Does War Improve Cooperation?

I review Peter Turchin’s book from 2005. My final paragraph:

For libertarians, these are crucial questions. In order for markets to function well, they must be embedded in cultures that promote pro-social behavior and are conducive to trust. If the absence of external conflict weakens the bonds that prevent internal conflict, then the libertarian goal of peaceful cooperation in all domains will prove elusive.

Coincidentally, the Journal of Economic Perspectives that just came out has an article on this topic by Michal Bauer, Christopher Blattman, Julie Chytilová, Joseph Henrich, Edward Miguel, and Tamar Mitts. They conclude,

Most of the papers in this emerging literature agree on one central matter: that the data strongly reject the common view that communities and people exposed to war violence will inevitably be deprived of social capital, collective action, and trust. Across the 16 studies from economics, anthropology, political science, and psychology, the average effect on a summary index of cooperation is positive and statistically significant, if moderate in magnitude.

A More Timely Measure of Rent Inflation

Adam Ozimek writes,

As I proposed in my work, CoreLogic utilizes an approach that mirrors the S&P/Case-Shiller house price index. This approach measures current market prices by using only new leases, and controls for housing quality by tracking the same units over time.

Pointer from Tyler Cowen.

The standard BLS measure is more like a smoothed lagging indicator. Relative to the BLS path for rental inflation since 2008, Ozimek’s revised path shows inflation dipping by more early in the recession and then climbing by more during the recovery (should I say “recovery”?).

Unlike Ozimek, I see this as having zero impact for the macroeconomic theory of the Phillips Curve. That theory deals with the rate of wage change, and changing how you measure rent inflation does not change the history of wage inflation. To show a meaningful trade-off between wage growth and unemployment in recent years, you are going to have to find another data-massaging trick.

Of course, I admit that I used consumer prices in my recapitulation of Phillips Curve history. If I were extending that essay today, I would say that the Phillips Curve died again in 2008-2016, which is another period in which conventional macro does poorly. The Kling/FischerBlack view of inflation, which is not confounded by recent data, is presented in my latest book.

Russ Roberts and Yuval Levin

The latest episode of econtalk. Recommended. A snippet:

We don’t think enough about how unusually cohesive and consolidated America was coming out of the Second World War, after the experience of the Depression; but even more than that, half a century of industrialization, of mass media, of progressive politics left American life intensely cohesive and consolidated and focused on national unity, on solidarity above individual identity and individualism generally. And what’s happened since that time is the breakdown of that consolidated culture–the liberalization, we would say in a positive sense, or the breakdown in a negative sense–the culture has become much more fragmented

This reminds me a bit of Brink Lindsey’s The Age of Abundance.

Recall my review of Levin’s book.

How Should Europe be Organized?

In the wake of the Brexit vote, here are my thoughts. I view the issue primarily from a libertarian perspective, which means a bias in favor of free trade and free movement and a bias against centralized bureaucracy.

1. The actual Brexit vote, as I interpret it (and I make no claim to expertise at reading voters’ minds) seemed to rest mostly on hostility to free trade and free movement, with some hostility toward centralized bureaucracy. And if you have not already followed my recommendation and read Martin Gurri’s The Revolt of the Public, the Brexit vote is another reason you should.

2. I think that a common currency is a good thing. As readers of my new book will realize, I don’t subscribe to the sort of monetarist macroeconomics that would lead one to say otherwise.

3. I think that freedom of movement is a good thing. Border checkpoints are a bad thing.

4. However, you have to think about how to reconcile freedom of movement with welfare-state benefits. The libertarian approach is to get rid of the welfare-state benefits. A less radical approach is to clarify which benefits are limited to citizens and specify the qualifications for becoming a citizen.

5. As for terrorism coming from immigrants, it seems that we can choose two of the following three: privacy, open borders, and security. I am willing to toss out privacy, as long as the government actors providing security are not themselves able to hide what they are doing. Few card-carrying libertarians would agree with this view. Before you blast away at it, read or re-read David Brin’s Transparent Society Revisited. In any case, I interpret the voters as saying that we should toss out open borders.

6. Some people equate a strong EU with technocrats being able to solve/avert the sovereign debt crisis that threatens several countries. I do not.

7. Some people see the EU as a force for free trade. I see it as a force for trade that is managed, regulated, and harmonized. Is this more or less free than what we would see if trade policies were left up to individual governments? I would guess it is somewhat less free, particularly as we move through time, and the bureaucratic tentacles of the EU tend to spread.

8. Of all the reasons for selling stocks, I think this was the least compelling. I wonder if the stock market was simply poised for a decline, anyway, but it needed some sort of focal point to get the selling going.

On net, I would have voted “Leave.” But I don’t like the anti-immigrant, anti-trade rationale.

Rep. Hensarling on Risk-Based Capital

He said,

Risk-weighting is simply not as effective. First, it is far too complex, requiring millions of calculations to measure capital adequacy. Second, it confers a competitive advantage on those large financial institutions that have the resources to navigate its mind-numbing complexity. Third, regulators have managed to get the risk weights tragically wrong, for example, treating toxic mortgage-backed securities and Greek sovereign debt as essentially risk-free. One myopic globally imposed view of risk is itself risky. Finally, risk-weighting places regulators in the position of micro-managing financial institutions, which politicizes credit allocation. Witness the World Bank recently advertising its zero risk rating under the Basel Accords for their “green bonds.”

