Shorter Version of Tyler Cowen’s New Book

From one of my comenters.

the chief anti-libertarian human tendency is the wish to minimize risk by distributing it which leads to all the “too big to fail” and social security and regulatory boondoggles. The bigger and richer the society the easier it is to fulfill this wish at least in the short-medium run

This sounds like the problem of the “complacent class,” as reviewed by Walter Russell Mead or Edward Luce.

I have influence with Steve Bannon


he was indeed reading “The Best and the Brightest.”

Read the whole article, by Marc Tracy in the NYT. No, there is no indication that I had anything to do with Bannon’s choice of reading. Tracy makes this point:

If “The Best and the Brightest” is a brief against the East Coast meritocracy, though, its proposed alternative is not pure ideology. It is expertise.

Time and again, in Mr. Halberstam’s telling, lower-level government officials who understood Vietnamese politics, sentiments and even geography assessed reality accurately and offered correct policy recommendations to the major characters — who shunted them aside.

Well, in hindsight, the lower-level officials who raised doubts about the Vietnam commitment were experts. But there were other lower-level officials who argued the other way, and in hindsight they look like fools, or like toadies saying what they thought the senior policy makers wanted to hear.

I did not come away from the book thinking that the main conflict is between ideology and expertise, although I think that is a plausible reading. Instead, I came away from it thinking that the major conflict was between “can-do” overconfidence and sensible skepticism. The political process prefers the overconfident individual promising to solve problems, and so power accrues to people with “solutions,” even if those turn out to have dreadful consequences.

It did not take an expert to sense that there was something wrong with getting involved in Vietnam. On p. 181, Halberstam writes,

Thruston Morton was assigned to inform Senator [Richard] Russell of the Armed Services Committee that the President would be sending an estimated 200 men to South Vietnam as well as funding the country. Russell answered that it was a mistake, it would not stay at 200, it would eventually go to 20,000 and perhaps one day even as high as 200,000. . .

“I think this is the greatest mistake this country’s ever made,” Russell said.

That was during the Eisenhower Administration. A few years later, Russell and others advised President Kennedy against expanding the commitment, but at the same time other powerful figures argued for an even stronger U.S. buildup. This was to be the case throughout the war, and neither Kennedy nor Johnson were decisive enough to either limit the commitment on the one hand or to undertake the most aggressive military actions on the other.

As I pointed out in a previous post, Eisenhower deserves credit for staying out of a war in Vietnam. Halberstam writes (p. 178-179),

Eisenhower was in no mood for unilateral action, and in 1954 his manner of decision making contrasted sharply with that of Lyndon Johnson some eleven years later. Whereas Eisenhower genuinely consulted the Congress, Johnson paid lip service to real consultation and manipulated the Congress. Eisenhower’s chief of staff had made a tough-minded, detailed estimate of what the cost of the war would be; eleven years later an all-out effort was made by almost everyone concerned to avoid determining and forecasting what the reality of intervention meant. In 1954 the advice of allies was genuinely sought; in 1965 the United States felt itself so powerful that it did not need allies, except as a means of showing more flags and gaining moral legitimacy for the U.S. cause. Eisenhower took the projected costs of a land war to his budget people with startling results; Johnson and McNamara would carefully shield accurate troop projections not only from the press and the Congress but from their own budgetary experts. The illusion. . .that bombing could be separated from combat troops, which was allowed to exist in 1965, was demolished in 1954 by both Ridgway and Eisenhower.

The lessons that Mr. Bannon might take away from this are to consult widely on decisions, pay attention to pessimistic estimates of potential costs and adverse consequences, and above all encourage honesty from subordinates. Beware of those who tell you what they think you want to hear, and instead encourage those who give you their honest analysis.

Prestige and Social Change

Vera L. te Velde asks

which cooperative norms are chosen to be enforced and how does this come about?

Pointer from Tyler Cowen. Read her whole post.

Joseph Henrich, in The Secret of our Success, emphasizes the role of prestige. I can think of some examples. Joel Mokyr points out that prestigious scientists, particularly in the UK, were able to change the way people approached many issues during the Enlightenment. Another example would be the way that prestigious people, particularly in arts and entertainment, were able to quickly change attitudes about homosexuality in the United States. Another example would be the way that prestigious people, again particularly in arts and entertainment, began in the 1960s to use four-letter words in public with increasing frequency, leading to the breakdown of the norm against doing so. Another example would be racism and eugenics, which were popular among intellectuals one hundred years ago and became very unpopular more recently.

Another source of changes in norms is general upheaval, in which many people lose wealth or status. I am thinking of the changes in norms that took place in Germany after the first World War, producing political street violence and

Still, it is exceptional for social norms to change rapidly. Many attempts to change social norms are not successful. And I think that you have to allow for a lot of idiosyncratic factors.

A good example to keep in mind is the emergence and influence of the Beatles. I think it is a mistake to view every aspect of that phenomenon as if it were pre-ordained somehow. Beatle haircuts? Quite accidental, if you ask me.

Sure, maybe somebody else comes along and combines gritty R&B instrumentation with vocal harmonies, but do they go to India? Turn drug use into a high-status activity?

Finally, to say that people with prestige determine which norms get enforced invites the question: how do certain individuals or classes of people come to have high prestige?

