Monthly Archives: January 2013

Annie Lowrey on the Capital of the Empire

Posted on by

She writes in the New York Times Magazine.

“We get about 15 cents of every procurement dollar spent by the federal government,” says Stephen Fuller, a professor of public policy at George Mason University and an expert on the region. “There’s great dependence there.” And with dependence comes fragility. About 40 percent of the regional economy, Fuller says, relies on federal spending…

The amorphous war on terror and the creation of the Department of Homeland Security — plus the wars in Afghanistan and Iraq — bloated the country’s spending by about $1 trillion. The contracting dollars that were pumped into the local economy, Fuller says, more than doubled between 2000 and 2010, when it reached $80 billion a year.

However, elsewhere she advocates more deficit spending now to stimulate growth. The most charitable interpretation I can give is that she thinks in terms of “good” spending and “bad” spending on the part of government. The former adds to overall economic growth. The latter just sucks wealth into Washington. The bad spending comes from President Bush and the war on terror. The good spending comes from President Obama and the stimulus.

Some concerns that I have.

1. A lot of the wealth goes to lobbyists for whom the distinction between good spending and bad spending is not meaningful.

2. A lot of the influence on the direction of the spending comes from lobbyists for whom the distinction between good spending and bad spending is not meaningful.

3. The good spending is justified as needed temporarily to boost the economy. But will this temporary spending ever subside? The Keynesian argument for countercyclical government spending seems to get made when the economy gets weak but never when the economy is strong.

4. For that matter, there is also an asymmetry in the argument for more government spending when interest rates are low. I would give this more credibility if those making the argument had ever advocated reducing government spending because interest rates were high.

Of course, my own view is that the evidence that more spending by the federal government benefits the economy as a whole is not compelling. I find it much more believable that such spending benefits Washington.

Can Experts Be Trusted?

Posted on by

Dan Kahan reports on a study by Brendan Nyhan, Jason Reifler, and Peter Ubel.

Two groups of subjects got a news article that reported on false assertions by Sarah Palin relating to the role of “death panels” in the Obamacare national health plan. One group received in addition, though, a news story that reported that “nonpartisan health care experts have concluded that Palin was wrong.” They then compared the perceptions of the two groups.

…As subjects became more pro-Palin in their feelings, high political knowledge subjects did not merely discount the “correction” by a larger amount than low political knowledge ones. The effect of being exposed to the “nonpartisan experts say Palin wrong” message on high knowledge subjects actually made those with pro-Palin sentiments credit her initially false statements even more strongly than their counterparts in the “uncorrected” or control condition!

My reaction:

1. Just to be fair, I would like to see a study done in which two groups of subjects get a news article reporting on a study that purports to show that a higher minimum wage does not reduce employment. Yes, I know that Krueger and Card did such a study. Then have the experimental group be exposed to the statement that later studies contradicted the Krueger-Card finding (which is what happened). My guess is that, once again, strong partisans would credit the Krueger-Card study even more strongly in the experimental condition.

2. One of the implications of the theory of motivated reasoning and political cognition, which Kahan is discussing here and which I agree is important, is that the correlation between partisanship and knowledge is very high. Therefore, the term “nonpartisan expert” is nearly an oxymoron.

3. If “non-partisan expert” is an oxymoron, then it would make sense for people to view the use of the term with suspicion. It may in fact be rational to react to the statement “non-partisan experts believe X” by reducing your belief in X. Perhaps the experimental subjects intuitively understand the theory of motivated reasoning. They may think, “The article is telling me that some highly motivated reasoners believe X. But it is not giving me any new evidence for X. If there were actual evidence to convince me of X, the article would have shown the evidence, instead of just giving me the views of motivated reasoners. So I should be even more skeptical about X than I was before.”

4. What one seeks in an expert on a politically-charged issue is someone who is a political ignoramus but an expert in the subject at hand. That may not be easy to find.

5. What is most informative is a statement by an expert who is politically motivated one way but who offers testimony in the opposite direction. In fact, when such statements are encountered we give them particularly high credibility.

John Mauldin on Japan

Posted on by

He writes,

One has to assume that the law of gravity will not be repealed and that investors will want something more than 2% on the ten-year bond if inflation is at 2%. If the ten-year bond were to rise by 2%, Japan would soon be spending over 50% of its tax revenues on the interest carry alone.

Perhaps bond investors are willing to accept negative real rates of return. Folks have bid up TIPS in the U.S. to negative real rates.

Negative real interest rates are very good for holding down the ratio of debt to GDP. We saw that in the United States in the 1970s. But the 1970s are not so fondly remembered as far as economic performance and financial wealth are concerned.

