Monthly Archives: March 2013

Big Sugar’s Gall

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This is the first time I have ever written a blog post to comment on a newspaper advertisement, in this case in The Washington Post, on March 6th. I assume that there is no way to link to it. The ad says:

Big Candy’s Greed
[picture of a suit pocket stuffed with cash next to a picture of a farm with a foreclosure sign]
Jeopardizing 142,000 U.S. jobs and America’s food security isn’t a game. It’s a travesty.
So why are Big Candy executives lobbying Congress to outsource America’s sugar production?
To boost their already bloated profit margins at the expense of American farmers, workers and consumers.
Winners: A few corporate executives.
Losers: America
Support Current Sugar Policy–It Works for America
American Sugar Alliance
Backing America’s Beet and Cane Farmers

Why did the trade association executives choose to run this ad? Consider these possiblities:

1. They do not actually believe the oppressor-oppressed narrative they have concocted (to support sugar tariffs, of course), but they think that they can fool people with it and thereby influence policy.
2. They do not believe the narrative will influence policy, but they believe that they can fool the donors who sponsor their organization into thinking that they are getting something valuable for their contributions.
3. Actually, they are not trying to fool anyone with this narrative. In fact, they believe it themselves, even though to everyone else it is transparently ridiculous.

I lean toward (3). When you cash your paycheck from a pure rent-seeking organization, you want to convince yourself that you are actually a good guy, and in the process you make someone else the bad guy.

Tod Lindberg On the Left’s Success

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Read the whole essay. He views the Left as animated by egalitarianism. This is close to my thesis that progressives use the language of oppressor-oppressed. Some excerpts:

The Left shares the suspicion of government power at the heart of classical liberalism, but only up to a point. Individuals need rights to protect them from overweening government intrusion, true, but government power in the proper hands can do good, and indeed the proper hands must wield the power of government in order to do the good of pursuing equality.

I have written that progressives believe that what their goals require is sufficient moral authority. Getting government to do good things is just a matter of summoning enough moral authority.

Few on the Left are willing to grant that their critics are likewise reasonable — in other words, that the Left has anything to gain from taking its critics seriously. That leaves the Left in search of an explanation for why it hasn’t won over its critics. The Left has three main explanations. The first is ignorance, in the sense that its critics lack sufficient knowledge of how society could be improved and why what the Left seeks would constitute improvement. For this category, there may be hope in the form of remedial education. The second is stupidity; its critics are simply unable to understand superior wisdom when they face it. There is little hope for them, alas. The third is venality — that its critics know better but seek to defend their position of personal privilege anyway. The only way to deal with these critics is to defeat them politically.

Lindberg notices, as I do, that this is not the New Left of the 1970s, with its revolutionary rhetoric and anti-establishment ideology.

The Left’s ambition is to obtain majority political support — no more, no less. The Revolution has been canceled. “The system is the solution.” The Democratic Party is the sole legitimate representative of the aspirations of Left 3.0.

Lindberg also notices the hard-line stance of today’s left. This may be the key quote of the essay:

The notion of an invincibly center-right electorate was anathema to the emerging Left 3.0. A key moment in its reconciliation with the Democratic Party was the latter’s abandonment of policies designed with a center-right electorate in mind. For the foreseeable future, the party would lay claim to the center not on the basis of adopting positions to appease moderates and independents, but on the basis of winning more than 50 percent of the vote on election day for candidates congenial to Left 3.0 and garnering majority public support for positions congenial to Left 3.0.

I see this hard-line stance evident in the progressive’s resistance to any suggestion for reducing government spending. You cannot suggest cuts in the short run, because that would mean austerity. You cannot suggest trimming entitlement promises, because Social Security is sacred and control over health care spending is a job for technocrats.

As an aside, possibly related, I find Venezuelans’ grief at the passing of Hugo Chavez to be fascinating and frightening. If nothing else, it suggests that earning popular support does not vindicate a politician’s wisdom or benevolence.

Some Perspective on Budget Cuts and Austerity

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Employment, in thousands:

Category 2000 2006 2012
Private sector employment 111,101 114,155 111,820
Government employment 20,790 21,975 21,915

Source: FRED graph, establishment survey. Private sector employment increased less than 1 percent from 2000 to 2012, while government employment (Federal, state, and local) increased more than 5 percent.

Spending, millions of dollars:

Category 2006 Q4 2012 Q4
Total GDP 13584.2 15851.2
Government Expenditures 4325.9 5704.9

Source: FRED graph, national income accounts. Government spending (again, including state and local government) is up 32 percent since 2006.

