Monthly Archives: May 2014

What I’m Reading

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It’s the book that you’re not supposed to read. A Troublesome Inheritance: Genes, Race and Human History, by Nicholas Wade. Robert VerBruggen reviews it.

An overarching theme is that while institutions matter greatly — just look at the difference between North and South Korea — it is possible that some institutions are better able to take root if certain genetic adaptations have already taken place. If human populations in some parts of the world, but not others, evolved slightly higher levels of trust, a slightly greater tendency toward nonviolence, and so on — perhaps because population density forced them to live in close proximity to each other, abandon tribalism, and develop states — that might help to explain why some populations have become unusually peaceful, democratic, and economically productive.

It seems that many people disagree with parts of the book, although they disagree with different parts. If I were Brad DeLong, I might say that this proves that the book is basically right. But I’m not and I won’t.

On Freedom of Speech

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Fredrik DeBoer writes,

undermining rights works both ways. This is going to happen: sooner or later, some CEO or sports team owner or similar is going to get ousted because he or she supports a woman’s right to an abortion, or the cause of Palestinian statehood, or opposes the death penalty. It’s inevitable. I can easily see someone suggesting that, say, Israel is an apartheid state, and watching as the media whips itself into a frenzy. And when that happens, the notion that there is no such thing as a violation of free speech that isn’t the government literally sending men with guns to arrest you will be just as powerful, and powerfully destructive, as it is now. So what will these people say? I don’t have the slightest idea how they will be able to defend the right of people to hold controversial, left-wing political ideas when they have come up with a thousand arguments for why the right to free expression doesn’t apply in any actual existing case. How will Isquith write a piece defending a CEO’s right to oppose Israeli apartheid? A sports owner’s right to do the same? I can’t see how he could– unless it really is just all about teams, and not about principle at all.

Read the whole thing. The piece came up in comments on this post.

Perhaps it is the case that generically certain forms of speech are being declared “unacceptable” by mobs, either on the right or the left. That is what concerns DeBoer.

Another possibility, raised in the comments on my earlier post, is that the progressive “elect” is confident of its moral superiority and its dominance of the media. Hence, it does not have any worries about becoming a victim of speech suppression by the mob.

Going back to Joseph Bottum’s thesis, I think it is a fair worry that politics has become infused with religious meaning. His thesis is that progressives, as the heirs to mainline Protestantism, hold the upper hand in this religious contest. So even if I am correct, and there is an element of religiosity in all political outlooks, the religion that most threatens to become the established church in this country is progressivism.

I hope that America’s historical resistance to an established church asserts itself in this case. That is, I hope that the backlash against the religious conformity of the progressive movement will prove ultimately to be more powerful than the movement itself.

Robert Murphy, Capital, and the Cambridge Controversy

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He writes,

If a firm hires a specific capital good for a unit of time, the payment is the rental price of the capital good. For example, suppose that a warehouse pays $100,000 per year to an independent company that maintains fleets of forklifts. These annual payments are clearly due to the “marginal product” of the forklifts; the warehouse can sell more of its own services to its customers when it has use of the forklifts.

However, these technological facts tell us nothing about the rate of interest enjoyed by the owners of the forklifts. In order to determine that, we would have to know the market price of the forklifts. For example, if the forklifts that the independent company rents out to the warehouse could be sold on the open market for $1 million, then their owners would enjoy a 10-percent return each year on their invested capital. But if the forklifts could be sold for $2 million, then the $100,000 payments—due to the “marginal product” of the forklifts—would correspond to only a 5-percent interest rate. As this simple example illustrates, knowledge of the marginal product of capital, per se, does not allow us to pin down the rate of interest.

I am not sure what to take as exogenous and what to take as endogenous. My inclination would be to treat the interest rate and the marginal product of forklifts as exogenous and the market price of forklifts as endogenous. That is because I was brought up by the folks who lost the Cambridge controversy but went ahead writing down neoclassical production functions, anyway. While Murphy comes from yet another tradition, I doubt that he has the same agenda as, say, Jamie Galbraith.

