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Mercatus scholars apply economic analysis to the issues of the day

Why the Fed Should Follow Rules

by Alexander Salter on December 18, 2014

How should monetary policy be conducted? What previously was a question of interest only for a subset of economists has exploded into popular debate since the 2008 financial crisis. This, no doubt, is due to the Federal Reserve's unprecedented activities during the crisis. Some, such as Stanford's John Taylor, have accused the Fed of fueling a speculative boom by keeping interest rates "too low for too long" in the years running up to the crisis. Others, such as monetary-economics blogger Scott Sumner, argue instead the Fed was responsible for not acting swiftly and decisively enough when the trouble in asset markets became apparent. Whatever the reason, many believe that the Fed bears some of the responsibility for putting the "Great" in Great Recession, and that its activities must be scrutinized to discover how its operating framework can be changed to avoid such a calamity in the...

Drawn Up In the Dark of Night, Dodd-Frank's Unintended Consequences

by Hester Peirce on December 17, 2014

When Dodd-Frank became law more than four years ago, even its proponents acknowledged that the law needed some tweaks. After all, remaking the financial markets in the wee hours of the night fueled by cold pizza and too much caffeine is a risky undertaking. Despite acknowledged problems, the law has remained largely untouched until this month. Fixes look like capitulation to Wall Street. It took emergences unrelated to Dodd-Frank-the need to get a spending bill done and the impending expiration of the Terrorism Risk Insurance Act-to drive changes in recent weeks. Concern that fixing errors will help financial firms can overshadow the cost that such errors can impose on the companies and individuals that buy useful products and services from those firms.

On July 15, 2010, shortly after the congressional conference committee finalized the text of Dodd-Frank (but before the president signed it), a number of senators gathered on the Senate floor to...

‘Pro-Business’ Is Bad Business for the Middle Class

by Matthew Mitchell on December 17, 2014

Policymakers at the federal, state and local level have never been more interested in promoting business. And yet for the average American, business is bad. A smaller share of people are working or looking for work than at any point since 1978. More alarmingly, the U.S. economy seems to have lost the dynamism that was once its hallmark. The rate of new business start-ups has fallen over the past several decades, and the share of employment by young firms has declined by 30 percent over the last 30 years.

This is not a coincidence. The bipartisan impulse to privilege particular businesses — through subsidies, bailouts, tax privileges, incentive packages, and the like — stands in the way of genuine economic progress. Here are five...

Seven Internet Policy Ideas that Everyone Can Agree On

by Eli Dourado on December 12, 2014

Right now, technology policy wonks are locked in a bitter dispute about the future of network neutrality. One of us is a technology policy expert who supports President Obama's call for stronger network neutrality regulations. The other is a tech policy expert who thinks it's a terrible idea.

But fortunately, not all technology issues are so divisive. Here are seven issues on which we do agree — and we think policy experts across the political spectrum could get behind these common-sense reforms.

1) Rein in surveillance by the National Security Agency

Last summer, Ed Snowden revealed that the National Security Agency was collecting troves of data on both foreigners and U.S. citizens. In the process, they've also been undermining the security of American products and the internet as a whole. Among other things,...

The Cornerstone of Regulatory Reform

by Jerry Ellig, Richard Williams on December 12, 2014

When the 114th Congress assembles in January, members will have a plethora of proposed regulatory reforms on their plate. These plans range from required congressional approval for major regulations to stronger judicial review standards. Setting priorities will be a challenge, but one reform can lay a crucial cornerstone—statutory regulatory analysis standards for all regulators. 

Regulatory expertise requires the discipline to conduct quality economic analysis. In order to get a good result from regulations, it’s important to use good inputs before writing them. Unfortunately, federal regulatory analysis is poor at best. If it were better, agencies could solve more problems at lower costs with fewer regulations. 

Any effective regulatory reform must ensure that agencies first conduct a complete economic analysis of regulatory proposals, including an examination of regulatory and non-regulatory alternatives. Before they write...

