Monthly Archives: December 2016

How Would I Fix the Rust Belt?

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A commenter asks,

As libertarian economist, what do you recommend for WWC [white working class] in the Rust Belt. Paul Krugman is right the jobs in these areas aren’t coming back no matter what happens to China. And it is really hard to solidify a culture without private investment. (And no David Brooks Sullivan Travels nonsense is not the answer.) Do we teach these kids to work hard to basically get the hell out like the urban inner cities of the 1980s?

1. I could dodge the question, and say that as a libertarian I leave it up to the WWC in the rust belt to figure it out.

2. How are all those programs to alleviate African-American urban poverty workin’ out for ya?

3. I think that what the Federal government does poorly is administer programs at a national level–see (2). What it does well is hand out money. So here is what I would recommend:

First, come up with some criteria for determining a low-income geographic region. Something like the bottom 20 percent of counties in terms of median income. (County is not the right geographic unit, but you get what I mean.) Hand over some Federal tax money to the governmental units in those regions. In addition, give a very large subsidy to any organization that builds a new facility that employs at least 1000 people in one of those regions or which relocates a facility from a high-income region to one of those regions. Even if the facility does not hire from the local community itself, the multiplier effects should be favorable.

The State of Arab Youth

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From a UN development report press release.

Today, youth in the region are more educated, more connected and more mobile than ever before.

Pointer from Timothy Taylor.

We know from Martin Gurri’s The Revolt of the Public that this is a mixed blessing. Indeed, also from the press release:

increasing levels of armed conflict are destroying the social fabric of the Arab region, causing massive loss of life not only among combatants, but also among civilians. Conflicts also are also reversing hard-won economic development gains by destroying productive resources, capital and labour, within a larger territory neighbouring countries where they are fought. Between 2000–2003 and 2010–2015, the number of armed conflicts and violent crises in the region have risen from 4 to 11, and many of them are becoming protracted in nature.

The Donald Trump Movie

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Tom Palmer writes,

A common theme among populists is to empower a leader who can cut through procedures, rules, checks and balances, and protected rights, privileges, and immunities and “just get things done.”

In other words, Donald Trump is Dirty Harry. In the American collective unconscious (I have instantly become a Jungian, after watching a semester’s worth of Jordan Peterson lectures last week), there is a generic movie about a rogue cop. The bureaucrats try to use rules to hem him in, but he breaks the rules in order to stop the bad guy. Of course, there were precursors of Dirty Harry long before 1971, when the movie appeared. The hero who has to break a few dishes because the system is to corrupt to do its job is an ancient story.

Think of the election in 2016 in those terms. Think of Mr. Trump as the rogue cop, and think of the public as the audience. The press and other elites are the soft-headed folks trying to get him to play by the rules. But the more obstacles they put in his way, and the more defiant he is, the more the audience roots for him.

Consider another movie, One Flew Over the Cuckoo’s Nest. Again, the audience roots for the rogue, Randle McMurphy, against the representative of order, Nurse Ratched. Try that one on.

I seem to be taking in a lot of input these days from very erudite individuals whose outlook I might describe as seeing evil welling up in the collective unconscious–on the left as well as on the right. If you don’t like that phrase, I could say it in more words, as Tom Palmer does (read the whole thing). Or you could look at some data on authoritarianism among millenials (pointer from Tyler Cowen). Or you could look at Peter Turchin’s new book, Ages of Discord.

WaPo Watch, Week 2

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Again, this is sort of a trial run. The idea is to work out the best approach for doing it. I agree with the commenters who say that someone other than me should take on this project. If someone is interested in taking it on, perhaps along with a similar project for the NYT, they should get in touch with me, and we can brainstorm how to fund it.

My current thinking is that there are three types of bias. First, the headlines and lead paragraphs sometimes do a lot of editorializing, as in the first story on the phone call between Mr. Trump and Taiwan’s President.

Second, there are double standards in choice of emphasis, as when the Post tells the “Steve Bannon is controversial” story in a way that makes Bannon seem totally beyond the pale but tells the “Keith Ellison is controversial” story in a way that endorses neither Ellison nor his opponents. I do not have a problem with the Ellison story, but I do have a problem with the disparate treatment given to Bannon.

Third, there is the “world view confirmation” bias of the Metro section, the Style section, and the Sunday Outlook section. That is, each contains essays or stories that make progressives feel good about their world view, with much fewer pieces that might give progressives reason to doubt or reconsider in any way.