Let’s back up, though, and try to think of a general equilibrium model. (Nick Rowe does something similar, with diagrams.) Continue reading →

Me on Greg Clark’s Latest

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I write,

his findings argue against the need to create strong incentives to succeed. If some people are genetically oriented toward success, then they do not need lower tax rates to spur them on. Such people would be expected to succeed regardless. The ideal society implicit in Clark’s view is one in which the role of government is to ameliorate, rather than attempt to fix, the unequal distribution of incomes.

The book I am reviewing is The Son also Rises, in which Clark argues that social status is highly heritable everywhere in spite of many differences in institutional rules. I spend a lot of the review talking about the statistical basis for Clark’s work.

SNEP Solution: Alternatives to the FDA Process

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One of the problem areas is anachronistic regulatory models. The FDA drug approval process is onerous. The FDA acts as if the worst error that it can make is to approve a drug that it later regrets approving. Essentially, it treats every drug as snake oil unless proven otherwise. As scientific progress speeds up, the FDA process turns into a significant bottleneck.

Bartley J. Madden and Gregory Conko propose,

However, after making a preliminary demonstration of safety and efficacy by completing Phase I trials and at least one Phase II trial, drug manufacturers would be given the option to place an experimental product on a parallel Free To Choose track that would enable patients, advised by their doctors, to make an informed choice to use the experimental drug. Drug makers could opt to continue pursuing a standard FDA approval—with all the attendant clinical testing that would require—concurrent with placing a drug on the Free To Choose track. Or, they could put off standard FDA-regulated clinical trials indefinitely, using Free To Choose track experience to guide future development decisions and randomized control trial designs.

Thanks to Alex Tabarrok for pointing me to the article. However, I think that there may be other instances in which the social cost of denying access to a drug is high relative to the risk that the drug will cause harm.

Somebody who is dying or enduring great suffering might have little or nothing to lose from trying an unproven remedy even before Phase I trials are complete.

As medicine becomes more customized, to the genetic makeup of the patient (or, in the case of cancer, the genetic makeup of the tumor), a question arises as to what is the relevant population for a clinical trial.

Two Affirmations

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1. From Jason Potts.

For conservatives, public funding of arts and culture is worthy when it supports the values of civilisation, which means a John Ruskin type view of the best of cultural heritage: museums, galleries, botanical gardens and opera will always do well here. What this group is hostile to are threats against that – barbarism – which come from the transgressive, edgy frontiers of arts and culture.

He offers a three-axis model take on arts funding.

2. From Tim Harford.

People are too used to the idea that someone else – the state or an insurer – will pay the bill. Free choice is nice but what everyone seems to prefer is free treatment.

Pointer from Mark Thoma. I call it the desire to be insulated from paying for health care.

The Elite vs. The Elect

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This lecture by Joseph Bottum was three months ago. It is based on his book An Anxious Age.

I do not think I can do justice to it in a blog post. In fact, the Q&A may be the best part, even though he seems to be rambling in his answers.

I might describe the overall theme as being that liberal-progressive politics is a substitute religion that is Protestant in character, with progressives serving as the elect. A few comments.

1. Although he is hardly the first person to offer this hypothesis, he is perhaps the most eloquent.

2. It is a very uncharitable hypothesis. It violates the Caplan Turing test (no progressive would recognize himself or herself in Bottum’s description).

3. Jonathan Rauch, during the Q&A, points out that if one were to apply similar reasoning to the Tea Party, it might also come across as a substitute religion. I think that Bottum’s best answer is to suggest that the Tea Party religion emerges as a reaction against the progressive religion.

4. The news in recent weeks has prominently featured the severe punishment meted out to business executives for violating speech norms. This may fit the religious zealotry paradigm.

5. Bottum suggests that a better term for progressive intellectuals than “elite” is “elect.” A difference is that an elite must prove its merit. An elect starts from an assumption of superiority and proceeds from there.

I am most interested in this last point. I think that it raises some interesting questions:

Do conservatives and libertarians also have an “elect” mindset? By that, I mean a mindset in which you believe that you occupy a moral high ground that others do not.

