Excellent Sentences

From Alex Tabarrok.

What bothers me about these stories is not the rent-seeking–that is to be expected. What bothers me is that there is a law that prescribes how mutual funds must inform their customers. Why must every aspect of commercial life be governed by a gun? And this is where I expect pushback–the mutual funds will rip us off if we don’t have these laws, blah, blah, blah. Fine, believe that if you must, but then you have no cause to complain about rent seeking. You created the conditions for its existence.

Hundreds of millions of dollars have been spent on designing and implementing disclosure rules for such products as home mortgages. Has there been a single case of a consumer who read such a disclosure and made a better decision as a result?

Modernity is a Package

I have just started reading Leviathan 2.0, by Charles S. Maier. I could not find a Kindle edition when I was ordering the book. Here is a quote from p.5-6:

The winners were the well-organized representatives of Europeans and their American or African or Asian descendants organized into the most efficient engine of expansion and governance that the world had seen for centuries: the modern nation-state. This was a large-scale unit organized to permeate and master territory, to pursue sedentary agriculture and industrial technology, possessing complex legal systems that allowed the preservation and transmission of family and individual property, the salaried employment of large-scale private and public workforces, the rapid communication of commercial and policy decisions by electrical telegraph, the ministerial archives and records that ensured institutional memory, and ideologies of rivalry and group purpose that generated intense loyalties.

Reading this passage, I came up with a catch-phrase “Modernity is a package.” Libertarians see the evils of the state–wars, inefficient and harmful policies, rent-seeking–and they imagine a utopia with a minimal state or no state at all. Progressives see the evils of capitalism, and they imagine a utopia with minimal or no use of markets.

But both capitalism and the state are deeply embedded in modernity. To eliminate either is to pull the rug out from under the system that supports prosperity an innovation.

To take a less politically fraught example, consider urbanization. We know that in small villages people feel a stronger sense of community. They know one another’s names. When they meet on the street, they take time to have a conversation, whereas in a large city people hurriedly rush past one another–friends might say “Oh, hi! We should have lunch, strangers might mutter “good morning.” People look out for one another.

And yet, the overwhelming majority of people who migrate from one to the other move from small villages to large cities, not the other way around. The city offers better employment opportunities, more variety of consumption options, and more overall effervescence.

The city represents the package of modernity, both good and bad. You cannot enjoy both the pre-modern charm of the small village and the modern wonders of the city in the same place.

Daniel Sarewitz on Bubbe-Meisis

He writes

Technology keeps science honest. But for subjects that are incredibly complex, such as Alzheimer’s disease and criminal behavior, the connection between scientific knowledge and technology is tenuous and mediated by many assumptions — assumptions about how science works (mouse brains are good models for human brains); about how society works (criminal behavior is caused by brain chemistry); or about how technology works (drugs that modify brain chemistry are a good way to change criminal behavior). The assumptions become invisible parts of the way scientists design experiments, interpret data, and apply their findings. The result is ever more elaborate theories — theories that remain self-referential, and unequal to the task of finding solutions to human problems.

In a world of causal density, such theories amount to bubbe-meisis.

The article is long with many themes, enough to offend just about everyone.

Bubbe-Meisis

It is a Yiddish expression, meaning roughly “an old woman’s superstitions.” Here are three pieces of advice given to my daughter concerning the recent birth of our first grandchild that struck me as bubbe-meisis.

1. If the fetus is below the 10th percentile in estimated weight at the 8th month, the risk of still birth is sufficiently elevated that labor should be induced immediately.

2. If you want your milk to come in, you must not allow the baby to drink any formula.

3. If you allow your newborn to sleep on its stomach instead of its back, the risk of SIDS (sudden infant death syndrome) is very elevated.

If your grandmother said such things, you would probably ignore her. Unfortunately, these opinions were rendered by my daughter’s obstetrician, lactation consultant, and pediatrician, respectively. Hence, they had the force of Authority.

(1) does not take into account: the huge margin of error in fetal weight estimates; the fact that still birth is such an unusual event that unless the fetus is showing clear symptoms of acute distress it is very difficult to find factors that have reliable correlations with still birth; and the fact that different women tend to give birth to infants of different weights. I would bet that our grandson was in the 50th percentile of the weight that was expected for a child of his parents. So his low estimated fetal weight was not a signal of any distress whatsoever.

(2) strikes me as more ideology than science. If the mother is nursing correctly, how soon her milk comes in (or whether it comes in at all) depends on many idiosyncratic factors. Denying the infant any formula at all will mostly serve to starve a baby if the mother’s milk is not available.

(3) Again, we are talking about a rare event where we do not know the causal mechanism. If there is any effect of sleeping on the stomach, it is not materially significant. There has been a small decrease in the rate of SIDS death since the back-sleeping advice started to be given, but there could have been many other factors that changed over this same time period. Meanwhile, as soon as he is put on his back, our grandson wakes and cries, while on his stomach he sleeps like, well, a baby–but he is not allowed to do that.

These bubbe-meisis deal with phenomena that have what James Manzi calls causal density–there are too many potential causal forces at work to have a definitive theory of the process. Many factors can cause still birth. Many factors can cause a mother to be unable to supply enough milk to a newborn. Many factors might be implicated in SIDS.

