The Case for Moderation

Posted on August 17, 2017 by Arnold Kling

Stefanie Haeffele-Balch and Virgil Henry Storr write,

Moderation does not necessarily mean adopting moderate policy positions. [Adam] Smith is not suggesting we compromise our political views and values. Instead, he is suggesting that we think about how we present these views and values to others and how we characterize those who disagree with us. It’s a reminder to think of our political opponents as human beings, seek connection and embrace comity.

Pointer from Don Boudreaux.

My sense is that we have seen a decline in thinking about politics as a tool for problem-solving. Instead, we act as if our main goal in politics is anger validation. The stories that get the most prominent coverage are not necessarily the ones that deal with the most important topics. Instead, they are stories that encourage people to validate their anger. Unfortunately, we live in a TLP world.

Posted in Three-Axes Model | 2 Comments

Clarifying Two Terms

Posted on August 16, 2017 by Arnold Kling

1. Interpretive Charity

This is Jeffrey Friedman’s term. I think that it means trying to understand someone else’s point of view before criticizing it. It means trying to set up the strongest case for the opposing point of view for counter-argument, rather than attacking a weak or straw-man version of the opposing point of view. In Bryan Caplan’s terminology, try to pass an ideological Turing test before you engage in debate.

2. Asymmetric insight

This is David McRaney’s term. It is close to the opposite of interpretive charity. It means taking the view that you understand the other side’s true motives, which they themselves do not understand.

Pete Boettke would say that public choice theory is symmetric, in that it takes people to operate under the same incentives in politics as in the market. But that is a different meaning of “symmetric.”

Many people would deny that their political motives are dominated by the pursuit of material advantage. Thus, when you claim that they are pursuing material advantage, you are claiming to have insight into their motives that they lack. That is asymmetric insight, and it is the opposite of interpretive charity. Of course, on occasion asymmetric insight is accurate and interpretive charity is too kind.

A commenter points to a passage from Dan Klein.

We just need to make clear that when we offer a description based on assumptions of self-seeking behavior, we present the description as one, simplified description of the matter, and not the one that the political participants themselves believe.

Describing behavior in ways that participants themselves do not believe is uncharitable–although, again, it might turn out to be correct. Medical professionals genuinely believe that licensing requirements protect the public. It is the economist’s task to show that this is incorrect the net effect on the public is negative, regardless of motive. Trying to ascribe self-seeking motives to the medical professionals is at best beside the point and at worst uncharitable.

Finally, let me return to the idea of interpreting “self-interest” broadly, so that it need not be limited to material advantage. . A man sacrifices his life to defend his country? Well, he had an interest in acting honorably. A man advocates for a policy that hurts his own business? Well, he had an interest in being well thought of.

If there is no limit to the breadth of your definition, then “people act in their self-interest” is a tautology. It is always true, and that makes the statement uninteresting. If you want to make an interesting statement, you have to take the risk that your statement will be false. Saying that people make choices to try to maximize material advantage is an interesting statement. It risks being false, and indeed it often is false. However, it is true in so many contexts that it is quite useful.

Posted in public choice | 7 Comments

Jeffrey Friedman on Public Choice theory

Posted on August 15, 2017 by Arnold Kling

He writes,

Public-choice theory rules out interpretive charity in advance. All that is left is the imputation of bad motives to one’s political opponents.

. . .Actions may be objectively evil, but subjectively, everyone is doing what they think is somehow justified. Attributions of (subjectively) evil motives end the process of scholarship before it can begin. In studying politics, we want to know (among other things) why evil results may flow even from good motives—as an unintended consequence.

Read the whole post. There is a strong temptation to believe in asymmetric insight, meaning that you claim to know the other person’s motives better than they know themselves. This is a temptation that one ought to try to resist.

Friedman is somewhat hard on public choice theory. I have been hard on it myself. Still, it has some value, as when it predicts that public policies in areas like housing or health care will tend toward subsidizing demand and restricting supply.

Posted in public choice | 14 Comments

Could Elite Colleges Expand?

Posted on August 14, 2017 by Arnold Kling

In the course of the podcast with Russ Roberts, Tyler Cowen says

I think that a Harvard/California could work. I believe normatively Harvard should do it. I see zero signs they are about to. It would mean a dilution of control, a lot of headaches, a lot of new legal issues. You know, some reputational risk. But you could increase the number of people getting into some version of Harvard by really quite a bit. And that would be a wonderful thing for the country. And the world.

This is during a long digression on whether elite colleges could expand by orders of magnitude.

