Pursuit of Truthiness

my gut tells me I know economics

Archive for October 2011

The Fed Can Commit

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Anna seems to trust Ben's commitment

I have heard otherwise-intelligent people insist that the Federal Reserve is incapable of making believable commitments to take certain actions in the future.  For instance, Angus keeps saying things like

“Please repeat after me:


Promises to act against one’s preferences in the future that are made without any commitment mechanism are simply cheap talk and are extremely unlikely to shape agent’s expectations or actions.”

It is obviously wrong to say that the Fed has no commitment mechanism.  The Fed makes believable commitments every day.  It does not need to resort to Schelling-style special tricks like having its employees make contracts with 3rd-parties to lose lots of money if the inflation target is missed (though of course these tricks are available and potentially useful).  The real commitment mechanism is that your reputation is itself a valuable thing, and the Fed’s leaders know this and have less-than-infinite discount rates.  Ben Bernanke has carefully developed a reputation for keeping his word; he is not going to throw this durable good away in 2012, because he will still find it useful in 2013, and he values his 2013-utility a significant positive amount.  Because Bernanke knows the importance of the expectations channel, he knows his reputation is more important than just about any one-time action.  Ben will not sell his birthright for a mess of pottage.

We don’t even need to delve into the complexities of monetary policy to establish the obvious truth that the Fed can make commitments.  Just consider the fact that thousands of Fed employees feel almost certain that the Fed will give them their next paycheck as promised.  Surely the Fed would benefit in the short term by not paying them; it could get them to keep working for a few weeks at least by insisting there was some technical problem with the payroll system.  Why doesn’t the Fed try this?  Because the leaders of the Fed know that their reputation for doing what they say [eg paying people, even if they promised too high a salary] is far more valuable than any short-term savings.  Their employees know this too, making it much easier for the Fed to manage their own labor market; for instance, no one is demanding payment up front, because they trust they will be paid later.  Similarly, the FOMC announces their meeting dates months ahead of time.  Somehow they always manage to meet when they said they would, even if everyone attending realizes at the last minute it is not a great time; they value their reputation more than a one-time inconvenience.  That’s some magical stuff right there people!

Odysseus binds himself to the mast

Written by James Bailey

October 17, 2011 at 3:47 pm

Berkeley Students Are So Conservative

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They, like most people, are small-c Burkean conservatives about life in general.  They have a strong status quo bias, but rather than admit this like Edmund Burke, they feel compelled to invent reasons why status quo things are good.  Berkeley psychology prof Seth Roberts said “Most of my students, for better or worse, were very conformist. My conclusion…. is that the reasons we give for our beliefs have roughly zero correlation with the actual reasons and shouldn’t be taken seriously (e.g., argued with).”  Robin Hanson said the same about George Mason students:

  • Ask random colleges student random policy questions and they will feel compelled to come up with opinions.
  • Ask them for reasons for those opinions and they’ll feel compelled to come up with such reasons.
  • Such opinions strongly tend to support the status quo – mostly whatever is, is assumed good.
I am thinking along similar lines today after discussing organ markets with my students.  Students say that legal markets in human organs would be bad mainly because it would lead to organ theft.  Even supposing there would be more organ thefts, it is hard to imagine there would be enough to outweigh the deaths of 9000 Americans every year caused by our current ban on organ sales.  If people were used to a functioning market in organs, I have to think they would be horrified by someone saying we should ban organ sales and consign thousands to death in order to reduce theft, just as it would seem crazy to ban day-laboring to protect laborers from employers who stiff them after a day’s work (stealing is already illegal!).  It is easier to think there must be a good reason for the status quo, that we live in the best of all possible worlds and aren’t doing something horrible.  Indeed, there is more right with the world than wrong with it; there is a reason status-quo-biased people continue to survive and thrive.  Further, it is dangerous to think that those who disagree with you must do so out of some ignorant bias; call this the “bias bias”.
In general though, if we are trying to figure out the truth, we have to fight pro-status-quo bias more often than its opposite.  The reason for this is wired into our brains: our dominant trait is to rationalize, not reason.  One part of our brain is dedicated to coming up with a reason for anything, whether it makes sense or not.  In extreme cases, paralyzed people can come up with all sorts of reasons to explain why they aren’t really paralyzed; their brain is acting as an apologist for what is done, not a reasoned truth-seeker (Seriously, check out that link- it is way more interesting than my post, even if you have heard of the phenomenon before).
I am optimistic about getting people who think of themselves as non-conformist or politically liberal to consider new ideas by telling them they are being conservative conformists.  Put name-calling to good use!

Written by James Bailey

October 17, 2011 at 3:00 pm