About one month ago, the Wall Street Journal reviewed two books (here) about orchestra leader Stan Kenton. The review described Kenton's music as "...essentially, art music." However described, it was great modern jazz, as the clip above demonstrates.
Until details of Kenton's private life were revealed in "Love Affair," the book by Kenton's daughter Leslie, Stan Kenton was thought to have been "...buttoned down and conservative." Evidently, he was neither.
In a previous post (here) I discussed the right-wing fixation with business confidence (no regulation, no taxes, etc.), credibility (austerity) and its relationship to the current debt crisis in the U.S. (the Subprime mortgage crisis or the Great Recession).
"Through our new TARP authority, Treasury will purchase up to $250 billion of preferred stock of banks and thrifts prior to year-end," he [...Hank Paulson, Treasury Secretary at the time...] said, with the gravity due the unprecedented measure. "The system needs more money, and all of you [...the CEOs of the major US banks...] will be better off if there's more capital in the system. That's why we're planning to announce that all nine of you will participate in the program."
Paulson explained that the money would be invested on identical terms for each bank, with the strongest banks in the country taking the money to provide cover to the weaker banks that would follow suit. "This is about getting confidence back into the system. You're the key to that confidence."
The implication seems clear: what the right wing wants is austerity, deregulation, reduction in tax rates and bailouts to generate business confidence. Someone else can pay for government services necessary to run businesses (infrastructure, police protection, border security, national defense, education, basic R&D, etc.) and the negative externalities created by a free market (environmental damage, unemployment, poverty, financial crises, etc.). That someone else, of course, is consumers who are also being squeezed multiple ways by the debt crisis (loss of jobs, loss of income, loss of homes, etc.).
A good definition of political power is "...the capacity to restructure actual situations..." so they work out in your favor.
John Taylor is an economist at the right-wing Hoover Institution. His specialty is monetary policy. He is best known for proposing the Taylor Rule, a simple rigid formula for how the central bank should change its nominal interest rate based on departures from targeted inflation rates and differences from potential GDP.
The purpose of the Taylor rule is to systematically reduce uncertainty and increase the credibility of future central bank actions to foster price stability and full employment. In the video above, Taylor extends his uncertainty-credibility analysis beyond the central bank to all areas of government policy, to include fiscal policy, health care policy, regulatory policy, etc.
The extended generalization hinges on whether uncertainty-credibility are at the root of our current financial crisis. Taylor thinks that business would be hiring if the government was "credible" (instituted austerity programs) and business had "certainty" (business can be certain that they can do whatever they want without regulatory interference).
The Keynesian response to the "business confidence" argument (stated here and critiqued here) is that actual demand is more important to investment. What's the point of investing if there is no demand? In the current financial crisis where investment has been chocked off with the evaporation of liquidity, we're in a situation where consumption (C) and employment (L) are at low levels consistent with the downturn in GDP. We might hope that exports (a positive balance of payments, BOP) might help, but that's unlikely because the world system is also in recession.
Eliminate "Investment" and "BOP" from the graph above and you are left with government expenditure (deficit spending) as the only way to increase consumption and employment. You can lower the interest rate as much as you want and it won't stimulate investment because (1) current capacity is not being fully utilized and (2) the interest rate cannot go below zero.
John Taylor's arguments about uncertainty-credibility make sense in a business-as-usual environment when inflation and GDP are near their targeted values. To make these arguments during the Great Recession, when inflation and GDP are well below targeted values doesn't even make sense using Taylor's own formula (see below).
THEORY: The Taylor Rule is roughly i = i* + a(P - P*) + b(GDP-GDP*) where i is the interest rate, P is the price level, GDP is gross domestic product, and the starred values are desired, equilibrium or attractor levels. If P* and GDP* are a lot greater than P and GDP, respectively, the interest rate becomes negative, the dreaded zero-bound when the Taylor Rule no longer applies.
Analyzing the Taylor Rule would, by itself, be an interesting topic for a future post. For me, the key issues here are how to specify the dynamic attractors for inflation and GDP and how well changes in nominal interest rates would lead to price stability and full employment. The fact is that central banks do not use the Taylor rule so its application is purely counterfactual.
The graphic above is from a Wall Street Journal analysis of the housing market (here). What the graph shows is that the market share of Fannie and Freddie declined rapidly during the housing boom as privately issued (questionable?) mortgages came to dominate the market. The market share reversal is also mentioned in the Treasury report on reforming Fannie and Freddie (here).
Purely from the standpoint of causal analysis, the finger has to be pointed at the private sector that was taking market share away from Fannie and Freddie. Consider this causal counterfactual: Why couldn't the market have stabilized at 40% Fannie/Freddie and 55% Privately Insured? It couldn't stabilize because the privately insured mortgages being written were garbage.