In my view, these facts can provide some perspective on the issue of spending cuts and austerity. Draw your own conclusions.

As an aside, two documents that usually come out in February were not available when this was written (on March 6th, scheduled for posting March 8th). One is the President’s Budget. The other is the Economic Report of the President. I wonder if they are being planned for release at “news graveyard” time, which is late afternoon on a Friday.

Hall of Shame Forecasters

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I am pleased to see that Nouriel Roubini makes this list. He is famous for predicting the Great Recession. But if you always predict bad things, then you are certain to be correct when they happen–and equally certain to be incorrect the rest of the time.

Pointer from Scott Sumner.

For what it’s worth, I increased my exposure to the market late in 2008 and early 2009. But these days I am happy to have a very low-beta portfolio, in which my participation in the ups and downs of the market is small. For every 10 percentage points the stock market goes up, my portfolio gains about 2 percentage points. I am more weighted toward real estate and commodities (oil, not gold), as befits my fear that the next decade might unleash considerable inflation.

One phenomenon I am not bearish about is the sequester. My guess is that its adverse effects on the economy will not be visible to the naked eye, which will observe a rebounding economy. The sequester’s adverse effects can only be seen through the lens of a Keynesian macroeconomic model. Such models always include government spending multipliers of about 1.5 (or 1.57). However, a forecaster might have been better served by assuming a negative multiplier.

[UPDATE: The employment figures for February were relatively positive. Even if you take a conventionally Keynesian view of aggregate demand, you should be quite bullish. Whatever negative impacts of “austerity” have been more than offset by the positive surprises in the stock market and home prices.]

Can He Get Away with This?

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The Washington Post reports,

Fannie Mae and Freddie Mac will create a common platform for issuing mortgage-backed securities as they wind down operations and plan for a future in which the two companies no longer exist, their regulator said today.

I must have been absent the day they announced that Edward J. DeMarco was going to settle the fate of the housing finance system going forward. Not that I have a problem with it. I just thought that the Administration was more interested in kicking the can down the road.

By the way, my online course on the American housing finance system is proceeding. We will try a live video chat this Friday at 1 PM eastern time.

Meanwhile, Michael Barr reports on the recommendations of a group called The Bipartisan Policy Center’s Housing Commission. The recommendations include,

The 30-year fixed rate mortgage is an important option for American families. American homeowners are not the best bearers of interest-rate risk in our economy. To have a robust and liquid market for such mortgages for most households, there needs to be a government guarantee.

I disagree with this, and with nearly everything else in this group’s recommendations. So I Googled to see who they were. They represent all sides of the issue, if by all sides you mean left-wingers and housing industry lobbyists. My guess is that these folks representing all sides of the issue will not make life easy for Mr. DeMarco.

In other news, Peter J. Wallison and Edward J. Pinto write,

Despite the claim that it is “protecting consumers from irresponsible mortgage lenders,” the new Qualified Mortgage rule finalized in January by the Consumer Financial Protection Bureau turns out to be simply another and more direct way for the government to keep mortgage underwriting standards low.

Sounds like the Qualified Mortgage rule was shaped by the folks representing all sides of the issue.

The Controversy Over the 1920’s Housing Cycle

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Michael Brocker and Christopher Hanes write (NBER, $)

We find that cities which had experienced the biggest house construction booms in the mid-1920s, and the highest increases in house values and homeownership rates across the 1920s, saw the greatest declines in house values and homeownership rates after 1930. They also experienced the highest rates of mortgage foreclosure in the early 1930s. These patterns look very much like those around 2006, despite the gap between the house-market peak in 1925 and the businesscycle downturn in 1929. They are consistent with a bubble. They show that the effects of the mid-1920s boom on house markets were still present as of 1929. They suggest that in the downturn of the Great Depression house values fell further, and there were more foreclosures, because the 1920s boom had taken place.

This appears to be part of a conference volume. The introduction to the volume, ungated and recommended, is by Kenneth Snowden.

The conference volume also includes Gjerstad and Smith, who view the housing cycle as important in the Great Depression. But we saw that Alexander Field, another author in the conference volume, disputes the view that housing leverage was important in the 1920s and 1930s.

So confusing! I think that all of these economic historians agree that the 1920s boom peaked in 1925. All seem to agree that the economy survived the ending of the boom quite well until 1930. Apparently, the big decline in house prices took place in the 1930s, although the authors note that good data on house prices for this period is lacking. Note also that there was general deflation, so that the decline in real house prices was much less than in our recent financial crisis. Of course, that is of little comfort to someone who borrows at a positive nominal interest rate.

