Report delves into Gingrich's work for Freddie Mac

A story today by Bloomberg News tries to flesh out the work Newt Gingrich did for Freddie Mac and his relationship with the mortgage company.

When Gingrich was asked at a GOP presidential debate about his Freddie Mac work, the former House speaker said he acted as a "historian," did no lobbying and warned of the company's "insane" business model.
The Bloomberg story says Gingrich was "asked to build bridges" with Republicans in Congress and "develop an argument on behalf of the company's public-private structure that would resonate with conservatives seeking to dismantle it."

The story cites unnamed sources.
If Gingrich concluded Freddie Mac's business was "risky," the story says, "he didn't share those concerns with Richard Syron," Freddie Mac's CEO at the time.

A statement posted on Gingrich's campaign website after the Nov. 9 debate says the Gingrich Group offered "strategic advice" on a number of issues, including "how to reach out to more conservatives."
Here's what the Gingrich statement said on that point:

The Gingrich Group stressed that Freddie Mac must be open to reform of their lending practices but that by stressing the historical success of public-private partnerships in achieving public goods at a minimum of taxpayer money and bureaucracy.

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Non-conformism in academia

In economics, there is the mainstream and various heterodox fractions that do not identify with the mainstream or each other. Too many, the heterodox seem like annoying and useless chatter. But they fulfill an important role, which is to keep those in the mainstream on their toes. This is part of the scientific process: challenge long and widely held views to check whether they are still valid. And even if the challenge is wrong, it makes those in the mainstream think about the axioms the build their theories on.

Vela Velupillai makes the case that dissenters are typically silenced by the mainstream, but may prevail in the long-run, citing many examples of mathematical economics, in particular the work of Pietro Sraffa. And this is really what tenure is good for: a dissenter will have much trouble publishing but may ultimately still contribute a lot to scientific advances.

We are in times were dissenters seems to have a more receptive audience. Indeed, the current crisis is seen by some as a failure of Economics, thus it is easy to criticize it. But it also highlights that dissenting can be very distracting if it is poorly focused, uniformed and populist. In this regard the recent dissenting by Colander, Krugman and Stiglitz has, I think been counterproductive, as I have occasionally discussed here. It is good to criticize the fundamental assumptions of the mainstream. It is better, but not necessary to offer alternatives. But it is counterproductive to dissent on the basis of a old read of the literature, and a literature that has in the meanwhile evolved to address these supposedly new criticisms.

Heterodox Economics has thus gained a fresh wind, simply because it is different from the mainstream. But what does it have to offer? Peter Skott, a heterodox economist himself, argues that it is still far from being an viable alternative. While heterodox approaches usually reject microeconomic foundations in macroeconomics, they should not throw out the baby with the bath water, i.e., ignore microeconomics altogether. And while the heterodox analysis for income distribution has focused on the labor income share, the large changes in income inequality happened within labor income. Finally, the heterodox literature is just as guilty of ignoring many of the suddenly relevant intricacies of the world of finance.

There is still a lot of work to do, and instead of pursuing an excess of mutual accusations and claiming Economics is useless, it seems much more appropriate to put more resources into making it better, heterodox or mainstream. After all, medical research was not defunded when the HIV/AIDS epidemic made ravages.

About beer

Beer has been an important part of human well-being, and this for thousands of years. While the economic literature has dealt rather little with it, many great papers have significantly evolved at the pub. Still, I have previously reported on a conference on the Economics of beer, and open source beer.

Now, let us talk about the economic history of beer, thanks to Eline Poelmans and Johan Swinnen. Brewing in the middle ages was he realm of monasteries, with rather small output and a lot of product diversity. With technological advances and reduction in transportation costs, commercial breweries took over and especially over the last hundred years they lead a remarkable trend towards consolidation. After all those mergers and acquisitions, product diversity was considerably reduced. This is all changing now, and tastes have become more sophisticated and local micro-breweries are on the upswing. In some ways, beer has become more like wine.

Why are school counselors so bad?

Recent news articles following up on the Occupy X movement have focused on youth unemployment and student debt. One aspect of this that strikes me are the absurdly bad choices students make. And from discussions with undergraduate students I ahad over the years, school counselors shares share part of the blame.