Nonetheless, most people would rather listen to an Authority who offers a specific causal theory rather than one who says “we don’t know.” So economists who dispense Keynesian bubbe-meisis are listened to, and those of us who say that we don’t know how to create patterns of sustainable specialization and trade are not.

By the way, so far our grandson is doing fine. Our daughter compromised with Authority. She refused to be induced in week 37, and only caved in at week 39. She limited her infant’s intake of formula, but she did not eliminate it altogether. As for sleeping, because he cannot sleep on his back, he tends to fall asleep on someone’s chest (face down, of course). If an Authority knew this, would he or she give the parents a pass to let the baby sleep on its stomach in the crib?

Common-law Banks

A commenter asks,

What do you think of the limited purpose banking proposal advanced by Laurence
Kotlikoff and others? Link to PDF:

https://www.aeaweb.org/conference/2012/retrieve.php?pdfid=568

I am skeptical of the ability of government to design banks. It is one thing to write legislation that defines the activities that constitute banking and to issue charters and regulations to these legislatively-defined banks. It is something else entirely to keep banking from breaking out somewhere else.

Consider the money-market fund as an example of what I mean by a common-law bank. Money market funds are not banks as legally defined. They were not eligible for deposit insurance. And yet, I would argue that the regulators hit the panic button in 2008 because of what happened to Reserve Primary money market fund as a result of the Lehman failure. So from a common-law perspective, money market funds had become banks by the time of the financial crisis.

A Sentence about Tetlock’s Famous Study

Jason Collins writes,

However – and this point is one you rarely hear in commentary about the book – the experts outperform unsophisticated forecasters (a role filled by Berkeley undergrads), whose performance is truly woeful.

Read the entire book review.

Herbert Stein wrote a memoir in which he summarized what he had learned is that economists do not know very much, but non-economists know even less.

The challenge is to get people to admit what they do not know. A non-economist who is quite ignorant is only dangerous if he or she tries to engineer the economy. Most economists, believing that they can engineer the economy, are dangerous.

What Was Glass-Steagall?

I don’t think that Robert Reich actually knows.

Some argue Glass-Steagall wouldn’t have prevented the 2008 crisis because the real culprits were non-banks like Lehman Brothers and Bear Stearns. But that’s baloney. These non-banks got their funding from the big banks in the form of lines of credit, mortgages, and repurchase agreements. If the big banks hadn’t provided them the money, the non-banks wouldn’t have got into trouble. And why were the banks able to give them easy credit on bad collateral? Because Glass-Steagall was gone.

Pointer from Alex Tabarrok. Reich seems to think that Glass-Steagall was some sort of magical regulation that allowed regulators to keep banks from making unwise loans.

In fact, my understanding (like most commentators, I have not actually read the law itself) is that it was intended to separate commercial banking from investment banking. That is, one type of institution could take deposits and make loans, and another type of institution could underwrite securities. It started to fall apart in the 1970s, when money market funds were invented, allowing investment banks to issue debt that looked a lot like deposits. This caused banks to complain that financial activity was going to shift out of banks, which was going to hurt banks and make bank regulation irrelevant. The 1980s were spent with lobbyists and legislators trying to work out a fair way for commercial banks to compete in investment banking and vice-versa.

Ironically, what Reich is describing, with commercial banks lending to investment banks, shows that the two were still somewhat separate even ten years ago. I am willing to be corrected, but as far as I know, there was nothing in Glass-Steagall to stop a commercial bank from lending to an investment bank. Repurchase agreements and lines of credit were not forbidden. And when Reich says that non-banks received mortgages from commercial banks, he is completely unhinged.

I continue to believe that the Nirvana Fallacy it what drives a lot of analysis of the financial crisis, and of government intervention in general. That is, if you believe that Nirvana is achievable through government intervention, then if we have disappointing outcomes it must be because government is being held back from intervening the way it should.

The overall Atlantic piece to which Tyler refers includes comments from some left-leaning economists that are actually reasonable concerning the irrelevance of Glass-Steagall. But on the whole, the left is locked into its Nirvana fallacy of financial regulation.

Three Version of Stagnationism

John Cochrane clarifies helpfully.

The cause of sclerotic growth is the major economic policy question of our time. The three big explanations are 1) We ran out of ideas (Gordon); 2) Deficient “demand,” remediable by more fiscal stimulus (Summers, say) 3); Death by a thousand cuts of cronyist regulation and legal economic interference.

Read the whole post. He make the case for (3).

Start with the Nirvana Fallacy

Bryan Caplan writes,

The claim that “free-market dogma” is the “reigning economic policy” of the United States or any major country seems so absurd, so contrary to big blatant facts (like government spending as a share of GDP, for starters), that I’m dumb-founded. Sure, I could defend this position with demagoguery. But if I wanted to intelligently argue in favor of the claim that neoliberalism actually guides economic policy in any major country, I literally wouldn’t know where to start.

I would suggest starting with the Nirvana fallacy. That is, take the point of view that things could be almost ideal if your preferred policies were in place. Then compare reality to this ideal. When reality falls short, you can infer that your preferred policies are not in place.

This approach works equally well for people who prefer more statist policies and for people who prefer more libertarian policies. For the former, the flawed state of current outcomes are sufficient to demonstrate the futility of free-market dogma, which must be the only thing standing in the way of Nirvana. For the latter, the flawed state of current outcomes are sufficient to demonstrate the futility of government intervention, which must be the only thing standing in the way of Nirvana.