The dysfunctional and regressive nature of policy in housing reflects the political configuration in Washington. For several decades, policies combined the efforts of social engineers clumsily seeking to expand home ownership with well-heeled interest groups skillfully lobbying for profits. The social engineers put taxpayer subsidies up for grabs, and the interest groups do the grabbing.
Monthly Archives: May 2014
Marc Andreessen on EconTalk
Self-recommending. I was talking last night with Steve Teles about personality and executives. Think in terms of OCEAN. Which personalities are likely to like to take risks? I think of high O (openness) and high E (extraversion) as positive toward risk taking, with high N (neuroticism) and high A (agreeableness) negative toward risk taking. Teles and I agree that the market tends to select for CEO’s men with high O, high E, and low N and somewhat low A, thus creating a bias toward risk-taking among CEOs. I think that Andreessen exemplifies that. He is much more struck by the mistakes venture capitalists make in missing out on the big hits than the mistakes they make in backing losers.
I think that his attitudes toward risk are probably really a good fit for venture capital. I think they are a terrible fit for being a banker backed by deposit insurance. That is why I think that regulators should be concerned about the personalities of bank CEOs. Teles thinks I ought to write up my theories on that. I think I would have to do a lot of empirical research first.
Andreessen says that journalists are nostalgic for an era of oligopoly, and now they face an era of intense competition. I think that is correct. Even if he is correct that the market is big, that does not mean that there are easy profits in it. Think of a sort of California Gold Rush, with enough miners competing to drive profits near zero. You want to figure out how to be Levi’s.
More Contra Piketty.
1. From a Francophone blogger.
comparing the mean wealth of the x% through time is an implicit selection process where you only select the winners and forget the losers.
In other words, there are two ways to explain why the mean wealth of the x% has grown faster than the mean wealth of the whole population. According to Piketty, it means that the richer you are in the first place, the faster your capital grows over time (hence, the dynastic wealth world he foresees). But it might also be the opposite: this phenomenon is exactly what we should expect to see in a world of high wealth turnover, a world where fortune rewards skills, hard work and risk taking. Quite symptomatically, Piketty and its numerous followers have completely dismissed that possibility.
Pointer from Tyler Cowen.
The phrase “the income of the top X percent grew by z percent” is always a mis-statement, because of turnover among the top x percent. The point made above is that such a figure is always an upward-biased estimate of the actual growth of the actual incomes of actual people in the top x percent.
2. From Martin Feldstein.
his thesis rests on a false theory of how wealth evolves in a market economy, a
flawed interpretation of U.S. income-tax data, and a misunderstanding of the current nature of household
wealth.
These two criticisms cast aspersions on Piketty’s empirical analysis, which Feldstein’s former student Larry Summers said deserves a Nobel Prize.
David Brooks Plays Fantasy Despot
The process of change would be unapologetically elitist. Gather small groups of the great and the good together to hammer out bipartisan reforms — on immigration, entitlement reform, a social mobility agenda, etc. — and then rally establishment opinion to browbeat the plans through. But the substance would be anything but elitist. Democracy’s great advantage over autocratic states is that information and change flow more freely from the bottom up. Those with local knowledge have more responsibility.
Pointer from Tyler Cowen. An example of what Brooks may have in mind is the Regulatory Improvement Commission suggested by the Progressive Policy Institute.
Originally conceived by PPI economists Michael Mandel and Diana Carew, the RIC is modeled after the highly successful military base-closing commission. It would consist of nine members appointed by Congressional leadership and the President to consider a single sector or area of regulations and report regulations in need or improvement, consolidation, or repeal.
The spirit of the proposal is fine, but I do not see why we need a commission appointed by Congressional leadership. Any Administration has the power to improve, consolidate, or repeal regulations, without requiring a special commission.
Modern democracy gives rise to what Kenneth Minogue called “fantasy despot syndrome.” You imagine that policies would be wise and benign if you became despot, and then you project this onto your favorite candidate. Each of these steps involves an error. It is unlikely that your policy ideas are so wonderfully wise and benevolent, and it is very unlikely that your favorite candidate is going to follow wise and benevolent policies. With Barack Obama, I believe that Brooks committed both of these errors.
