Another step toward the Young Lady’s Illustrated Primer. Tablets in Ethiopia.
Monthly Archives: January 2013
A Three-Axis Survey
Below is a survey you can try out, based on the three-axis model. Do your progressive friends answer as one would expect? Does the survey help to separate conservatives from libertarians? Continue reading
Error in 2011 AP Microeconomics Exam
It turns out there is a rather shocking mathematical error in the 2011 AP Microeconomics exam. You can view the exam at the College Board site here. There is a nice video of the solution here, but the teacher is totally oblivious to the error. See if you can find it. I will describe it below the fold. Continue reading
James Buchanan and the Ideological Divide
The death of Nobel Laureate James Buchanan has been much noted in the libertarian blogosphere, by Don Boudreaux for example. Alex Tabarrok lists more.
In contrast, those of us who were educated at left-leaning institutions learn almost nothing about Buchanan. There, he is (was) that right-wing guy who was a big proponent of public choice theory. He is treated as a shallow thinker whose claim to fame is treating government officials as self-interested.
In fact, Buchanan is one of the few economists who I credit with thinking more deeply than I do. (Yes, this reveals a lot about my self-regard. My egotistical view of the world is that other economists forego philosophical rigor in exchange for mathematical precision.)
To see what I mean about Buchanan, go to the library of economics and liberty and read Cost and Choice. (Note that you get to the contents of the book by clicking on the links over on the left. Or you can purchase the book relatively inexpensively.) Here is an excerpt (from the beginning of chapter three), to see what you are getting into.
A century has elapsed since the subjective-value revolution in economic theory, but the subjective theory of value has not been fully reconciled with the classically derived objective theory. As the notes on the development of the concept of opportunity cost indicate, economists have not drawn carefully the distinction between a predictive or scientific theory and a logical theory of economic interaction. As subsequent chapters will demonstrate, this methodological confusion is the source of pervasive error in applied economics. The treatment and discussion of cost, especially in its relation to choice, provides a usefully specific context within which the more general methodological issues can be examined.
…The following specific implications emerge from this choice-bound conception of cost:
1. Most importantly, cost must be borne exclusively by the decision-maker; it is not possible for cost to be shifted to or imposed on others.
2. Cost is subjective; it exists in the mind of the decision-maker and nowhere else.
3. Cost is based on anticipations; it is necessarily a forward-looking or ex ante concept.
4. Cost can never be realized because of the fact of choice itself: that which is given up cannot be enjoyed.
5. Cost cannot be measured by someone other than the decision-maker because there is no way that subjective experience can be directly observed.
6. Finally, cost can be dated at the moment of decision or choice.
I like to wrestle with these sorts of topics, but, for better or worse, my goal in writing is to bring them down to a layman’s level, as in my essay on subjective value.
Anyway, the point should not be to talk about me. What strikes me about James Buchanan is that, apart from the libertarian fringe, no economists attempt to appreciate the depth of his thought. I find that sad and disturbing.
Organizational Mediocrity is No Accident
Tim Kane’s book, Bleeding Talent, earns a review from the New York Times.
That act binds the military into a system that honors seniority over individual merit. It judges officers, hundreds at a time, in an up-or-out promotion process that relies on evaluations that have been almost laughably eroded by grade inflation. A zero-defect mentality punishes errors severely. The system discourages specialization — you can’t expect to stay a fighter jock or a cybersecurity expert — and pushes the career-minded up a tried-and-true ladder that, not surprisingly, produces lookalikes.
Pointer from Tyler Cowen. Reihan Salam has more praise for the book.
This reminds me of the Federal Reserve Board, or of the public school system. To some extent it reminds me of the way large corporations treat middle managers. As I explained almost fifteen years ago,
For corporations, encouraging middle managers to take good risks is not as easy as it sounds. Middle managers understandably do not want the same degree of personal downside risk as entrepeneurs. However, in the absence of personal downside risk, the middle manager’s incentives would be skewed toward taking unjustifiable risks. Bureaucratic controls and limits on upside incentives may be an appropriate adaptation for correcting this potential bias.
