Monthly Archives: December 2012

The 1920s as a Housing Bubble?

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Stephen Gjerstad and Vernon L. Smith (GS) take that view.

Most notably, housing expanded rapidly by nearly 60% from 1922 to 1925, leveling out in 1926 and then began its long descent, not bottoming out until 1933. In 1929 new housing expenditure had returned to its 1922 level before any of the remaining expenditure categories had declined more than small temporary amounts…the 60% increase in the rate of new home construction expenditures from 1922-1925 was matched by a 200% increase (from $1B to $3B) in the net flow rate of mortgage credit.

This sound similar to the more recent episode. That is, much of the decline in housing construction was already behind us when the bottom dropped out of the rest of the economy. GS point out that the credit boom in the late 1920s did not raise house prices as it did more recently, because (they argue) in the 1920s the housing supply was more elastic.

Edward Leamer, in Macroeconomic Patterns and Stories, shows that spending on housing and consumer durables generates much of the variation in GDP growth relative to trend. However, in the typical recession, as GS also note, the decline in housing construction coincides more closely with and accounts for a larger share of the decline in GDP. Continue reading →

Re-defaults

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The blogger at Sober Look writes,

This is telling us that mortgage modification programs have not been very successful, as the probability of re-default rises. By modifying mortgages, banks in many cases are simply kicking the can down the road – and now some are writing down these mortgages (which may be what is driving the higher charge-off numbers). We are therefore seeing an increase in delinquencies, but mostly among modified mortgages and concentrated in sub-prime portfolios.

It actually helps to have some experience in the mortgage business. Unlike Joseph Stiglitz, Martin Feldstein, Glenn Hubbard, and others who have written op-eds and influenced policy makers, I actually know something about the track record of giving delinquent borrowers a “break” by modifying their mortgages. What lenders have found is that, even in good times, loan modifications just set borrowers up to fail again. Maybe in the confines of your faculty office you can design a program that should work in theory. But in the real world, we observe failure in practice.

Targeted Killing

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In a long piece, Glenn Greenwald writes,

Ultimately, what is most extraordinary about all of this – most confounding to me – is how violently contrary this mentality is to the ethos with which all Americans are instilled: namely, that the first and most inviolable rule of government is that leaders must not be trusted to exercise powers without constant restraints – without what we’re all taught in elementary school are called “checks and balances”.

He discusses Presidential exercise of power in the name of fighting terrorism. Read the whole thing. There are many interesting issues here. My thoughts:

1. One hundred years ago, if you did not have a mass of men wearing uniforms, you could not pose much of a threat to society. One hundred years ago, governments did not have available to them the surveillance technology and drone strike technology that some governments have today. I am not saying that I am confident about which old rules, if any, no longer apply, but it is worth thinking about the issue. For a book-length treatment that pre-dates 9/11 (but anticipated it), see David Brin’s The Transparent Society. To see my alternative to Brin’s solution, read The Constitution of Surveillance.

2. My general view is that if we want the government to have new powers, then we ought to build in new checks and balances. I think this applies to much more than just the issue of terrorism, drone strikes, and surveillance. I have written about the generic benefits of having a strong audit function in government.

3. It could be that the best principle to follow when it comes to drone strikes is “never do them.” I think it is easy to develop the hypothesis that they will do more harm than good. It is also quite hard to think of a way to test that hypothesis reliably.

4. At the very least, it would seem better to arrive at a “kill list” by having suspects tried in absentia under some form of courtroom procedure (obviously not with full rights for the accused, and not necessarily public, but subject to audit) than simply have suspects nominated by the intelligence bureaucracy and approved by the President.

5. How does this issue play out with libertarians, progressives, and conservatives? One of Greenwald’s main points is that progressives are not consistent on the issue. They distrusted the Bush Administration but not the Obama Administration. I would say that conservatives fairly consistently support the use of unusual powers. Remember that, as I see it, conservatives’ main focus is on the struggle between civilization and barbarism. Through that lens, provided that you see our side as representing civilization and the members of terror organizations as representing barbarism, drone strikes look good. I would say that libertarians are fairly consistent on the opposite side, because libertarians fundamentally distrust government exercise of power.

6. I think of the essence of progressivism as being on the side of the oppressed against the oppressors. I suspect, as does Greenwald, that because progressives see Obama as on the side of the oppressed they have difficulty imagining that he would abuse power. That does not strike me as a very charitable interpretation of the progressive position. Can one do better?

