Monthly Archives: September 2017

Jeffrey Friedman watch

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His latest essay argues that Trump supporters are flag-waving nationalists, not sheet-donning racists. He winds up,

Trumpism represents not a monstrous perversion of modern politics, but an expression of some of its most blandly familiar features.

Mick Jagger sang, “He can’t be a man ’cause he doesn’t smoke the same cigarettes as me.” Let us abbreviate “he can’t be a man” as HCBAM.

Nationalism is HCBAMist toward citizens of other nations, and Friedman would like to talk Trump supporters down from that. But people who take great pride in their opposition to Trump have become HCBAMist toward Trump supporters, and Friedman would like to talk them down from that.

I fear that HCBAMism is very much a part of human nature (recall my recent post on politics as religion). Friedman says that just because behavior is instinctive does not make it right.

We can drop our arbitrary group attachments for rational reasons.

Yes, but a more pessimistic outlook is that when we drop our arbitrary group attachments we then pick up other arbitrary group attachments that have the same consequences, or worse.

The new partisanship

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Janet Hook reports in the WSJ,

People who identify with either party increasingly disagree not just on policy; they inhabit separate worlds of differing social and cultural values and even see their economic outlook through a partisan lens.

The wide gulf is visible in an array of issues and attitudes: Democrats are twice as likely to say they never go to church as are Republicans, and they are eight times as likely to favor action on climate change. One-third of Republicans say they support the National Rifle Association, while just 4% of Democrats do. More than three-quarters of Democrats, but less than one-third of Republicans, said they felt comfortable with societal changes that have made the U.S. more diverse.

And these are much larger than the gaps that existed years ago.

Alan Abramowitz and Steven Webster use the term “negative partisanship.”

American politics has become like a bitter sports rivalry, in which the parties hang together mainly out of sheer hatred of the other team, rather than a shared sense of purpose. Republicans might not love the president, but they absolutely loathe his Democratic adversaries. And it’s also true of Democrats, who might be consumed by their internal feuds over foreign policy and the proper role of government were it not for Trump.

What people have come to seek in political news and commentary is anger validation. That is, they want the news to be presented in such a way that it confirms and justifies their anger at political opponents. To say that the market is catering to this desire is an understatement.

Sub-prime crisis or speculator crisis?

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Stefania Albanesi, Giacomo De Giorgi, and Jaromir Nosal write,

A broadly accepted view contends that the 2007-09 financial crisis in the U.S. was caused by an expansion in the supply of credit to subprime borrowers during the 2001- 2006 credit boom, leading to the spike in defaults and foreclosures that sparked the crisis. We use a large administrative panel of credit file data to examine the evolution of household debt and defaults between 1999 and 2013. Our findings suggest an alternative narrative that challenges the large role of subprime credit in the crisis. We show that credit growth between 2001 and 2007 was concentrated in the prime segment, and debt to high risk borrowers was virtually constant for all debt categories during this period. The rise in mortgage defaults during the crisis was concentrated in the middle of the credit score distribution, and mostly attributable to real estate investors.

“Real estate investors” means buyers of houses who did not intend to occupy them but were instead buying them for speculation. The non-owner-occupied phenomenon (also known as investor loans) was noted by Andrew Houghwout and others in 2011, and it was something that I suspected back in October 2008. Kevin Erdmann also has pointed out that it was not low-income borrowers who drove the boom and bust.

Criminology as normative sociology

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John Paul Wright and Matt DeLisi write,

Liberal political values can shape and distort the research that criminologists do and the public positions that they take. Lee Ellis and Anthony Walsh surveyed several hundred criminologists and found that self-reported ideological perspective was strongly associated with the type of theory that the scholar most often advocated, with liberal criminologists primarily supporting theories that locate the causes of crime in social and economic deprivation. Coauthor John Wright has recently collected data showing that political ideology predicts almost perfectly the policy positions of criminologists. On issues ranging from gun control to capital punishment to three-strikes laws, liberal criminologists showed almost no variation in their beliefs. (Needless to say, they dislike guns, oppose punitive sentences, and vehemently object to the death penalty.)

Of course, it was Robert Nozick who coined the term “normative sociology” as the study of what the causes of problems ought to be.