Suppose Harvard set up branches around the country, thinking that it could use its brand name to expand to, say, 250,000 students. Think about how this would play out. Many more students could get into Harvard. Assuming that other elite schools did not expand, Harvard would become by far easier to get into than Princeton or maybe even Maryland. So I think you ruin the Harvard brand.

It seems to me that this is an example in which value depends on scarcity.

Posted in Economics of Education | 10 Comments

Tyler Cowen’s Philosophical Opus

Posted on August 14, 2017 by Arnold Kling

He discusses it with Russ Roberts.

I claim we should use an intergenerational discount rate of zero. That is, the distant future we should not discount at all. There’s positive time preference within a life, but over the course of generations no one is sitting around impatiently waiting to be born. And once you adopt that move, the further-out future becomes very important for our deliberations. And then the gains from getting this higher compound rate of economic growth, they really do just overwhelm anything else in the calculation.

It is an argument for thinking about long time horizons when making economic policy. That is easier said than done, of course.

Posted in Growth Causes and Consequences, Tyler Cowen is my Favorite Blogger | 6 Comments

Renewable != Sustainable

Posted on August 13, 2017 by Arnold Kling

Benjamin Zycher writes,

there is nothing “clean” about renewables. There is the heavy-metal pollution created by the production process for wind turbines, along with their noise and flicker effects. There is the large problem of solar panel waste. There is the wildlife destruction caused by the production of renewable power. There is the land use both massive and unsightly, made necessary by the unconcentrated nature of renewable energy.

And above all: There is the increase — yes, increase — in the emissions of conventional effluents caused by the up-and-down cycling of the conventional backup generation units needed to avoid blackouts caused by the unreliability of wind and solar power.

(links omitted)

In Specialization and Trade, I make the point that sustainability is best measured by profitability at market prices. The attempt by environmentalists to second-guess prices is misguided. Recycling, if measured at market prices, is not sustainable. The use of renewable resources for energy, if assessed at market prices, is not sustainable. It is likely that from a strictly environmental point of view, practices like buying local and subsidizing renewable energy have adverse effects.

Posted in energy and the environment, Specialization and Trade Economics Intro | 16 Comments

Is the economy illegible?

Posted on August 12, 2017 by Arnold Kling

In the model of the economy as a GDP factory, the most fundamental equation is the production function, Y = f(K,L).

This says that total output (Y) is determined by the total amount of capital (K) and the total amount of labor (L).

Let me stipulate that the economy is legible to the extent that this model can be applied usefully to explain economic developments. I want to point out that the economy, while never as legible as economists might have thought, is rapidly becoming less legible.

For example, the analysis of changes in the trend in productivity requires extremely fine legibility. You start with the measure of Y/L, which is problematic, because you have to add together disparate goods and services to get Y. You have to aggregate all sorts of different specialized workers to get L. Next, to get a trend in productivity, you have to compare Y/L between two periods relatively far apart, say 1986 and 2016. The difference between what you are aggregating then and now is staggering.

Once you look at differences across decades, adjusting for price changes becomes important but impossible. For example, Bret Swanson says that the computing power in his iPhone would have cost $12 million in 1991. If for the purpose of comparing Y/L today to Y/L in 1991 you valued every iPhone at $12 million, you would report an enormous increase in real GDP and hence in productivity.

Finally, to get the change in the productivity trend, you have to attach meaning to the difference of the difference, e.g., the difference between the change in Y/L from 1986 to 2001 and the change in Y/L from 2001 to 2016. That is asking the data to be correct to an additional decimal point.

Here are some other indicators of the decline in legibility:

1. The increasing disconnect between stock prices and earnings. I have made the point about Amazon. In fact, Amazon typifies the decreasing legibility of corporations. Commenters who gave me pushback on Amazon said that they do not think it will end up primarily as a retailer. To me, all the top tech companies have vague business models, particularly if you look ahead several years, and particularly if you compare them with the old industrial giants. Bethlehem made steel. GM made cars. What does FaceGoogle make? Space for ads? Do you think that will still be their primary business five years from now? If so, do you like their prospects? Folks like Ben Thompson seem to think that the business models of all the major tech companies necessarily must evolve radically, which to me makes their future earnings harder to predict.

2. The increasing disconnect between corporate earnings growth and GDP growth. Some of this is due to the fact that a lot of important U.S. corporations are multinationals, so that their earnings are not just a function of what goes on in the U.S. [corrected]

3. The increasing disparities in individual earnings. I bet if you looked at the ratio of the pay of a college president to that of a cafeteria worker today and compared it to that ratio in 1980, it would blow your mind.

