Search

Begin New Search Topic Markets Political Geography Global Focus Publishing Institution The Cato Institute

1. Slippery Fish: Enforcing Regulation under Subversive Adaptation

Author:
Andres Gonzalez-Lira
Publication Date:
04-2022
Content Type:
Policy Brief
Institution:
The Cato Institute
Abstract:
Correcting market failures and improving economic efficiency often require curbing undesirable behaviors of market agents who act to maximize their private benefits. Examples include actions that affect ecosystems, such as deforestation, pollution, and overexploitation of natural resources; actions that affect community health, such as drunk driving and open defecation; or actions that undermine government performance, such as corruption and tax evasion. Enacting and enforcing regulations is the most direct strategy to deter such behaviors. Implementing this strategy requires strong institutions to enforce laws, plus sophisticated policing to track agents’ reactions to enforcement so that rules are robust enough to curb the undesirable behavior even when regulated agents try to game the new system.
Topic:
Environment, Government, Markets, Regulation, and Adaptation
Political Geography:
Global Focus

2. The Economic Mentality of Nations

Author:
Pál Czeglédi, Brad Lips, and Carlos Newland
Publication Date:
10-2021
Content Type:
Journal Article
Journal:
The Cato Journal
Institution:
The Cato Institute
Abstract:
Two hundred forty‐​five years after the publication of Adam Smith’s An Inquiry into the Nature and Causes of the Wealth of Nations, economists continue to debate the causes of disparities in wealth among the countries of the world. Some scholars focus on the role of climate, natural resources, proximity to markets, or access to technology. Others study human capital, capital accumulation, the use of comparative advantages and economies of scale, and institutional and legal frameworks. We believe that another factor must be considered as well: the economic attitudes and causal beliefs (henceforth, “mentality”) of the population. While a growing body of research shows a clear association between economic growth and the institutions of economic freedom, those institutions can be quite fragile if the population does not have a clear understanding of what makes a country prosperous. To measure popular attitudes toward economic values, we have created the Global Index of Economic Mentality (GIEM).
Topic:
Economics, Markets, Capitalism, Youth, and Free Market
Political Geography:
Global Focus

3. GameStop and the Rise of Retail Trading

Author:
Jennifer J. Schulp
Publication Date:
10-2021
Content Type:
Journal Article
Journal:
The Cato Journal
Institution:
The Cato Institute
Abstract:
In January 2021, a curious event in the stock market caught the attention of the media, regulators, and the public. A well‐​known struggling company dominated the headlines, not for its business model, but for the meteoric rise of its stock price. GameStop Corp. started the year trading around $19.00 a share, a pretty robust share price for a company that had been trading below $5.00 as recently as August 2020. Yet, by the end of January, GameStop’s shares were trading at over $300, at one point hitting a high of $483. GameStop’s stock price has receded from those meteoric highs, but, as of late May, it continues to trade between $160 and $180 a share.
Topic:
Markets, Economy, Investment, Stock Markets, and Equity
Political Geography:
Global Focus

4. Should the State or the Market Provide Digital Currency?

Author:
Lawrence H. White
Publication Date:
06-2021
Content Type:
Journal Article
Journal:
The Cato Journal
Institution:
The Cato Institute
Abstract:
Private commercial banks have been providing trusted money to the public for hundreds of years, in the form of banknotes (where allowed) and transferable deposit balances, as an integral part of their business model. Economically, money balances are a private good: they are rival in consumption (you and I can’t both simultaneously spend a given banknote or deposit balance) and excludable in supply (you and your bank can stop me from spending the funds in your wallet or account) (White 1999: 89). Accordingly, the market does not inherently fail to provide money efficiently.
Topic:
Markets, Monetary Policy, Economy, State, Banks, and Digital Currency
Political Geography:
Global Focus