Mortgage Rules and Mortgage Risk

Posted on by

To much fanfare (it was the lead story in last Thursday’s Washington Post), the Consumer Financial Protection Bureau promulgated rules intended to reduce risky mortgage lending. My thoughts:

1. Horse. Barn Door.

2. Ed Pinto offers valid criticism.

3. Nothing has changed in Washington. Pinto notes that Freddie and Fannie are effectively granted exemptions from following the rules. To me, this leaves no doubt that the housing lobby is still setting mortgage policy. The CFPB may be a brand new agency, but it is caving into the same old rent-seekers.

4. The rules do not strike me as evidence-based. As I point out in a new essay, mortgage defaults are driven largely by the borrower’s loss of equity. Thus, the most important risk factor at the time the loan is made is the size of the down payment. The rules ignore that. Instead, the focus in the borrower’s debt/income ratio, which is far and away the least predictive of the major factors used in predicting default (the down payment is most useful, followed by credit score and then by loan purpose, although the effects of these variables interact with one another so that it is not so easy to rank-order their importance).

5. Later this month, I am going to be launching a course on the American housing finance system at Marginal Revolution University. Details to follow. But the course will be aimed at the sort of agency staff who work on housing policy issues. My goal is to share what I know about mortgage analytics and business processes within the mortgage industry. I am confident that my target audience is capable of absorbing this information. I am less confident that they will be able to have as much influence with policy makers as the industry lobbyists. But one can only hope.

The Minimum Wage and the Three Axes

Posted on by

Bryan Caplan writes,

Please don’t give me any “hard heads, soft hearts” answers. Give me “soft heads, soft hearts” answers. You’re trying to persuade Oprah Winfrey

The idea is to argue against the minimum wage. In my terms, Caplan’s challenge is to make this argument to someone who views political economy along the oppressor-oppressed axis. Low-wage workers are typically seen as oppressed, their employers are seen as oppressors, and the minimum wage looks like a tool to reduce oppression.

You can say, “The low-skilled workers who are priced out of the labor market by a minimum wage are even more oppressed,” but that does not get you far. Even though eliminating the minimum wage will make some low-skilled workers better off, it seems as though you are strengthening the oppressors’ bargaining position vis-a-vis the low-skilled workers who deserve more than the minimum wage.

The libertarian’s freedom-coercion heuristic says that working at a sub-minimum wage cannot possibly be a bad thing if someone agrees to do so. For progressives, aside from the fact that this is not their preferred heuristic, the problem is that working at a sub-minimum wage is not, in Michael Munger’s terms, euvoluntary. That is, it is only voluntary because your best alternative (not working at all) is so bad.

The Greg Mankiw approach would be to argue that a minimum wage acts like a wage subsidy to low-skilled workers combined with a tax on hiring low-skilled workers. So, if you really want to help the oppressed, you should have the government give a subsidy to low-wage workers, period, with no minimum wage. The subsidy will raise wages and increase employment rather than lowering employment.

I think that even the Mankiw approach will fail among those who see corporations and business owners as the oppressors. The subsidy fails to make the statement that low wages are an act of oppression. A minimum wage law does make such a statement.

Tyler Cowen on James Buchanan

Posted on by

He writes,

He thought through the conflict between subjective and objective notions of value in economics, and the importance of methodologically individualist postulates, more deeply than perhaps any other economist. Most economists hate this work, or refuse to understand it, either because it lowers their status or because it is genuinely difficult to follow or because it requires philosophy.

This is the aspect of Buchanan that I picked up on, but that is only one of 13 items in Tyler’s post.

We Are Still Tribal

Posted on by

Robin Hanson writes,

People quite often find it prohibitively hard to talk merely because different groups have gotten into the habit of talking differently, even though their concepts could be translated without great difficulty. And members of these groups often go out of their way to signal group loyalty by choosing to talk differently than outsiders.

He refers to what seems like a fascinating article, which is behind a paywall. If I could put this in Hansonian terms, I would say that language is not about clear communication. It is about signaling tribal identity. Often, it is important for the signals not to be easily picked up by another tribe. And, yes, of course, this applies to jargon used in various academic disciplines.

Incidentally, one of the ways I describe the three-axis model is that progressives, conservatives, and libertarians speak different languages. Each responds to disagreement by, in effect, shouting louder in a language that the other party does not understand.

UPDATE: thanks to a reader, a quote from the article

we have acquired a suite of traits that help our own particular group to outcompete the others. Two traits that stand out are “groupishness” — affiliating with people with whom you share a distinct identity — and xenophobia, demonising those outside your group and holding parochial views towards them. In this context, languages act as powerful social anchors of our tribal identity.How we speak is a continual auditory reminder of who we are and, equally as important, who we are not. Anyone who can speak your particular dialect is a walking, talking advertisement for the values and cultural history you share. What’s more, where different groups live in close proximity, distinct languages are an effective way to prevent eavesdropping or the loss of important information to a competitor.

