Monthly Archives: February 2018

Life expectancy slowdown

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Tyler Cowen cites a study that says that the rate at which life expectancy at birth (LEB) is increasing has slowed down. This does not surprise me.

Suppose that there are two outcomes. One outcome is that you live to a ripe old age. The other outcome is that you die within one year of birth. As the percentage of people who die early goes from 10 percent to 1 percent, average LEB goes up dramatically. As it goes from 1 percent to 0.1 percent, average LEB goes up more slowly. But I would not call that stagnation.

New Russ Roberts video on income distribution statistics

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Here is part 2 of his series.

The video tries to make clear the flaws in comparing the income of the median household in, say, 1970, with that of the median household today. In very important respects, they are not the same household, so that the question that you think you are answering is not the question that you are really answering.

Russ is trying to teach people to think for themselves about economic questions and data. That is absolutely admirable. I worry that most people would just prefer to use the credentials heuristic, which means that they will accept whatever interpretation of data comes from someone whose credentials they respect. The respected person might not be a careful economist. It might not even be an economist at all–it could be a journalist with very weak analytical skills who happens to get hold of some data.

Or worse, some people might use a confirmation-bias heuristic. If the interpretation of the data confirms the your bias, then you go with that interpretation. Otherwise, you tune it out.

The Stock Market: narrower, deeper, older?

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Check out two abstracts of papers by Rene Stulz and others.

Eclipse of the Public Corporation or Eclipse of the Public Markets?

Since reaching a peak in 1997, the number of listed firms in the U.S. has fallen in every year but one. During this same period, public firms have been net purchasers of $3.6 trillion of equity (in 2015 dollars) rather than net issuers. The propensity to be listed is lower across all firm size groups, but more so among firms with less than 5,000 employees. Relative to other countries, the U.S. now has abnormally few listed firms. Because markets have become unattractive to small firms, existing listed firms are larger and older. We argue that the importance of intangible investment has grown but that public markets are not well-suited for young, R&D-intensive companies. Since there is abundant capital available to such firms without going public, they have little incentive to do so until they reach the point in their lifecycle where they focus more on payouts than on raising capital.

Why has Idiosyncratic Risk been Historically Low in Recent Years?

Since 1965, average idiosyncratic risk (IR) has never been lower than in recent years. In contrast to the high IR in the late 1990s that has drawn considerable attention in the literature, average market-model IR is 44% lower in 2013-2017 than in 1996-2000. Macroeconomic variables help explain why IR is lower, but using only macroeconomic variables leads to large prediction errors compared to using only firm-level variables. As a result of the dramatic change in the number and composition of listed firms since the late 1990s, listed firms are larger and older. Larger and older firms have lower idiosyncratic risk. Models that use firm characteristics to predict firm-level idiosyncratic risk estimated over 1963-2012 can largely or completely explain why IR is low over 2013-2017. The same changes that bring about historically low IR lead to unusually high market-model R-squareds.

These reminded me of my “narrower, deeper, older” observation of hobbies, such as Israeli dancing. People are being more selective about hobbies. Each hobby has a narrower base of participants. They are deeper into the hobby. And if the hobby has been around for a while, the participants tend to be older.

This seems to describe the public stock market in the U.S. Companies are being more selective about whether or not to use the public market. The public market has a narrower base of companies participating. The participants tend to have higher market capitalizations. They have been around longer.

The supply is too damn low (housing)

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Edward Glaeser and Joseph Gyourko write,

Empirical investigations of the local costs and benefits of restricting building generally conclude that the negative externalities are not nearly large enough to justify the costs of regulation. Adding the costs from substitute building in other markets generally strengthens this conclusion, as Glaeser and Kahn (2010) show that in America building restrictions are higher in places that have lower carbon emissions per household. If California’s restrictions induce more building in Texas and Arizona, then their net environmental effect could be negative in aggregate. If restrictions on building limit an efficient geographical reallocation of labor, then estimates based on local externalities would miss this effect, too.