Based on this, I am reluctant to assign housing a major causal role in the Depression. If the big decline in house prices took place in the 1930s, then that could be an effect of, or a part of, the overall Depression. Note, however, that the authors write,

This [the cross-sectional correlation between severity of house price declines in the 1930s and the extent of the construction boom in the 1920s] remains true when we control for measures of the local severity of the depression – changes in family income, changes in retail sales – or for changes in average rents.

The Snowden piece is filled with interesting background information, such as

The home mortgage market of the 1920s grew even more rapidly than the nonfarm housing stock, with nonfarm residential debt tripling (from $9 to $30 billion) in less than a decade, while the ratio of debt to residential wealth doubled from 14 to nearly 30 percent

He summarizes other papers in the volume, including one by Eugene White.

He argues that the double liability rule faced by bank shareholders and the restrictions on mortgage lending meant that both national and state-chartered banks were well-capitalized relative to the modest risks that they carried on real estate loans.

White argues that although there were some common factors that affected the banks during the building booms of the 1920s and the 2000s…the important difference between the two episodes is that banks were induced in the modern period to participate in risky real estate finance by a set of policies that were missing in the 1920s—deposit insurance, the “Too Big to Fail” doctrine, and federal subsidization of risky mortgage lending and securitization.

Three Axes Commentary

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Readers suggested that I check out these two posts:

1. James Pethokoukis on Arthur Brooks. Brooks writes,

the core problem with out-of-control entitlements is not that they are costly—it is that the impending insolvency of Social Security and Medicare imperils the social safety net for the neediest citizens. Education innovation and school choice are not needed to fight rapacious unions and bureaucrats—too often the most prominent focus of conservative education concerns—but because poor children and their parents deserve better schools.

Brooks appears to be suggesting that conservatives adopt the oppressor-oppressed language when talking about entitlements and about school choice. My guess is that this will not be successful. I do not think that most ordinary people respond so much to the rhetoric of the three axes. And I don’t think that political elites can be talked into changing sides with different rhetoric.

Most of the energy in political discussions goes toward closing the mind of people on your own side. This seems to work, because elites on all sides are pretty closed-minded.

Of course, if you ask me what might be successful for conservatives, I do not have an answer.

2. Scott Alexander writes,

My hypothesis is that rightism is what happens when you’re optimizing for surviving an unsafe environment, leftism is what happens when you’re optimized for thriving in a safe environment…. Leftism wins over time because technology advances over time which means societies become more secure and abundant over time.

Read the whole thing. I think there is a little bit there that is correct. That is, I think that conservativism tends to include a tendency to worry that we could go down the tubes. In terms of the civilization-barbarism axis, conservatives see many routes back to barbarism.

However, I do not think that either progressives or conservatives would recognize themselves in Alexander’s mirror. Progressives also can be pessimistic–about the distribution of income and the environment, for example. And conservatives are optimistic along some dimensions.

My goal with the three-axis model is not to explain away someone else’s beliefs. Instead, the goal is to describe political beliefs in a way that reflects how each side talks about issues, particularly as they reach a settled opinion.

Quintile Mobility: Built-in Properties

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Timothy Taylor writes,

For example, for all those born into the bottom quintile, 44% are still in that quintile as adults. About half as many, 22%, rise to the second quintile by adulthood. The percentages go down from there. … Similarly, those born into the top income quintile are relatively likely to remain in the top. Among children born into the top quintile, 47% are still there as adults. Only 7% fall to the bottom quintile. The experiences of those born into the middle three quintiles are quite different. The distribution among income quintiles as adults is much more even for those born in these three middle groups, suggesting significant mobility for these individuals. … This pattern has led researchers to conclude that the U.S. income distribution has a fairly mobile middle, but considerable “stickiness at the ends” …”

This result is nearly an arithmetical certainty. Suppose that everyone faces three equally-probable outcomes:

–their income as adults puts them in the same quintile as their parents
–their income as adults rises enough to move up a quintile
–their income as adults falls enough (in relative terms) to move down a quintile

If this were the case, then people in the top would have a 2/3 chance of remaining at the top, because those who get lucky have nowhere to go but up within the top quintile. Similarly, people would have a 2/3 chance of remaining at the bottom, because those who get unlucky have nowhere to go but down within the same quintile. People in the middle quintiles would have only a 1/3 chance of remaining in their original quintile, because they can move in either direction. This pattern would lead researchers to conclude that the U.S. income distribution has a fairly mobile middle but considerable stickiness at the ends, even though by construction everyone in all quintiles has the same probability of moving up or down the income scale.