Fannie and Freddie's private-side drive for profit allowed them to be played by the private sector who dumped all their toxic assets back on Fannie and Freddie after 2006. At the end of all this, Fannie and Freddie are back to their 1992 levels of market share (70%), the private sector is down to almost nothing and government-guaranteed mortgages are up to 30%. In other words, the government and the public-private GSEs ended up holding the bag for actions taken in the private sector.
And, now the Treasury is trying to roll things back to 2006 (here) and replay history with good oversight. But I'm confused. Until 2003, Fannie and Freddie evidently were not a problem. How does reducing Fannie and Freddie's market share solve a problem that was created in the private sector after 2006? At least the Treasury recognizes that "Fannie Mae and Freddie Mac's profit-maximizing structure undermined their public mission." A big question in my mind is whether the private sector (who created the problem in the first place) is going to be a trustworthy player.
One point in favor of eventually winding down Fannie and Freddie is that any large pot of money or assets sitting somewhere close to the government is going to create problems. How to make sure originators can write sound mortgages without having to keep the entire mortgage (some percentage of each mortgage might be a good idea to keep their skin in the game) is going to be the challenge.
When a politician says that "something isn't about something," you can be sure that it is precisely about that thing. When Wisconsin Governor Scott Walker says that his budget repair bill (which strips public sector unions of collective bargaining rights) is not about collective bargaining rights, he means that it is precisely about ending collective bargaining rights (you can read more here and here) .
Governor Walker is a master of Orwellian Doublethink and has used it effectively even to reprogram union members who supported him in the last election. One sympathizes with members of the Tea Party Movement who feel that they cannot trust politicians to tell the truth. But they also have been reprogrammed into accepting contradictory ideas such as "respecting public sector workers" involves taking away their collective bargaining rights .
The popular press has picked up on another questionable research result and used it to raise hopes of preventing Alzheimer's disease (AD). For example, CBS news ran a piece titled "Alzheimer's self-defense: Are two languages better than one?" (here) discussing findings from a study by Ellen Bialystok, a psychologist at York University in Toronto.
The original research (here) confuses correlation with causation, a distinction that gets lost in the popular press. Essentially, the researchers took whomever showed up at their treatment center in Toronto with AD symptoms, determined whether or not they were bilingual (this is of course interesting to the Canadians given that French and English are both the national languages) and determined how rapidly AD progressed over time for the two groups.
Epidemiological studies studies of intact populations have been a source of most ideas about AD prevention and most of the ideas have turned out to be wrong when tested by clinical trials. Consider (taken from Szekely et. al. 2007) life style factors (Mediterranean diet, physical activity, cognitive activity, etc.), neutraceuticals (Vitamins E and C, ginko biloba, Huperzine A, Folic Acid, and Curcumin) and pharmaceuticals (NSAIDs, hormone replacement therapy, anti-hypertension drugs, statins, immunotherapies, thiazolidinediones, arundic acid, etc.); none of them have proven effective in delaying the progression of AD. All were suggested by epidemiological studies.
The problem with epidemiological studies is that they do not control alternative causal explanations the way a correctly conducted randomized clinical trial would. Consider the factors implicated in AD from the causal diagram above (click to enlarge). Lifestyle factors, diet, education, genetic differences and bilingualism are all thought to affect cognitive reserve, that is, other parts of the brain's ability to deal with impairment. However, AD is thought to be a result of disease history (hypertension, diabetes, etc.), risk factors, cognitive reserve and random factors. None of these factors is controlled when we look at a non-random sample of patients who enter a Canadian clinic for AD treatment. What's especially important here is that Canada is supposedly a bilingual country but many citizens only speak English. That choice alone my define different populations with different risk factors.
Now, Ellen Bialystok is a respected researcher who specializes in the psychological study of bilingualism. Given her specialty, she probably feels compelled to report any conferred advantages of bilingualism. Unfortunately, just like all the many other dead-ends generated by epidemiological studies, the result is unlikely to replicate. That's how science works: results that don't replicate are forgotten.
What is unfortunate is that the distinction between correlation and causation is lost on the popular press and is probably lost on most of the readers. As statisticians, although we might have succeeded in teaching students how to calculate a correlation coefficient, we have evidently failed to successfully communicate (even to the editors of medical journals) the difference between correlation and causation.
I use my blogs to make informal comments on policy topics related to my research interests in the World-System, computer simulation of the US Health Care System, the US Economy, the US Stock Market, and the US Financial System. I am retired from the University of Wisconsin -- Madison. I have taught Statistics and Computer Science and also served on the UW's HIPAA Task Force and the Bioterrorism Task Force. I have also been a member of my local planning commission, a jazz guitarist and a golfer, so some of that may find its way into the blogs.
