Monthly Archives: March 2014

Call Screening Device

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Does this exist? If it does not, it should. The device should have a “white list” of approved phone numbers, meaning numbers from which I am willing to receive calls. There would be three ways to add numbers to the white list.

1. As a call comes in from a number I know, I push a button and it gets onto the whitelist.

2. When I call a number, that number is added to the whitelist.

3. I can enter numbers directly into the whitelist.

I can put the device into one of three modes:

1. Ring regardless of who calls.

2. Ring only if the call comes from the whitelist

3. Ring with one sound if it comes from the whitelist, with another sound otherwise.

I really am fed up with phone spam.

The Case for More Aid to Community Colleges

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Richard Kahlenberg makes it.

According to research by Anthony Carnevale and Jeff Strohl of Georgetown University, rich students outnumber poor students by 14 to 1 at selective four-year colleges, but at community colleges, it is poor students who outnumber rich ones, by nearly 2 to 1. There is also considerable stratification within the two-year sector, such that the most racially isolated quartile of community colleges has student populations in which almost two-thirds are from underrepresented minority groups. Community colleges, like public schools, tend to reflect the economic and racial segregation of surrounding neighborhoods.

…Stunningly, over the past decade, inflation-adjusted spending at public research universities has increased roughly $4,200 per student, compared with just a $1 per student increase for community colleges.

Community colleges generally achieve poor outcomes, although individual students are exceptions. It is not clear to me that this is because those colleges lack resources. A lot of it could be the null hypothesis (that education interventions to not make a big difference at the margin). If that is true, then putting more resources into them is not the solution.

The Audience is in Control

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Tyler Cowen asks Which of the new mega-web sites will succeed?. He thinks that the answer depends on internal characteristics of the sites. I think it will depend on how the audience behaves.

I have always felt that the Internet supports only two types of group efforts (it supports a variety of individual voices, including Tyler’s). In terms of group efforts, either your are broad and shallow or you are narrow and deep. The linkers and the thinkers, if you will. What is not yet clear to me is where these new sites will fall in that classification. My guess is that success will require making a definite choice, and that the choice will involve giving up breadth. In any case, the only choices that can survive are ones that the audience buys in to.

There is a story about a class that was taking a course in psychology from a Skinnerian behaviorist who liked to pace in front of the classroom as he lectured. The students decided to play a prank on the professor. They agreed that every time the professor moved backward or toward the left side of the room, they would sit up, lean forward, and appear to be paying rapt attention. When he moved the other way, they would slump back and drop eye contact. By the end of the class, the professor was backed into the far corner, because that is where the students’ Skinnerian reinforcement had trapped him.

Where will the new web sites get their Skinnerian reinforcement, which will come in the form of high page views? Will Leonhardt only get reinforcement when he talks about business celebrities and the Fed? Will Silver get it only when he discusses sports? Will Klein get it only when he recycles Democratic talking points?

If you need to make a profit on the Web, then you do not have complete discretion in how you build your site. The audience is in control.

Trying to Understand

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I was sent a review copy of The Moral Foundation of Economic Behavior, by David C. Rose. Here is what I think is a key passage, which is italicized in the book, on p. 140:

the moral foundation of economic behavior is a norm of unconditional trustworthiness made possible by a preponderance of people possessing an ethic of duty-based moral restraint while not regarding moral advocacy as a moral duty.

I have not been able to follow the argument in the book. This podcast with Russ Roberts gets me closer. Here is what I think Rose is saying.

1. Trust is difficult as groups get large. You cannot completely rely on incentives, reputation, and the like.

2. The best way to obtain trust in a large group is for people in the group to be committed to following moral rules. They won’t cheat, even if they can get away with it, because they think that it is wrong to cheat.

3. People have two potential motives to break rules. One motive is to obtain personal gain. Another motive is to achieve some higher moral objective. Rose wants to say that either motive serves to undermine trust. Therefore, telling someone to focus on higher moral objectives (to “think globally, act locally”) is to encourage that person to break rules, which ultimately will lead to a breakdown in trust.