Later, the authors write,

Reliable evidence tells us that the most effective strategies to reduce crime involve police focusing on crime hot spots, targeting active offenders for arrest, and helping to solve local problems surrounding disorder and incivility. Putting predatory, recidivistic offenders in jail or in prison remains the best way to protect the public—especially those who live in high-crime neighborhoods.

Some day, we will view incarceration as inhumane. But until we come up with an effective alternative, I fear that we will find that non-incarceration is even more inhumane.

My fear about academic economics is that it will evolve in the direction of criminology. I foresee ever-increasing social pressure within the community of academic economists to undertake research that confirms left-wing biases.

Russ Roberts on Bootleggers and Baptists

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He offers a primer on the model.

The Baptists give the politicians cover for doing what the bootleggers want. No politician says we should ban liquor sales on Sunday in order to enrich the bootleggers who support his campaign. The politician holds up one hand to heaven and talk about his devotion to morality. With the other hand, he collects campaign contributions (or bribes) from the bootleggers.

He proceeds to give some very depressing real-world examples of how this plays out in public policy.

Variable costs approach zero

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Jan De Loecker and Jan Eeckhout write,

We document the evolution of markups based on firm-level data for the US economy since 1950. Initially, markups are stable, even slightly decreasing. In 1980, average markups start to rise from 18% above marginal cost to 67% now. There is no strong pattern across industries, though markups tend to be higher, across all sectors of the economy, in smaller firms and most of the increase is due to an increase within industry. We do see a notable change in the distribution of markups with the increase exclusively due to a sharp increase in high markup firms

Tyler Cowen brought up the paper in order to criticize it. Greg Ip covered the controversy.

Variable costs are costs that increase as the business produces more output. They include costs of materials and the labor cost that is involved in direct production. My explanation for the two-Jans result is that variable costs are tending toward zero in many industries. (I think that this is also Tyler’s explanation, but I prefer to use more specific examples and less technical jargon.)

My notes on the topic.

1. Fifteen years ago, I noticed the trend toward declining variable costs. I wrote an essay called asymptotically free goods, “where research and development costs are high, but the marginal cost of the final product or service is low.” Think of a pharmaceutical that is expensive to develop but cheap to manufacture. Think of cell phone service providers, where the marginal cost of transmitting another gigabyte of data is close to zero. Think of a hospital, where most of the cost is overhead (if the amount of medical services that a hospital were to supply on a given day declined by 1 percent, the amount by which its actual costs would decline is close to zero). Think of an Internet service, such as Facebook, with high costs of development and maintaining a data center but with extremely low cost of adding another user.

The point of the essay is that under marginal cost pricing, these would be free goods. If variable cost approaches zero, then markup over variable cost approaches 100 percent. [update: a commenter points out that this statement was in error. The ratio of price to variable cost approaches infinity as variable cost approaches zero.] (In the case of Facebook, the marginal cost of serving an ad is close to zero, and the markup that it charges advertises therefore approaches 100 percent).

2. When I taught economics in high school, I would say that “price discrimination explains everything.” That is because most businesses do not operate in the textbook world of perfect competition. Instead, firms are focused on recovering fixed costs. To do so, they apply different markups to slightly different versions of products, trying to recover more fixed costs from the less price-sensitive buyers. That is why movie theaters charge so much for popcorn, why airlines have different classes of seats, why cable TV providers offer bundles, and so on.

3. In manufacturing, the share of production workers is declining, but the share of non-production workers is increasing. Overall, we are producing more output with fewer workers on the assembly line (and I would guess that materials costs also are lower).

4. My guess is that, if anything, the two-Jan’s paper understates the trend toward high markups. That is because my guess is that most corporate data allocates more labor to variable cost than really belongs there. Garett Jones pointed out that these days most workers do not produce widgets. Instead, they produce organizational capital. Garett Jones workers are part of overhead, not variable cost.

5. In textbook economics, the term “monopoly power” is pretty much by definition the ability to charge a price above marginal cost. By that definition, it is very hard to think of real-world businesses that do not have monopoly power. If you want to say that the textbook model of perfect competition is baloney sandwich, I would have to agree with you.

