Krugman Recognizes that the Tobin Tax Isn't "Working Very Well" in Brazil

During an interview in São Paulo, Krugman recognized that the Tobin tax isn't "working very well," something that I discussed in this post a few days ago. This shouldn't be a surprise to him, for the reasons explained in the same post and also here. Strangely, he insists in not opposing it. Here's my translation of the original article from the estadao.com.br, which is in Portuguese:

He did not oppose the tax (called IOF) on capital inflows adopted recently by the Brazilian government, at a rate of 2% on foreign investments in stocks and government bonds. But he observed that the measure is not “working very well.”

Inflation Targeting: When Creator and Creature Collide

The death of inflation targeting has been covered in this blog here, here and here. Yesterday we got news from the Wall Street Journal that, in a coup de grâce, the creator has come to terms with the need to kill the creation (HT Selva Brasilis).

The creator's name is Ben Bernanke. The creature's name is inflation targeting. Bernanke devoted a large part of his successful career as a scholar to the analysis of inflation targeting regimes. This was probably the main reason for his appointment as Fed Chairman, as explained in this Bloomberg article of 2005:

The nomination [of Bernanke], which is subject to confirmation by the U.S. Senate, may nudge the Fed in the direction of more than 20 foreign central banks that pursue numerical inflation levels or ranges, said global economists and former central bankers.

Here's however the big irony: Bernanke was appointed to bring the creature to life inside Fed's labs. Once there, however, he became responsible for pulling the plug on his own creation.

I'll use Bernanke's own words to make the point. In an American Economic Review article of 2001, Bernanke the Princeton Professor said:

In recent decades, asset booms and busts have been important factors in macroeconomic fluctuations in both industrial and developing countries. In light of this experience, how, if at all, should central banks respond to asset price volatility? ...

The inflation-targeting approach gives a specific answer to the question of how central bankers should respond to asset prices: changes in asset prices should affect the central bank's policy only to the extent that they affect the central bank's forecast of inflation.

What Bernanke meant is that, as long as inflation is expected to remain low and around the target, the Fed should not try to "shoot bubbles." Now, contrast the statement above with what Bernanke the Fed Chairman said recently, according to yesterday's WSJ article:

"The best approach here if at all possible is to use supervisory and regulatory methods to restrain undue risk-taking and to make sure the system is resilient in case an asset price bubble bursts in the future," Mr. Bernanke said in answer to a question after a speech in New York last month. ...

Mr. Bernanke is leaving himself hedged. If he felt stamping out a bubble with higher rates would forestall a rise in inflation or stabilize the economy, "We'd have to think about that very seriously," he told the New York Economic Club recently. "We can never say never."

So, what has happened? While I worked in the Central Bank of Brazil a few years ago I tried to bring to to the attention of some of my colleagues that inflation targeting is a monetary regime that lacks a credible nominal anchor. I discovered later that John Cochrane had the same intuition and was able to formalize it in this excellent critique of inflation targeting. Most central bank economists that I met however would prefer to follow Bernanke's inflation targeting cookbook without making any serious attempt to think about its economic foundations (or lack thereof). Many among them would also choose, mostly because of Bernanke's diagnostic reproduced above, to ignore asset price runs that would periodically infest economies based on new-Keynesian interest rate rules such as is the case with inflation targeting. What followed is history: welcome to "bubble world"!

Mistakes made by central banks during the inflation targeting years are a good example of a big problem in science: the institutionalization of scientific consensus. The Hadley CRU "Climategate" scandal is another example of the same problem, although in the latter case there was serious unethical conduct by some scientists and extreme politicization of the scientific community - something that I've never witnessed at such an inordinate level during my years in central banking.

Dissent, as long as based on the scientific method, should never be silenced. Indeed, it should be welcomed by all that are intellectually curious, ethical and passionate about science.

The Climategate According to John Stewart

John Stewart breaks the silence... Enjoy!

Krugman's Tobin Tax: Shooting the Messenger

Stefan Karlsson wrote a post clearly explaining one of the main problems (although not the only one) with Krugman's defense of the Tobin tax. In his words:

... The transactions that would be particularly discouraged by a Tobin tax would be arbitrage type dealings trying to close discrepancies in pricing. Ending arbitrage trade would represent a big reduction economic efficiency.

