Monthly Archives: September 2016

Tonight’s Debate

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I’m guessing that the people most motivated to watch will be those who already have made up their minds which of the two they are voting for. I have already made up my mind, not to vote for either one of them. And I will not watch. (Note: Peggy Noonan has encountered a lot of people who are undecided. That goes against my experience, but I don’t deny living in a bubble. I remember in previous elections Jonah Goldberg wondering who the heck these undecided voters were. I sympathize with his befuddlement.)

Also, I think that Gary Johnson deserves to be in the debate. The threshold of 15 percent in the polls may have been appropriate when the two major parties were nominating acceptable candidates. However, that is not the case this year. Simply being on the ballot in every state should qualify Johnson to be in the debates in a year when the majority of people have a negative view of both Mr. Trump and Ms. Clinton. I think that the threshold for keeping Johnson out of the debates should be that the polls show that the unfavorability ratings for the other candidates should be less than, say, 40 percent.

While I am on the topic of the election, Tyler Cowen recommends David Brooks. Brooks writes,

We have an emerging global system, with relatively open trade, immigration, multilateral institutions and ethnic diversity. The critics of that system are screaming at full roar. The champions of that system — and Hillary Clinton is naturally one — are off in another world.

There is a strong case to be made for an open world order, and a huge majority coalition to be built in support of it.

In the nearly twenty years since Brooks wrote Bobos in Paradise, coining the expression “bourgeois bohemians,” have the Bobos achieved the status of a “huge majority coalition”? My guess is that Peggy Noonan, based on her conversations with potential voters, would have doubts.

The guardians of the open world order helped encourage a revolution in Syria that became a civil war. The guardians of the open world order were unable to stop this civil war. The guardians of the open world order have yet to convincingly demonstrate that they can cope with the refugee problem created by this civil war.

I am not joining the anti-Bobos here. But I do think that one should not over-estimate the Bobo vote, and where Mrs. Clinton needs help is with people who are not Bobos. If you talk to them about an “open world order,” they are likely to want to know where the “order” part is going to come from.

As a final point, I endorse the view that democracy works best when elections do not matter much. Let us all hope that this election does not matter much, and that the system is robust enough that we can get through the next four years regardless.

A Congressional Regulation Office?

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Philip Wallach and Kevin R. Kosar write,

The office would have two core functions. First, it would perform cost-benefit analyses of agencies’ significant rules, which number around a hundred per year, in order to provide a disinterested check on agencies’ self-interested math. These CRO analyses would coincide with the prospective estimates that agencies themselves perform. This would create a legislative counterweight to the rule-review function of the Office of Information and Regulatory Affairs — which is nested within the OMB and thus the Executive Office of the President, and is therefore unable to provide a credibly neutral review process that goes beyond concerns internal to the executive branch.

The CRO’s assessment of a proposed regulation, like CBO’s bill scores, should be posted online and delivered to the committee of jurisdiction. Doing these things would increase the political salience of agency rulemaking, thereby fostering congressional oversight and encouraging policy entrepreneurs in the legislature to take up the subject. A CRO cost-benefit analysis should also be automatically submitted as public comment to the rule, which would oblige an agency response and possibly a recalibration of the rule.

Second, but perhaps just as promising, would be to have CRO perform periodic retrospective analyses informed by real data rather than forward-looking estimates. Agencies sometimes perform “look-back” assessments, but they are modest in number (certainly compared to the massive corpus of standing regulation) and produce only nominal changes. This is unsurprising, since each agency is passing judgment on its own work. CRO reports would regularly goad Congress to examine how the rules produced by existing laws are performing, such that they could work to revise those statutes that have yielded problematic results.

My thoughts.

1. Take the analogy with the Congressional Budget Office. People love the CBO, but its practical impact has been questionable. Since 1975, the Congressional budget process has become worse, not better. Congress has become more evasive of accountability, not less so.

2. The proposed CRO is a solution if the problem is that Congress lacks information about bad regulatory policy. But is that really the problem? The problem is that, as with the budget, there is not much collective will in Congress to set policy.

I think that we have the state of affairs that we do because politicians like it. That means either that the regulators are getting away with something without the public realizing it or the public is basically complacent about regulators running amok. I am afraid that it is the latter.

