The One-Axis Model of “Scott Alexander”

It is thrive-survive. The left thinks in terms of what it will take to thrive, and the right thinks in terms of what it will take to survive.

What he is trying to do is explain why the two tribes believe what they do. My goal with the three-axis model is to explain why they communicate as they do. My objective differs a bit from Scott’s although they are close. I think that the tribes have nuanced reasons for believing what they believe, but when they are beating tribal drums, the signals fall along my three axes.

Anyway, here is a sentence from his post:

I despair of any theory that will tell me why school choice is a rightist rather than a leftist issue

Pointer from a commenter on Bryan Caplan’s post.

Suppose that both sides now believe that the left controls the public schools. Then I think it becomes easy to explain the partisan pattern. To put this another way, if most teachers and school boards were proponents of right-wing views, I think that a reversal on school choice would be highly probable.

In terms of Scott’s single-axis model, the fact that the left controls public schools may cause the left to deduce that public schools are the best hope for providing students with the tools that they need to thrive, and that taking students out of public schools only subjects them to inferior models. Conversely, the right may believe that public schools are ruining the character of young people, and the only way for society to survive is to make alternatives available to as many students as possible.

David Brooks’ Economic Priorities

Dean Baker writes (The post is unsigned, so it might not be Baker),

we get Brooks telling us:

“The government should reduce its generosity to people who are not working but increase its support for people who are. That means reducing health benefits for the affluent elderly.”

There are two questions that come up here. First what is the definition of “affluent” and second what counts as “generosity.”

In case you didn’t know, Baker does not heart Brooks. My own views align with neither Baker nor Brooks.

1. Brooks supports more government spending on infrastructure, as does Baker. I do not.

2. On the redistribution issue, my perspective differs somewhat from Brooks. My concern is that we have too many uncoordinated means-tested programs, making marginal tax rates too high for the able-to-work poor. As you know, I prefer something more along the lines of a small universal basic income provided at the Federal level, with additional specific needs addressed through programs from states, local governments, and charities.

As for health benefits, I am not for taking away Medicare from the elderly today, but I am for scaling back promises to people tomorrow. Note that Baker claims that today’s beneficiaries have paid for their benefits. I call baloney sandwich. What they paid for were their parents’ benefits, and what they paid into the system was not sufficient to pay for the benefits they are now receiving. If it were true that they had paid for their benefits, the system would be solvent.

3. Brooks endorses the reform conservative Room-to-Grow idea of showering middle-class families with tax credits. I see that as political posturing. If I could be in charge of tax reform, we would get rid of credits and deductions, and we also would move away from taxing income and instead toward taxing consumption. Note, however, that tax reform is not one of my top three priorities.

4. Brooks wants us to open the immigration door wide for high-skilled immigrants, while presumably trying to keep it relatively closed for low-skilled immigrants. If it were up to me, the door would be wide open for people who are grateful for the chance to live in America and are eager to assimilate, and otherwise my feelings about opening the door would be more ambivalent. But I also would not make immigration reform a top priority.

5. Brooks wants more spending on education. I take the null hypothesis seriously.

Remembering the Suits vs. Geeks Divide

I’ll provide a post-mortem on my appearance at this panel on whether or not to break up the banks after I’ve had more time to reflect.

Prior to the panel, I Googled one of the other panelists, and I found that he had hopes for the Volcker Rule, which would try to keep banks from doing proprietary trading. I am not a fan of the Volcker Rule. In fact, in recent years, I have not been a fan of Paul Volcker, because I think he has what I call a low geek quotient.

What I call Geek Finance has emerged over the past thirty years. It is used extensively in derivatives markets and in mortgage finance. It involves very complex probabilistic simulation models that are used to assign values to long-term, deep out-of-the-money options. Some thoughts.

1. Is Geek Finance a good thing? On the one hand, I would say that we need some rational way of valuing these sorts of options. On the other hand, it is important to be aware of the assumptions that go into such models and not to have too much faith in their precision. In the case of mortgage default risk, for example, it matters whether you assume that house prices across different locations are highly correlated or nearly independent. It matters whether you assume that a large nationwide house price decline is practically impossible or just somewhat unlikely.

2. Shortly after the financial crisis, Robert Merton, who shared the Nobel Prize for developing option price theory, gave a lecture in which he suggested that many top corporate executives did not really understand what was being done by the practitioners who worked for them. I termed this the Suits vs. Geeks divide. Many CEOs, and also many top officials in Washington, had low geek quotients.