Clearly, he understands what I call The Regulator’s Calculation Problem. Pointer from John Cochrane.

Read the rest of John’s post and weep. Weep because this could have been a year when a strong center-right Republican Presidential candidate, running on an agenda that includes these sorts of proposals, could have been so easy to support.

My Essay in Canada’s National Post

It came out yesterday.

Macroeconomics, which is the branch of economics that purports to connect fiscal stimulus with employment, tries to ignore the evolution of PSST. Interestingly, macroeconomics straddles the too-concrete thinking of the public and the too-abstract thinking of the academic elite.

The essay is based on my new book, which rose to #1 on Amazon in the narrow category of macroeconomics.

My Review of Kim Holmes

Is here.

Holmes claims that the left has largely abandoned liberalism. To back this claim, he offers a depressing litany of examples, which I will not recite here. Instead, what I found particularly interesting is the way that Holmes blames post-modern philosophy for leading the left away from the Enlightenment values of free speech and individual liberty.

It is from reading Scruton and Holmes that I have come to see post-modernism as something other than a minor intellectual diversion.

Indulging in Confirmation Bias

For my view of the housing bubble. John Geanokoplos and others wrote,

Notice that if we freeze leverage (LTV) at constant levels, the boom gets dramatically attenuated, and the bust disappears.

This statement is based on a simulation of an “agent-based” model for house prices. Pointer from Eric Beinhocker from Mark Thoma.

Beinhocker writes,

rather than predict we should experiment. Policymaking often starts with an engineering perspective – there is a problem and government should fix it. For example, we need to get student mathematics test scores up, we need to reduce traffic congestion, or we need to prevent financial fraud. Policy wonks design some rational solution, it goes through the political meat grinder, whatever emerges is implemented (often poorly), unintended consequences occur, and then – whether it works or not – it gets locked in for a long time. An alternative approach is to create a portfolio of small-scale experiments trying a variety of solutions, see which ones work, scale-up the ones that are working, and eliminate the ones that are not.

American pragmatist John Dewey also thought that technocrats should take an experimental approach. That is not a new idea. (I learned this from Jeffrey Friedman, who sent me a draft from his forthcoming book.) Of course, my view is that I would rather see experiments come from the market than from technocrats.

Later, Beinhocker writes,

A major challenge for these more adaptive approaches to policy is the political difficulty of failure. Learning from a portfolio of experiments necessitates that some experiments will fail. Evolution is a highly innovative, but inherently wasteful process – many options are often tried before the right one is discovered. Yet politicians are held to an impossibly high standard, where any failure, large or small, can be used to call into question their entire record.

I would argue that avoidance of failure is natural in any large organization, not just government. That is why I think that markets are better able to conduct experiments to solve problems.

I found Beinhocker’s essay interesting. However, if we are going to try to improve economics, it is important to include behavioral policy-making and politics into the analysis. Do not simply assume a benevolent, rational technocrat as decision-maker.

Speaking of confirmation bias, a recent Instapundit post linked to an old essay of mine, one which speaks to this comparison between expertise mediated by markets and expertise mediated by government.

Carlos Lozada Reviews Yuval Levin

Lozada writes,

So how do we go about strengthening families, religious organizations, schools and all those mediating institutions? Levin’s recommendations are aggressively vague, and where they get specific they seldom surprise. He calls for a “mobility agenda,” with economic growth spurred by tax and regulatory reform, a more competitive and low-cost health-care system, lower budget deficits — all part of a standard conservative recipe. He proposes education reform that includes more professional certificates, apprenticeships “and other ways of gaining the skills for well-paid employment that do not require a college degree.” He prefers to untether employees’ retirement accounts and health insurance from any particular workplace, but acknowledges that this would require “more fundamental policy innovations, and it is not yet evident just what those will be.” Okay, then. It’s nice if the things you want are all bottom-up and empowering and networked and diverse and flexible, but adjectives are not policies.

The review is more sympathetic than what I expected. In my view, Lozada makes too much of the contrast between Levin and Trump. Of course, that contrast is quite strong, but dwelling on it does not help the reader of the review understand what is distinctive about Levin’s thought. For that, you should go back to my review. And read the book when it comes out, which will be in a few days.

Scott Alexander Puts Me in His Corner

On the subject of poverty, he offers a two-by-two matrix to classify viewpoints.

On one axis, you can think that the capitalist system is basically competitive or basically cooperative. The former view is that it creates winners and losers. The latter view is that it is a rising tide that lifts all boats.

On the other axis, you can be optimistic or pessimistic. If you are optimistic, you think that a bit of social change can take care of poverty. If you are pessimistic, then if you think of the system as competitive you want revolution. If you think of the system as cooperative, you end up like this:

we’re all in this together, but that helping the poor is really hard. . .capitalism is more the solution than the problem, and that we should think of this in terms of complicated impersonal social and educational factors preventing poor people from fitting into the economy. . .worry school lunches won’t be enough. Maybe even hiring great teachers, giving everybody free health care, ending racism, and giving generous vocational training to people in need wouldn’t be enough. If we held a communist revolution, it wouldn’t do a thing: you can’t hold a revolution against skill mismatch. This is a very gloomy quadrant, and I don’t blame people for not wanting to be in it. But it’s where I spend most of my time.

Me, too. Except note that over the past two hundred years the tide has lifted more and more boats, quite dramatically. It is still lifting more and more boats, but those boats are more likely to be in China, India, or Africa than in the rural United States. And places like St. Louis.