Would a CRO make the public less complacent? Well, CBO has not made the public any less complacent about the unfunded liabilities of Social Security and Medicare. Instead, the CBO’s main impact has been to increase policy makers’ hubris about the ability of deficit spending to create jobs.

In a better world, what are called “regulations” would be called “laws,” and every single last one of them would require Congressional votes. In an even better world, politicians in Washington would look at all the things that agencies are attempting to regulate and say, “Gee, we have no business doing that. We are not properly informed. We should only regulate in areas where we have a good set of information on which to base regulation.”

I don’t know how to get to a better world. Look, I love checks and balances in theory. And I don’t mean to discourage creative ideas for addressing what I agree is a serious problem. But I am afraid that I must assign a low probability to a CRO moving us in the right direction.

Economic Data in 1946

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Scott Sumner writes,

One commenter pointed out that RGDP fell by over 12% between 1945 and 1946, and that lots of women left the labor force after WWII. So does a shrinking labor force explain the disconnect between unemployment and GDP? As far as I can tell it does not, which surprised even me. But the data is patchy, so please offer suggestions as to how I could do better.

You could do better by taking the RGDP figure with a tablespoon of salt. The way that the Commerce Department adjusts nominal GDP for price changes is pretty unreliable for that period. Part of the reason is that there was so much shifting between public sector output (who knows how much of that is “real” vs. nominal?) and private sector output, and part of the reason is that as you move away from the base year (either many years ahead or many years behind) the adjustment process gets screwy. 1946 is now many, many years away from the base year that is used to calculate real GDP. I think that if you can find old publications from the Commerce Department, you will see very different patterns of real GDP for 1946, resulting from shifts in the base year from 1958 to 1975 to ….

I think that for 1946 you are safer sticking to nominal GDP numbers.

By the way, here is a piece I wrote on that period.

The Status of Status Games

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A commenter asks,

If beach volleyball is made an Olympic sport, does that lower the status of Usain Bolt? No probably not, but it does raise the status of beach volleyballers. What evidence is there that status is zero sum?

Within each status game, it is zero-sum. The 100-meter race can have only one winner.

But what about multiple status games? Does adding a status game lower the status of existing games?

I hope instead that with multiple status games, more people can be winners. I recall Tyler Cowen arguing that having multiple status games would be more conducive to social peace. Instead, if there is only one ultimate game, so that “status” can be reduced to a single dimension along which everyone has a rank, then conflict seems inevitable.

Friedman and Samuelson

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I think of Specialization and Trade as an attempt to redirect economics away from the path that it followed after the second World War. This recently produced the following train of thought.

Who has been the most influential economist since 1945? I am inclined to go with Paul Samuelson, and that is implicit in the book. But some people might have said Milton Friedman. In neither case, do I think that the influence on academic economists was good. [somewhat related: Tyler Cowen’s simple theory of recent intellectual history, which he apparently still propounds]

With the public, their impact differed. Friedman argued that people should admire markets and be wary of government. Samuelson said it the other way around. Those of us who agree with Friedman approve of Friedman’s influence. Those who agree with Samuelson disapprove of Friedman’s influence.

Back to academic economists. I think that both Friedman and Samuelson were guilty of promoting economic methods that involved imitating hard science (at least as they thought of science as being practiced). Instead, in my book I argue that economic analysis can yield frameworks of interpretation, but economic hypotheses are not verifiable the way that they are in chemistry or physics.

In macroeconomics, Friedman enjoyed influence starting in the 1970s, because the Solow-Samuelson Phillips Curve broke down and Friedman’s alternative view that emphasized monetary policy seemed to work better. However, my view is that both monetarism and Keynesianism are misleading as interpretive frameworks.

In fact, what started out as monetarism ultimately degenerated into deity-worship of the Fed chairman. First it was Paul Volcker, who slew the dragon of inflation. Then it was Alan Greenspan, the Maestro of the Great Moderation. Until in hindsight he became the Randian ideologue, who turned the banks loose to create a financial crisis. The crisis came on Ben Bernanke’s watch, and he is deified as the man who saved us from another Great Depression.

I think that the effect of each of those three on the economy is vastly over-rated. Instead, I think that financial markets and the economy in general simply took the course that they took, and story-tellers wrongly attribute the outcomes to the policies of the Fed at the time.