6. But lack of perfect competition does not mean that government regulators know better.

7. Lack of perfect competition does not mean that there is no market discipline. There is still competitive discipline, but a lot of it comes in the form of creative destruction rather than in the form of prices being driven down to marginal costs by copycat entry.

8. Government intervention can easily take the form of trying to stop creative destruction. For example, demand that autonomous vehicles be accident-free, rather than merely less dangerous on average than human-driven cars.

Re-reading David Brooks

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Almost twenty years after it first appeared, I review Bobos in Paradise.

What Brooks might have foreseen, but did not, was how this Bobo project would play out as it gathered momentum. In the last two decades, we have witnessed the acceleration of the long-term trend toward expansion of the more abstract-oriented industries, such as finance and entertainment, and a decline of the more concrete-oriented industries, such as manufacturing and mining. As a result, the cultural influence of Bobos has soared. The Bobos became insistently cosmopolitan on issues of immigration and foreign relations, increasingly aggressive in their assault on traditional ideas about gender, and increasingly eager to stifle the speech on campus of those with whom they disagree.

Should we miss the working class?

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Brink Lindsey writes,

people are not machines, and they don’t like being treated as such. By inducing millions of people to take up factory work and creating a social order in which those millions’ physical survival depended upon their doing such work for most of their waking hours, industrial capitalism created a state of affairs deeply inconsistent with the requirements of human flourishing—and, not unrelatedly, a highly unstable one at that.

…In pursuing the technical efficiency of mass production regardless of its human costs, the class system created by industrial capitalism divided people along very stark lines: those who work with their brains and those who work with their bodies; those who command and those who obey; those who are treated as full-fledged human beings and those who are treated as something less.

I spent two summers working in a plant that produced speakers for sound systems for buildings (think of the music piped in at shopping malls). A lot of the work was with materials that probably were dangerous to one’s lungs, including jute and fiberglass. Maybe my chronic cough comes from that. Otherwise, the work was not as rote as Lindsey depicts, and even when it was rote the time would pass reasonably well. On the plus side, there was no office politics, no ambitious co-workers stabbing you in the back or trying to steal credit for your ideas. But on net, I would tend to agree with Lindsey that we should be happy to see old-fashioned manufacturing production work phase out.

The last time I looked, which was a few years ago, the share of manufacturing production workers (as opposed to managers and supervisors) in the labor force was down to just over 5 percent. Fifty years ago, I believe it was more than 20 percent.

The erstwhile working class has moved in two directions. One direction is white-collar work. However, the other direction is non-employment. To address the latter, Lindsey offers this:

A more humane economy, and a more inclusive prosperity, is possible. For example, new technologies hold out the possibility of a radical reduction in the average size of economic enterprises, creating the possibility of work that is more creative and collaborative at a scale convivial to family, community, and polis. All that hold us back are inertia and a failure of imagination—and perhaps a fear of what we have not yet experienced. There is a land of milk and honey beyond this wilderness, if we have the vision and resolve to reach it.

To me, this sounds like the sort of utopian hope that we held for the Internet twenty years ago. As I pointed out in several posts a week ago, the reality has recently seemed to differ.

Politics as Religion

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A commenter writes,

“Politics as religion” is such a lazy argument because nobody has a definition of religion. It’s classic case of defining the obscure in terms of the more obscure. By any reasonable definition, a religion needs a transcendent being. Where is the transcendent being of this “secular religion”? You can’t just say the passion level is so high that it has passed into religious territory. That’s not how it works; the beliefs have to actually be structured like a religion, whatever that would mean.

The term “religion” does indeed have too many connotations. So let us not start there.

Instead, let us speak of a subset of culture that defines a tribe at large scale. A broad set of norms, symbols, beliefs and practices constitutes culture. Narrow that down to a subset of norms, symbols, beliefs and practices that clearly define who is or is not a member of the tribe. Focus on that subset. For example, Jews eat gefilte fish, observe Yom Kippur, and don’t pray to Jesus. But only a subset of those (observing Yom Kippur and not praying to Jesus) are tribally definitive. The rabbis won’t question your Jewish identity if you turn down gefilte fish.

