we now find ourselves would be even more severe than it is; think of the chaos that ensued when Lehman Brothers, one of the lesser financial intermediaries, was allowed to fail that month. No private investor was willing to step in and save the tottering banks, so the federal government stepped in instead.

TARP proved highly unpopular with Congress and the general public. The main reason was that the banks were seen to be “hoarding” the money they had received from the government, rather than lending it. TARP had been sold to a public suspicious of “Wall Street” (an echo of age-old hostility to finance as “sterile,” rather than “productive” like making a physical product) in part as a way of stimulating economic activity by enabling banks to increase their loans. The idea was that the hundreds of billions of dollars fed the banks by the government would go out as loans to the bank’s customers. And loans do stimulate economic activity. Many businesses rely on bank loans to bridge the gap between incurring costs of production or distribution and later receiving revenues from the sale of goods and services; and both businesses and consumers use borrowing to bring production and consumption, respectively, forward–borrowing to spend means consuming more today and less in the future (the eventual repayment of the loan will reduce the amount of money that the borrower has for spending on investment or consumption). A depression is a severe contraction of output, and borrowing is a way of increasing output by increasing the amount of money that people and firms have for immediate spending.

The hoped-for expansion of lending did not take place. Contrary to myth, at no point did banks cease to make loans, although they came close to doing so last September and October. But they did reduce their lending, both by raising interest rates and by increasing credit standards and, in some cases, by refusing to lend to other than their best, established customers. The money that the banks received from the government was mainly either hoarded quite literally, or used to buy bonds or other assets (including in some cases other banks). By literal hoarding I mean keeping the money received from the government in cash or a cash equivalent, such as a bank account in a federal reserve bank. Banks are required to keep a modest percentage of their demand deposits in cash; these are their “required reserves.” Any excess cash they have is called “excess reserves,” and since cash does not earn interest, banks usually try to minimize their excess reserves. In 2007 their excess reserves amounted to only about $2 billion; today, they are almost $800 billion. When banks are worried,”excess” reserves are not really excess.

Why did the bankers not lend the money they received from the government? There are five reasons: (1) because banks were undercapitalized, as a result of being overinvested in assets that had lost much of their value, such as mortgage loans and interests in mortgage-backed securities; (2) because they anticipated big losses from their outstanding credit card and commercial real estate loans, and perhaps from other loans as well (this is related to the next point); (3) because lending in a depression is highly risky–the default risk is high, and if the lender tries to compensate for the risk by charging a very interest rate this will increase the risk of default, because interest is a fixed cost of the borrower, that is, invariant to his revenues; (4) because as businesses reduced their output their need for borrowing fell and the risk of default (as I just mentioned) rose, making them reluctant to borrow; and (5) because consumer borrowing fell as a result of consumers’ being overindebted as a consequence of the fall in house and stock values, the principal source of their savings. Of course failing businesses and unemployed or otherwise necessitous consumers might want desperately to borrow, risky as their borrowing would be. But they are unattractive customers for banks, especially when the banks, because they too are overindebted, are trying to reduce the riskiness of their loan portfolios.

These reasons for the banks’ reluctance to use federal money to make loans are perfectly good reasons, and do not invalidate the TARP because without the additional capital that the program contributed the banks would have been even more chary about lending. But the reasons that despite TARP bank lending is continuing to decline were never adequately explained to the Congress or to the public, and as a result the failure of the banks to lend more was and is seen as sinister. And when it turned out that banks were continuing to pay high bonuses and other generous-seeming compensation to their employees, Congress and the public accused the banks of being a conduit between the federal taxpayer and the “stupid, greedy, reckless” bankers who had brought down the banking industry and, with it, the nonfinancial economy.