Also, I am finding that a binary classification system of “bias or no bias” is not the best scheme. I would feel much better assigning bias points to pieces, which could range, say, from 0 to 5, with 0 for no bias to 5 for extremely high bias. Using this system, the initial story on the China phone call would get the full 5 points for editorializing. For each week, you would have a scorecard giving the number of progressive bias points and the number of anti-progressive bias points.

For now, and probably in general, the actual scoring is less important than explaining my thinking on the various pieces.
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Noah Smith on Labor Supply and Demand

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He writes,

What is a better theory of the labor market? Maybe general equilibrium (which might say that immigration creates its own demand). Maybe a model with imperfect competition (which might say that minimum wage reduces monopsony power). Maybe search and matching theory (which might say that frictions make all short-term effects pretty small). Maybe a theory with very heterogeneous types of labor. Maybe something else.

Pointer from Mark Thoma.

This is the middle of the movie, so to speak. At the start of the movie, Smith looks at two stylized facts about the short run. One is that an immigration surge has little effect on wages. This suggests that labor demand is highly elastic. The other is that a minimum wage increase has little effect on employment. This suggests that labor demand is highly inelastic. It cannot be both.

Of course, you do have the option of denying the veracity of one or both stylized facts. But I do not want to go there. I vote for “very heterogeneous types of labor.” There is no such thing as “aggregate labor demand” in the labor market. There are patterns of specialization and trade. And these tend to be sticky, both in terms of wages and the quantity of each type of worker employed.

The “labor market diagram” makes it appear that you can have either a sticky wage or a sticky quantity of labor, but not both. Behind this (false) theorem lies the presumption that it is very easy to substitute among workers. This is an instance in which mathematical modeling serves to confound rather than help the modeler.

In fact, workers are specialized. Even relatively unskilled workers have been trained to perform their particular tasks. The substitutability that is implicit in the labor market diagram does not exist in the real world.

Labor market adjustment comes primarily from changes in the patterns of sustainable specialization and trade. Because it takes time for old patterns of trade to become unsustainable and for new sustainable patterns to form, neither wages nor quantities change as much in the short run as they do in the long run.

The effect of the minimum wage in the short run on existing firms can be small. They mostly just suck it up and pay the higher wage. However, over time, there will be a tendency for processes that use low-skilled workers to be less profitable and processes that instead use capital and high-skilled workers to be relatively more profitable. So the patterns of specialization and trade that break up will tend to be those that have been employing low-skilled workers, and the new ones that form will tend to employ fewer low-skilled workers than would have been the case otherwise.

As for immigration, what Noah calls general equilibrium I call creating new patterns of specialization and trade. There is no “lump of labor demand” that immigrants and natives are competing to fill. Firms do not say, “Oh, goody. Now I can now fire my native workers and hire immigrants for $1 an hour less.” Instead, entrepreneurs who are thinking of starting firms ask, “Where can I get the best workers for the least cost?” And in many cases immigrants are the answer. As this process plays out, my guess is that the main wage-depressing effect is on native workers just entering the labor force. But of course a lot of them have specialized skills that insulate them from competition from immigrants. So the effect on natives’ wages is limited in scope and stretched out in time.

Ideology and Polarity

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Jordan Peterson says,

In a sophisticated religious system, there is a positive and negative polarity. Ideologies simplify that polarity and, in doing so, demonize and oversimplify.

That sentence really bolsters my approach in the Three Axes Model. The whole interview is interesting.

In fact, I have been binge-watching his lectures. Reviews of his book suggested that it might be inaccessible, but his lectures are very accessible, albeit with a big investment of time. If you don’t have the patience for his style, you might want to jump to lecture 5, part 1. But my view is that you should have patience for his style.

Peterson, like Jung, believes that ancient myths tell us a lot about how we are wired. In my eBook, I say that the Progressive oppressor-oppressed axis can be found in the Exodus story. I think that Peterson would locate what I call the civilization-barbarism axis in a lot of ancient myths in which the death of a king or the emergence of a terrible king leads to chaos until a hero fights the chaos and is crowned the new king.

The libertarian liberty-coercion axis may be more modern. In Peterson’s terms, government (and our cultural inheritance in general) always enbodies both the good father who provides order and the tyrant who chains people. The liberty-coercion axis sees the tyrant and not the good father. Peterson probably would find libertarian utopianism to be akin to other utopianisms. In that sense, he would view a really dogmatic libertarian as dangerous, the way that Whitaker Chambers famously remarked that reading Ayn Rand made him feel as though there was lurking a “To a gas chamber–go!” mindset.

I think that embedded in his course is a philosophy of science that is profound. I think it can be applied usefully as a perspective on economic models. I will say more about that when I finish the course.