I think that mediocrity is the natural state of organizations. Only the discipline of competition serves to bring about improvement.
David Brooks on Conservatism
American conservatism has three-part roots. Morally, it is rooted in the biblical metaphysic. Conservatives have an appreciation for the sinful nature of men and women and hence a healthy respect for Murphy’s Law. If something can go wrong, and there are people involved, you should be ready for the possibility that it will.
Philosophically, conservatism goes back to the epistemological modesty of Edmund Burke. The world is a complex place. The power of reason is bounded. Be skeptical of those who think they can grasp the complexities of reality and reorganize it through rational planning.
Economically, American conservatism differs from European conservatism because it goes back to the governing philosophy of Alexander Hamilton, to the belief in social mobility, immigrant possibility, and the idea that, in limited but energetic ways, government can help give people the tools to compete in a capitalist economy.
Today’s conservatism is estranged from these roots. Today’s conservatism is more properly called Freedomism. It is the elevation of freedom as the ultimate political good.
Run this through the filter of the three-axes model. “an appreciation for the sinful nature of men and women” sounds to me like the civilization-barbarism axis. The complaint about “the elevation of freedom as the ultimate political good” sounds to me like a concern with focusing on the freedom-coercion axis.
David Brooks is probably my favorite columnist, in part because he tends to be more charitable than others to those with whom he disagrees. However, I often do not share his prescriptions, and this is one such instance.
Sovereign Default Threshold Analysis
In a study of the prospects for Canadian provinces, Marc Joffe writes,
This method employs a multi-year fiscal simulation with a default threshold stated in terms of an interest expense to total revenue ratio (or interest bite). Using evidence from our historical survey, the conclusion is that default is likely at a 25% interest bite, so the simulations simply estimate the probability of each province reaching that level.
One way to think of this is that the political system will not tolerate debt payments that absorb more than 25 percent of revenue, and investors know that. So once the interest rate rises to the point where the interest bite hits .25, expect a debt crisis. That is, at that point, the government (in this case, a Canadian province) will consider default. The interest bite, B, is the average interest rate on debt, r, times the amount of debt, D, divided by tax revenue, T.
B = rD/T
Suppose that the ratio of debt to GDP is 50 percent and the ratio of revenue to GDP is 20 percent. Then we have
B = 2.5r
which means that once the average interest rate on debt hits 10 percent we are in crisis territory.
For the U.S. federal government, the ratio of debt to GDP is at least 70 percent (perhaps it is at least 100 percent), and the ratio of tax revenue to GDP tends to max out at 20 percent. At 70 percent, B = 35r. If we stick to the rule of thumb that a 25 percent interest bite is the point at which default becomes thinkable, then it would take an average interest rate of about 7 percent to reach that point. Note that because we have locked in low rates on some of the debt by issuing long-term bonds, it would take an increase in rates well above 7 percent in order to make the average interest rate on our debt reach 7 percent.
Some other thoughts:
1. It is hard to know what the rule of thumb might be for a U.S. default. It’s not like we have historical examples to serve as benchmarks.
2. For U.S. states, or for Canadian provinces for that matter, I wonder if pension payments to government workers should be added in order to estimate an “interest plus pension cost” bite. My thinking is that the political process may be stressed by taxpayers not receiving current services in return for their tax payments, and neither interest payments nor pension payments can be used to purchase current services.
3. Canadian provinces do not have balanced budget amendments, and consequently at least some of them are in more trouble than U.S. states. I am becoming more and more convinced that it is really hard to keep a democratic polity out of a debt trap in the absence of a Constitutional restraint.
4. Also, the Canadian single-payer health care system is run at the provincial level, so rising health care spending is a big driver of provincial fiscal problems.
5. I like the simplicity of Joffe’s rule of thumb. However, my own analysis of crisis triggers warns that the problem is complex and there are limits to what objective analysis can accomplish.