Brooks can be very insightful, but he has a wet dream any time he contemplates “unapologetic elitism.” I don’t find it such a turn-on. Being somewhat older than Brooks, my visceral attirude toward elites in power is much more strongly influenced by the Vietnam war.
Both David Brooks and Tyler Cowen seem to have liked The Fourth Revolution. I am almost finished with the book, and apart from an anecdote here or a statistic there, I do not feel I profited from it. It felt dumbed down, either because they were trying (probably unsuccessfully) to appeal to non-libertarians or because that is how they roll.
Sorry if I seem off my meds today.
Paul Willen on Risk Retention
He notes that the new risk-retention rules in mortgage securities mandate a lower rate of losses than the securitizers actually took in the subprime crisis. In other words, Congress claims to have improved the safety of securitization by mandating “skin in the game” that amounts to less than what the securitizers actually had.
Who Says These Are Public Goods?
By paying for public goods like education and health care, governments can improve efficiency as well as welfare.
That is from John Micklethwait and Adrian Wooldridge, writing in The Fourth Revolution. I have just started to read it, based on Tyler Cowen’s recommendation.
If one of my high school students wrote the quoted sentence, it would receive a bad grade. The standard economic definition of public goods is that they are neither excludable nor rivalrous. That means that once the good is produced, it is hard to stop anyone from enjoying it, and one person’s enjoyment does not interfere with someone else’s enjoyment. National defense and pubic public safety are classic examples. Sanitary conditions in a city would qualify.
However, education and health care do not qualify as public goods under the standard definition. If it chooses to, a school or hospital can exclude non-paying customers from obtaining its services. And your use of a teacher’s or a doctor’s time can reduce my ability to use that person’s time.
Another characteristic of public goods is that the social benefits exceed the private benefits. One can make a case that vaccinations have that property. In theory, driver education would have that property also. However, for the most part, the benefit I receive from your education and health care is extremely low, particularly relative to the benefit that you receive from those goods.
In my opinion, casually making the case that government should pay for health care and education by asserting that these are public goods sounds to me like what Tyler would call “mood affiliation,” not sound reasoning. I hope that his endorsement of the book does not turn out to be mood affiliation.
Who Says Markets Work Perfectly?
I know of no Econ 101 course or its equivalent that talks just about “a world where free markets work perfectly and government intervention is always bad.” Zero, none, nada.
I can confirm that the AP economics curriculum, which is based on freshman economics, does not contain either the phrase or the implication that markets work perfectly and government intervention is always bad. On the contrary, it includes a major section on market failure and on government’s (presumably perfectly executed) role in correcting it.
When I see the phrase “markets work perfectly,” I know that I am going to see a straw-man argument against conservative economists. I know of no instance in which someone who is berated for believing that markets work perfectly has actually claimed to hold that belief. Zero, none, nada.
If you want to pass an ideological Turing test, then drop the phrase “markets work perfectly” from your vocabulary. What conservative economists do believe is that government has a propensity to fail that often exceeds the propensity of markets to fail.
In Debt to Social Engineering
What is needed, they argue, is to make debt contracts more flexible, and where possible, replace them with equity. Courts should be able to write down the principal of mortgages as an alternative to foreclosure. They recommend “shared-responsibility mortgages” whose principal would decline along with local house prices. To compensate for the risk of loss, lenders, they reckon, would have to charge a fee equal to 1.4% of the mortgage, or receive 5% of any increase in the value of the property.
Pointer from Mark Thoma. “They” are Mian and Sufi, in House of Debt. Avent argues similarly that student loans should have an equity component.
What these forms of bad debt have in common, in my view, is that they reflect clumsy social engineering. Public policy was based on the idea that getting as many people into home “ownership” with as little money down as possible was a great idea. It was based on the idea of getting as many people into college with student loans as possible.