Gun Control

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A reader familiar with the three-axes model asks,

The oppressed would seem to be victims of violence, but wouldn’t that make criminals the oppressors? How do hunters, recreational shooters, and the NRA end up being the bad guys?

1. The progressive model requires a villain who belongs to some sort of privileged class. Criminals do not fit the bill.

2. Hunting and recreational shooting are not approved activities for city-dwellers. Rural folks need to start acting like normal people and taking Zumba classes, going to restaurants run by celebrity chefs, and spending more time on smart phones.

The Dark View of Schooling

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Bryan Caplan thinks that schooling is not about education. He thinks instead it is about signaling.

Bryan’s view is benign compared with John Holt.

society demands of schools, among other things, that they be a place where, for many hours of the day, many days of the year, children or young people can be shut up and so got out of everyone else’s way. Mom doesn’t want them hanging around the house, the citizens do not want them out in the streets, and workers do not want them in the labor force. What then do we do with them? How do we get rid of them? We put them in schools. That is an important part of what schools are for. They are a kind of day jail for kids.

Thanks to a commenter on this post for the pointer.

Bryan is also mild in comparison with Ivan Illich.

A political program which does not explicitly recognize the need for de-schooling is not revolutionary; it is demagoguery calling for more of the same.

Illich’s DeSchooling Society starts with a chapter “Why We Must Disestablish School,” which opens

Many students, especially those who are poor, intuitively know what the schools do for them. They school them to confuse process and substance. Once these become blurred, a new logic is assumed: the more treatment there is, the better are the results; or, escalation leads to success. The pupil is thereby “schooled” to confuse teaching with learning, grade advancement with education, a diploma with competence, and fluency with the ability to say something new. His imagination is “schooled” to accept service in place of value. Medical treatment is mistaken for health care, social work for the improvement of community life, police protection for safety, military poise for national security, the rat race for productive work. [Does this foreshadow the classic “not about” post by Robin Hanson?] Health, learning, dignity, independence, and creative endeavor are defined as little more than the performance of the institutions which claim to serve these ends…

the institutionalization of values leads inevitably to physical pollution, social polarization, and psychological impotence…this process of degradation is accelerated when nonmaterial needs are transformed into demands for commodities; when health, education, personal mobility, welfare, or psychological healing are defined as the result of services or “treatments.” I do this because I believe that most of the research now going on about the future tends to advocate further increases in the institutionalization of values and that we must define conditions which would permit precisely the contrary to happen. We need research on the possible use of technology to create institutions which serve personal, creative, and autonomous interaction and the emergence of values which cannot be substantially controlled by technocrats.

The New Left had its vices. As with the Occupy Wall Street movement, within their smoldering discontent it is difficult to discern how they would address economic organization. In The Mind and the Market, p. 345-346, Jerry Muller writes of New Left icon Herbert Marcuse,

his work, unlike Keynes’, was less than useless in providing tangible institutional solutions. For Marcuse was fundamentally uninterested in institutions, whether economic or political….Marcuse proceeded as if these fundamental issues of modern political and economic life could simply be ignored.

The New Left also bequeathed to us an academy where the oppressed-oppressor narrative becomes the sum of all scholarship. As Muller puts it on p. 344,

Scholarship, in this understanding, was not about objectivity…The model of the professor as critical intellectual, liberating his or her audience from one or another variety of false consciousness, became institutionalized in some academic disciplines, above all literary studies and sociology. Three decades after the zenith of the New Left and the publication of Marcuse’s Essay on Liberation, for example, the annual convention of the American Sociological Association was devoted to the theme of “Oppression, Domination, and Liberation”; it focused on racism as well as “other manifestations of social inequality such as class exploitation and oppression on the basis of gender, ethnicity, national origin, sexual preference, disability and age.”

But one thing I will say for the New Left is that they were not the hard-line statists that we see on the left today. On the contrary, they viewed government technocrats as part of what they called “the system,” and opposition to this system was a centerpiece of New Left ideology.

Ken Kesey, in One Flew Over the Cuckoo’s Nest, coined the term “the Combine” to describe forces of control that deprived people of freedom supposedly for their own good. Interestingly, John Taylor Gatto, another anti-schooling radical, wrote a Cliff Notes version of the novel that emphasized its anti-authoritarian aspects.

I imagine that if universal pre-kindergarten had been proposed by Richard Nixon, the New Left would have denounced the scheme as fascist. In that sense, I miss them.