5. Assessing State Capacity Libertarianism

Author:
Ryan H. Murphy and Colin O'Reilly
Publication Date:
10-2020
Content Type:
Journal Article
Journal:
The Cato Journal
Institution:
The Cato Institute
Abstract:
Tyler Cowen (2020), in a controversial and widely discussed blog post, has argued that free economic institutions must be accompanied by state capacity to achieve maximal growth rates. He calls this “State Capacity Libertarianism,” which echoes positions he has posed previously (Cowen 2007, 2018). Besley and Persson (2011) can be perhaps seen as a direct predecessor. Criticisms immediately emerged, with Henderson (2020) arguing that Cowen’s specific proposals are in direct conflict with libertarianism, and with minor caveats, free economic institutions are already able to achieve the goals Cowen hopes to achieve with state capacity. Geloso and Salter (forthcoming) argue that the lack of examples of wealthy countries with weak states is due to survivorship bias, and they apply their argument to criticize Cowen (Geloso and Salter 2020). Caplan (2018), while not directly addressing State Capacity Libertarianism, argues that there is little reason to believe that the effects of state capacity are the result of strong states themselves, rather than the social and cultural factors that allowed a strong state to emerge in the first place. The purpose of this article is to put data to the question of the individual effects of state capacity and free economic institutions on economic performance, and the potential interaction between the two.
Topic:
Economics, Markets, State, and Libertarianism
Political Geography:
Global Focus

6. On the Desirability of Nominal GDP Targeting

Author:
Julio Garin, Robert Lester, and Eric Sims
Publication Date:
08-2015
Content Type:
Working Paper
Institution:
The Cato Institute
Abstract:
This paper evaluates the welfare properties of nominal GDP targeting in the context of a New Keynesian model with both price and wage rigidity. In particular, we compare nominal GDP targeting to inflation and output gap targeting as well as to a conventional Taylor rule. These comparisons are made on the basis of welfare losses relative to a hypothetical equilibrium with flexible prices and wages. Output gap targeting is the most desirable of the rules under consideration, but nominal GDP targeting performs almost as well. Nominal GDP targeting is associated with smaller welfare losses than a Taylor rule and significantly outperforms inflation targeting. Relative to inflation targeting and a Taylor rule, nominal GDP targeting performs best conditional on supply shocks and when wages are sticky relative to prices. Nominal GDP targeting may outperform output gap targeting if the gap is observed with noise, and has more desirable properties related to equilibrium determinacy than does gap targeting.
Topic:
Economics, Human Welfare, Markets, and GDP
Political Geography:
Global Focus

7. The Supply of Transaction Assets, Nominal Income, and Monetary Policy Transmission

Author:
Joshua R. Hendrickson and David Beckworth
Publication Date:
06-2015
Content Type:
Working Paper
Institution:
The Cato Institute
Abstract:
Over the last few years, the Federal Reserve has conducted a series of large scale asset purchases. Given the Federal Reserve’s dual mandate, the objective of this policy has been to generate an increase in real economic activity while maintaining a low, stable rate of inflation. The effectiveness of large scale asset purchases and the ability of the central bank to achieve a particular target has been subject to debate. The monetary transmission mechanism is of primary importance for understanding the effects of both the recent large scale asset purchases and of monetary policy more generally. The purpose of this paper is to propose a monetary transmission mechanism and to present empirical support for this mechanism. In particular, this paper suggests that monetary policy is transmitted through changes in the growth rate of transaction assets through both a direct and indirect effect. First, an increase in the growth rate of the monetary base, whether through lump sum transfers or open market operations, generates a real balance effect that increases real economic activity. Second, the indirect effect is through bank lending. Since bank loans are often a function of nominal income, expansionary monetary policy increases bank lending. Since economics agents are forward-looking and the the effects of monetary policy are persistent, monetary policy is transmitted through the expected future time path of the growth of transaction assets and nominal income. This characteristic is especially important in light of the policy recommendations of Sumner (2011, 2012) and Woodford (2012), in which the central bank attaches an explicit target for the level of nominal income to large-scale asset purchases.1
Topic:
Economics, Markets, Monetary Policy, and Federal Reserve
Political Geography:
Global Focus