Some of it has to do with their idiosyncratic abilities. Lennon and McCartney had a gift for cultivating pop stardom. Samuelson had a gift for making other economists feel like lesser mortals.

Some of it also has to do with where individuals fit in the entire status cosmos. Lennon and McCartney benefited from disc jockeys and others trying to raise their own status in the nascent world of teenagers listening to transistor radios. Samuelson benefited from young mathematically-oriented economists eager to raise their status within the profession.

In short, I would recommend studying the issue of how people obtain high prestige and how that in turn enables them to affect the larger society.

Jeff Sachs on Health Care Policy

He writes,

That report found that the higher health care outlays in the United States–compared with Europe, Canada, Japan, and Australia–are due to the higher prices of health services. . .rather than to a greater use or higher quality of those services.

That is on p. 64 of his new book, Building the New American Economy. The report that he footnotes is this one from the Institute of Medicine.

I looked through the report, and I did not see the comparison to other countries to which Sachs refers. The report does have a table that allocates what it calls excess spending in the United States, which briefly looks like this:

Category Excess Cost
Unnecessary services $210 billion
Inefficiently delivered services $130 billion
Excess administrative costs $190 billion
Prices that are too high $105 billion
Missed prevention opportunities $55 billion
Fraud $75 billion

I am not endorsing these numbers. My point is that the report’s analysis and recommendations differ considerably from the way that Sachs construed them.

I do not ordinarily write about books that I do not like. I was sent a review copy, and I would like to be charitable about it.

Sachs is not always wrong. He is willing to dispute mainstream economists, and I certainly do not hold that against him. But wading through this careless and dishonest book left me hoping that the Democrats stick with their mainstream economists.

Russ Roberts and Sam Quinones

The most recent econtalk is one of the most fascinating episodes ever. It made me want to read Quinones’ book on the evolution of the opiod crisis. I’ll pick one random excerpt:

Oxycontin is a game-changer for another reason, not just how it’s marketed. … it takes people up to very, very large addiction levels, daily addiction levels, so you have to be doing 100, 200, 300 milligrams a day of these pills–that’s $1 dollar a milligram on the street. So, it’s 100, 200, 300 milligrams a day. Well, you can’t sustain that. There’s no way you can continue with that. So you begin to look for something very cheap and just as potent. And cheap Mexican heroin fills that bill perfectly. And their heroin fills that bill absolutely. And it’s easy to get. And it’s available. And they’ll give you free come-ons and discounts, etc. And so it’s that kind of encounter, between the heavy marketing of pain pills and Purdue Pharma, and …these heroin traffickers with this new system and this very cheap, very potent dope that creates the first examples of what we’re now seeing all across the country, almost in every state of the union. Which is: people getting addicted first to pills, and then transitioning to very cheap Mexican heroin.

Jay Winik on the President’s Erratic Style

He writes,

Often he acted not by following any grand design but by sheer instinct, hastily improvising. . .He deliberately fostered disarray among his own people. . .Disorder, delays, and muddle were frequently the watchwords; problems were met principally by improvisation, not long-term strategy.

He is referring, of course to FDR. FDR was also a wealthy man who was highly regarded by non-affluent voters. He used new media effectively (radio was new at the time). And some of his political opponents really, really hated him.

The book is 1944.

Different Types of Expertise

Something bothered me about the way that Tyler Cowen framed the issue of rule by experts vs. popular rule. He refers to David Levy and Sandra Peart’s new book, which I started reading. I think I am going to be bothered by their framing, also. Let me try to articulate my issue.

Last year, I was not happy with the way my bike brakes were working, and I took the bike into the shop. An “expert” diagnosed the problem as a worn brake cable and replaced the cable. The brake worked much better with the new cable, so as far as I can tell the diagnosis and the remedy were correct.

I believe that economics is fundamentally different from bicycle brake repair. We are not experts in the same sense that my bike mechanic was an expert. Let me try to explain why that is the case.

We know what a brake is supposed to do. It is much harder to give an account of what a financial system (or example) is supposed to do.

We can describe in complete and comprehensive terms how a bicycle brake should work. We cannot do that with a financial system.

A bicycle brake was built from a design. Knowledge of how it was designed can help us to fix it. The financial system emerged. There is no design specification to which we can refer.

When brakes are not working well on a bike, there are a limited number of possible causes. When a financial system does not work well, there are more possible causes than we can list.

Theories about brakes are easily tested under controlled conditions. Theories about financial systems are not.

The brake itself does not have beliefs that affect its behavior. The participants in the financial system do have beliefs that affect the behavior of the system.

It is possible to gain some wisdom from studying economics, just as it is possible to gain some wisdom from studying history. But it is not possible to attain the sort of expertise in economics that one can attain as a physicist, plumber, or bicycle repairman. To encourage such analogies is unwise.

Reframing Financial Regulation

That is a new compendium from Mercatus. I wrote one of the essays, on risk-based capital.

The way I see it, the main purpose of central banking and financial regulation is to try to allocate credit to uses favored by political leaders. These leaders want credit to be cheap and available for government borrowing and for residential mortgages. So we should not be surprised that risk-based capital requirements are used to reward banks that put money into those assets.

In the essay, I explain why risk-based capital regulation has not served the intended purpose of reducing financial risk.