My Review of Peter Thiel

I write,

the business environment of biotechnology, which Thiel and I agree is a very promising field for future economic growth, may be different from that of software. In software, companies like Microsoft and Facebook grew to dominance in large part because consumers find an advantage in using the same software as other consumers — this is the network effect. This in turn creates an opportunity for venture capitalists to back the rapid expansion of a firm that is unprofitable for a few years and then wildly profitable a few years later, once the network effect has been captured. It is not necessarily the case that biotechnology will exhibit network effects in which profits are created by rapidly expanding on an early lead.

I should note that Edmund Phelps, in Mass Flourishing, argues that progress is driven not by big individual breakthroughs but instead by cumulative entrepreneurial progress.

Megan McArdle on New York Living Costs

She writes,

Ultimately, something under 45 percent of New York’s rental stock is trading in a free market; the rest is going at below-market rates to people who cling to those apartment like ancient barnacles. If you are lucky enough to have a good deal, you can live in the city for well below the average rent — though you should not assume that all the tenants of rent-controlled or rent-stabilized apartments are low-income.

Read her whole post.

Government Accounting

Jason Delisle and Jason Richwine write,

the government’s official method for estimating cost is incomplete. It fails to incorporate the cost of the market risk associated with expecting future loan repayments. So-called “fair-value accounting,” an accounting method favored by the vast majority of finance economists as well as the CBO itself, factors in the cost of market risk. The difference transforms the official student-loan “profit” into a loss, for a budgetary swing of $279 billion over ten years. That figure demonstrates why the stakes are so high in the debate about fair-value accounting.

I recommend the entire essay. I would like to make changes to government accounting a top economic priority, because I think that avoiding a debt crisis ought to be a top priority.

If you ignore risk, then the government can appear to make a profit with all sorts of loans and loan-guarantee programs. I would go beyond fair-value accounting and subject the government budget to stress-testing, to give a measure of risk exposure.

Scott Sumner on a Basic Income

He writes,

The problem with simple solutions is that poor people are just like everyone else–they’re complicated. And they have complicated problems.

That is why you do not want to try to solve poverty in a nation of 300 million people at a national level. A basic income is a partial answer. State and local governments and charities have to supply the rest of the answer.

Nick Rowe suggests a simple way to estimate the currently-feasible amount of a guaranteed annual income.

About a Common Probability Error

John Pinkerton writes (on Facebook),

I always interpreted the bank teller probability as “If I were to tell you that Linda is a bank teller and is active in the feminist movement, how likely would you think I was correct?” For this meaning, if you describe someone in greater detail, it’s more likely you know them well and thus describe them accurately.

This is a plausible explanation. However, I have seen students wrestle with such problems when they are presented as a question of whether the sequence of coin flips HHT has higher probability than the sequence HHTT. Pinkerton’s comment is on Steven Poole’s article. About the bank teller example, Poole writes

Tellingly, the psychologists Ralph Hertwig and Gerd Gigerenzer reported in 1999 that when you give people the same puzzle and ask them to guess about relative frequencies instead of what is more ‘probable’, they give the mathematically correct answer much more often. One might add that, if we are talking plausibility, the notion that Linda is a bank teller and an active feminist fits the whole story better. Arguably, therefore, it is a perfectly rational inference: all the available information is now consistent.

The entire article is recommended.

Yuval Levin’s High-Holiday Sermon

His article is behind a paywall, but worth the $2. My notes from it:

1. Progressives and Conservatives both focus on individual freedom. Progressives a bit more on equal positive liberty, conservatives more on negative liberty.

2. Both theorize as if all you need are the right social mechanisms, and free individuals will flourish.

3. But in fact, if you don’t start with responsible, virtuous individuals, social mechanisms will not work. The miracle of this country is not our institutions but that we have citizens “generally capable of using their freedom well.”

4. Liberation from outside coercion is a shortcut to liberty. The “long way,” which Levin is writing about, is what he calls “moral formation.”

5. Although our theory often points to unlimited liberty, our practice often involves traditional restraints. For example, traditional marriage remains popular, along with its constraints.

6. Religious institutions “command us to a mixture of responsibility, sympathy, lawfulness, and righteousness that align our wants with our duties.”

Ultimately, the piece is difficult to summarize. Using my own words, he seems to me to be making a case that virtue is important for the individual and for the community, and politics provides a false path to virtue. Instead, it is the individual, aided by the traditional institutions of family, work, and faith, who must struggle with the issue of virtue.

And, yes, this should provide reinforcement to those who view the world along the civilization vs. barbarism axis, without resonating so well with libertarians or progressives. But everyone should be able to appreciate the clarity of thought and the quality of writing.