And furthermore, by reducing trading volumes, slippage (the decrease/increase in price caused by an individual actor's sale/purchase, something which prevents the realization of potential gains through transactions) would increase, something which would produce non-trivial costs for people engaged in foreign trade and long-term investments.

Thus, problems with large exchange rate fluctuations are not the result of “speculation”, but are inherent in the nature of fluctuating currency exchange rates. Given that system however, short-term speculation is a force that reduces, and not aggravates the problem. This applies to short-term speculation in other markets too.

In other words, Krugman's financial transactions tax economics is based on the wrong notion that, to solve a problem, all that you need to do is to shoot the messenger.

Lawrence H. White on the Rule of Law and the Fed

Below an interesting Cato podcast interview with Lawrence H. White on the state of central banking in the US.

The Dog Ate My Climate Change Homework

The Times Online reports: preserving climate data doesn't appear to be that important in the science of climate change (HT Cafe Hayek's Roberts). Here's a passage:

SCIENTISTS at the University of East Anglia (UEA) have admitted throwing away much of the raw temperature data on which their predictions of global warming are based.

It means that other academics are not able to check basic calculations said to show a long-term rise in temperature over the past 150 years. ...

Roger Pielke, professor of environmental studies at Colorado University, discovered data had been lost when he asked for original records. “The CRU is basically saying, ‘Trust us’. So much for settling questions and resolving debates with science,” he said.

The Matrix Runs on Windows

From CollegeHumor.com (HT Alex). Enjoy!

See more funny videos and funny pictures at CollegeHumor.

Impoverished Reasoning in Anti-Poverty Activism

This is an extract from an article on poverty in Switzerland that appeared in the Swiss Review of December 2008:

But what's the "official" poverty threshold? In Switzerland, the poverty values of the Swiss Conference on Social Welfare are the most commonly used. These values factor in decent living conditions and social integration. The poverty threshold for single people is CHF 2,200 a month [US$ 26,268 per year], ... and CHF 4,650 [US$ 55,524 per year] for a couple with two children.

Sincerely, how can anyone take these values seriously? A large proportion of people I know would be considered poor according to this definition (and they're obviously not poor). These values are higher for example than the nominal per capita income of most countries in the world. In reality, their choice of poverty level for a couple with two children is almost as high as Switzerland's per capita income itself, in other words, the per capita income of one of the richest countries in the world!

Naturally, public choice economics predicts (correctly) that anti-poverty activists, acting as rent seekers, will try to include in their poverty definition as many people as possible, so they make their jobs and salaries appear to be more justifiable than what they really are.

Krugman Should Read the Tobin Tax Literature

Krugman wrote an article that appeared yesterday in the NYT defending the Tobin tax, a tax on financial transactions, as a way to "deter financial speculation."

Financial speculation by itself isn't a problem, is a solution, and as an economist he should know that. Krugman's mistake is worse however: his article transparently shows that he doesn't know anything about the recent literature on the subject (or doesn't bother to show his knowledge on it), but speaks as if he knows it (or as if he's showing his knowledge).

The Tobin tax has been discredited on many different grounds by economists that have spent much more time than him trying to understand it. There's plenty of experimental, theoretical and empirical evidence against taxes that work like a Tobin tax. There's some less clear evidence in favor of it too, which however tends to show that the effects are only positive in special cases (probably not found in real markets) or that the benefits are not worth the costs.

Besides all the scientific evidence, Brazil just adopted a Tobin tax and stock market volatility didn't fall after its introduction on October 20, as seen in this Bovespa graph:

Krugman may have deserved a Nobel Prize in Economics for his contributions to international trade theory, but he doesn't help the economics profession when he writes on things he doesn't have a clue about.

Unethical Conduct in Climate Research

In my previous post I referred to the East Anglia's CRU scandal. The WSJ summarizes damning evidence of unethical behavior in these extracts taken from the documents (a harsh editorial regarding the scandal is found here).

Let's be clear about it: what's in those documents isn't normal practice in science. There's too much bad blood and intellectual arrogance in there, mixed with an absence of personal detachment and a lack of commitment to scientific virtue.

Real scientists are dutifully skeptical. Real scientists refute bad arguments with good arguments and nothing else. Valid scientific theories stand on their own merits, they don't need the connivance, obfuscation and sanctimony that permeate those files.