The author, Mark Pagel, has a book called Wired for Culture, which I will want to look into. On the Amazon page for the book, Herbert Gintis has a fascinating review.

Charter Cities and Corporate Soap Opera

Posted on by

I cannot recommend strongly enough listening to this edition of This American Life. Thanks to Tyler Cowen for the pointer.

The episode looks into what happened with the Charter City concept in Honduras. The reporters, Chana Joffe-Walt and Jacob Goldstein, hone in on exactly the aspect that most fascinated me about the story: what I call corporate soap opera. It’s all there–the egos, hurt feelings, control issues. I feel as though I have been, at one time or another, in the shoes of all the major participants in this story.

Human beings seem hard-wired to create conflict. That is why speaking of “the state” or “the corporation” as a unitary decision-maker strikes me as often misleading.

If You Need Something to Read

Posted on by

Here are some popular books from the latter half of the twentieth century that I would put in the queue ahead of many recent works. My guess is that you have not read all of them yet.

The New Industrial State, John Kenneth Galbraith, 1968. Galbraith actually got some things right–I agree with his take on the significance of bureaucracy within corporations, rather than viewing the CEO is an autonomous actor. But with the benefit of hindsight you can see how wrong he was about big things. He minimized the differences between the Soviet and American economies. He thought that new, small firms were insignificant. By blogging standards, his writing is gentle (if long-winded). He takes on conservatives with quips rather than base insults. But the main reason to re-read him is to see the contrast between a highly-reputed intellectual’s outlook and subsequent events. Incidentally, there is much in Milton Friedman’s Capitalism and Freedom, particularly on Civil Rights, that does not hold up very well, either.

The Money Game, ‘Adam Smith’ (George J W Goodman), 1969. Goodman, a journalist, had a great instinct for what made a good story and a wonderful ability to tell it. This was the first popular treatment of the efficient markets hypothesis. As Goodman put it, “Stocks have no memory, and yesterday has nothing to do with tomorrow.” I also recommend two other books of his, both hard to find. Supermoney (1973) among other things introduced the world to Warren Buffett, then a relatively young, successful money manager. Goodman’s description of the Fed’s response to the Penn Central bankruptcy is classic. Finally, Powers of Mind (1975), which I was lucky to come across in a used book store, is a very rich treatment of the New Age psychology that emerged in that period, and which still echoes through the halls of major corporations today (teambuilding, anyone?).

Liars Poker, Michael Lewis, 1989. This was Lewis’ smashing debut onto the financial journalism scene. The recent financial crisis made this book topical once again.

Microcosm, George Gilder, 1990. One thing I remember about this book is the way Gilder emphasized that the main material resource in computers–silicon–is sand. After reading this book, I felt that I really “got” the economics of the computer revolution. It influenced me to become an Internet entrepreneur a few years later. It influenced me as an economist to focus on intangible wealth, ultimately leading to my book with Nick Schulz.

The Work of Nations, Robert Reich, 1991. Today, everyone talks about skill-biased technological change and the plight of less-educated workers. With this book, Reich got there before the crowd. This is nothing like the predictable partisanship of Reich’s recent opinion pieces.

Vision of the Anointed, Thomas Sowell, 1996. Not at all charitable to those with whom he disagrees. Still, I think this book is insightful. I would be hard pressed to deny that my thinking on the oppressor-oppressed axis can be traced to Sowell.

The Physics of Wall Street

Posted on by

That is the title of a book by James Owen Weatherall. I received a review copy. I will say that I finished it, which is more than can be said for most books that I get sent to review. So I feel entitled to blog about it. The book offers short biographies of students of physics who applied their models in finance, along with layman-friendly explanations of the theories involved. A main theme of the book is that economists are too snotty toward physicists. For exaple, on p. 146-147 he describes attempts by the Santa Fe Institute to bring physicists and economists together in the late 1980s. This worked out poorly, but when the institute invited practitioners from Wall Street, “The traders proved much less defensive than the economists.”

I think that the complaint about snotty economists is pretty widespread. Experts in many disciplines, including psychology, sociology, and biology, believe that they bring techniques that would be useful to economists but are under-appreciated. I am not sure how to react. I think that what Weatherall calls the sociology of the economics profession is as bad as he says it is. But I am not part of the mainstream myself. If you ask folks in the leading departments about the state of economics, they will tell you that it is basically fine.

The book itself contains some well-written stories, a bit reminiscent of The Money Game, which most of you are too young to remember (Weatherall probably never heard of it). I learned little new from the early chapters, but I got a bit more insight into the Santa Fe Institute folks and the chapter on Didier Sornette and his models for sensing major changes was entirely new to me. After that, the book sort of petered out for me. At the end, he calls for a sort of “Manhattan Project” to apply physics to economics. Calling for a “Manhattan Project” on anything is a surefire way to put me off.