3. Whether you love or hate geek finance, whether you want to tolerate it or would seek to get rid of it, you have to understand it. I think that Suits with low geek quotients are dangerous.

4. In 2003, Freddie Mac’s Board ousted a CEO with a high geek quotient and replaced him with a CEO with a low geek quotient. The main change that resulted from that was that Freddie Mac greatly increased its exposure to risky loans.

5. In 2006, Goldman Sachs lost a CEO with a low geek quotient. Subsequently, and this may have been purely coincidental, Goldman was relatively good at reducing its exposure in the mortgage market.

6. The original idea of TARP, which was to use government funds to buy toxic assets, had a low geek quotient. As a geek, I did not think it was workable. Of course, this idea was never implemented. Instead, the TARP money pile was used to inject capital into banks, to restructure GM and Chrysler, and ….well, whatever the President and Treasury Secretary felt like spending it on, it seems.

7. Back to the Volcker Rule. I don’t think it can fly. My prediction is that they will get it off the ground to save face, then it will wobble at low altitude for a bit, and within a few years you will find it resting on the ground. I imagine a sequence of conversations going something like this:

Volcker rulers: Banks, you cannot touch securities.

Banks: But you do want us to hedge our risks, don’t you?

Volcker rulers: Hmmm. OK, but you have to hold your hedging instruments until they mature.

Banks: But when interest rates change, you do want us to rebalance, don’t you?

Volcker rulers: Hmmm. OK, but…

etc., etc., until there is no rule left

Robert Solow and Russ Roberts

On this podcast. As many commenters point out, Solow has a lot of acuity (and stamina!) for someone aged 90.

I think that in their discussion of what people believe in macro and why, I prefer Solow’s rendition. I think he is correct that it was not as simple as saying that Chicago taught monetarism and MIT taught fiscalism. (Small world note: Roberts’ undergraduate friend who went to MIT was my roommate during our first year of graduate school.) I think Solow is correct that the AS/AD paradigm was very different from what came before. However, I would note that until the 1970s, it was the AD paradigm alone, with the Phillips Curve (popularized by Samuelson and Solow) tacked on. In the 1970s, as economists started to think more about inflation and about what sort of theory might explain the Phillips Curve, there emerged the AS-AD paradigm. Most of the macro that came out of that 1970s theorizing ended up going in a direction that neither Solow nor I liked. As I point out in my macro memoir, that is how I was drawn to Solow as a thesis adviser.

Joshua Gans on Apple Pay and Market Power

He writes,

So last week, in some of these stores you could use Apple Pay. This week in CVS and Rite Aid you can’t. The reason appears to be that a bunch of large retailers got together a couple of years ago to develop their own mobile payments solution — mostly to compete with existing banks and credit card associations. They are still doing that and will only launch their app, CurrentC, next year. In the meantime, they have acted to stop Apple Pay and Google Wallet from getting traction.

When a consortium of big legacy companies tries to take on a tech company in an innovative area, I expect an epic fail.

Matthew Yglesias on Amazon and Market Power

He writes,

What is indisputably true is that Amazon is on track to destroy the businesses of incumbent book publishers. But the many authors and intellectuals who’ve been convinced that their interests — or the interests of literary culture writ large — are identical with those of the publishers are simply mistaken.

Pointer from Jason Collins.

I agree that we should not be rushing to the barricades to defend the traditional publishing business model. Rooting for the book publishers to have strong negotiating leverage with Amazon is equivalent to rooting for the legacy music industry to have strong negotiating leverage with iTunes.

Research Findings Support Change-the-Gender

Therese Huston writes in the NYT,

Neuroscientists have uncovered evidence suggesting that, when the pressure is on, women bring unique strengths to decision making.

…the closer the women got to the stressful event, the better their decision making became. Stressed women tended to make more advantageous decisions, looking for smaller, surer successes. Not so for the stressed men. The closer the timer got to zero, the more questionable the men’s decision making became, risking a lot for the slim chance of a big achievement.

Pointer from Jason Collins.

An evolutionary psychologist would have a great just-so story to explain this. Women are gatherers, looking for smaller, surer successes in finding food. Men are hunters, risking a lot for a slim chance of bringing back meat.

As you know, I have frequently suggested that if I had the job of regulating risk in the financial industry, I would change the gender of the CEO’s at big banks. (Some people wonder if that means I would order sex-change operations. No, I would also give the CEO the option of stepping down to allow a woman to be appointed.) I came to this point of view on the basis of casual observation of the different propensities of men and women as executives.

But now we have experimental evidence. Trust the science!

Just to be clear, these findings come from a methodology of which I am deeply skeptical. It just happens that in this case that the results line up with my own preconceptions.