4. The increasing disparities in cost of living. I bet if you looked at the ratio of the cost of living in San Francisco to the cost of living in Peoria and compared it to that ratio in 1980, it would blow your mind.

5. Increasing disparities in tastes. The usefulness of a single price index, such as the Consumer Price Index or the GDP deflator, to describe inflation depends on the validity of the assumption of a representative consumer. I don’t see that today. One family shops for groceries at Walmart, and another shops at Whole Foods. One household puts discretionary income into private school for the children, and another puts it into home entertainment.

Still, economists want to treat the economy as if it were legible.

–They tell you that we are in a productivity slump, and we need to explain it and figure out how to solve it. I think that the numbers are not reliable enough to say.

–They tell you that inflation is below target, and central banks are puzzled about how to respond. I think that we see such large changes in relative prices that the very concept of “overall inflation” loses meaning and monetary policy becomes irrelevant until the central banks get into an orgy of money-printing.

–They tell you that “the” real interest rate is low, but what happens if you take health care and education out of the inflation numbers? I mean, if as an entrepreneur you could respond to the scarcity of schools and hospitals (as indicated by rising prices) by borrowing money to launch a new one, then that low real interest rate would mean something. But you can’t do that. Meanwhile, if you’re borrowing to finance a new firm in the solar power business, where prices are going down every year, maybe that interest rate does not look so low.

Posted in Economic education and methods, PSST and Macro | 9 Comments

Jean Twenge Update

Posted on August 11, 2017 by Arnold Kling

She writes,

Rates of teen depression and suicide have skyrocketed since 2011. It’s not an exaggeration to describe iGen as being on the brink of the worst mental-health crisis in decades. Much of this deterioration can be traced to their phones.

I don’t think a crusade against cyber-bullying is the answer. I am enough of a McLuhanite to say that the medium is the message. There is something about smart phones that is damaging, and I suspect it is the sheer immediacy of them. I think that this immediacy is what makes contemporary politics so stressful. You see what somebody posts online and if you like it, great, and if you don’t it really gets your fight-or-flight hormones raging.

Also, this is something I noticed and remarked on when I was teaching high school:

Even driving, a symbol of adolescent freedom inscribed in American popular culture, from Rebel Without a Cause to Ferris Bueller’s Day Off, has lost its appeal for today’s teens. Nearly all Boomer high-school students had their driver’s license by the spring of their senior year; more than one in four teens today still lack one at the end of high school.

The book is due out in less than two weeks.

Posted in books and book reviews, culture | 13 Comments

Intangible factors and research methods

Posted on August 10, 2017 by Arnold Kling

A commenter writes,

How do you square this:
“…Nick Schulz and I tried to point out how much you miss when you ignore the intangibles in economics.”

with this:

“If you define self-interest broadly enough, then the statement “people pursue their self-interest” becomes irrefutable. And if you cannot refute it, then it is just an empty tautology.”

In other words, I am claiming that intangible factors matter (I think primarily of institutions, social norms, and innovations). But when someone wants to include intangible factors in self-interest (think of ideology or a desire to help others) then I think it degrades the notion of self-interest into an empty tautology.

Someone who broadens the definition of self-interest to include intangible interests is making a concession to reality. But in order to make useful statements about the world, you have to get specific about how intangible interests enter. For example, you could, as commenter Handle sagely suggests, talk about the desire for raising status within one’s reference group as a motivating factor, and this could help to make useful predictions about behavior.

But the statement that “people act in their self-interest,” without being more specific, does not help make any predictions. And when I see the words “self-interest,” I think that the logical way to make it meaningful is to associate it with economic gain.

Posted in Economic education and methods | 12 Comments

House Prices in the 21st Century

Posted on August 9, 2017 by Arnold Kling

Alex Tabarrok writes,

Over the entire 20th century, housing prices never once roce above 131, the 1989 peak. But beginning around 2000 house prices seemed to reach for an entirely new equilibrium. In fact, even given the financial crisis, prices since 2000 fell below the 20th century peak for only a few months in late 2011. Real prices today are now back to 2004 levels and rising. As I predicted in 2008, prices never returned to their long-run 20th century levels.

As a matter algebra, house price = (rent) x (price/rent). If this time is different, it is due to a combination of higher rents and higher price/rent ratios. As I read the graph of prices against rents at the Economist, it looks like prices have been rising faster than rents, so an increase in the price/rent ratio is certainly a contributing factor, although more in other countries than in the U.S.

I think that in many parts of the world, including portions of the U.S., price/rent ratios are getting very high. If I were Alex, I would not stand in front of the sign that says “mission accomplished” claiming to have debunked the house price bubble.

Posted in Housing and housing finance | 4 Comments