Testing for Housing Discrimination

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Commenting on an article by Sun Jung Oh and John Yinger, Timothy Taylor writes,

Overall, the findings from the 2012 study find ongoing discrimination against blacks in rental and sales markets for housing. For Hispanics, there appears to be discrimination in rental markets, but not in sales markets…

However, the extent of housing discrimination in 2012 has diminished from previous national-level studies.

What was most interesting to me was the method of testing for discrimination, which involved sending pairs of auditors of different races with otherwise identical characteristics to ask real estate agents for help finding apartments or homes. It would be interesting to see such a method applied to mortgage lending, rather than trying to make inferences from observed data.

Lunch Costs

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Abha Bhattarai writes in the WaPo:

An increasing number of Americans are ditching $10 sandwiches and $12 salads in favor of food from home, according to new data from the research firm NPD Group. Lunch traffic is slowing at restaurants around the country, with weekday lunch visits down 7 percent compared to a year ago, the steepest decline since the beginning of the recession, data show.

I found the article interesting, although I think you should take the statistical reporting with a grain of salt, pardon the pun.

I am not part of the dining-out culture, but I do not spend much time on food preparation.. Apart from a few fruits and vegetables, I tend to go with prepared foods from the store.

In general, I expect people to increase their consumption of food prepared by others. In a world of specialization and trade, the costliest lunch of all is the one that you spend a lot of time making yourself.

Child Care and Subsidized Demand

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Luke P. Rodgers writes,

Child care tax credits are intended to relieve the financial burden of child care expenses for working families, yet the benefit incidence may fall on child care providers if they increase prices in response to credit generosity. Using policy-induced variation in the Child and Dependent Care Credit and multiple datasets in both difference-in-difference and instrumental variable frameworks, I find evidence of substantial pass-through: between $0.73 – $0.90 of every dollar is passed through to providers in the form of higher prices and wages. Robustness checks confirm the pattern that the bulk of credits are crowded out by increased prices. Furthermore, the relative inelasticity of child care suppliers implies that increased non-refundable credit generosity may have the unintended effect of making child care less affordable for low-income families, though the magnitude of this conclusion is tempered by heterogeneous pass-through rates.

Pointer from James Pethokoukis.

I am surprised by the claim that supply is relatively inelastic. I wonder if that is true in the long run and, if so, why. Again, I do not think of the child care industry as politically powerful, so even though this perfectly illustrates my view that the public-choice outcome is subsidized demand and restricted supply, I want to be cautious about this one.

Once Again, Subsidize Demand and Restrict Supply

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John Cochrane writes,

Both Mr. Trump and Mrs. Clinton want to lower the cost and, presumably, increase the amount of child care. A quick economics quiz: What is the policy change that would have the greatest such effect?

I hope you answered: legal immigration of child care workers! And remove the large number of restrictions on providing child care.

In Specialization and Trade, I claim that public policy ends up subsidizing demand and restricting supply, which is almost always incoherent from the standpoint of traditional public goods. Usually, it is the suppliers of the good or service who push for such policies. However, the child care industry does not, as far as I know, have a formidable lobbying presence. Thus, I am inclined to bet that child care subsidies will not get very far in Congress.

Intellectual Yet Idiot

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Nassim Nicholas Taleb coins that phrase, writing

What we have been seeing worldwide, from India to the UK to the US, is the rebellion against the inner circle of no-skin-in-the-game policymaking “clerks” and journalists-insiders, that class of paternalistic semi-intellectual experts with some Ivy league, Oxford-Cambridge, or similar label-driven education who are telling the rest of us 1) what to do, 2) what to eat, 3) how to speak, 4) how to think… and 5) who to vote for.

I have had a couple of people compare my Specialization and Trade to Taleb’s work. For what it is worth, my thoughts on the similarities.

1. We both believe that highly-educated experts over-estimate what they know.

2. We both doubt the ability of “science” to understand the human world, including the economy.

3. We both think that statistical analysis as commonly practiced is unreliable.

4. We are both outsiders relative to academia at present.

I think that Taleb is a much more colorful writer. I tend to be more risk-averse, both in terms of substance and style.