Again, I do not necessarily get the argument, so do not take my interpretation as gospel. In a way, I see this through the lens of the alleged distinction between act-utilitarianism and rule-utilitarianism. Act-utilitarianism says that you should choose each act in order to make people better off. Rule-utilitarianism says that you should follow rules that, if they were always followed, make people better off. I see Rose as saying that rule-utilitarianism is better, because act-utilitarians cannot be trusted. The act-utilitarian may break his promise for what he sees as perfectly defensible reasons. The rule-utilitarian keeps his promise, regardless. (There is a well-known philosophical problem with the distinction between act-utilitarianism and rule-utilitarianism. You can argue that the former reduces to the latter, or vice-versa. Try to ignore that philosophical problem here, since Rose himself does not rely on that distinction.)

4. Another way to put this is that there are two types of opportunism. There is selfish opportunism, which is breaking the rules to gain for yourself. And there is what I might call utilitarian opportunism, which is breaking the rules in order to achieve what you think is a higher good. About this utilitarian opportunism, Rose would say that:

a) our moral intuition, which is based on based on small-group society, is that utilitarian opportunism is fine. However, this is incorrect.
b) in fact, in a large-scale society, utilitarian opportunism does as much to undermine trust as selfish opportunism.
c) our current educational system and elite culture, rather than urging people to follow rules, urges them to behave morally. It encourages, in both individuals and politicians, utilitarian opportunism.
d) This trend in education and culture threatens to undermine trust.

Again, I am just trying to understand. Had I been the editor of this book, I would have gone back and forth with the author until I was satisfied that the points were made clearly.

Shame on the Consensus

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Nick Timiraos reports,

A consensus has emerged over the last few years among economists, academics, and industry officials that says any new system should do the following:

  • Make the “implied” guarantee explicit and require any successors to Fannie and Freddie to pay a fee for that guarantee, as the chart up top illustrates. Successors would compete for business, selling securities and taking initial losses before any guarantee would be triggered.
  • Get rid of those investment portfolios, or shrink them to the point where they don’t create systemic risks. This way, the firms wouldn’t be guaranteed by the government—only their securities.
  • Require more capital and tighter regulation, since too little of both is what got Fannie and Freddie into trouble. Just how much capital will be required will be a major point of contention, because having more will protect taxpayers but would also raise borrowing costs.

As I have said before, what this “consensus” would accomplish is to complete the Wall Street takeover of the mortgage industry. The history is roughly as follows:

1. In the 1970s, Wall Street saw an opportunity to “disintermediate” the savings and loan industry, which formerly supplied mortgage loans. In a high-inflation economy, money market funds had a regulatory advantage for attracting funds (banks and S&Ls were constrained by regulatory limits on the interest that they were allowed to pay on deposits ceilings).

2. In the 1990s, with the savings and loan industry dead, Wall Street along with Freddie and Fannie took over the mortgage finance system. But Wall Street always resented having to work with Freddie and Fannie. See All the Devils are Here, by McLean and Nocera.

3. In the 2000s, Wall Street thought it had figured out a way to get around having to work with Freddie and Fannie. Investment bankers would issue “private label” mortgage securities, use the CDO structure to get most of these securities a AAA rating, and use those high ratings to substitute for the Freddie-Fannie guarantee. Wall Street firms managed to pull off this trick with a lot of subprime mortgages.

4. Then came the bust, which discredited the Wall Street model of securitization.

5. Now, what Wall Street wants is to re-start securitization. They realize that nobody will fall for the AAA-rating scam any more. They need a government guarantee. But they don’t want the government-guaranteed enterprise to take profits away from them the way that Freddie and Fannie did. Hence, the three items listed by Timiraos, particularly “get rid of the investment portfolios.”

Assuming that the “consensus” eventually becomes policy, the decks will have been completely cleared for mortgage finance in the United States to be a 100 percent shadow-banking enterprise, exactly what Wall Street wanted.