The U.S. Debt Problem

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Timothy Taylor discusses an article by Daniel Thornton on the origins of the debt problems in the United States.

Thornton locates the start of the problems back to about 1970. In the chart of annual deficits, for example, notice that after about 1970 a pattern of volatile but growing deficits emerges. The pattern is interrupted for a few years in the late 1990s by the higher tax revenues and lower social spending resulting from the unsustainable dot-com boom, but a return to the larger deficits was coming eventually.

Recall that in this post I said that in the 1960s two taboos were broken. One was a taboo against deficit spending in peacetime. The other was a taboo against Social Security surpluses in order to spend elsewhere.

In deference to the season, I would say that we face the ghosts of deficits past, deficits present, and deficits future. The ghost of deficits past is the debt we accumulated starting in the 1960s in spite of good economic performance and falling defense expenditures (as a share of GDP). The ghost of deficits present is what Keynesians call the “fiscal cliff,” meaning the horrible recessionary consequences that they predict would follow were Congress to actually follow through on its recent commitments to try to reduce deficit spending from currently high levels. The ghost of deficits future is the fact that projections for spending going forward show increases to unprecedented levels relative to GDP, driven largely by health care spending. The ghosts of deficits future mean that (a) we cannot count on a “peace dividend” to solve the budget problem and (b) we cannot easily inflate our way out of the problem (inflation will raise the cost of future obligations and send interest expense soaring).

The Decline of Jewish Genius?

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The Ron Unz piece on meritocracy to which I referred contains a provocative claim that Jews are maintaining, or even increasing, their admissions rate to elite colleges while their rate of genius appears to be reverting back to average. He documents the decline in Jewish genius by looking at performance in high-level competitive examinations, such as the Putnam exam. My thoughts:

1. Perhaps the period from 1920 through 1970 was unusual in some respects. Maybe instead of asking why Jewish genius has declined since then, we should be asking why it became so prominent in those years.

2. My wife and I attended a talk by an official from the Technion, an Israeli version of MIT. He said in his talk that the Israeli students are less interested in science and technology than in the past. When my wife asked him afterward to speculate on why this is the case, he curtly replied, “The DNA hasn’t changed.” Like Unz, he attributed it to a softening of life, so that Jews feel less need to deal with the difficult courses in math and science.

3. I am struck by the way genius seems to come in small clusters. Read Eric Kandel about Vienna or George Dyson about the Institute for Advanced Study in the 1930s and 1940s. In the latter case, it seems as though much of the genius originally was concentrated in a part of the Jewish community in Budapest. So, my hypothesis is that having one high school with 5 really bright students produces more geniuses than five high schools with one bright student each. Together, the bright students are more competitive and also learn from one another. The same would be true for tennis players or artists–people with talent will be pushed to higher levels by being around other people with talent. According to this hypothesis, the decline of Jewish genius might come from the dispersion of the population of bright Jewish students, instead of a high concentration at particular high schools in Vienna, Budapest, or New York.

4. Tyler Cowen argues that the status accorded to math and science matters, and I would say that the status of science and math has fallen among Jews. Perhaps part of the reason is that, as Unz points out, elite colleges are emphasizing “well-rounded students.” If the parental status symbol is the child admitted to Harvard, and this is less likely to be achieved by an outstanding math score than by participating in community service projects, then parents will not press their children to cultivate math genius. One would think this would affect non-Jews as well as Jews, though.

5. Another possibility is that the mediocrity of the American teaching profession is dampening the emergence of young genius. Back when the teaching profession was populated in part by highly intelligent women, bright students probably felt better understood and more appreciated. Again, one would expect this to affect non-Jews as well as Jews.

I urge you to read the Unz piece before commenting.

College Admissions, Merit, and Ethnicity

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The (long) article is by Ron Unz. One somewhat tangential excerpt:

Ultimately, he stamped her with a “Reject,” but later admitted to Steinberg that she might have been admitted if he had been aware of the enormous time and effort she had spent campaigning against the death penalty, a political cause near and dear to his own heart. Somehow I suspect that a student who boasted of leadership in pro-death penalty activism among his extracurriculars might have fared rather worse in this process.

Pointer from Tyler Cowen, who seems to have misgivings about recommending the article. I would actually nominate for the citations that David Brooks hands out every year for most important magazine essays.

