Category Archives: links to my essays

Peter Suderman Predicts the Fiscal Cliff Outcome

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This essay appeared almost three weeks ago.

just as the doc fix has become a yearly congressional ritual with no end in sight, it may be that many of the temporary policies of the fiscal cliff become permanent fixtures on our policy calendar.

And if the doc fix is any guide, that will have deleterious effects on both the budget and the economy. It will provide a convenient way to hide long-term spending commitments inside repeat extensions of temporary policies. And it will result in nagging economic uncertainty as the private sector endlessly worries that this year just might be the fluke year that Congress won’t act like it normally does and make a deal. At the same time, it will have the larger effect of distracting Congress from fixing the budget’s real long term problems by focusing legislators’ attention on an infinite loop of short-term problems. It’ll be the doc fix for everything—and the fiscal cliff forever.

Read the whole thing. Along with my Lenders and Spenders, it provides you with a pretty complete cynical picture.

James Kurth on Conservatism

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He writes,

The economic and fiscal thinking of the Tea Party movement had much in common with that of traditional American conservatism, and with theorists such as Friedrich Hayek and Ludwig von Mises. It had much less in common with the economic and fiscal thinking of reinvented conservatism, and with theorists such as Friedman and the monetarists. Indeed, the thinking of the Tea Party movement was largely the same as that of the libertarian movement, which had long been a marginal element within the Republican Party.

…American conservatism is now split between two tendencies: (1) a partially-discredited reinvented conservatism, which nevertheless continues to dominate the leadership or “establishment” of the Republican Party because it corresponds to the economic interests of the party’s elites and big donors, and (2) a partially-revived traditional conservatism, which is a significant insurgent force within the Republican Party, because it corresponds to the economic interests of much of the party’s base and many of its core voters.

It is a long essay, which I recommend reading even though I disagree with a fair amount of it. Some thoughts:

1. What is the plural of post mortem? It seems to me that we have seen a lot of them after the election. I had a traumatic experience after 2008, in which I made the case that the U.S. was going to turn into a one-party state. Bryan Caplan challenged me to a bet, which I lost when the Republicans won the House in the 2010 mid-terms. Still, I may have been correct, at least in terms of national politics. But it is interesting that so many states are in Republican hands.

2. Kurth’s history of conservatism has traditional conservatives favoring free markets, while what he calls “reinvented conservatism” comes across as cronyism. He associates “reinvented conservatism” with Milton Friedman and Ronald Reagan, which I am sure will annoy fans of those two icons.

3. As those of you have read Not What They Had in Mind know, I disagree with Kurth’s narrative in which banks fought for and achieved deregulation, leading to the financial crisis. First, this ignores the role played by housing policy and capital regulations. Second, it ignores the views of regulators, who did not think that they were loosening up the reins but thought that they were in fact exercising better control and fostering an environment of reduced risk-taking by banks. There is a huge hindsight bias in claiming that the regulators were intentionally easing up.

4. Kurth summarizes the current state of affairs as follows:

The core voting groups for the progressive coalition and the Democratic Party are (1) blacks, (2) Hispanics, and (3) workers in the public sector. Conversely, the core voting groups for the conservative coalition and the Republican Party are (1) economic and fiscal conservatives; (2) Evangelical or Bible-believing Protestants; and (3) white male workers in the private sector

…there remains one immense independent or swing group, and that is white women. A substantial majority of these now vote for Democratic candidates, with economic issues being primary for working-class women and social issues being primary for middle-class women. If these women continue to vote for the Democratic Party in the future, the prospects for the Republican Party to win most presidential and senatorial elections will remain bleak.

5. I think that what potential factor that could shape up electoral politics is the government debt problem. Will it cause continued political friction, as I predict? And will voters perceive the problem as unsustainable progressive programs or Republican recalcitrance? Keep in mind that objective reality, even assuming that it is knowable, may play little or no role in public perceptions.

My Election Post-Mortem

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In this essay, I attempt to channel Winston Churchill.