For me, this is painful to watch, even though for a long time I have realized that is the most likely scenario. It is like watching a young brat who wrecked the five-year old family sedan have his parents console him by buying him a brand-new sports car.

My suggested alternative to housing finance reform can be found here.

The Danger of Bond Bubbles

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Gillian Tett writes,

In recent years an astonishing amount of money has quietly flooded into fixed income funds, which buy corporate bonds, emerging markets bonds and mortgage debt. And as the US looks more likely to raise interest rates, creating potential losses for bondholders, the flows could reverse – creating destabilising shocks for regulators and investors alike.

Read the whole thing. Pointer from Phil Izzo. My thoughts:

1. The last time I talked about a “bond bubble” was in 2003. Subsequently, I wrote that only a bursting of the bond bubble could undermine high house prices. I was wrong about that one.

2. Larry Summers would explain the “bond bubble” as secular stagnation. In his view, there is low demand for capital. As you know, I have little regard for this thesis.

3. Perhaps I feel burned by the way that the housing bubble burst on its own, but I would not focus on a bursting of the bond bubble as the key risk today. I find myself sympathetic to Seth Klarman on the stock market (Klarman is cited by Tett, and if you search diligently you can find copies of his investor letter posted on the web). I am skeptical of contemporary market arithmetic.

4. Klarman blames the Fed for low interest rates, and so do many people of my ideological stripe. My view is that if the markets wanted high interest rates, they could have them, notwithstanding the Fed’s efforts. Perhaps we now live in a world in which the primary threat to saving comes from political risk. In that world, savers are not looking for the assets with the best financial characteristics. Instead, they are hoping to invest where they will not lose their capital to taxation and confiscation. This might explain why a lot of foreigners still prefer to invest in low-yielding U.S. assets.

But the bottom line is that today’s financial markets have me puzzled.

The Labor Market: Four Takes

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1. Josh Barro writes,

For four decades, even in stronger economic times, wage gains have not kept pace with economic growth. Wages and salaries peaked at more than 51 percent of the economy in the late 1960s; they fell to 45 percent by the start of the last recession in 2007 and have since fallen to 42 percent.

I would note that a very important part of that trend is the shift from “straight” wages and salaries to other forms of compensation, notably health insurance. Higher payroll taxes also play a role. The share of total compensation to GDP held up fairly well until recently. One might argue that with offshoring, capital-labor substitution, and the relentless climb of non-wage benefits costs, the elasticity of demand for labor is starting to yield declines in labor income.

2. Catherine Rampell writes,

The share of people getting laid off each month — as well as, more disturbingly, the shares getting hired and quitting their jobs — is near record lows. That’s according to Labor Department data released this week and calculations from John Haltiwanger , an economist at the University of Maryland. Haltiwanger estimates that private-sector layoffs, hires and resignations are 21 percent to 26 percent below their rates two decades ago.

This is important information, and Rampell wisely points out that there are a number of plausible explanations, with rather divergent policy import.

Incidentally, I agree with Tyler Cowen that it is good to have Barro and Rampell joining the ranks of columnists. I look forward to op-eds that I might actually have to read in order to find out what they have to say.

3. Bill Gates says,

I think tax structures will have to move away from taxing payroll. … Technology in general will make capital more attractive than labor over time. Software substitution — whether it’s for drivers or waiters, nurses … it’s progressing. And that’s going to force us to rethink how these tax structures work in order to maximize employment given that capitalism in general over time will create more inequality, and technology over time will reduce demand for jobs, particularly at the lower end of the skill set. We have to adjust, and these things are coming fast. Twenty years from now, labor demand for lots of skill sets will be substantially lower, and I don’t think people have that in their mental model.

James Pethokoukis points out, as I would, that Gates’ views align with a growing literature on this topic.

4. Mark Perry writes,

one of the reasons for the disappointing monthly employment reports is the persistent weakness in the public sector employment, which is offsetting the relatively healthy increases in private sector hiring that is 63% greater than private job creation during the last recovery.