Unz proposes a two-part admissions process for prestige institutions. One part would select the very best students, based on demonstrated academic ability. The other part would select a random sample of other qualified students.

I think he is on the right track. In fact, forgetting the first part and just taking a random sample of students who meet some qualification criteria would be an outstanding reform. However, you would also have to make scholarship offers unbiased. My proposal would be to have them be totally need-based. These policies would take politics, ethnicity, and other factors out of the equation. It would make sports teams genuinely amateur.

When I was an undergraduate, I assisted a Swarthmore economics professor with a study of the admissions process. We found that the student’s interview received a high weight and that scores on the interview went down as SAT scores rose above the high 600s. I speculated that admissions officers were not themselves super-smart and did not like super-smart applicants. (I was admitted because I talked about wrestling with the alumnus who interviewed me, having seen his son lose a match for the high school state championship. The day I arrived on campus, the Dean of Admissions said that the wrestling coach was looking forward to having me on the team. I never was any good in high school, and I never met that wrestling coach, but the interview did the trick.)

Back to the Unz article, it raises questions about the process by which America selects its elite. I share Unz’s concern that this process has been deteriorating. Moreover, think about what happens when people achieve elite status without merit. They become really attached to the existing system, because they are threatened by true meritocracy. I think that one of the signs of that is when questioning orthodoxy itself becomes a disqualifying factor. As I see it, the American academy has crossed that threshold.

Axes of Exaggeration

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Partly in response to comments, here are a few more thoughts on the three axes I propose. I think the axes help to predict which threats will be exaggerated by which partisan.

A conservative will exaggerate the extent to which a practice leads to barbarism. Again, I use the example of illegal immigration. A conservative emphasizes that it is illegal, therefore the immigrants are lawbreakers by definition, hence the threat to civilization is intrinsic. In general, I think that conservatives view social trends as much more dire than I do and see society in decline more readily than I do.

A progressive will exaggerate the extent to which people fall into classes of oppressors and oppressed. If you look at the biography of UN Ambassador Susan Rice, she apparently both inherited and married into wealth, received an elite education, worked for McKinsey, and now has a net worth of over $20 million. Yet people on the left describe her as oppressed, because she is African-American and female. I want to say, “Really?”

A libertarian will exaggerate the extent to which a practice represents coercion. They are fond of saying, “If you don’t comply with xyz policy, men with guns will come and take you to prison.” I understand this argument and I generally take it as valid. However, I can also understand how someone with a different point of view might argue that when they pay taxes what they get in return is a fair deal.

I also believe that the three axes are different. A practice can be barbaric without being coercive or oppressive. Body piercing, for example. A practice can be coercive without being oppressive or barbaric. Social Security, for example. A practice can be oppressive without being coercive or barbaric. Owners of restaurants refusing to serve non-white customers, for example.

It is Sometimes Appropriate…

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I wish that people would begin political conversations by conceding that the generic way that their opponents view the world is sometimes correct. Start by saying, “It is sometimes appropriate…”

My hypothesis is that progressives, conservatives, and libertarians view politics along three different axes. For progressives, the main axis has oppressors at one end and the oppressed at the other. For conservatives, the main axis has civilization at one end and barbarism at the other. For libertarians, the main axis has coercion at one end and free choice at the other. So here is what I recommend doing when arguing with each:

When arguing with a progressive, start by saying, “It is sometimes appropriate to view particular classes of people as oppressors and other classes as oppressed.” Slavery is an example. Proceed then to suggest that, on the other hand, there are instances in which this way of looking at things is not so compelling. For example, if you think about it, borrowers who obtained homes with no money down are not necessarily oppressed, and the banks that lent them the money are not necessarily oppressors.

When arguing with a conservative, start by saying, “It is sometimes appropriate to view particular practices as barbaric and to view tradition and authority as protecting civilization.” There are, for example, criminals who commit assault and murder without remorse. Proceed then to suggest that, on the other hand, there are instances in which this way of looking at things is not so compelling. For example, if you think about it, Latin Americans who sneak across the border in order to work in this country are probably more civilized than barbaric.

When arguing with a libertarian, start by saying, “It is sometimes appropriate to view particular policies as coercion.” For example, taking tax revenue to hand out political favors. Proceed then to suggest, that, on the other hand, there are instances in which this way of looking at things is not so compelling. For example, if you think about it, it is plausible that some activities function better as monopolies: water and sewer service; courts; road systems. If competition is unworkable, then provision via elected government should not be considered coercive.