The problem, therefore, is not that debt contracts are too rigid. The problem is that the social engineers are trying to make too many people into home “owners” and to send too many people to college. Home ownership is meaningful only when people put equity into the homes that they purchase. College is meaningful only if students graduate and do so having learned something (or a least enjoyed the party, but not with taxpayers footing the bill).
As long as we still have these sorts of public policies, monkeying around with the nature of the loan contract is simply doubling down on clumsy social engineering.
Computers and Go
The rate at which possible positions increase is directly related to a game’s “branching factor,” or the average number of moves available on any given turn. Chess’s branching factor is 35. Go’s is 250. Games with high branching factors make classic search algorithms like minimax extremely costly. Minimax creates a search tree that evaluates possible moves by simulating all possible games that might follow, and then it chooses the move that minimizes the opponent’s best-case scenario. Improvements on the algorithm — such as alpha-beta search and null-move — can prune the chess game tree, identifying which moves deserve more attention and facilitating faster and deeper searches. But what works for chess — and checkers and Othello — does not work for Go.
Pointer from Tyler Cowen.
My theory of skill at these sorts of games is that it involves making the correct move a high percentage of the time. With games that last many moves, eventually the weaker player will make a mistake. For example, I can get into a favorable position against Zebra Othello any time it plays a suboptimal opening, but I can almost never maintain my lead.
Another theory that I and others have is that top players use pattern recognition, based on experience. For computers, databases of games can be used to build experience and the ability to recognize patterns. The real dominance of computers in Othello took place when somebody accumulated a large database of games, so that the programs could start looking for statistical patterns in evaluating positions. My guess is that the same is true in chess.
My advice to “Go” programmers is to
1. Amass a large databases of games played by top players, with positions annotated in terms of quality at each step in the game.
2. Then, using your knowledge of Go, construct an algorithm that will rate a position by measuring its similarity to positions in the database and their ratings. (This is the hard part, and it is where the program will have to be constantly revised.)
3. Choose a move that produces a position that appears to least resemble a weak position in the database. That is, go for a mistake-avoidance approach.
Once a Go program gets good enough to come close to being able to beat a top player, the ability to use computer vs. computer games to enlarge the database will come into play. At that point, progress in computer Go will be very fast.
Matt Bruenig vs. Larry Summers on Piketty
He accuses Piketty of confusing gross returns to capital with returns net of depreciation. But in the book, Piketty specifically says that his figures are net of depreciation. If you want to quibble with his specific data or how he accounts for depreciation in it, then you can do that, but you can’t just say “I think he misreads the literature by conflating gross and net returns to capital.” He doesn’t conflate them. He’s careful to explain the importance of depreciation and tries to account for it.
Pointer from Mark Thoma. Unlike Bruenig, Summers is very clear to distinguish Piketty’s data from Piketty’s analysis. The data may include depreciation, but the analysis, in which Piketty argues for an elasticity of substitution between capital and labor greater than one, evidently does not include depreciation. I give this point to Summers, not to Bruenig.
Bruenig goes on,
Additionally, when economists start going into the substitution elasticity stuff (on which Summers himself admits there is not good data), they appear to me to be pushing Piketty into a physicalist capital framework that is totally different from what he is talking about. As I explained in a prior post, Piketty has a social constructivist account of capital. The “capital” he is discussing in his book refers to all tradeable assets that deliver passive returns, not just physical buildings and machines and the like. Models that try to show adding more machines will cause the rate of return to fall proportionally such that the owners of the machines won’t grab increasing shares of the national income do not actually address Piketty’s “capital.” Summers falls into that trap here.
Right. Who cares about all this neoclassical production function, Solow growth model stuff, anyway? Instead, give a “social constructivist account of capital,” and just make statements about how this capital accumulates, earns returns, and becomes concentrated in the hands of a few.
I can be sympathetic to that approach. I would be the last person to defend the neoclassical aggregate production function. But a “social constructivist account of capital” leaves a lot of room for reasonable people to disagree about whether Piketty has discerned the true nature of capitalism or is instead being highly speculative.