Barry Weingast on Violence

This was a very interesting Russ Roberts podcast, which I missed last week while I was at the beach.

the median poor country has violence– Russ: Poor defined as? Guest: The bottom half of the distribution of countries. Russ: The median within that half. Guest: The median within that half experiences violence every 7 years. Russ: A regime change. Not just some fighting outside the palace. That’s shocking. Guest: Right.

When a regime changes through violence, the rules of property can change along with them. It is hard to invest for the long term under such circumstances. Also, people come to see control over government as the main route to obtaining or securing wealth. Finally, Weingast argues that in order to prevent coups, governments have to make economic concessions to groups that otherwise might become violent. Governments have to use regulation and subsidies to keep the peace.

I should note that in the United States, a similar process takes place but without the threat of violence. The housing lobby can threaten to throw a legislator out of office, and so the housing lobby gets what it wants. I am not convinced that the U.S. has less rent-seeking than less developed countries. Maybe it’s true, but I would like to see data. However, I am convinced that stability of regime is a good thing.

Pattern-Seeking

Temple Grandin and Richard Panek write,

Michael Shermer, a psychologist, historian of science, and professional skeptic – he founded Skeptic magazine — called this property of the human mind patternicity. He defined patternicity as “the tendency to find meaningful patterns in both meaningful and meaningless data.”

What all these examples tell me is that in society, the three kinds of minds — visual, verbal, pattern thinkers — naturally complement one another. When I recall collaborations in which I’ve successfully participated, I can see how different kinds of thinkers worked together to create a product that was greater than the sum of its parts.

I don’t know why it is written in the first person. I suppose that means that the thoughts belong to Grandin?

Anyway, finding meaningful patterns in both meaningful and meaningless data, which Grandin says describes people on the autistic spectrum, might also describe macroeconomists.

Big Gods

That is the title of a new book by Ara Norenzayan. I have just started it. It appears to be an account of religion that is based on evolutionary psychology. He argues that the religions that thrived are those with (p. 6-7)

beliefs and practices that reflect credible displays of commitment to supernatural beings with policing powers.

This facilitates trust in strangers, which is otherwise difficult for humans (or any other species) to achieve.

I found the book very persuasive–perhaps too persuasive. I worry that so many of the psychology experiments that provide support for his propositions use “priming” techniques, and I wonder how well they replicate. I also worry that the idea that fasting and other painful rituals help to signal commitment makes for a “just-so” story.

Here is a question to think about. If religions help to create social capital by allowing people to signal conscientiousness, conformity, and trustworthiness, how does this relate to Bryan Caplan’s view that obtaining a college degree performs that function?

Housing Finance Reform

I collect some of my thoughts in this essay.

Who will win the battle to get the most favorable subsidies and regulations? At this point, all signs point to victory by two of the biggest culprits in the mortgage crisis — the mortgage bankers (firms that originate loans to distribute, not to hold) and the Wall Street investment banks. Both depend on securitization if they are to participate in the mortgage lending process. However, securitization has only been able to compete with traditional bank lending when securities are backed by guarantees from the taxpayers and when bank capital requirements punish banks that hold their own loans.

The Decline of Marriage

Julissa Cruz writes,

The proportion of women married was highest in 1950 at approximately 65%. Today, less than half (47%) of women 15 and over are married—-the lowest percentage since the turn of the century.

Pointer from Timothy Taylor.

Note also that Nick Schulz quietly published a short book on this topic. I have just started reading it.

Noah Smith Picks Up the Theme

He writes,

In macro, most of the equations that went into the model seemed to just be assumed. In physics, each equation could be – and presumably had been – tested and verified as holding more-or-less true in the real world. In macro, no one knew if real-world budget constraints really were the things we wrote down. Or the production function. No one knew if this “utility” we assumed people maximized corresponded to what people really maximize in real life. We just assumed a bunch of equations and wrote them down. Then we threw them all together, got some kind of answer or result, and compared the result to some subset of real-world stuff that we had decided we were going to “explain”. Often, that comparison was desultory or token, as in the case of “moment matching”.

