Monthly Archives: June 2016

John Goodman on a new Health Reform Proposal

Posted on by

Summarized here. Twelve points, including

Health Status Insurance: For the first time, people with pre-existing conditions will have real protection against discrimination and against the “race to the bottom,” reflected in narrow networks and high drug costs for the chronically ill. Risk adjustment between health plans (similar to Medicare Advantage) will insure each plan receives an actuarially fair premium when receiving an enrollee from another plan. (Plans will not benefit by seeking the healthy or avoiding the sick.) Plans are free to voluntarily agree to better risk adjustments, so there will eventually be free market risk adjustment. We expect plans to eventually specialize, with some plans becoming focused on cancer care, others on heart care, etc.

…Grandfathering. To minimize potential disruption, self-insured employer plans and labor union plans may elect to remain in the current tax system. Individuals with insurance obtained from an (ObamaCare) exchange may elect to remain in that system.

The latter is this proposal’s version of “if you like your plan, you can keep your plan.”

I happened to run into John last week, and he was very enthusiastic about the plan. I expressed my doubts about something like this getting anywhere with a Trump candidacy, and he said that he was actually optimistic. But when I pressed him, John admitted that “Trump is hard to get to see.”

We’re all normative sociologists now

Posted on by

Commenting on a paper that looked at clusters of citations in economics research and found evidence of ideological tribalism, Tyler Cowen writes,

Berkeley and MIT have the saltiest taste, while Minnesota and Rochester are the freshest of the fresh. Chicago has a more neutral set of citation practices than many economists (not I) might think. Chicago cites saltwater school papers at a higher rate than the general average, nonetheless Chicago ends up strongly in the freshwater camp because it is cited so much by other freshwater schools, and not so much by the saltwater schools. A cynic might wonder if the Chicago economists are more open-minded than their critics, and I must confess that is consistent with my own anecdotal experience.

Robert Nozick once wrote of

Normative sociology, the study of what the causes of problems ought to be

In my new book, without using the term normative sociology, I give the example of different views of the cause of lower average wages for women. Using Nozick’s formulation, sociologists study gender bias and power, which they believe should cause the problem. Economists study human capital and lifestyle choice, which they believe should cause the problem.

In the book, I claim that economics is not a science. The usual narrative for scientific progress is that someone observes a phenomenon, comes up with an insight to try to explain it, turns that insight into a testable hypothesis, and tests the hypothesis. The problem in the disciplines that study social phenomena is that hypothesis tests never seem to be definitive, for familiar reasons, some of which are stated in the book.

In the book, I say that economists create interpretive frameworks, and that we have a hard time choosing from among different frameworks. Thinking about it further, I would say that in the absence of definitive empirical testing, economists are tempted to champion frameworks that focus on what they think the cause of a problem ought to be. If you’re pro-market, you think that the cause of the crisis of 2008 ought to be Fed misbehavior or housing policy. If you’re pro-government, you think that the cause of the crisis ought to be deregulation.

Of course, the best thing to do would be to come up with something better than normative sociology. Meanwhile, however, I think it would be better if we were to admit that is what we are doing. I we did, then I think we would be better off than we are now, when we think that we are applying scientific standards. Believing that science is possible leads to a mindset that thinks, “I’m doing science. Those guys are just investigating what they think ought to be the causes of the problem.”

Rep. Hensarling on Risk-Based Capital

Posted on by

He said,

Risk-weighting is simply not as effective. First, it is far too complex, requiring millions of calculations to measure capital adequacy. Second, it confers a competitive advantage on those large financial institutions that have the resources to navigate its mind-numbing complexity. Third, regulators have managed to get the risk weights tragically wrong, for example, treating toxic mortgage-backed securities and Greek sovereign debt as essentially risk-free. One myopic globally imposed view of risk is itself risky. Finally, risk-weighting places regulators in the position of micro-managing financial institutions, which politicizes credit allocation. Witness the World Bank recently advertising its zero risk rating under the Basel Accords for their “green bonds.”

Clearly, he understands what I call The Regulator’s Calculation Problem. Pointer from John Cochrane.

Read the rest of John’s post and weep. Weep because this could have been a year when a strong center-right Republican Presidential candidate, running on an agenda that includes these sorts of proposals, could have been so easy to support.

Timothy Taylor on Economic Epistemology

Posted on by

He writes,

There’s a widespread quick-and-dirty version of the relationship between theory and empiricism in economics, which is that one first creates theories, tests those theories with data, and then iterates with new theories and empirical tests. But in the 21st century, I’m not sure anyone really believes this. It’s well-known that you can create an internally consistent theory to reach pretty much any conclusion you want, as long as you tinker with the underlying assumptions. Moreover, it’s well-known that when doing empirical work, one can try out a bunch of different statistical tests until you find one that reaches the conclusion you want. To make matters worse, there’s no particular reason to believe that if some particular economic theory is validated by some particular empirical estimate in one context that it will also hold true in all other times and places. These concerns prove the case that a social science is not a natural science, but it would be as severe overreaction to hype them up into a claim that social sciences can’t lead to meaningful knowledge.

In my new book, I argue that economics is not a science. I say that we deal primarily in non-falsifiable frameworks of interpretation, rather than non-falsifiable hypotheses. Taylor’s comments speak to some of the reasons that this is the case.

