Monthly Archives: March 2017

John Cochrane on Economic Methods

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Commenting on Russ’ essay, he writes,

Economics and economic history also teach us humility: No economist in 1900 could have figured out what farmers, horse-shoers, ice deliverers, street-sweepers, and so forth would do when those jobs disappeared. The people involved did. Knowledge of our own ignorance is useful. Contemplating the railroad in 1830, no economist could have anticipated the whole new industries and patterns of economic activity that it would bring — that cows would be shipped from Kansas to Chicago, and give rise to its fabled meat-packing industry. So, in a dynamic economy, all the horse-drivers, stagecoach manufacturers, canal boat drivers, canal diggers, and so forth put out of work by the railroad, and their children, were not, in the end, immiserized.

Russ Roberts on Economic Methods

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He writes,

fundamentals like income or even changes in income over time are somewhat measurable with some precision, [but] we are notoriously unreliable at the things the world really cares about and asks of our profession: why did income for this or that group go up by this or that amount? What will happen if this or that policy changes? Should the subsidy to college education be increased or decreased and if so, by how much? These much-demanded answers for precision and an understanding of the complex forces that shape the world around us are precisely the questions we are not very good at answering.

It is a long essay, difficult to excerpt. Pointer from Tyler Cowen.

I am writing an even longer essay along similar lines. Currently, the hope is to have it come out this summer.

In physics, you have what is known as “effective theory.” That is, you have a theory, like Newton’s laws, which works very well for certain problems. Moreover, physicists can tell you where it works and where it does not work.

The problem in economics is that we have speculative interpretations which we try to pretend are effective theories. For reasons that Russ Roberts goes into, we cannot get rid of conflicting speculative interpretations.

Dan Sperber on Culture

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He says,

The classical view of what culture is, very simply, that which is transmitted in a population by non-genetic means: by communication, imitation, and all forms of interaction. In the human case, imitation is an important factor which has been overplayed. Humans imitate better than any other animal, (except maybe parrots, but parrots have a narrow range of things that they imitate).

Later,

to explain the success of bits of culture, of practices, of rituals, of techniques, of ideologies, and so on, the question was not how do they benefit the population in which they evolve; the question was how do they benefit their own propagation? Dawkins was saying that much better than I could have done at the time.

He argues against the System 1, System 2 framework of Kahneman.

[Humans] exploit reasons in our cognitive work. This is not a second system; it’s just an ordinary cognitive capacity among others, which has important implications for interaction because that’s what drove its very evolution. It’s an ability to understand others, to justify ourselves in the eyes of others, to convince them of our ideas, to accept and to evaluate the justifications and arguments that others give and be convinced by them or not.

…the basic functions of reason are social. They have to do with the fact that we interact with each other’s bodies and with each other’s minds. And to interact with other’s minds is to be able to represent a representation that others have, and to have them represent our representations, and also to act on the representation of others and, in some cases, to let others act on our own representations.

How to Think About Obamacare and its Replacement

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Think of it as robbing Peter to pay Paul. Paul gets a subsidy for health insurance. Peter pays by being charged higher premiums for his own insurance and by funding Medicaid with taxes or by lending to the government.

According to the Democrats and their friends in the media, if you stop paying Paul, then you are “taking away his health care,” and that is unacceptable. If the Republicans concede that, as they appear to be doing, then they are left with tinkering around the edges by shifting around the Peter burdens (probably by using more borrowing) and by cutting the subsidies for future Pauls.

The thing about health care is that it is so expensive nowadays that robbing Peter to pay Paul involves really big bucks. So if Obamacare has moved the Overton Window to the point where robbing Peter to pay Paul is entrenched policy, then the government now owns a much bigger chunk of the economy.

The Basis of Moral Outrage

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Zachary K. Rothschild and Lucas A. Keefer write,

we test the counter-intuitive possibility that moral outrage at third-party transgressions is sometimes a means of reducing guilt over one’s own moral failings and restoring a moral identity.

Pointer from Elizabeth Nolan Brown, who nicely summarizes the studies. Brown writes,

Ultimately, the results of Rothschild and Keefer’s five studies were “consistent with recent research showing that outgroup-directed moral outrage can be elicited in response to perceived threats to the in-group’s moral status,”

In other words, you lash out at Trump in part because of your own status anxiety.

My thoughts:

1. Be cautious. Remember the low replication rate of these sorts of studies.

2. Counter-intuitive? Not so much. I think that many people suspect that expressing moral outrage is a cheap way of trying to raise one’s status.

3. When I was younger, psychological reductionism (e.g., Freud) was quite popular. There was widespread suspicion that the “true believer,” in Eric Hoffer’s terminology, was wrestling with personal demons. Back in those days, if you were to suggest that, say, a politician who spoke up for family values was probably plagued by guilt about his own sexuality, everyone in the room would have nodded their heads.

The Making of a Quagmire

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Concerning the new official Republican House health care proposal, Michael Cannon writes,

The leadership bill therefore creates the potential, if not the certainty, of a series of crises that Congress will need address, and that will crowd out other GOP priorities, in late 2017 before the 2018 plan year begins, and again leading up to the 2018 elections. If Congress gets health reform wrong on its first try, health reform could consume most of President Trump’s first term. Pressure from Democrats, the media, and constituents could prevent Republicans from moving on to tax reform, infrastructure spending, or even Supreme Court nominees.