In other words, the math was no longer real. It was all made up. You could no longer trust the textbook. When the textbook told you that “Households maximize the expected value of their discounted lifetime utility of consumption”, that was not a Newton’s Law that had been proven approximately true with centuries of physics experiments. It was not even a game theory solution concept that had been proven approximately sometimes true with decades of economics experiments. Instead, it was just some random thing that someone made up and wrote down because A) it was tractable to work with, and B) it sounded plausible enough so that most other economists who looked at it tended not to make too much of a fuss.

I think that this is a well-expressed criticism, which Paul Krugman sidesteps in his response. I understand Krugman’s point to be that it is possible when expressing ideas verbally to say something that would be incoherent or self-contradictory if you were to try to express it in mathematical terms.

However, let us reflect on Smith’s point. Macroeconomic equations are not proven and tested. They are instead tentative and speculative. And macroeconomists have not been able to avoid allowing math to disguise this tentative, speculative quality of theory. Indeed, in the very same post in which Krugman defends math, he writes,

The basics of what happens at the zero lower bound aren’t complicated, but people who haven’t worked through small mathematical models — of both the IS-LM and New Keynesian type — generally get all tied up in verbal and conceptual knots.

In fact, it is pretty to easy to understand the liquidity-trap argument without mathematical models. However, the idea embedded in IS-LM models that there is only one interest rate is controversial (in fact, it is downright false). The idea that the Federal Reserve runs out of things to buy when the Fed Funds rate is zero is controversial. The idea that an interest rate that is “close to zero” is the same as an interest rate that is zero is controversial. Yet Krugman appears to be so persuaded by his math that he cannot seem to come to terms with anyone who disagrees with his view that the liquidity trap is an important characterization of the current U.S. economy.

I think that Noah Smith has expressed clearly and profoundly that macroeconomists who dress up like physicists are being tragically foolish. I think it is one of the best blog posts that I have ever read.

The idea of freeing macro from its pseudo-physics pretensions came up in Jag Bhalla’s post that I mentioned the other day. Perhaps it is something “in the air” right now. I hope so.

Amar Bhide on the Fed

He writes,

Instead of casting about for a new maestro, we need to return the Fed to dullness and its chairman to obscurity.

It is interesting that there is such a strong folk-macroeconomics belief that the economy will perform well if and only if there is a wise Fed Chairman. My current reading, Big Gods, is about the cultural advantages of religion. One of the advantages that the author overlooks is that people who put their faith in a divine being are less likely to deify humans.

Bhide writes,

Before the crisis the Fed seemingly lost all capacity for the painstaking, boots-on-the-ground supervision of the banks under its purview. And, effective or not, top-down monetary interventions remain attractive to the Fed’s top brass. Running what amounts to a hedge fund on steroids is more glamorous and exciting than managing a regulatory bureaucracy. Perhaps the most important qualification for the next Fed leader is one all too rare in Washington: humility.

During the Great Moderation, macroeconomists took the view that the details of finance do not matter. If the Fed sets the Fed Funds rate properly, it can achieve any macroeconomic objective. Scott Sumner still speaks for that view.

Bhide’s view is the opposite. The details of finance matter a lot, and the Fed’s monetary policy tools are not reliable. I am inclined to agree with Bhide.

CR Symposium on John Zaller

It’s all gated, but Critical Review is worth a subscription. I found Zaller’s own entry the most interesting. Some excerpts (each paragraph is plucked at random–they are not a sequence):

An ideology is a set [of] policy positions recommended by informal coalitions of political pundits, intellectuals, and interest-group representatives…The purpose of ideology is to persuade citizens at large, and espectially the more politically active segment of the populace, of what ought to be done in politics…different people are attracted to liberalism and conservatism for different reasons…what Conover and Feldman call symbolic attachments–e.g. disliking “Big Business,” liking “Women’s Liberation”–are more closely associated with evaluations of liberalism and conservatism than are policy preferences.

If there is one thing that my “political education” over the last 20 years has taught me, it is that one cannot tell a sensible story about public opinion and democracy in the United States without ascribing a central role to interest group and activist policy demanders.