The problem becomes how to evaluate competing frameworks if scientific epistemology (i.e., falsificationism) does not apply. Taylor is discussing essays by Harrod and Keynes, who, each in his own way, seems to argue for an “I’ll know it when I see it” approach to evaluation. However, I think we should try harder to spell out the criteria that are most helpful.

Megan McArdle on the Climate Debate

Posted on by

She writes,

It would be a lot better for everyone — including the planet — if we left off the tribalism and the excommunications and went back to actually talking about the science: messy, imprecise and always open for well-grounded debate.

Read the whole thing. I am, like McArdle, reminded of macroeconometrics when I see statements based on climate models. Which is why I am a skeptic.

Jason Furman’s Puzzle

Posted on by

He writes,

In the absence of economic rents, the return on corporate capital should generally follow the path of interest rates, which reflect the prevailing return to capital in the economy. But over the past three decades, the return to productive capital generally has risen, despite the large decline in yields on government bonds.

Pointer from Mark Thoma.

For a moment, think that there is just one interest rate. If “the” interest rate is low, then the rate of return on new capital ought to be low. Otherwise, firms would borrow at the low interest rate in order to purchase new capital.

One possibility is that the marginal return on new capital is low, but the returns on existing capital are high. That would be true in an economy where there are economic rents available, due to monopoly power and/or government favoritism. I gather that this is the story that Furman thinks is right.

I would note that there is more than one interest rate. It could be that there is a high interest rate charged to firms that are trying to invest in new capital at the margin. Microsoft can borrow at a low interest rate, but when it buys Linked-In that is not new capital investment.

Despite that possibility, my inclination is to believe that Furman is onto something. Read his whole essay.

James Surowiecke on the Universal Basic Income

Posted on by

He writes,

One striking thing about guaranteeing a basic income is that it’s always had support both on the left and on the right—albeit for different reasons. Martin Luther King embraced the idea, but so did the right-wing economist Milton Friedman, while the Nixon Administration even tried to get a basic-income guarantee through Congress. These days, among younger thinkers on the left, the U.B.I. is seen as a means to ending poverty, combatting rising inequality, and liberating workers from the burden of crappy jobs. For thinkers on the right, the U.B.I. seems like a simpler, and more libertarian, alternative to the thicket of anti-poverty and social-welfare programs.

Pointer from Mark Thoma. A few thoughts of mine:

1. The apparent left-right consensus breaks down if in the last sentence the left is thinking that the word “alternative” should instead be “in addition to.”

2. There is a question of how to finance the UBI. For those on the right, the answer is by getting rid of the other programs. For those on the left, it may be less clear. See (1).

3. The existing approach to anti-poverty programs fits with what in my forthcoming book I describe as real-world economic policy: stimulate demand, restrict supply. Food stamps stimulate demand for food. Housing subsidies stimulate demand for housing. Student loan subsidies stimulate demand for accredited colleges. Medicaid stimulates demand for medical services.

A UBI would allow the recipients to decide on their own priorities. It thus lacks the base of support that the other programs have.

Yuval Levin praises my book

Posted on by

Actually, he praises two of them.

His 2013 book The Three Languages of Politics is a great example of that. The book sheds a bright light on our political life by arguing that progressives, conservatives, and libertarians tend to see political questions as arrayed along three distinct axes: Progressive think about politics along the oppressor/oppressed axis; conservatives think in terms of the civilization/barbarism axis; and libertarians think in terms of the freedom/coercion axis. . .Try that insight on for a minute as a lens through which to look around at our politics and you’ll find that an awful lot of our debates make much more sense.

Kling’s latest book, out this week and available practically for free on Amazon, is to my mind his greatest contribution yet. Specialization and Trade: A Re-introduction to Economics, is as ambitious as its subtitle suggests. Kling argues that our understanding of the fundamental character and purpose of the discipline of economics has been distorted by the form that the professionalization of the discipline has taken.

Those are just excerpts. More kind words at the link.

Neoliberalism vs. Socialism

Posted on by

Scott Sumner is frustrated.

The is no plausible argument that Hong Kong’s success is in any way a success story for statism, and there is no plausible argument that Greece’s failure has anything to do with neoliberalism. To suggest otherwise is to engage in The Big Lie. So what does this mean?

Read the whole thing.

Let me try, in a somewhat charitable way, to express what I believe is the mindset of the left.

1. Start with the assumption that there is a science of government. I need to credit Jeffrey Friedman with influencing me to articulate this assumption. Note that everyone uses the term “social science,” even though Jeffrey and I would argue vehemently that economics, sociology, et al, are not sciences.

2. If there is a science of government, then there is no reason to tolerate market failure. Since market failure is widespread, government intervention should be widespread.

3. If there is a science of government, then government failure is avoidable. Government failure only results from leaders not heeding the scientists.

4. If there is a science of government, and people on the right believe in markets, then they must believe that markets are perfect. They are clearly wrong about this.

According to this scheme, the key to intellectually overcoming the left is to get people to concede that there is no science of government. And in particular, it means taking economics down a peg. That is what Jeffrey is trying to do with his next book, and it is what I try to do in the book that will be out later this month.