I believe that the three-axes model would say that conservatives and libertarians also have an “elect” mindset. It would say that the progressives think of themselves as the elect that fights for the oppressed against the oppressors, conservatives (including Bottum) think of themselves as the elect that fights to preserve civilization against barbarism, and libertarians think of themselves as the elect that fights for liberty against coercion.

As an aside, On my Krugman/Rothbard post, a commenter wrote,

Surely Rothbard’s intellectual lows of racism, sexism, and homophobia are lower than Krugman’s straw man arguments.

Bottum would put this comment squarely in the column of the new Protestantism. The evils of racism, sexism, and homophobia are, according to Bottum, examples of the metaphysical evil that has replaced original sin, witches or the devil. I got the sense that the commenter is excusing Krugman’s unreasonable tactics by using Rothbard’s views on race, gender, and sexual orientation as some sort of moral trump card. I hope that interpretation of the comment is wrong.

I cannot speak for Rothbard’s admirers, having never been one myself. But it would not surprise me if some of them share, or at least are willing to excuse, his troglodyte opinions. The point I was making in my original post is that both Rothbard and Krugman attract rabid followers who would never question the master’s words. Whereas with me, you will often have commenters who write, “I usually agree with you, but in this instance….” And I prefer that sort of audience.

The World is Complicated

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Tyler Cowen quotes Aaron Hedlund:

The flaw with both of these models, of course, is that they are representative household models where there is no inequality.

Fair point, but I do not see this as a fatal flaw in trying to adapt the Solow growth model to a theory of inequality. Suppose you have two types of representative households–workers and capitalists. The capitalists do all the saving.

The real trick, which is just as tricky in a model with one type of representative household, is to get the capital/worker ratio to rise without the return on capital falling. At most, that can happen for a while–not indefinitely.

Robert Higgs asks the Huemer Question

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He writes,

(1) Who do these people—that is, the state’s kingpins, Praetorian guards, bootlickers, and key private-sector supporters—think they are to treat us as they do?

(2) Why do nearly all of us put up with the state’s outrageous treatment?

…As for why we submit to the state’s outrages, the most persuasive answers have to do with fear of the state (and nowadays, for many, fear of self-responsibility as well), with apprehension about sticking one’s neck out when other victims may fail to join forces with those who resist first and, probably most important, with the ideological “hypnosis” (as Leo Tolstoy characterized it) that keeps most people from being able to imagine life without the state or to understand why the state’s claim to intrinsic immunity from the morality that binds all other human beings is the purest bunk.

Pointer from Don Boudreaux.

I believe that the answer is what I call FOOL–Fear Of Others’ Liberty. That is, we tolerate restrictions on our liberty because we want to live in a world where others’ liberty is restricted.

Elsewhere, Matt Mitchell quotes Higgs.

I believe crony capitalism—the alliance between business and government—is the biggest problem of our age. And the reason is that it is robust. As alternatives to free-market capitalism, communism and old-fashioned fascism are thankfully dead. And genuine socialism has no real constituency in America. But crony capitalism, unfortunately, has a very active, organized, well-funded, and vocal constituency. It is the greatest threat to our prosperity and our freedom.

These days, there are many people, not just big-time capitalist cronies, who benefit from government economic restrictions. People in licensed occupations, for example, will have Fear of Others’ Liberty.

SNEP Solution: Flexible Benefits and Extreme Catastrophic Health Insurance

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The problem is high implicit marginal tax rates on many people who are eligible for benefits from means-tested government programs. I think that a generic solution might consist of flexible benefits.

One approach would be to replace all forms of means-tested assistance, including food stamps, housing subsidies, Medicaid, and the EITC, with a single cash benefit. For this purpose, we might also think of unemployment insurance as a means-tested benefit.

The classic approach is the negative income tax. What I would suggest is a modification of the negative income tax, in which recipients are instead given flexdollars. These would be like vouchers or food stamps, in that they can be used only for “merit goods:” food, health care/insurance, housing, and education/training. One way to think of this is that it takes the food stamp concept and broadens it to include the other merit goods.