Again, no one explained that (1) bankers are smart, and the collapse of the industry last fall was due to a combination of dumb Federal Reserve interest-rate policy in the early 2000s and the excessive deregulation of financial intermediation, beginning in the 1970s; (2) bonuses are a more efficient form of compensation than salary, because they are more closely aligned with performance; and (3) the problem of overcompensation is a problem of senior management, because of its de facto control, in a large, publicly trade corporation, of the board of directors; most recipients of bonuses in financial intermediaries are not part of senior management. Somehow Congress and much of the public got into its head that the banks had hired dopes and deliberately overpaid them, which would make no sense from the standpoint of senior management.

The uproar over the banking industry has led to legal restrictions on compensation, proposals for other highly intrusive forms of regulation, even threats to “nationalize” major banks (that is, confiscate them), congressional witch hunts, interference with banks’ use of private aircraft and with promotional activity at resorts, adverse publicity, and other inroads into the autonomy and efficiency of financial intermediation. So naturally the banks are scrambling to repay the TARP money as fast as they can, in the hope of getting the government, the public, the politicians, and the media out of their hair.

I can’t see a good reason not to allow them to repay the loans. Repayment will go some distance toward reducing the astronomically mounting federal deficit and will allay, to some extent at any rate, the public and legislative hostility to banks and bankers. That hostility is counterproductive. By increasing the uncertainty of the banks’ business environment, the attacks on the banks increase their incentive to hoard cash or to make safe investments rather than to make loans. (So who is being stupid and reckless?) There is I suppose a danger that some banks would repay prematurely, that is, before the risk of insolvency has been dispelled, but that is unlikely. As Becker points out, a bank would be reluctant to repay its government loans if it anticipated a significant probability of having to return soon to the government, hat in hand, for a further loan because it has gotten into more financial difficulties.

Next weekend, some young American economist will win the John Bates Clark Medal. The prize has been awarded every second year since 1947 by the American Economic Association to the researcher who is “judged to have made the most significant contribution to economic thought and knowledge” before the age of 40.  (The European Economic Association has begun a counterpart award, the Yrjö Jahnsson Prize.)

Starting next year, the AEA will award its medal annually. No more claiming that the Clark Medal is more valuable than a Nobel Prize because it’s twice as scarce!

But suppose the prize had been awarded annually from the very beginning?  Then we would have known twice as many interesting economists from a relatively early age – but who?  Hence the idea of a hindcast, a backwards look at who might have won in the even-numbered years if the rules had been different.

There are several ways to do this.  One is the historian’s way, to painstakingly try to pry out the committee’s lists, to recreate the jury room arguments. But the counterfactuals quickly spin out of control because any awards committee must always think ahead.

Another method would be to attempt to gauge the award’s success over the years in anticipating the constantly-shifting judgment of history, a very complicated effort involving citation counts and the opinions of other prize-givers, both ex ante and ex post, using the guidelines created thereby to generate a second list.

The alternative is journalism: pay lip service to the sanctity of the electoral college, report until deadline, and make educated guesses. The idea is to start interesting conversations.

Herewith, then, one such a preliminary hindcast, based on a number of conversations with some of those involved one way or the other over the years, a first rough draft of (counterfactual) history.  The more recent choices are the more difficult ones.  Where it’s hard to make a confident case, very recently and long ago, I have left the matter open.