I am not sure that his numbers line up with his rhetoric. Relative to the labor market as a whole, the weakness in public sector employment strikes me as pretty small. To put it another way, if you were to restore all of the government jobs that have been lost since the start of the recession, the employment-population ratio would be maybe .3 or .4 higher than it is now, but still about 4.0 below what it was before the recession hit.

I suspect that state and local governments have been constrained by low property taxes and increases in Medicaid spending. Also, if they have to hold down employment because of the strain of pensions, that would not surprise me.

The State, the Clan, and Liberty

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At Cato Unbound,

Mark S. Weiner argues that, while the state does often destroy individual liberty, an even greater danger lies in the rule of the clan. Clan-based societies have been found throughout the world, in many different times and places. In general they have been highly resilient, successful at replicating themselves – and markedly illiberal. Individual freedom may need a strong central state after all, one that can provide the rule of law, enforce contracts, and suppress clan-based feuds and prejudices. Without the state, we may find ourselves regressing from an egalitarian society of contract to a hierarchical society of status….

Arnold Kling argues that human beings require institutions to interact on the basis of trust and cooperation. Kling argues that the resurgence of the clan is possible but unlikely in Anglo-American societies because the nuclear family rather than the clan is our distinctive form of non-state order. Kling concludes that the natural individualism fostered by the nuclear family makes prospects bright for shrinking the state without the risks of clannism. He calls on libertarians to advocate institutions that would accomplish this task.

Feel free to follow the link and read these essays, as well as others that will be posted on the topic.

Mokyr vs. Phelps

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Joel Mokyr’s review of Mass Flourishing (ungated version, anyone?), and it is not glowing.

Mokyr refers to Mariana Mazzucato’s The Entrepreneurial State, which argues contra Phelps (and contra nearly everyone on the libertarian side of things) that the state has been the font of much innovation.

Mazzucato’s bullishness on government as a source of entrepreneurial flourishing is a strong antidote to Phelps’s dismissive view of corporatism as the source of all evil, although her enthusiasm for state-led innovation is at times overblown; the truth is somewhere in between. Like a bad marriage, innovation and the State cannot live with or without one another. It is a standard dilemma for all capitalist societies.

There must be something about Phelps–style, substance, or both–that puts people off. Recall that he received a lot of pushback when he spoke at a dinner last month. My own review was more on the positive side.

Mokyr locates Phelps’ antipathy toward Schumpeter:

I argued at length in Mokyr (2002) [that] It was not either science or business, but the realization that there are huge complementarities between them that led to success. Phelps notes that Schumpeter made this very point, but then dismisses him as a “pied piper” who misled historians and the general public (p. 10).

Off Topic

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Tyler Cowen links to a new book by John Judis on Jewish influence on President Truman’s Middle East policy. I have read and suggested to friends another book on Israeli history that Tyler recommended, Ari Shavit’s My Promised Land. Also, I recommend Like Dreamers, which looks at the 1967 war in terms of intended and unintended consequences. I will not read Judis, because of some completely unrelated personal issues, which I will put below the fold.

Consider this exercise: flesh out an alternate history in which President Truman does not recognize the Jewish state and Israel’s war for independence fails. State what happens to

1. Arabs in the region
2. Jews in the region
3. Jewish holocaust survivors
4. Jews in Russia
5. Jews in the U.S.
6. The rest of the world

Let me sketch out one ideal scenario: Arabs become secure in terms of sovereignty and status. Feeling good about themselves, they give Jews full rights to own property anywhere and engage in commerce with anyone. They establish democratic modern states embodying civil rights and the rule of law. Holocaust survivors and Russian Jews migrate to the region, as do some American Jews (although not as many as actually migrated). The rest of the world lives quite happily.

I do not think of that as the only scenario, or even the most likely. But the larger alternate-history concept might make for an interesting discussion, if it can be kept civil. Continue reading →