Flexdollars would start at a high level for households with no income and then fade out at rate of 20 percent of the recipient’s adjusted gross income. This “fade-out” would act as a marginal tax rate on income, so we should be careful not to set the fade-out rate too high.

Suppose that a household receives $7500 in flexdollars per member. Thus, a family of four with zero income would receive $30,000 in flexdollars. A family of four with $20,000 in income would lose 20 percent of $20,000, or $4,000, to fade-out, and hence would receive only $26,000. A family of four with a $50,000 income would receive $20,000. A family of four with a $100,000 income would receive $10,000. A family of four with a $150,000 income would receive nothing.

At the end of the year, unused flexdollars could go into flexible savings accounts. Tghese could be used for medical emergencies, down payments when buying a home, or to save for retirement.

There are two ways in which this represents an improvement over the current approach. First, it ensures that implicit marginal tax rates are low for benefit recipients. As it is now, people with low incomes easily can find that if they work they lose more in benefits than they obtain in pay. I think that is very corrosive, and I would put a high priority on restoring the incentive for people to work, while still giving them the means to meet basic needs.

The second benefit is that it gives recipients more flexibility and choice. Just as food-stamp recipients can decide for themselves what groceries to buy, flexdollar users can decide for themselves how much to allocate to housing vs. food vs. training.

One problem with a negative income tax or with flexdollars is that some families are needier than others, particularly with respect to medical issues. Someone with a lot of ailments and little in the way of resources will not have enough flexdollars to pay medical bills (remember that there is no longer Medicaid in this approach).

The solution I would propose would be to have taxpayers provide extreme catastrophic health insurance that kicks in if a household’s medical expenses exceed $30,000 in a year. For every additional dollar of medical expenses over $20,000, the government would pay 90 percent. For example, a household requiring $100,000 would receive $72,000. Of course, households would be permitted to obtain private insurance to cover lower levels of spending and/or to cover the remaining 10 percent of higher levels of spending. Overall, this idea bears some resemblance to the idea of “catastrophic reinsurance” that was floated about ten years ago.

I am thinking that we would eliminate Federal support for unemployment compensation. Instead, perhaps a private-sector form of unemployment insurance might emerge, and households would be able to buy this using flexdollars. If it turns out that nobody wants to spend their flexdollars on unemployment insurance, then that might be a sign that unemployment insurance is not such a great thing.

It might be best to phase in implementation. The first phase might be to fold in the EITC, food stamps, housing vouchers, and health insurance subsidies. Those are all programs that already take the form of cash or vouchers given to households. A later phase would be to replace Medicaid and unemployment insurance with flexdollars given to households. (Of course, if states want to continue to continue Medicaid or to provide unemployment compensation, without any Federal dollars to support the, they are welcome to do so. I doubt that would happen.) Another phase would be to wind down all forms of housing assistance, mortgage subsidies, Federal aid to education, training programs, Pell grants, and student loan programs, and replace these with flexdollars.

One challenge with implementation is in deciding which goods and services are eligible for flexdollars. Just as the food stamp program has to decide which groceries are eligible, the flexdollar program has to decide what counts as eligible medical services, housing services, and education services. Yes, that opens up the floodgates for lots of rent-seeking. If that gets really out of control, then it would be better to give people a straight cash benefit.

This is just a concept I am toying with. Criticism welcome.

Note that I once wrote an essay that I called The FlexDollar Welfare State that was not about an idea of this character. Instead, the essay criticized the George W. Bush Administration’s domestic policy initiatives. Actually, the best thing about the essay is the discussion of the oxymoron of “company benefits.”

What is interesting is that workers are not naturally suspicious of companies that pay “good benefits.” Apparently, most people believe that “good benefits” reflect generosity and sharing by the company, rather than a shrewd, calculated effort to save on compensation costs. My guess is that the people who see through the scam of “good benefits” tend to gravitate toward self-employment, which allows them to take their payments in cash and buy benefits themselves.