s a young economics professor in the late 1970s, Richard Thaler began noticing small but nagging ways in which ordinary people defied the predictions of economic theory. A friend confided that he mowed his lawn to save $10, but winced at the suggestion that he mow someone else's to make $10. A colleague confessed that he'd never go out and buy a $50 bottle of wine for a family meal, but that he'd recently opened up a $50 bottle at dinner because it happened to be lying around. The textbooks assumed people would behave identically when equal amounts of money were at stake. But here they were doing completely different things depending on the context.
By the late '80s, Thaler had begun recording these observations in a column for a leading academic journal. The column laid the groundwork for a book, called The Winner's Curse, published in 1994. And the book widely signaled the arrival of a previously obscure sub-field known as behavioral economics. Behaviorists like Thaler believed that the perfectly rational, utterly selfinterested maximizers of economists' imaginations had little in common with actual human beings, who frequently err when making simple calculations, who have trouble with self-control, who often act out of altruism or spite.
But what's really interesting is how Thaler and his fellow behaviorists responded to this fairly critical insight. Though rational self-interest was the central tenet of neoclassical (i.e., modern) economics, they didn't take a wrecking ball to the field and replace it with some equally sweeping theory of human behavior. Instead, they labored to bring economics closer in line with how the world actually works, one small adjustment at a time. "'Discovery commences with the awareness of anomaly,'" Thaler wrote in the introduction to The Winner's Curse, quoting the philosopher Thomas Kuhn. "I hope to accomplish that first step--awareness of anomaly. Perhaps at that point we can start to see the development of the new, improved version of economic theory."
As it happens, Thaler is revered by the leading wonks on Barack Obama's presidential campaign. Though he has no formal role, Thaler presides as a kind of in-house intellectual guru, consulting regularly with Obama's top economic adviser, a fellow University of Chicago professor named Austan Goolsbee. "My main role has been to harass Austan, who has an office down the hall from mine, " Thaler recently told me. "I give him as much grief as possible." You can find subtle evidence of this influence across numerous Obama proposals. For example, one key behavioral finding is that people often fail to set aside money for retirement even when their employers offer generous 401(k) plans. If, on the other hand, you automatically enroll workers in 401(k)s but allow them to opt out, most stick with it. Obama's savings plan exploits this so-called "status quo" bias.
And, yet, it's not just the details of Obama's policies that suggest a behavioral approach. In some respects, the sensibility behind the behaviorist critique of economics is one shared by all the Obama wonks, whether they're domestic policy nerds or grizzled foreign policy hands. Despite Obama's reputation for grandiose rhetoric and utopian hope-mongering, the Obamanauts aren't radicals--far from it. They're pragmatists--people who, when an existing paradigm clashes with reality, opt to tweak that paradigm rather than replace it wholesale. As Thaler puts it, "Physics with friction is not as beautiful. But you need it to get rockets off the ground." It might as well be the motto for Obama's entire policy shop.
The Case for Foreclosures- Landsburg
Foreclosures: How to save America’s family equity
Michael S Barr and Laura D Tyson
With colleagues at the Center for American Progress, we’ve developed the Saving America’s Family Equity (SAFE) loan plan to achieve these two objectives. SAFE is inspired by the successful Home Owner’s Loan Corporation introduced in 1933 to deal with an unprecedented wave of foreclosures in the Great Depression.
Under the SAFE loan plan, Treasury and the Federal Reserve would run auctions, in which Fannie Mae, Freddie Mac and Federal Housing Administration originators would purchase mortgages from current investors at discounts determined by the auction process. Investors would take a hit, trading a reduction in asset value and yield in exchange for liquidity and certainty. The Federal Housing Administration, Fannie Mae, and Freddie Mac would work with responsible originators to restructure the loans they acquire to stem defaults, foreclosures, and liquidations. Only loans on owner-occupied homes would be eligible for restructuring and speculators would be excluded.
Capital Budgeting and Public Financial Management
Obama’s free-trade credentials top Clinton’s
By Jagdish Bhagwati
While Barack Obama and Hillary Clinton are locked in combat for the Democratic party’s presidential nomination, commentary on the front-running Mr Obama’s policy agenda, especially on trade, has become faintly ludicrous.
On the one hand, David Wessel declared in the Wall Street Journal recently, as others have, that the two had no disagreements on trade policy. On the other hand, Mrs Clinton has assaulted Mr Obama for having no policy agenda at all, a charge that John McCain, the Republican frontrunner, has eagerly embraced. Both views are wrong. Mr Obama has specifics and they differ in important respects from those offered by Mrs Clinton.
The Russian proverb goes that, if you are looking for a good son-in-law, you would not ask whether he drank but only how he behaved when he was drunk. Similarly, no Democratic candidate during the primaries can be anything but a protectionist. The only question is: of the two, which is likely to be friendlier as president to the cause of multilateral free trade? Careful scrutiny suggests that the odds are in favour of Mr Obama.
To be sure, all Democratic candidates must face the reality that their party has gravitated towards protectionism, overt and covert, in the past decade. The number of Democrats voting for trade deals has steadily declined. The North American Free Trade Agreement was a turning point that deeply divided the party and then a succession of bilateral free trade agreements, many paltry, has steadily eroded the political capital of free-trade Democrats as they were forced repeatedly to go in to bat for trade in sceptical constituencies. The Democrats have also had to face the problem that the antiwar groups that have helped lift the party’s fortunes also overlap often with anti-globalisation and hence anti-trade groups, so the party tends to be propelled into an anti-trade position willy-nilly.
Wrong About Mexico
China's New Intelligentsia
Can "strengthening/clarifying language" save jobs in Ohio?
"On NAFTA, Goolsbee suggested that Obama is less about fundamentally changing the agreement and more in favour of strengthening/clarifying language on labour mobility and environment and trying to establish these as more 'core' principles of the agreement."
Stiglitz Says Iraq War Totally Financed With Borrowing
Advancements in Contemporary Islamic Finance: from practice to scholarship
The Logic of Life
Vernon Smith on Rationality in Economics
What Makes a Terrorist?
Alan B. Krueger
The Mind of the Market
Human Organs for Sale?
The New Asian Hemisphere: The Irresistible Shift of Global Power to the East