Monthly Archives: July 2014

Reputation and Regulation

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From a podcast with Russ Roberts and Mike Munger on ride-sharing and apartment-sharing services.

[Mike]It’s actually subversive of the state’s sort of traditional role of licensing and restricting access. And now we have–the whole world is basically Rotten Tomatoes, where you get by on peer to peer information about reviews, not just the reducing of transactions costs. But the quality. [Russ] Your reference to Rotten Tomatoes, I assume, is to the film site. Not to the– [Mike] Yeah, I try that in class sometimes. I ask my class what would happen if there were no FDA (Food and Drug Administration). It would be the Wild West. All sorts of drugs would be out there. You wouldn’t know what to do. And I say, Yes; what if there were no Federal agency in charge of reviewing movies? And they look at me and say, Well, there isn’t one.

But would we want a decentralized system for reviewing drugs? Do I trust a system that is not dominated by experts?

Reihan Salam on the Tea Party

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He writes,

Deep divisions notwithstanding, there are a number of principles that unite the movement. The most important is a devotion to subsidiarity, which holds that power should rest as close to ordinary people as possible.

Read the whole thing. He may be right in his description of leading politicians who claim allegiance to the Tea Party, but I do not think he describes the movement at a grass roots level. I think of it as ordinary Americans who are filled with resentment of Washington. They perceive that Washington takes care of its own, not them.

Banks as Secret Keepers

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Gary Gorton and co-authors write,

banks will choose to create private money by investing in projects that are less risky and more opaque; opacity makes the cost of information acquisition higher. Note that the implied allocation of projects between banks and financial markets does not rely on any comparative advantage that banks have in evaluating and overseeing its assets.

I like the basic picture of financial intermediaries as holding information-rich assets and issuing low-information liabilities. This is similar to George Gilder channeling Arnold Kling.

I am not convinced that banks’ comparative advantage comes from corporate debt being more opaque than corporate equity. I suspect that what differentiates 20th-century banks from other financial intermediaries is their relationship to the government.

Suggested Economic Priorities

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From the 125th anniversary WSJ edition. John Cochrane writes,

Washington is stuck because that serves its interests. Long laws and vague regulations amount to arbitrary power. The administration uses this power to buy off allies and to silence opponents. Big businesses, public-employee unions and the well-connected get subsidies and protection, in return for political support. And silence: No insurance company will speak out against ObamaCare or the Department of Health and Human Services. No bank will speak out against Dodd-Frank or the Securities and Exchange Commission. Agencies from the Environmental Protection Agency to the Internal Revenue Service wait in the wings to punish the unwary.

…in the end, only an outraged electorate will bring change—and growth.

That is a dire outlook, given my lack of faith in democracy. Right now, the only outraged electorate is the Tea Party, and (a) much of their outrage is currently directed at the immigration issue, which is not central to the crony capitalism that concerns Cochrane, and (b) they are strongly opposed by the forces of the establishment, particularly in the media.

Peter Huber writes,

Washington’s drug-approval process, grounded as it is in a one-size-fits-all perspective on how drugs are supposed to operate, and anchored in clinical-trial protocols and statistical methods developed decades ago, is lagging far behind the science. We need a regulatory process that can keep pace with a rapid proliferation of highly customized therapies that are grounded in a mechanistic understanding of molecular biology. This will require fundamental changes in clinical-trial protocols and in the type of evidence that is required for drug approval.

Richard Epstein writes,

we have to bid farewell to the egalitarian mantra that we can lift the nation up out of its doldrums by raising minimum wages to living wages, by tightening overtime regulation, by strengthening public and private unions, by expanding family-leave protection, by continuing with aggressive enforcement of the antidiscrimination laws based on race, sex and age, by imposing a health-care mandate on employers, and by extending unemployment benefits. The tragic truth is that these feel-good measures hit hardest at the bottom end of the labor markets, especially minority teenagers desperate to gain work experience.

Schucks

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David Henderson’s takeSchuck explicitly defends public choice from its critics, writing, “[P]ublic choice theory’s rational actor model explains and predicts far more observed official behavior than its main rival, public interest theory.” He then lays out how well public choice predicts the destructiveness of many government programs–programs that are destructive precisely because of the many perverse incentives that motivate politicians, bureaucrats, special interests, and voters. Schuck gives many historical and contemporary examples of government programs that cause large inefficiencies, including unemployment insurance (creates the incentive to stay unemployed); disability insurance (creates the incentive to claim disability and quit work); and the Dodd-Frank Act (creates moral hazard by broadening the government’s safety net for risk takers).