Right-scaling the Polity

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Eli Dourado writes,

if economic integration prevails, the optimal country size is small, maybe even a city-state.

Given what we know about optimal country size, a monolithic America makes less sense today than it did a century ago. What made America into the superpower that it is today is its massive internal free trade area. Now that trade barriers have declined worldwide, this is less of an advantage than ever before. It’s not at all clear that this diminishing advantage outweighs the cost of our divisive politics based on unshared cultural assumptions.

I have been interested in this issue for a long time. In 2005, I wrote We need 250 states. Among other things, I pointed out that

In 1790, the largest state in the union, Virginia, had a population of under 700,000. Today, Montgomery County has a population of over 900,000. Our nine-member County Council answers to about the same number of registered voters as the entire House of Representatives of the United States at the time of the founding of the Republic.

Switzerland, although it is much smaller than the U.S., is even more decentralized. We have way too much policy made in Washington relative to what could be made more appropriately at local levels. But right now Washington is the only city that can borrow huge sums of money, and that makes it hard to shift responsibilities around.

Richard Florida on Autonomy for Cities

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He writes,

The world has become spikier and spikier, across nations, across regions, and within cities. The clustering of talent and economic assets also makes the city the new economic and social organizing unit, undermining two core institutions of the old order: the large vertical corporation and the nation-state.

…this age of urbanized knowledge capitalism requires a shift in power from the nation-state to cities, which are the key economic and social organizing unit of the knowledge economy. That means also means that cities must take on the outsized power of the nation-state and the imperial presidency. We must devolve power and resources back to the local level — raking back their tax money from the federal government so they can spend it on themselves.

In a way, he is suggesting the the wealthy (and blue) cities should secede from Donald Trump’s America. Whatever merits the concept may have (and I try to encourage ideas of this sort), I doubt that Florida has thought through the details of “raking back their tax money.”

We are headed to a point (already past it?) where at the Federal level cutting 100 percent of discretionary spending that is not related to national security will still leave a deficit. That means that could wind up giving the cities responsibility for housing, education, infrastructure, etc. without any tax revenue to rake back to pay for those functions.

You could let the cities do what the Feds do, and run big deficits, but that seems rather dangerous. Or you could transfer a lot of budget dollars from the Federal government and states to cities by giving them Medicaid, but that does not sound like fun.

Look, the consequences of devolution of power to cities could turn out to be very good. But they might be more radical than what Richard Florida has in mind.

Trumpophobia Wager Update

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I found one taker. He bets $20, I bet $1000, proceeds go to charity of winner’s choice. For me to lose, all of the following have to happen prior to the mid-term elections in 2018. I believe my counterparty thinks that none of these things will happen unless there is major terrorist activity in the U.S. in the next two years. In that sense, my counterparty is not a stereotypical Trumpophobe.

– Trump issues an executive order, or gets legislation passed, in response to a terrorist attack which allows for searches or seizures without warrant, or, makes warrants arbitrarily easy to obtain.

– Hundreds (or more) are arrested as Trump rounds up political opponents (including immigrants) in expanded or new prisons which employ unorthodox methods.

– Trump becomes dictator, in name or in practice, signified by either: 1) use of executive orders that are unconstitutional or program TY$100B without Congressional consent; or 2) Congress grants the executive branch the ability to effectively write legislation that can amend the Constitution.

– A person who has met with a Trump official at the official’s office in Washington DC will organize a boycott of businesses or places of worship occupied by one or more minorities, or that person will claim to be inspired by Trump’s rhetoric.

– The emphasis on outsourcing governmental positions to the private sector will in effect cleanse the bureaucracy of persons who oppose Trump policies or world view.

– A new domestic federal agency will be established that performs searches or seizures without warrant, or, using warrants that are arbitrarily easy to obtain. (Note I believe that illegal immigrants are today protected by the Fourth except from immigration agents, so this could apply to suspected immigrants and terrorists.)

– Trump either: 1) postpones a federal election; or 2) detains or restricts speech on the leadership of a substantial or growing political organization not generally considered radical.

Sentences to Ponder from Mike Konczal

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He writes,

Oil doesn’t experience unemployment as the most traumatic thing that can happen to it. Oil moves magically to new opportunities, unlike people who don’t often move at all. A barrel of oil doesn’t beat their kids, abuse drugs, commit suicide, or experiencing declining life expectancy from being battered around in the global marketplace. But people do, and they have, the consequences persist and last, and now they’ve made their voices heard. It’s the the dark side of Polanyi’s warning against viewing human being as commodities.

Pointer from Tyler Cowen. The entire essay, which looks at Donald Trump’s consistent message, is worth reading.