Social Security as a Public Bad

Robert Fenge and Beatrice Scheubel write that they provide,

an empirical confirmation of the negative relationship between statutory old-age insurance or more broadly statutory social insurance and fertility. The effect amounts to a total reduction of approximately 1.7 marital births per 1000 between 1895 and 1907… [the] impact of pension insurance is comparable to the impact of an increase in urbanisation by 10-20%.

Pointer from Brian Blackstone

Off hand, it would seem to me that any form of capital accumulation by the elderly could have this effect. Private pensions certainly, and perhaps even private savings for retirement. But it might be argued that there are huge negative externalities in public pensions, in that they allow you to benefit from my having children.

DeLong-term Productivity Trend

Brad writes,

My problem is that I believe in the slow diffusion of technology, the importance of incremental improvements, the usefulness of the incentives provided by the fact that it is easy to make a lot of money by figuring out a cheaper way to produce and supply things that people are willing to pay a lot of money for, and the law of large numbers. These make me think that–modulus the business cycle and measurement error–total factor productivity should be smooth in the level and smooth in the growth rate as well: whatever processes were going on last year that led to invention, innovation, deployment, and thus higher productivity in a potential-output sense ought to be almost as strong or only a little stronger this year.

The entire post is interesting. I think that the view that there are no sudden economic regime changes is difficult to shake. Probably my best argument against a post-2003 productivity slowdown is that we are seeing the continued expansion of education and health care, two sectors where there is essentially no reasonable way to measure productivity to begin with. Also, quality-adjustment in the goods sector is getting harder to measure, because goods tend to overlap with services (is Amazon Kindle really mostly a good, as opposed to a service)>

Pointer from Tyler Cowen.

Housing Re-Bubble?

Nick Timiraos reports,

the [Federal Housing Agency home price] index shows U.S. prices now standing just 6.4% below their previous peak in April 2007.

…The Case-Shiller national index, which is set to report its own measure of July home prices next Tuesday, showed that home prices in June were 9.9% below their 2006 peak.

Some comments:

1. Overall, consumer prices have risen about 15 percent since 2007, so you might say that on an inflation-adjusted basis home prices are more like 20 or 25 percent below their 2007 peak.

2. However, even on an inflation-adjusted basis, house prices are higher than they were in late 2003, by whichi point cries of “bubble” already were being heard.

3. If I were Scott Sumner, perhaps I would say that this suggests that the 2007 prices were not really a bubble. Indeed, the real anomaly was the crash in house prices in 2008-2009, due to tight money. But I am not Scott Sumner.

4. The case that we are in another bubble strikes me as weak. It is certainly is not a sub-prime lending phenomenon. Two phrases that I hear a lot in casual conversation with real estate folks are “all-cash deal” and “foreign buyer.”

5. Even if house prices were to fall sharply again, my guess is that there would be many fewer loan foreclosures. Lenders are taking on much less risk, and instead home buyers are taking on more of it.

6. It seems to me that we are much closer to full recovery in the housing market than we are to full recovery in the labor market. Does that not pose a problem for the theory that the recession was mostly an aggregate-demand phenomenon caused by the loss of housing wealth?

7. Again, today’s economy feels so much like 2003 and 2004. Very low r, seemingly below g. Last decade, Bernanke labeled this a “global savings glut.” This decade, Larry Summers calls it “secular stagnation.”

8. In June of 2004, I wrote Bubble, Bubble, is there Trouble? arguing that low r was the central economic puzzle, and that given low r, housing prices were not out of line. I have been excoriated since then for failing to call the housing bubble. In 2009, that excoriation seemed warranted. Today, it seems like you could change the date to June of 2014 and re-print it.

On Science and Policy

Pascal-Emmanuel Gobry writes,

Because people don’t understand that science is built on experimentation, they don’t understand that studies in fields like psychology almost never prove anything, since only replicated experiment proves something and, humans being a very diverse lot, it is very hard to replicate any psychological experiment. This is how you get articles with headlines saying “Study Proves X” one day and “Study Proves the Opposite of X” the next day, each illustrated with stock photography of someone in a lab coat. That gets a lot of people to think that “science” isn’t all that it’s cracked up to be, since so many studies seem to contradict each other.

This is how you get people asserting that “science” commands this or that public policy decision, even though with very few exceptions, almost none of the policy options we as a polity have have been tested through experiment (or can be).

I agree with this. I think it applies to macroeconomics and also to climate “science.”

Note that the origins of the progressive movement were based on the exact opposite view, which is that public policy could and should be based on something called social science.

Read the whole thing, so that you can reach these sentences:

the reason it took us so long to invent it and the reason we still haven’t quite understood what it is 500 years later is it is very hard to be scientific. Not because science is “expensive” but because it requires a fundamental epistemic humility, and humility is the hardest thing to wring out of the bombastic animals we are.