Arnold Kling has a nice post up on his Substack about “The True Role of the Central Bank“.
He was asked recently about three ideas that he (Arnold Kling) is known for, and these are the three that he came up with:
- Subsidize demand and restrict supply: Government intervention might well be thought of as the subsidization or provisioning of what the market fails to provide. But in practice, he says, the political process tends to be controlled by incumbent producers or owners. These guys are going to lobby the government for subsidized demand and restricted supply. He cites the example of housing: subsidize demand (subsidized home loans, for example), and restrict supply (zoning restrictions). Might higher education be another? Do we end up restricting the supply of quality higher education, and subsidizing demand for it by giving subsidized student loans?
If you distrust the private sector, now would be a good time to say, “Hah! See? Big bad incumbents derail well-meaning government”
If you distrust the government, now would be a good time to say, ”Hah! See? Government is as corrupt as big bad incumbents”
If you agree that incentives matter, you might want to think about how to redesign various systems with better incentive design front and center. But that’s boring work. Saying “Hah! See?” is much easier. - His second idea is that “price discrimination explains everything”. Given high fixed costs in so many different industries (especially Internet-based businesses), the marginal cost of serving an additional consumer is zero. So if marginal-cost pricing makes no sense, what to do? Announce Big Billion Day sales, for example. How’s that price discrimination, you say? That’s just low prices all around for all goods, you say? Well, what about the rest of the days in the year, when the Big Billion Day sale isn’t around? Who do you think is buying then? Are those folks paying the same price for the same good? And that’s just one example. You could teach a semester’s worth of micro by using nothing more than the Amazon app on your phone!
- And his third idea is to do with the true role of the central banks. In the 2008 financial crisis, he says, the main concern of the Fed wasn’t forestalling a recession, but rather to focus on the health of the primary dealers. Or more simply put (although you should read the whole blog, as always), the central bank’s top priority is “always going to be enabling the government to borrow more money”. His last paragraph is worth quoting in full:
“The Fed’s job is to make sure that the Treasury can market its debt. For that purpose, it has to be much more concerned with keeping banks healthy than with hitting a target for inflation, unemployment, nominal GDP, or any other supposed goal.”
Fascinating ideas, all of them. But the last one in particular mad me think about the phrase “the true role” more generally.
What is the true role of:
- Educational institutes?
- Hospitals?
- The Patenting System?
- YouTube?
- Students?
Ask yourself, and the people around you, these questions. And add to the list! Try answering them yourself. See if the answers differ, and ask yourselves what that reveals about the items on these lists, and about the respondents.
EconForEverybody 