Romney’s campaign was cautious and uninspired, with no chance of glory in either eventuality. Had he instead said in plain terms that our government is broke and offered specific, bold steps to eliminate activities and reform entitlements, perhaps the result would have been a resounding loss. But it would have been an inspiring defeat, one that would have positioned the Republican Party to gain favor as the United States heads toward fiscal crisis, just as Churchill’s long record of warnings about the Nazis positioned him to gain favor when Hitler launched his blitzkrieg.

John Cochrane on Health Care

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A reader asked me to comment on Cochrane’s essay from October 18. The title of the essay was “After the ACA,” which might indicate that Cochrane mis-forecast the election. To make a long story short, I agree with his economic prescription but disagree with his political diagnosis for why we have what I call insulation instead of real health insurance. Cochrane’s explanation for the absence of the latter is:

Because law and regulation prevent it from emerging. Before ACA, the elephant in the room was the tax deduction and regulatory pressure for employer‐based group plans. This distortion killed the long‐term individual market and thus directly caused the pre‐existing conditions mess. Anyone who might get a job in the future will not buy long‐term insurance. Mandated coverage, tax deductibility of regular expenses if cloaked as “insurance,” prohibition of full rating, barriers to insurance across state lines – why buy long term insurance if you might move? – and a string of other regulations did the rest. Now, the ACA is the whale in the room: The kind of private health insurance I described is simply and explicitly illegal.

My thoughts:

1. Nowhere do we observe the Cochrane (or Kling) health insurance system, or anything close to it. This suggests that something other than anomalous U.S. regulations are at work.

2. Health care is something that people love to have others pay for. Insert obligatory Robin Hanson reference.

3. Very few people understand insurance in general. Most people seem to be more loss averse than risk averse. They will buy extended warranties on cheap goods but ignore risks of catastrophic events, such as floods.

4. All around the developed world, third-party payment dominates direct consumer payment for health care. Perhaps consumers feel that if they are spared the need to take out their credit cards then it is easier sustain the belief (illusion?) that their doctors really care about them.

5. All else equal, doctors prefer being paid by someone other than the patient. They prefer to be thought of as offering the “gift of healing.” Of course they do want to get paid.

It turns out, much to doctors’ dismay, that all else is not equal. Third party payers impose all sorts of unpleasant paperwork and regulation. But you won’t see many doctors lobby for consumer-paid health care as the solution. They seem to view paperwork and regulation as an evil plot foisted on them for no apparent reason, without recognizing that it as an intrinsic result of introducing a third party into the payment process.

Cochrane goes on to discuss health care supply. Again, I agree with his prescription, which is to allow for vigorous competition. But he seems to regard health care regulation as an evil plot foisted on society, without recognizing that it may emerge naturally.

Competition is a trial-and-error process. In health care, we equate consumer protection with prevention of error, creating a trade-off between consumer protection and competition. Our choice along this trade-off is affected by the problem of “the seen and the unseen.” Health care errors have concentrated, direct impact on identifiable patients. Competition has diffuse benefits that show up indirectly in an ill-defined broader population. I think it is very difficult to convince people to trade off consumer protection for competition. And, of course, incumbents in the health care industry will do their best to persuade people not to make that trade-off.

While I think Cochrane’s essay will appeal to those who are already inclined to agree with him, others are unlikely to be persuaded. Incidentally, I had the same reaction to John Goodman’s book, Priceless.

Neither Cochrane nor Goodman addresses the arguments for intervention that derive from Arrow and Stiglitz. Arrow focuses on asymmetric information between consumers and doctors, which appears to justify consumer protection. Stiglitz focuses on asymmetric information between consumers and insurance companies, which appears to justify mandated health insurance.

Both the Arrow argument and the Stiglitz argument have merit in theory. My own view is that other forms of “market failure” are more important in practice. The “seen and the unseen” problem that I alluded to earlier means that, contra Arrow, we have too much consumer protection in medicine, not too little.