Read the whole paper, or at least the conclusion.

Too little price discrimination?

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Timothy Taylor writes,

Imagine yourself as the profit-seeking owner of a chain of retail stores. Would you charge the same (or nearly the same) price across all the stores? Or would you vary prices according to average income level of consumers who use that store, or according to whether the local economy was robust or shaky, or according to whether the store had geographically nearby competitors?

He points to a working paper by DellaVigna and Gentzkow suggesting that chain retailers are leaving money on the sidewalk by not engaging in price discrimination.

My thoughts:

1. Changing computer systems to allow this would be difficult. Note that the computer systems would have to avoid making the mistake of letting a customer buy a product at the low-price store and return it at the high-price store for a higher price.
2. Consumers might adapt. Some might be willing to drive long distances to save. It would create an opportunity for an arbitrageur to offer to buy stuff at the low-price store and ship it to customers who live near the high-price store.
3. Competitors might advertise that the high-price store is gouging its customers.

In general, saying that strategy X would work without thinking about how the market might adapt seems rather brave.

McArdle’s Rules for Life

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She writes (among other suggestions),

Always order one extra dish at a restaurant, an unfamiliar one. You might like it, which would be splendid. If you don’t like it, all you lost was a couple of bucks.

…Go to the party even when you don’t want to. Nine times in 10, you’ll be bored and go home early. But the 10th time, you will have a worthy experience or meet an interesting person.

Sounds like it fits with my own rule for taking risks with high upside and low downside.

Also,

we keep ourselves bored in order to protect ourselves from feeling stupid. This is a bad trade.

That supports my idea of looking for new challenges at work.

I really like this rule:

Don’t just pay people compliments; give them living eulogies.

I enjoyed several other of her rules. I’m guessing that a collection of “n rules for life” from multiple contributors would be a fun book to put together and to read.

A moonshot to overthrow neoclassical economics

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Tyler Cowen gave me an idea. He described his personal moonshot. He wrote,

My goal is to be the economist who has most successfully used the internet as a platform to foment broad enlightenment.

He elaborates on this, creating a concise statement of his mission as a public intellectual.

So I did something similar. Please read Overthrow Neoclassical Economics: my personal moonshot. It begins,

My personal moonshot is that I wish to be a leader in overthrowing neoclassical economics.

…As I see it, neoclassical economics is characterized by two essential propositions.

1. Production is a process that employs two primary factors — labor and capital.
2. The distribution of returns to labor and capital reflects their respective contributions to the production process.
There are many economists, particularly on the left, who reject (2) in favor of theories of distribution that stress the role of political power. This criticism may have merit. But my criticism is more fundamental than that. I reject (1) as a useful description of the contemporary economy.

In neoclassical economics, individual productivity is inherent in the technology and the amount of capital per worker. In reality, it is way more complicated than that. Indeed, there are power relationships, but it is way more complicated than that. Technology and relative power are not sufficient to determine individual productivity and compensation. Everything depends on who you are teamed up with, how you are organized, the overall culture in which you are embedded, and other factors, including ongoing dynamics and expected future changes.

Jordan Peterson and other public intellectuals

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David Brooks writes,

In his videos, he analyzes classic and biblical texts, he eviscerates identity politics and political correctness and, most important, he delivers stern fatherly lectures to young men on how to be honorable, upright and self-disciplined — how to grow up and take responsibility for their own lives.

I have a few reasons for being less than fully bought into Peterson.

1. He is a spellbinding speaker but his first book, Maps of Meaning, was turgid. There is something disconcerting about the fact that his ideas seem to come across better in a format that allows for less editorial polishing. I noted this in December of 2016, when the Peterson tsunami was just forming.

2. Some of his ideas are mystical and sound really strange.

3. He gains some of his stature by attacking post-modernists who are intellectual weak, at least in the way that he presents them. For me, it is more impressive to take on stronger opponents than weaker ones.