Balanced Budget Amendment?
Glenn Hubbard and Tim Kane write,
One new approach has been proposed by Congressman Justin Amash (a Republican from Michigan) and has won some bipartisan support. His plan would essentially involve balancing the budget over the years of a business cycle. For instance, the proposal’s rule constraining annual outlays (including changes in accrued net liabilities in entitlement programs, as noted above) to a level no greater than the average annual tax revenue of the previous three fiscal years would be far easier for Congress to adhere to. Congress could, with a three-fourths vote, override that constraint during wars or deep recessions.
The parenthetical remark about accrued net liabilities is important. Each year, as demographics and other factors change, the outlook for Social Security and Medicare changes (typically, for the worse). Accrual accounting would put these changes onto the budget.
Vickies and Thetes
We’ve been talking about an increase in productivity producing an increase in leisure for a long time, but instead, the “winner take all” world of Brynjolfsson and McAfee often seems to produce a “winner” class that works itself into an early grave by running 100-hour work weeks at astounding payscales, and a much larger “loser” class that works itself into an early grave by working 100-hour weeks in shitty, marginal, grey-economy jobs, trying to stitch together something like an income.
I think this is wrong. The “loser” class has less income to spend on expensive schools and health plans that pay for you to get an MRI if you complain of a bad headache. But the people in this class do not necessarily work 100-hour weeks. I think that Neal Stephenson’s depiction in The Diamond Age is more apt. Some people work a lot and save a lot, because that is what their values call for. Those are the Vickies. Some people work less and save less. They are the Thetes. Their lifestyle looks distasteful to the Vickies, but they do not starve or lack for toys.
Pointer from Tyler Cowen. Both Doctorow and Cowen link to pieces by Kevin Kelly, and each Kelly piece is worth reading.
The Three Axes and Immigration
Vipul Naik uses the three-axis model to examine how immigration restrictionism differs between progressives and conservatives.
Combining a focus on the oppressor-oppressed axis with territorialism and local inequality aversion produces the kinds of proposals and concerns that Costa raised in his EPI blog post. Explicitly, it generally involves a combination of a path to citizenship, stricter enforcement, strong laws against worker exploitation, and an immigration policy designed to benefit currently low-skilled natives.
…center-right individuals are likely to be more focused on concerns of civilization versus barbarism, and while the alien invasion metaphor is probably an exaggeration, basic concern about how illegal immigration undermines the rule of law adds to the general worries about the harms created by immigration. Thus, center-right restrictionists are more likely to favor reform proposals that include attrition through enforcement and stronger border security while simultaneously reducing future levels of legal immigration
For libertarians, of course, immigration restriction is one of the biggest evils in the entire world. From the perspective of the freedom-coercion axis, there is nothing more powerful than the ability to exit government. I believe that America is a great country because through so much of its history it drew people who wanted to exit other lands. Also, the availability of a less-governed frontier gave the pioneers an exit option.
In this century, many trends have made exit more difficult. The consolidation of school districts into gigantic city-wide and county-wide units is one example. The increase in the scope of government (what economists would call “bundling”) is another. The widely-unread Unchecked and Unbalanced talks about problems and solutions in these terms.
I am not sure that I can be charitable toward progressives who favor immigration restriction. I believe that the oppressor-oppressed axis naturally would favor open immigration. However, open immigration is a political loser. The people who are here do not want it to be easy for other people to come in. Even Hispanic citizens probably do not want more immigrants, but they sense (correctly) that some of the hostility toward illegal immigration is motivated by ethnic prejudice. So my uncharitable view is that progressives are choosing the most politically advantageous position on immigration, which is to not stand up for more open immigration policies but instead to express solidarity with Hispanics by showing sympathy with currently-illegal immigrants.
I find it easier to be charitable to conservative immigration restrictionists. I do not see them as being cynical or hypocritical. They are just dead wrong.