Financial Industry Should Be Its Own Knight in Shining Armor

by Hester Peirce on December 09, 2014

A favorite children's book of mine is Robert Munsch's The Paper Bag Princess. Its twist on the traditional fairy tale is that the courageous and quick-thinking princess rescues the prince from the dragon. The ungrateful prince derides the princess for her unbecoming rescue outfit and disheveled appearance. So the princess responds by ditching the prince and presumably living happily ever after. The book offers valuable life lessons — but it also helps us to take a fresh look at financial regulation.

We often tell ourselves stories about regulators riding to the rescue when the financial industry gets into a bind. According to this tired narrative, in times of trouble, the dim-witted and over-indulged financial industry sits, waits, hopes, and pleads for strong, smart, powerful regulators' assistance. After each rescue episode comes the quid pro quo as the regulators tighten their hold on the financial industry, which clearly cannot...

Housing Bubbles, Subprime Mortgages and the Financial Crisis Reconsidered

by Arnold Kling on December 08, 2014

In his forthcoming book, "Hidden in Plain Sight: What Really Caused the World's Worst Financial Crisis and Why It Could Happen Again," Peter Wallison, a scholar at the American Enterprise Institute and former White House counsel to President Reagan, seeks to re-inject the word “mortgage” into the narrative of the 2008 financial crisis. At the center of his narrative are what he calls nontraditional mortgages.

Two decades ago, the major lenders employed mortgage underwriting requirements for collateral, capacity and credit history – the three Cs. Collateral meant that the home buyer made a down payment, preferably of 20 percent or more of the value of the house, never less than 10 percent. Capacity referred to the maximum share of a borrower's income that could be devoted to mortgage payments and other debt...

How Technology Could Help Fight Income Inequality

by Tyler Cowen on December 06, 2014

Rising income inequality has set off fierce political and economic debates, but one important angle hasn’t been explored adequately. We need to ask whether market forces themselves might limit or reverse the trend.

Technology has contributed to the rise in inequality, but there are also some significant ways in which technology could reduce it.

For example, while computers have improved our lives in many ways, they haven’t yet done much to make health care and education cheaper. Over the next few decades, however, that may well change: We can easily imagine medical diagnosis by online artificial intelligence, greater use of online competitive procurement for health care services, more transparency in pricing and thus more competition, and much cheaper online education for many students, to cite just a few possibilities. In such a world, many wage gains would come from new and cheaper services, rather than from being able to cut a...

Regulators Foist Do As We Say, Not Do As We Do On Wall Street

by Hester Peirce on December 03, 2014

At a November 19 meeting, the Securities and Exchange Commission adopted Regulation Systems Compliance and Integrity (Reg SCI). The new rule requires stock exchanges and other market infrastructure providers to keep their technology functioning properly. The SEC's own technology failed during the meeting when Commissioner Michael Piwowar's microphone malfunctioned. The irony was not lost on the commissioner, who joked that the SEC should subject itself to the new rule. The SEC's broken microphone is a harmless symbol of a real problem: too often, the regulators writing and enforcing standards do not adhere to their own standards.

Regulation Systems Compliance and Integrity replaces the current voluntary Markets Automation Review Policy program. Under that program, stock exchanges, clearing agencies, and other entities voluntarily submit to SEC inspections of their...

Don't Slam the Brakes on Smart Cars With Too Much Regulation

by Adam Thierer, Ryan Hagemann on December 01, 2014

The world is on course to change very rapidly in a short amount of time. From new business models changing how individuals interact with one another to the onset of deliveries-by-drone, technology is altering the way we live our daily lives — and some of the most significant changes have yet to arrive. Among all the contributors to the emerging digital age, no force has been as substantial as the idea of “permissionless innovation.”

As the Washington Post has highlighted, the essence of permissionless innovation is the idea that, in the absence of proof that a particular technology or idea will cause real, immediate and clear harm to society, “innovation should be allowed to flourish” unimpeded by preemptive regulations. The hurdles that innovators and entrepreneurs face in bringing new technologies to market should not...

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