He may now be over-rated by his fans on the right. But he is badly, badly, under-rated by smug leftists whose ability to understand opposing viewpoints pales in comparison with his.

Using the three-axes model, I put Peterson firmly in the conservative camp. He sees civilization as fragile and precious, and he is animated by the civilization vs. barbarism axis.

Rather than propose a list of public intellectuals that I think are influential, or important, or prominent, let me just list a few public intellectuals that I admire and trust, in the sense that I think that they really try to be careful to honor opposing viewpoints and try to avoid committing intellectual swindles.

–Jeffrey Friedman. Does he even count as a public intellectual? He is an intellectual, all right, but his writing is often steeped in academic jargon, and he is not a familiar figure, even to the highly-educated portion of the public. His journal, Critical Review, has pieces written by top minds, and yet his own contributions often tower over theirs.

–Steven Pinker. You can get a better education in the humanities by reading The Blank Slate than by taking any freshman humanities course at any university, I would bet.

–Tyler Cowen. Tyler has an unmatched ability to offer ideas that are surprising and original. He takes risks, sort of like an intellectual venture capitalist, if you will. Some of these start-ups don’t make it, but he picks enough winners to more than make up for the failures.

Friedman, Pinker, and Cowen all stand out for being non-tribal or even counter-tribal. They challenge and annoy their most likely allies, rather than offering a steady diet of reinforcement and comfort.

Blockchain and property rights

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Phil Gramm and Hernando de Soto write,

Fortunately there is a new technology that could make a global property-rights registration system feasible. Patrick Byrne, an e-commerce pioneer and the CEO of Overstock.com, has committed a professional staff and significant resources to modernizing the collection and maintenance of property-rights records on a global scale. Blockchain is an especially promising technology because of its record-keeping capacity, its ability to provide access to millions of users, and the fact that it can be constantly updated as property ownership changes hands.

I am not persuaded. Information technology can be used to track property rights, but that is not the problem in underdeveloped countries. The problem is to establish property rights in the first place. You can use data to identify a parcel of land. But data alone does not tell you who owns it. Ownership is a social construct.

Three axes in National Affairs

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I could not help but think “three-axes model” when I read Strangled by Identity, by Rishabh Bhandari and Thomas Hopson.

American politics features three concepts of identity, but Americans are rarely clear-eyed about how these differ and disagree. Ethnic identitarians think civic nationalists are closet racists. Civic nationalists think that ethnic identitarians are “race-baiters.” And while cosmopolitans wrongly believe themselves to be above the fray, the other two sides of this entangled triangle don’t trust them or the institutions they lead. So it is that, at the end of the day, people on each side can blame those on the other two sides for playing identity politics while nonetheless playing the game themselves.

For “Ethnic identitarians” read progressives, interpreting their opponents along the oppressor-oppressed axis. For “Civic nationalists” read conservatives, interpreting their opponents along the civilization-barbarism axis. For “cosmopolitans” read libertarians, interpreting their opponents along the liberty-coercion axis.

In the very same issue of National Affairs, there is Civility and Rebarbarization by Arthur Milikh. Citing essays published under a pseudonym in 1763 by the man who became the second President of the United States, Milikh writes,

According to Adams, the human passions — in particular anger and the desire for revenge, which especially characterize man in the barbaric state — must be ordered, moderated, and channeled so as to form human beings capable of civilized self-government and rule by laws. These passions, however, are ultimately ineradicable, which means that a permanent transformation into a state of civility is not possible. Indeed, entertaining such hopes is dangerous. Rebarbarization always remains a human possibility. Should it occur, nations may find it impossible to re-civilize major portions of their inherited order. Adams’s purpose is to educate his readers on both the origins and fragility of the constitutional liberty that we enjoy.

The entire essay is eloquent along these lines. My guess is that if a survey were taken, conservatives would check the box “strongly agree.” But it will not be so well received by progressives or libertarians. This is a case in which speaking in a single language means that only your tribe will understand what you say.