  CLARK MEDAL             NO CIGAR MEDAL 

2009  TBA

                                         2008 John List, Chicago

2007 Susan Athey, 37, Harvard

                                        2006 Edward Glaeser, 39, Harvard

2005 Daron Acemoglu, 38, MIT

                                          2004 TBA

2003 Steven Levitt, 36, Chicago

                                          2002 Michael Kremer, Harvard

2001 Matthew Rabin, Berkeley

                                         2000 TBA

1999 Andrei Shleifer, 38, Harvard 

                                          1998 Douglas Bernheim, 38, Stanford 

1997 Kevin M. Murphy, Chicago

                                         1996 Drew Fudenberg, 39, Harvard

1995 David Card, Berkeley

                                         1994 Paul Romer, 39, Berkeley

1993 Lawrence Summers, 39, Harvard

                                         1992 Jean Tirole, 39, MIT

1991 Paul Krugman, 38, MIT

                                         1990 Lars Peter Hansen, 38, Chicago

1989  David Kreps, 39, Stanford GSB

                                         1988 Nancy Stokey, 38, Northewestern

1987 Sanford Grossman, 34, Princeton

                                         1986 Oliver Hart, 38, MIT

1985 Jerry Hausman, 39, MIT

                                         1984 John Taylor, 38, Stanford

1983 James Heckman, 39, Chicago

                                         1982 Thomas Sargent, 39, Minnesota

1981 A. Michael Spence, 38, Harvard

                                         1980 Andreu Mas-Colell, 36, Harvard

1979 Joseph Stiglitz, 36, Princeton

                                         1978 Peter Diamond, 38, MIT

1977 Martin Feldstein, 38, Harvard

                                         1976 Sherwin Rosen, 38, Rochester

1975 Daniel McFadden, 38, Berkeley

                                         1974 Robert Lucas, 37, Chicago

1973 Franklin Fisher, 39, MIT

                                        1972 Edmund Phelps, 39, Penn.

1971 Dale Jorgenson, 38, Harvard

                                          1970 Robert Mundell, 38, Chicago

1969 Marc Nerlove, 36, Chicago

                                          1968 Herbert Scarf, 38, Yale

1967 Gary Becker, 37, Columbia

                                          1966 John Meyer, 39, Harvard

1965 Zvi Griliches, 35, Chicago

                                         1964 Robert Clower, 38, Northwestern

1963 Hendrik Houthakker, 39, Harvard

                                           1962 John Chipman, 36, Minnesota

1961 Robert Solow, 37, MIT

                                           1960 William Baumol, 38, Princeton

1959 Laurence Klein, 39, Pennsylvania

                                           1958 Lionel McKenzie, 39, Rochester

1957 Kenneth Arrow, 36, Stanford

                                           1956  Leonid Hurwicz. 39, Minn.

1955 James Tobin, 37, Yale

                                           1954 TBA

1953 No award

                                           1952 TBA

1951 Milton Friedman, 39, Chicago

                                           1950 George Stigler, 39, Chicago

1949 Kenneth Boulding, 39, Michigan

                                           1948 Tjalling Koopman, 38, Chicago

1947 Paul A. Samuelson, 32, MIT     

Legend has it that in the councils of those who created the award sentiment at first was strong to give the prize at 35, to underscore the conviction that truly new directions in economics are almost always charted by the young. Theodore Schultz (not Henry Schultz, at reported earlier, the pioneering econometrician who died in 1939), of the University of Chicago, argued successfully that empiricists couldn’t hope to make their impact felt before they had worked for at least twelve or fifteen years.  So the fortieth birthday became the cut-off date. (The No Cigar list illustrates just how inflexible that date can be:  Paul Milgrom, of Stanford, may have been more famous for auction theory in 1988 than Nancy Stokey, but he was born a year too late to qualify that year.)

Has the award worked as its founders hoped it might?  It is hard not to admire the association’s consistency over sixty years in choosing economists who, in the second half of their careers, become emblematic of the profession’s concerns.  On the other hand, there are already half as many Nobel Prize winners among No Cigar designees (six) as on the Clark Medal list.  What emerges from an exercise like this one is how many deeply interesting contributors to our understanding of our economic life are missing from both lists.

Still, the profession will be a marginally gentler place, with the quantity of rent to fame about to double. The competition has occasionally grown so rambunctious that some economists have taken to concealing their birthdates to sidestep the inside talk. The rest of us, too, will be better off thanks to the decision. Henceforth economics will be perhaps a little less a gerontocracy than it has been, at least since the first Nobel Prize was awarded in 1969 – a small but admirable reform stemming from the leadership of incoming AEA president Robert Hall, of Stanford, who didn’t win the Clark Medal in 1981.