Parties offer policies that are acceptable to their policy-demanding activists and calculate to appeal to particular voting blocs. There is no expectation that parties…will offer policies simply because voters want them. Nor does the median voter’s position…play a significant role. Majorities obtained through any means consistent with the agendas of policy demanders are what parties care about.

According to [Larry M.] Bartels’ analysis, each term in office (after the first) [for one political party] offsets 1.29 percentage points of Q14/Q15 growth [in real disposable income in the spring and summer of the Presidential election year].

The Bartels model raised a number of interesting questions to me. As I read the chart in Zaller’s paper, a first-term-for-the-party incumbent is likely to be re-elected as long as real disposable income does not fall the spring and summmer of the election year. That seems like a low bar. The finding that the bar gets higher the longer the incumbent party has been in office could be due to a combination of two things. One is that the voters get tired of the incumbent party, regardless of what the other party does. The other possibility is that the longer a party is out of power, the more desperate it comes, and the more willing it is to adapt in order to win. I think of those two possibilities as having rather different implications.

The vast amount of government policy-making…that is beneath the radar for most voters…is ceded to the demands of interest groups and activists…Where does the sending of cues by partisan leaders fit into this model of respresentation? It doesn’t have a primary role. Its secondary role is to increase political harmony within coalitions by gaining the assent of members for the common agenda.

My three-axis model would describe part of the cueing process. A politician who wants to send a “cue” to progressives can talk about issues along the oppressor-oppressed axis. A politician who wants to send a “cue” to conservatives could talk in terms of civilization vs. barbarism. A politician who wants to send a “cue” to libertarians would talk in terms of freedom vs. coercion.

Note that Republicans have a more complicated problem, because they want to send cues to conservatives and libertarians.

Note that all of the exercises in mobilizing voters, whether using group-identity or three-axis cues, or other means, are simply for the purpose of winning elections. Once in power, politicians primarily serve interest groups. That is why an ideologically committed voter always feels keen disappointment with how little is accomplished when his or her preferred politicians win.

In 1971, President Richard Nixon [imposed] emergency wage and price controls…[in] a survey of Republican activists…Support for price controls was 37 percent before the speech but 82 percent afterwards

My guess is that a survey of Democratic activists on NSA snooping would show a similar before-and-after. That is, before it was revealed that the NSA was snooping on Americans on Obama’s watch, a small percentage of Democratic activists would have favored such snooping. Now, I conjecture, a much larger percentage of Democratic activists favors such snooping.

Ira Stoll on Phelps

Stoll writes,

Professor Phelps tries to trace what he sees as a decline in modern capitalism beginning as early as the mid-1960s and continuing through the present day. One suspect is what the author calls the “new corporatism”: “Regulations of industries are instituted, aimed at shielding companies or workforces from competition. …Shakedowns of companies by communities, nonprofits, or governments extract donations or other accommodations….The new corporatist economy, then, is pervaded by fears of holdups by the government, by stakeholders, by organized labor, and by an ocean of persons and companies ready to litigate.”

Later,

The question of whether the late-1960s radicals were rebelling against tradition or against modernity is complicated, a topic for a book, or a column, of its own. But surely even a Nobel laureate economist ensconced at Columbia can figure out that whatever the great villain is in the story of the American economy or culture since the 1970s, it isn’t “the resurgence of family values.”

I think that the value of the book is in making the case that our system is corporatist, and that, unfortunately, many people are quite happy with that. I have written my own review, for which I am seeking an outlet.

Why Do Jews Succeed?

Jerry Muller and Noah Smith ask the question. Muller writes,

Jews had a religious culture that promoted universal adult literacy – at least for men – and a culture that respected book learning. Those attitudes and dispositions were transferred from religious texts to secular forms of education. As a result, Jews were highly oriented toward education, and willing to defer current pleasures and income to obtain more of it.

Maristella Botticini and Zvi Eckstein in The Chosen Few say that the literacy requirement had huge selection impact. Jewish farmers were unable to comply with the requirement, and so they exited the religion. People who remained Jews tended to be more urban in their outlook and of course with greater aptitude for literacy.