Again, I will have an essay that delves more into this way of characterizing ideological differences.

Being Uncharitable to Those Who Disagree

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In his recent book, Libertarianism: What Everyone Needs to Know, Jason Brennan writes,

American politics has two large camps. The first camp advocates an American police state–one that polices the world at large while policing its citizens’ lifestyles. It advocates having government promote traditional Judeo-Christian virtues. It wants to marginalize or expel alternative modes of life. The second camp advocates an American nanny state–one that tries to nudge and control the behavior of its citizens “for their own good.” Both camps support having the government manage, control, and prop up industry and commerce. In rhetoric, a vicious divide separates the two camps. Yet when in power, the two camps act much the same.

Brennan’s book is in large part an effort to refute the uncharitable views that others hold about libertarians. In that regard, it may be valuable. However, the quoted paragraph offers what I believe is an uncharitable view of progressives and, especially, conservatives.

Consider Bryan Caplan’s Ideological Turing Test. If you were to say, “I advocate an American police state,” would conservatives be convinced by that statement that you share their beliefs? Instead, I think that they would view this as a highly uncharitable characterization of conservatism.

I think that if you want to be convincing in an argument, taking an uncharitable view of the opponent is a bad strategy. Just as libertarians become scornful and defensive toward those who take an uncharitable view of our beliefs (think of people who say “libertarians just want to let people starve” or “libertarians believe markets are perfect”), we can expect others to become scornful and defensive if we take an uncharitable view of their beliefs.

I have written an essay, to appear next month, in which I suggest that the core conservative belief is that civilization is always threatened by barbarism. Think Lord of the Flies. Meanwhile, I think that progressives also see a threat everywhere–the threat of oppression. Think of the Biblical story of the Exodus. Libertarians do not typically focus on barbarism or oppression. Instead, we focus on coercion vs. free choice. We celebrate the fruits of voluntary cooperation via markets. Think I, Pencil.

Suppose that my characterization of conservatives is correct. Then libertarians need to address their concern. How do you keep civilization from sliding into barbarism? Conservatives viewed Communism as barbaric, and they saw a need for our government to defend against it. Similarly, they see terrorism as barbaric, and they see a need for our government to defend against it.

How should this concern with external barbarian threats be addressed? One approach is to deny the threat or to insist that our side is just as bad. I think of Murray Rothbard and his descendants as taking that path (am I being uncharitable?). It seems to me that you have to be incredibly selective in your choice of facts in order to sustain that position. A more promising approach, in my view, is to emphasize the costs and risks of various government strategies (airport screening, foreign invasion) for dealing with these threats.

Conservatives view a number of cultural phenomena as representing a slide into barbarism. There certainly is room to disagree with conservatives about what constitutes barbarism (gay marriage? marijuana?). However, nearly everyone I know shares some of the conservative’s worries. Few would argue that teenage motherhood, heavy drug use, or poor impulse control are desirable. Again, I think that the place to make a stand is to be skeptical of the practical results of government policies that purport to improve social character.

Finally, note that the pattern of demonization is likely to be predictable. Libertarians will demonize their opponents as statists, because what libertarians care most about is the coercion-freedom axis. Conservatives will demonize their opponents as enemies of civilization (“the left wants to destroy our way of life”), because what conservatives care most about is the civilization-barbarism axis. Finally, progressives will demonize their opponents as oppressors (“they want poor people to suffer”), because what progressives care most about is the oppressor-oppressed axis. One psychological benefit of demonization is that it provides a way of coping with people with whom you disagree without having to acknowledge the possible partial validity to their perspective. However, the cost of demonization is that it accentuates animosity–both yours and that of the group that you demonize.

The Libertarian as a Logical Thinker

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An excerpt from my latest essay, on libertarian thinking as a process rather than as an outcome.

What I am suggesting is that libertarians, rather than defining ourselves in terms of what we believe is right, could instead define ourselves in terms of how one should arrive at beliefs about what is right. Our goal should be to rely as much as possible on logic and as little as possible on heuristic biases. If using these methods leads to the conclusions that are traditionally libertarian, fine. If not, then we should change our conclusions, not our methods.

I think it is best to read the entire essay.