Avik Roy is more favorably disposed to the proposal, but with significant misgivings. I tend to agree with his “cons” and disagree with his “pros.”

The WaPo story on the proposal says

four key Republican senators, all from states that opted to expand Medicaid under the ACA, said they would oppose any new plan that would leave millions of Americans uninsured.

It would take a lot of nerve to say: Our plan is to hold households responsible for obtaining health insurance. Some households will “lose” coverage that was heavily subsidized by the government. But if you cannot stand up and say that, then you cannot change the direction of health care policy away from socialism.

As I wrote recently, the Overton Window has moved, so that responsibility for health insurance is strictly with the Federal government, not with the household. Along similar lines, Philip Klein writes,

Barring radical changes, Republicans will not be passing a bill that ushers in a new era of market-based healthcare. In reality, the GOP will either be passing legislation that rests on the same philosophical premise as Obamacare, or will pass nothing at all, and thus keep Obamacare itself in place.

After digesting these and other analyses, I am inclined to think that Obamacare will not be repealed and replaced during the Trump Administration. Instead, it will be repealed and replaced by the Democrats the next time they are in power. And the replacement will not look very market-friendly.

Asymmetric Intolerance

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In the United States, the average number of automobile accidents per year is 5.25 million (source). The average number of fatalities per year is 30,000 to 35,000. (source).

How many accidents are we willing to tolerate involving self-driving cars before we stop trying to restrict their usage? Pretty much zero, right?

Let’s call this “asymmetric intolerance.” We accept a phenomenon that is highly flawed (human-driven cars) while we refuse to tolerate a phenomenon if it has any flaws at all (self-driven cars).

If asymmetric intolerance had been a policy principle 125 years ago, might we not still be transporting ourselves in horse and buggy?

Some further thoughts:

1. Maybe this is in line with the issue of resistance to change that is a theme of Tyler Cowen’s latest book.

2. Is an obsession with terrorism an example of asymmetric intolerance?

3. I have a relative in California who buys “organic toaster pastries” (non-GMO, of course). In other words, Pop-Tarts that have been blessed as all natural. Isn’t that an example of asymmetric intolerance?

4. Where else do we observe dramatic examples of asymmetric intolerance? Or is this the only example that comes to mind?

Japan and the Consensual Hallucination Hypothesis

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Kevin Drum writes,

Japan’s deflation has persisted even in the face of massive BOJ efforts that, according to conventional economics, should have restored normal levels of inflation.

Pointer from Mark Thoma. BOJ = Bank of Japan, their central bank.

We have all been taught that money and inflation are tightly linked. Those of you have read Specialization and Trade know that one of my heresies is to deny that this is true under normal circumstances (large government deficits that can only be financed by printing money are the exception; to get hyperinflation, you need the fiscal driver of money creation). I say that money and “the overall price level” are a consensual hallucination. They are embedded in cultural norms and expectations.

The consensual hallucination hypothesis (which was held by the late Fischer Black) is consistent with the Japanese experience.

My Review of Tyler Cowen’s Complacent Class

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I conclude,

there is an important category of people who are dissatisfied with the status quo and at the same time are averse to risk and to change. It is an interesting pathology, but I think it is misleading to term it complacency.

A few more thoughts.

1. There is a lot to the book. You should read it. Even though it is getting a lot of coverage, don’t just assume that you can pick up its contents by osmosis. But prepare to disagree with him at times.

2. I wrote the review in a hurry. I can imagine re-reading the book and writing a different review.

3. I am still not happy with Tyler’s use of the term “complacency.” I can think of three senses of the word that are floating around in the book.

a. Complacency is “a general sense of satisfaction with the status quo.”

b. Complacency is a desire to avoid risk and resist change.

c. Complacency is a belief that the current social order is stable, that we will not suffer from a sharp increase in violence or a major breakdown of norms and institutions that maintain order.

Tyler explicitly writes (a), but I don’t think he really means it. The first three-quarters of the book are about (b), amassing evidence that modern Americans suffer from (b) much more than our forefathers. The last quarter of the book is about (c) and why Tyler believes it is wrong. He wants to claim that a big reason that (c) is wrong is that (b) has become so prevalent. Think of a Minsky model of social change: stability leads to instability.

The Case for Libertarian Despair

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John J. Dilulio, Jr. writes,

State and local governments and their governors associations, mayors associations, state legislatures, corrections commissioners, and more; big and small business lobbies; and, yes, nonprofit sector lawyer-lobbyists—all three federal proxies exert nonstop pressure in favor of federal policies that pay them to administer federal business, with as few strings attached as possible, and with lots of paperwork but little real accountability for performance and results.

Pointer from Tyler Cowen. DiLulio coins the phrase “proxy-administered state” to describe how government works today. It is hard to say which is more despair-inducing in the essay–the facts or the analysis.

I have said before that there are three forms of political economy:

1. Market economy: the private sector sets goals and owns the means of production

2. Socialist: the government sets goals and owns the means of production. Think of the public school system.

3. Corporatist (or Cronyist): the government sets goals and the private sector owns the means of production. Think of Freddie Mac and Fannie Mae back when they were owned by shareholders, or think of Obamacare. These are examples of the proxy-administered state.

Speaking of Obamacare, it seems increasingly clear that it has moved the Overton Window on health care policy. You are not allowed to substitute individual responsibility for Obamacare. Instead, you must come up with a “better” system. The ground rules for any new health care system now state that responsibility for your ability to obtain health insurance ultimately rests with the Federal government.