For one, they keep sending students into supposedly easy majors, even if job prospects are slim. If a student cannot handle the rigors of a serious university education, he should not be in university. He is less likely to get grants, more likely to take longer to graduate and then be in debt, less likely to get well-paying jobs there after and thus will face students debts for many years. Also, students with ambitions in better majors are told to switch to easier majors when they face difficulties, instead of helping them to overcome these difficulties. This is in particular the case for ethnic minorities and women, and one then wonders why they are underrepresented in science and technology. The problem is that counselors perpetuate or even amplify prejudices. An example is Neil deGrasse Tyson who was told that as a black he should go to basketball, not physics, and was not offered the help white students were getting when he struggled with classes, when blacks are not expected to excel in physics.

Also, counselors seem to obsessed with finding the "right college," which often an obscure little university where every major has only two or three faculty, and turn out to be expensive. The usual explanation is that the students needs small classes. This seems like another case of someone who is going to be highly in debt for a long time. And to come to Economics, the major is filled with undergraduates who did not get in or got kicked out of the business school, most often for failing on business mathematics and statistics. And what do counselors tell them? Get into a similar major, like Economics (or Psychology), ignoring that those quantitative skills are even more needed.

Why do counselors give such bad advice? I do not have an answer beyond wild guesses. But my casual observation tells me that the best psychologists or education professionals do not espouse this career, and for a good reason: on average the entry salary for a graduate of a Masters program in school counseling is an astounding US$33,000. In some sense, this is the bottom of the barrel that is trying to give advice to people on how to avoid falling to the bottom of the barrel. That is hardly inspiring. Schools should hire at least a few people who had successful careers to show how it is done, for example retirees.

Miss sharing with future generations? You are not missing much

Markets are not complete. Two major ways in whuch they are not complete is that we have borrowing constraints and that we cannot exchange with future generations. The latter can be a big deal when we think about the valuation of future amenities (like the environment) or long term risks. In particular, future generations could make us behave in certain ways if they could influence some of today's markets. This is precisely why the overlapping generation literature emerged, and a principal conclusion of it is that the government needs to intervene, in particular by providing an security that lives beyond generations: the government bond. While there is obviously a welfare cost to the lack of future generations on current markets, how large is it? The literature tells us the welfare benefit of the government bond is large.

Roel Mehlkopf just defended a dissertation on this topic, focusing on risk. In a nutshell, the cost is not that large, and it all has to do with distortions on the labor market. For one, those you ex-post need to transfer to another generation face a commitment problem in the sense that they want to reduce their labor supply, for example by retiring early. Once you take this into account, there is little to redistribute, and it can even be welfare-decreasing to transfer. This rationalizes why pension funds needs to be solvent at all times, even if they are solvent in the long run. One important implication is that when cuts are necessary in pensions, they should be larger for the young workers, as this reduces the labor market distortions.

Also, the dissertation points out that comparing to a situation with fictitious markets between non-overlapping generations can be misleading. Indeed, this implies that they all have the same weight in a social welfare sense. But there can be good reason for a social planner to deviate from this, and the analysis above, fr example, implies that future generations benefit more from risk sharing than current ones (who are at least partially locked in by past decisions). This should entice the social planner to give more weight to current generations, even beyond normal discounting of the future. And as only current generations for for the current government, we are not far from that optimum.

Physiology and Malthus

The Malthus model of economic growth (or the lack thereof) is now standard fare in undergraduate education. Basically, it shows that there is a limit to the size of an economy that hinges on decreasing returns to labor in production and on mortality increasing as standards of living, as measured by GDP per capita, decrease. Those two critical assumptions are based on observations that were certainly valid at Matlhus' times, and are likely to still be true today.

Carl-Johan Dalgaard and Holger Strulik go a little bit further in this theory. As more food is available, people grow taller. But being tall requires more food to sustain the body, which provides an additional reason for stagnation. This makes it more difficult to break loose from this "development trap" and may explain why economies stagnated for so long. But as Malthusian theory, this dies not explain why the economy suddenly exploded in the 19th century.