8. International Developments in the Insurance Sector: The Road to Financial Instability?

Author:
Therese M. Vaughan and Mark A. Calabria
Publication Date:
05-2015
Content Type:
Working Paper
Institution:
The Cato Institute
Abstract:
International activity related to the regulation and supervision of financial services has exploded since the global financial crisis. The crisis exposed weaknesses in the structure for regulating internationally active banks, and motivated a number of work streams aimed at strengthening standards (most notably, significant revisions to the Basel capital standard for internationally active banks, now known as Basel III). The insurance sector was also stressed by the meltdown in financial markets that occurred in 2007-2008, albeit far less than the banking sector, and, with the exception of AIG, it is generally recognized that insurers played little role in the financial crisis, and that traditional insurance activities do not pose a systemic risk to the financial system.1,2 Nonetheless, the insurance sector has also been targeted for a new stream of regulatory initiatives at the international level. The most important organizations with respect to these activities are the International Association of Insurance Supervisors (IAIS) and the Financial Stability Board (FSB), both based in Basel, Switzerland. The purpose of this paper is to review these developments and to highlight potential concerns for U.S. insurance markets.
Topic:
Economics, International Trade and Finance, Markets, and Financial Crisis
Political Geography:
Global Focus

9. The Case for Market‐​Based Regulation

Author:
Gerald P. O'Driscoll Jr.
Publication Date:
10-2006
Content Type:
Journal Article
Journal:
The Cato Journal
Institution:
The Cato Institute
Abstract:
In this article, we reconsider the rationale for government regulation of markets. We begin by identifying markets as governed not only by prices but also by evolved institutions, rules, and standards. We then analyze how this complex order regulates human behavior, discuss the case for adding a layer of government regulation to the market’s own regulatory system, and present a number of case studies to clarify the issues. Our focus is not on the familiar public choice criticism of government regulation—namely, that regulation is more about the pursuit of economic rents than protecting the so-called public interest. While that criticism is correct and we make reference to it where appropriate, the thrust of our argument is that market self-regulation is often superior to government regulation, which frequently is a solution in search of a problem.
Topic:
Government, Markets, Regulation, and Economy
Political Geography:
Global Focus

10. Science, Public Policy, and Global Warming: Rethinking the Market‐​Liberal Position

Author:
Edwin G. Dolan
Publication Date:
10-2006
Content Type:
Journal Article
Journal:
The Cato Journal
Institution:
The Cato Institute
Abstract:
A survey of market-liberal or libertarian publications and websites finds a large and growing literature on the issue of global warming. Almost without exception, this literature conveys a comforting message: Our planet is in good health. The markets that regulate resource use are working well. The only real dangers come from ill-considered policy initiatives that, if implemented, would do more harm than good. It would seem that the message is well received by its audience—it is repeated, embellished, and applauded with little variation. In this article, I take a contrarian position, not so much with respect to the science of climate change as with respect to the arguments used by market liberals in support of their message of comfort and complacency. One problem area concerns the proper use of scientific evidence in reaching conclusions regarding public policy. It seems to me that market liberals are often reckless in the degree of certainty they professes regarding climatological hypotheses that are, in fact, still controversial and in early stages of development. A second problem concerns the use of cost-benefit analysis. Market-liberal writers are prone to make cost-benefit arguments regarding climate policy that they would never accept in other contexts. Third, the literature on global warming is often weakly rooted, if rooted at all, in the core principles of classical liberalism from which modern market liberalism has evolved. Instead, it is, for the most part, indistinguishable from what is said by conservatives. It might even be said that there is no market-liberal position on this issue—only an echo of arguments made by Republican patriots and the carbon lobby. In short, the whole issue of global warming policy, as viewed by market liberals, needs to be revisited. This can best be done by going back to some of the classical liberal sources, particularly Friedrich Hayek and John Locke, from which modern market-liberal thought is derived.
Topic:
Climate Change, Markets, Science and Technology, Public Policy, and Libertarianism
Political Geography:
Global Focus