As I suggested earlier, the health insurance market suffers from the fact that consumers choose on the basis of loss aversion rather than risk aversion. Moreover, contra Stiglitz, there is that evidence relatively healthy people, rather than opting out of health insurance, are more likely to pay for it. This reflects the fact that the personality characteristic of conscientiousness drives both health and the propensity to obtain insurance. As a result, health insurance companies are treated to favorable selection, not adverse selection.

Having said that, I do not think it is Arrow and Stiglitz that libertarians need to overcome. I think we need to understand the deep-seated cultural beliefs that pertain to health care and either adapt our recommendations to those beliefs or try to change them.

The 30-year Fixed-rate Mortgage

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From my essay on mortgage interest-rate risk:

Interest-rate risk migrates toward those financial institutions that enjoy the highest level of perceived government protection with the least effective form of regulation. The perceived government protection enables them to serve as reliable counterparties to households and firms seeking risk protection. The relatively less stringent regulation leads the risk-bearing institutions to reap gains when interest rates are relatively stable, without having to hold sufficient capital to survive a major shock.

…Suppose that regulators actually succeed in locating all of the bearers of interest-rate risk and holding them to strict capital standards. I believe that the consequence of this will be that the interest rate on 30-year fixed-rate mortgages will rise significantly relative to mortgage instruments where rates are fixed for a shorter period.

Targeted Killing

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In a long piece, Glenn Greenwald writes,

Ultimately, what is most extraordinary about all of this – most confounding to me – is how violently contrary this mentality is to the ethos with which all Americans are instilled: namely, that the first and most inviolable rule of government is that leaders must not be trusted to exercise powers without constant restraints – without what we’re all taught in elementary school are called “checks and balances”.

He discusses Presidential exercise of power in the name of fighting terrorism. Read the whole thing. There are many interesting issues here. My thoughts:

1. One hundred years ago, if you did not have a mass of men wearing uniforms, you could not pose much of a threat to society. One hundred years ago, governments did not have available to them the surveillance technology and drone strike technology that some governments have today. I am not saying that I am confident about which old rules, if any, no longer apply, but it is worth thinking about the issue. For a book-length treatment that pre-dates 9/11 (but anticipated it), see David Brin’s The Transparent Society. To see my alternative to Brin’s solution, read The Constitution of Surveillance.

2. My general view is that if we want the government to have new powers, then we ought to build in new checks and balances. I think this applies to much more than just the issue of terrorism, drone strikes, and surveillance. I have written about the generic benefits of having a strong audit function in government.

3. It could be that the best principle to follow when it comes to drone strikes is “never do them.” I think it is easy to develop the hypothesis that they will do more harm than good. It is also quite hard to think of a way to test that hypothesis reliably.

4. At the very least, it would seem better to arrive at a “kill list” by having suspects tried in absentia under some form of courtroom procedure (obviously not with full rights for the accused, and not necessarily public, but subject to audit) than simply have suspects nominated by the intelligence bureaucracy and approved by the President.

5. How does this issue play out with libertarians, progressives, and conservatives? One of Greenwald’s main points is that progressives are not consistent on the issue. They distrusted the Bush Administration but not the Obama Administration. I would say that conservatives fairly consistently support the use of unusual powers. Remember that, as I see it, conservatives’ main focus is on the struggle between civilization and barbarism. Through that lens, provided that you see our side as representing civilization and the members of terror organizations as representing barbarism, drone strikes look good. I would say that libertarians are fairly consistent on the opposite side, because libertarians fundamentally distrust government exercise of power.

6. I think of the essence of progressivism as being on the side of the oppressed against the oppressors. I suspect, as does Greenwald, that because progressives see Obama as on the side of the oppressed they have difficulty imagining that he would abuse power. That does not strike me as a very charitable interpretation of the progressive position. Can one do better?

The Libertarian as a Logical Thinker

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An excerpt from my latest essay, on libertarian thinking as a process rather than as an outcome.