Luigi Zingales on Economists’ Capture

I passed on listening to this podcast with Russ Roberts last week, but Russ insisted that the paper is important, and I have come around to agree. Zingales concludes,

The purpose of this article is to highlight the parallelism between the forces that we use to explain regulatory capture and the ones that can capture economists. Unless we economists are made of a different fabric of the regulators, I do not see why we should not be subjected to the same kind of pressures.

Based on the analysis of these forces, I discuss several mechanisms to can help prevent (or reduce the effects of) capture: from a reform of the publication process, to an enhanced data disclosure, from a stronger theoretical foundation to a mechanism of peer pressure. Ultimately, the most important remedy, however, is awareness of the problem, an awareness most economists still do not have.

Read the whole paper. I thought that Zingales’ proposed remedies were too much on the clever and cute side. A couple of examples

Social handicaps make a person less suitable to an industry job, reducing the value of what business has to offer down the line and thus reducing a possible channel of capture.

If authors can post rejection letters, they can embarrass the editors when they make mistakes, especially when these mistakes seem to be driven by outside interests.

The conventional wisdom is that issues of professional ethics revolve around who pays you to do research. But money is not necessarily the driving force in economists’ capture. To borrow an expression from Roberts’ new book on Adam Smith, economists will respond to those who make them feel lovely. So if your paper with a statistically significant result gets published and your paper with a statistically ambiguous result does not, you stop submitting papers with ambiguous results. If the one-sided, uncharitable opinion pieces that you write get widely circulated and praised, then you stop writing charitable, balanced pieces. If the unreliable study that gets a result that is so exciting or pleasing that the press picks up on it, then you stop worrying about whether your results are reliable.

Although Zingales is correct to stress that it is vital for economists to be aware of the issue of capture, I would go further in the direction of deep cultural change, as opposed to clever incentives or procedural tweaks. I think that the challenge is to make feeling lovely align with intellectual honesty, as opposed to just getting articles accepted at journals or being a popular opinion-writer. That in turn requires thinking about, agreeing about, and caring about what it means to be intellectually honest.

My thoughts (these ideas may overlap):

1. Fight against confirmation bias. Work very hard to convince yourself that you may be wrong, and work less hard to convince yourself that you are right. When you come across a paper that goes against your views, look for its strong points. When you come across a paper that aligns with your prior views, look for its weak points. (I think that failure to uphold this standard accounts for a lot of the degeneration of academic journals. More generally, it contributes to the tend toward conformity and unreliable research findings rather than open intellectual inquiry and genuine progress.)

2. Resist the temptation to write in ways that work to persuade those with whom you agree to keep their minds closed. Instead, seek to open their minds to possible problems with their ideas.

3. In the political realm, try to pass Bryan Caplan’s ideological Turing Test. State the other side’s case in a way that they would mistake you for being one of them.

4. Be charitable to those with whom you disagree. Try to engage their strongest arguments rather than harping on their weakest arguments.

5. Steer clear of asymmetric insight. That is, do not claim to understand your opponents better than they understand themselves.

6. In particular, steer clear of reductionism. Rather than trying to explain away other’s beliefs, assume that others have arrived at their views on the basis of reason.

People, Countries, and Debt

James Kynge writes about China,

Total debts owed by the government, companies and households have ballooned to 240 per cent of gross domestic product, virtually double the level at the time of the global financial crisis.

This ratio, it is true, remains modest next to some in the west; US debts stand at 322 per cent of GDP, Ireland’s at more than 400 per cent, while Greece and Spain are at about 300 per cent each.

Pointer from Tyler Cowen.

To me, it seems careless to add up the liabilities of government, companies, and households. I object to taking the sum of these numbers and saying “China owes ___.” The debt is not owed by an entity called the country of China. It is owed by disparate entities within the country of China. And much of it is owed to disparate entities within China.

Speaking of which, it also seems careless to ignore assets. Suppose somebody has a $300,000 mortgage and a $30,000 income. You might say, “wow, their debt is 1000 percent of their income!” But that is not so alarming if they have $1 million in assets (maybe the house itself is worth $1 million).

I’m not trying to dismiss the issue. Just the other night, one of my favorite economists pointed out that if the debt burden on the Chinese government starts to pinch, then it might have to stop buying (or even start selling) American government bonds. That could fuel a rise in interest rates, and then the debt burden of the American government would spike up. If that happens, have a nice day. But a high ratio of total liabilities of all of the entities within in a country to its GDP is at best a very imprecise indicator of financial distress.