My take:

Schuck has an impressive grasp of neoclassical economics, but I think he gives it too much weight. Neoclassical economics is obsessed with the concept of equilibrium, and in turn it pays little attention to innovation. I believe that one of the biggest lessons of economics is the value of trial-and-error learning through entrepreneurial activity.

Incidentally, that is one of the important ideas that is, for all practical purposes, outside mainstream economics. The process of innovation has three steps: introducing experiments, learning from experiments, and evolving as a result of those experiments. The government is particularly inferior to the market when it comes to both experimentation and evolution. The government does not have the ability — or the will — to attempt as many experiments as private actors do. In the marketplace, when one organization won’t explore alternatives, another one often will.

Yuval Levin calls this the three-E’s model–experimentation, evaluation, and evolution.

What I’m Reading

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Where Does it Hurt?, by Jonathan Bush and Stephen Baker. Bush is W’s cousin, and I imagine there are many people who will not be able to read it because of their attitude about the family. Here is one quote that I liked:

I reached the conclusion not long ago that anger, either white hot or smoldering, is a fundamental fuel for entrepreneurs. They don’t have to be angry all of the time, of course; that would be no fun for anyone. But it helps if deep down they nurse some wound, grievance, or perhaps a sense of injustice.

I was very bitter in April of 1994 when I left Freddie Mac to start my Internet business. I had been shoved aside in a project that I had struggled to start at Freddie, and I was treated in a humiliating way. I called a staff meeting, and no one showed up. One of the staff members then explained that she had been named as my replacement.

I was motivated to do some things I would not have done ordinarily, including going out of my way to meet new people and to do sales, in part because I thought of succeeding in the business as a way of “getting back” at the people who I thought wronged me at Freddie.

Anyway, I have not read enough of the book to form an overall opinion.

The Case for Skepticism

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About a book by sociologist Duncan Watts, I write,

Watts’ book can be regarded as an extended argument in favor of what I might term Epistemological Skepticism about Social Phenomena, or ESSP. Those of us with ESSP believe that we should be skeptical about how much we can know with certainty in the fields known as the social sciences. We may learn things that are true for a majority of cases under specific circumstances. But we are less likely to find perfectly reliable, broadly applicable laws comparable to those found by physicists.

Further Remarks on Nonprofits

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I am thinking of the huge nonprofits that are dominant local economic enterprises, like UPMC or Washington U.

1. They are non-profit for tax purposes, but otherwise they behave like businesses. Administrators are well paid. They engage in business strategy, including mergers and expansions.

2. They exploit their non-taxable status, particularly in taking over land. You have a comparative advantage in building on land if you don’t pay real estate taxes.

3. Their CEO’s (or equivalent) have a lot of power, because they are not answerable to customers. I have said many times that a non-profit is like a for-profit except that it must satisfy donors rather than to customers.

Observations

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From visits to Pittsburgh, Cincinnati, and St. Louis.

1. A summary haiku:

Gentrification
Bike-friendly beyond all sense
Poor people moved…to where?

2. The dominant sectors are non-profits. Washington U once was located in a suburb. Now, along with St. Louis U, it is a colossus in the city. All three cities have vibrant hospital conglomerates, contributing to building booms and taking lead roles in philanthropic initiatives. We had people to visit in senior-living facilities in all three cities, and those facilities were very impressive.

3. Road construction projects are everywhere. Larry Summers should be happy.

4. Restaurants are another leading industry. Every chain, of course, but also many outstanding local restaurants. We ate better than we do in Washington (where we eat out very little).

5. In St. Louis, I biked from a suburban hotel to the arch, down a road where I would have feared for my life 40 years ago. With all the outdoor cafes along the way, it might have been Paris.

6. Went to a Cards game, of course. Those observations follow. Continue reading →

Conn Carroll’s Economic Proposals

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He writes.

If Republicans proposed limiting the mortgage interest deduction to just households with incomes below $200,000, and they eliminated the mortgage deduction for second homes, as well as the state and local tax deduction, the real property tax deduction, the state and local bond interest exclusion, and the investment income on life insurance exclusion, all of which predominately benefit wealthy households, they then could also cut the employee side of the payroll tax in half without adding a dime to the deficit.

The Room to Grow grab-bag eliminates the mortgage interest deduction twice, once each to pay for two separate tax credits. Obviously, you can only eliminate it once, and I prefer Carroll’s approach here.

Later, he writes,

Congress must stop punishing the working poor for getting married. Married couples should be allowed to keep their previously qualified for benefits through the first few years of marriage.

This sounds like a jerry-rigged solution to me. I think that the answer is to get rid of the steep benefit-eligibility cliffs for everyone. See my post on a universal flexible benefit.

Read his whole piece. I like it much better than Room to Grow.