What I am suggesting is that libertarians, rather than defining ourselves in terms of what we believe is right, could instead define ourselves in terms of how one should arrive at beliefs about what is right. Our goal should be to rely as much as possible on logic and as little as possible on heuristic biases. If using these methods leads to the conclusions that are traditionally libertarian, fine. If not, then we should change our conclusions, not our methods.

I think it is best to read the entire essay.

A Solution Exists…I Can Quit Any Time

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Tyler Cowen writes,

Unfortunately, longer-lasting solutions require coordinated agreement among many euro-zone nations and, possibly, the broader European Union. That would include significant debt write-offs (as the International Monetary Fund is suggesting), quick moves toward better-integrated European banking institutions, and a general agreement that the European Central Bank unconditionally support troubled debt securities without trying to manipulate home governments’ policies.

I would say that a longer-lasting solution has to include adopting sustainable fiscal policies. Read the whole column. Another excerpt:

Unfortunately, the relevant governments — and their citizens — still don’t seem close to accepting the onerous financial burdens they need to face. And when those burdens are unjust to mostly innocent voters, no matter whose particular story you endorse, acceptance becomes that much tougher.

Still, we shouldn’t forget that a solution exists.

Meanwhile, back in the United States, Jonah Goldberg writes,

You could confiscate 100 percent of income over $1 million, and it would cover about a third of the deficit (and crush the economy in the process). You’d still have to deal with spending, particularly entitlement spending.

But the Democrats want to do . . . nothing. Or at least that’s the position they seemed to be taking this week.

I want to caution readers not to commit the Fundamental Attribution Error. That is, do not attribute the current political strife and apparent short-termism to the personalities of politicians. Instead, these characteristics are structural defects of a system without a hard constitutional brake against deficit spending. Absent an effective constitutional brake, deficit spending is like smoking. In theory, the politicians can quit at any time. In practice, in many cases we end up with cancer.

That is the import of Lenders and Spenders, an essay that I expect I will be linking to regularly. The point of that essay is that debt crises are easy to slide into and very difficult to get out of.

At the end of the second World War, the United States was fortunate in that (a) running deficits in peacetime was still taboo and (b) Social Security was running surpluses that the politicians had not yet put their hands on, because it was considered a separate account. Unfortunately, both of those taboos went away in the 1960s, when Keynesianism became orthodox and President Lyndon Johnson got his hands on the Social Security surpluses by changing to a “unified budget”.

Eventually, some smokers get cancer. And some deficit-spending countries succumb to the fiscal equivalent. I used to think that Europe was going to get there before the United States, because I thought that in this country we had a stronger political will to restrain deficit spending.

I am starting to change my position. The mainstream views in the United States on deficit spending now lie somewhere in between, “We can quit at any time, but now is not the time” and “We never have to quit.”

Have a nice day.

Other Recent Essays of Mine

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Reforming the Housing Transaction offers suggested improvements in the real estate process.

Who Needs Home Ownership? suggests that the social benefits of home onwership are overstated.

How to Think About QE3 gives an “on the one hand, on the other” analysis.

Subjective Value and Government Intervention looks at how the Austrian economics focus on subjective value tends to bias one against government intervention. Conversely, justification for government intervention often seems to require an expert to calculate value objectively, and this is problematic.

Libertarians and Group Norms points out that libertarians may not have a simple way to respond to the fact that people display group loyalty.

MOOCs and Other Innovations in Education

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In September, I published an opinionated survey of education and technology. Among other things, I said that I thought that the hype around MOOCs (massive online open courses) was overdone.

Since writing that essay, one argument in favor of MOOCs has occurred to me. If you think about it, under the conventional model, most students hate many of the classes that they take. As Bryan Caplan pointed out a year ago, the fact that students are typically happy when class is canceled should give one pause. In the standard model, a sizable fraction of the students are only in the course as part of the process of getting a required certification.

With MOOCs, the student body is an all-volunteer army, as opposed to draftees. That might produce better class discussions, assuming that the technological hurdles to having class discussion over the Internet can be addressed.