No tribe is perfectly defined by a precise list of cultural characteristics. But bear with me and think in terms of tribally defining cultural subsets.

A tribally defining cultural subset will (a) tend to empower adherents to obey, enforce, and regularly re-affirm tribal norms, and (b) lead its members to fear and despise people who are not members of the tribe.

Further comments:

1. Cosmopolitans (including progressives, libertarians, and conservative intellectuals) would say that, yes, historically, “fear and despise” was part of religion, but that is a bug, not a feature. Ironically, cosmopolitans start to look like a tribe that fears and despises people who espouse traditional religions. And yes, there does seem to be a fourth axis here: cosmopolitan vs. populist, or Bobo vs. anti-Bobo.

2. The role of a transcendent being is to help motivate members to obey tribal norms, for fear of being punished by the transcendent being (See Ara Norenzayan’s Big Gods). However, belief in a transcendent being is not necessary to have a modern large-scale tribe. But it does seem necessary to have an out-group that you fear and despise.

3. Historically, major religions have usually fit my notion of a cultural subset that defines a large-scale tribe.

4. Usually, modern nation-states have fit this notion. There are those who say that nation-states were a better tribal bonding technology (so to speak) than belief in a transcendent being, and hence they made religion relatively unnecessary.

5. Finally, to the commenter’s point, I think that some political ideologies have come to fit my notion of a cultural subset that defines a large-scale tribe. The current progressive ideology seems to me to fit the notion particularly well. But the three-axis model suggests that conservatives and libertarians are tribal, also. Again, the emergence of the Bobo vs. anti-Bobo conflict has scrambled things quite a bit.

Think tanks and special interests

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Daniel Drezner writes,

New America is embroiled in a pay-for-play controversy of its own making. The New York Times reported that Slaughter had parted ways with Barry Lynn, an influential critic of the growing clout of U.S. tech companies. He ran Open Markets, an initiative “to promote greater awareness of the political and economic dangers of monopolization,” and had been scathing in his assessments of Google, a firm that had donated more than $21 million to New America’s coffers. Slaughter has disputed some of the facts in the story and issued a statement asserting that Lynn’s “refusal to adhere to New America’s standards of openness and institutional collegiality” led to the rupture. Slaughter didn’t deny, however, that she had implored Lynn in emails, “We are in the process of trying to expand our relationship with Google on some absolutely key points,” nor that she had warned Lynn to “just THINK about how you are imperiling funding for others.”

My thoughts:

1. For a long time, I thought that the New America Foundation was excessively focused on the “net neutrality” issue. Google has promoted the same definition of “net neutrality.” So if it is corrupt for New America to be aligned with Google, then New America has been corrupt for a long time. The issue with Barry Lynn is almost beside the point.

2. It does strike me as unseemly when a particular business interest provides funding for a researcher and gets research that aligns with its interests. I am bothered by the Stiglitz-Orszag work for Fannie Mae. You may recall that I accused the Brookings Institution and something called the Bipartisan Policy Center of doing the bidding of big banks.

3. It seems to me that the infamous Kochs tend to fund on the basis of ideology, which I regard as less unseemly than funding on the basis of corporate interest. Perhaps I am naive about that. Ironically, I think that their libertarian ideology, if it were to gain sway, would reduce the power of special interests by taking government out of the arenas in which special interests exert so much power.

4. I think that there are much worse forms of political heavy-handedness than funding research. The housing lobby and the teachers’ unions come to mind.

5. I do not think that there is an effective way to stop businesses from funding research that is in their interest. Economists write what they honestly believe (that includes Stiglitz, the Brookings researchers, and the New America folks). It is natural for corporations to find that research supporting their interests is credible and deserves support. Do not attribute to conspiracy what can be explained by confirmation bias.

6. Should you always trust government-funded research more than private-funded research? Suppose that the topic is the Fed’s conduct during the financial crisis. Suppose that the research is funded by the Fed.

7. It is often the case that there is research that supports either side of an issue. The problem is not so much that special interests are able to fund “their” side. The problem is when the other side cannot get funding at all, or cannot get its results disseminated and discussed. That would be a harder problem to spot. It is one thing to identify a source of funding. It is another thing to identify a source of non-funding.