The Year of Flawed Books

Writing a “best books of the year” post for 2014 means choosing among flawed books.

Six months after Piketty’s Capital made its splash with the “law of capitalism” that r>g, we have Pikettarians saying that, of course, Piketty never said that r>g explains the rise in inequality in recent years that concerns everyone, and in fact anyone who thinks he said that is a knave who has not read the book. I was among the many who never made it through Capital (it gave a new and different meaning to the expression “widely unread”), so I will take it on faith that the whole r>g thing was a head fake. Anyway, Capital does not make my list.

I think that number 1 is Complexity, by David Colander and Roland Kupers. On many pages, I highlighted insightful passages. On many other pages, I highlighted irksome passages. Look for a longer review from me next year.

Probably number 2 is Trillion Dollar Economists, by Robert Litan. It is a great achievement, but even so I wanted a different book.

Number 3 might be Isabel Sawhill’s Generation Unbound, about the pathology of unwed motherhood (it’s not just for teenagers any more) and what to do about it. However, I think that the question of whether “society” should be trying to prevent births of a certain type (namely, from unplanned pregnancies) is more difficult than she makes it out to be. Again, I have a review forthcoming.

Number 4 might be Charles Calomiris and Stephen Haber, Fragile By Design. The financial crisis continues to stimulate books on banking and related topics, and of the recent lot I thought this one had the strongest historical and international perspective. However, in the end, I found its main thesis, that U.S. banking policy is hindered by populism, unpersuasive.

Number 5 might be Mark Robert Rank, PhD, Thomas A. Hirschl, PhD, and Kirk A. Foster, PhD, Chasing the American Dream, which provides a good empirical study of income dynamics using longitudinal data.

Finally, there is a category of books written by friends of mine, in which I recommend Russ Roberts’ How Adam Smith Can Change Your Life, Megan McArdle’s The Upside of Down, and Elizabeth Green’s How to Build a Better Teacher.

UPDATE: Here is Tyler’s list.

Tyler Cowen, Neocon

He writes,

Without the current and past American security umbrella, for instance, I believe much of Asia would be a far less free place than it is today, starting but not ending with Taiwan and South Korea.

I give Tyler credit for raising this issue in a forum least likely to be sympathetic to it. This is Brink Lindsey’s growth forum hosted by Cato, where Brink is inviting contributions from the liberaltarian crowd.

I have to say that when looking at places like Russia, Hungary, or the Middle East, my appreciation for the civilization vs. barbarism axis tends to increase. On my list of books to sample (not necessarily read the whole thing) is Bret Stephens’ latest, where he argues that the U.S. should act as the world’s policeman. I wonder whether he explains how the U.S. could do that without also becoming the world’s social worker.

UPDATE: Here is how Stephens starts out:

Where do you fall on the spectrum between internationalists and neoisolationists? Ask yourself the following questions:

Does the United States have a vital interest in the outcome of the civil war in Syria, or in Israel’s relationship with the Palestinians, or in Saudi Arabia’s contest with Iran?

Should Americans take sides between China and Japan over which of them exercises sovereignty over the uninhabited Senkaku Islands? Similarly, should we care whether Ukraine or Russia controls Crimea?

Is America more secure or less secure for deploying military forces in hot spots such as the Persian Gulf and the South China Sea?

My views on these issues are mixed. On the Middle East, I see the Syrian civil war as barbarism vs. barbarism. Similarly, the contest between Saudi Arabia and Iran. On Israel and the Palestinians, I understand that many people explain the Palestianians’ barbaric behavior as being caused by oppression, but I see it more the other way around. They could end oppression by being less barbaric. And I believe that the U.S. ought to support civilization in that contest.

On the second issue, my memories of the Vietnam era are salient enough to make me wary of pushing conflict on the basis of domino theory. Uninhabited islands strike me as dominoes that can be allowed to fall. Note that Stephens in effect equates Crimea to uninhabited islands, which suggests that it, too, is a domino that should be allowed to fall. I do not think that caving in there means that next thing you know Putin will be at the gates of Paris.

I think we are more secure for deploying military forces in the Persian Gulf and the South China Sea. If you press me, I will tell you that I believe that the U.S. navy and air support are the true world government, and without world government we would have major war.

If you think that pacifism and non-interventionism are ways of preventing major war, you have company. But my concern is that those policies only work if there is someone else doing the work of the world’s policeman. Being Swiss seems fine now, but if the U.S. had not intervened in World War II, it might not have been so peachy. And ultimately not so peachy for the U.S., either.

UPDATE: I wrote the foregoing before yesterday’s massacre in Jerusalem. If I have my geography right, the attack took place far inside the 1967 borders. It is an area where young observant American Jews go to study. The sight of Palestinians celebrating cold-blooded murder is something that I cannot put out of my mind. Even the Germans did not celebrate when they murdered Jews.

Mission-Driven vs. Philanthropic

Peter Thiel says,

mission-oriented companies are often defined by a unique mission that maybe others don’t think is important, whereas a lot of the social entrepreneurship efforts gravitate towards things where you have many copycats doing relatively similar things.

From an interview with Ezra Klein. Pointer from Tyler Cowen.

One of the main recommendations of the Colander-Kupers book is to expand what they call the “for-benefit” sector. By that, they mean corporations that seek both profits and social benefits. To be fair, they tout this more as an alternative to government programs than as an alternative to profit-maximizing firms. As you know, I have been given to ranting against non-profits, on more than one occasion.

Technical and Communications Skills

Catherine Weinberger writes,

while math scores, sports, leadership roles, and college education are all associated with higher earnings over the entire 1979-1999 period, the time trend in the earnings premium was strongest among those individuals who participated in sports or leadership activities during high school and had higher levels of cognitive skills. Supporting evidence based on Census and CPS data matched with the Autor, Levy and Murnane (2003) job-task measures provides an independent observation also suggesting that the labor market increasingly favors workers with strong endowments of both cognitive and social skills. These findings, coupled with evidence of growing employment, suggest increasing complementarity between cognitive and social skills among young workers.

Pointer from Tyler Cowen, who sees the findings in an average-is-over context. Indeed, if cognitive skills and social skills are both somewhat scarce and imperfectly correlated, increasing complementarity would lead to greater inequality.

I would always tell my AP Statistics students that they were learning technical communications skills. I would say that communicators without technical skills end up as baristas. Those with technical skills but poor communication skills will end up as Dilbert, working for a boss who appears to be an idiot.

Why Jonathan Gruber is Paid the Big Bucks

Tyler Cowen comes to his defense.

I’ve disagreed with Gruber from the beginning on health care policy and I thought his ObamaCare comic book did the economics profession — and himself — a disservice. But I’m simply not very interested in his proclamations on tape, which as far as I can tell are mostly correct albeit overly cynical.

My remarks:

1, Gruber is not paid the big bucks to be a political tactician. In particular, whether or not Obamacare was sold deceptively was not his call to make.

2. For me, the problem with democracy is not the intelligence, or alleged lack thereof, among voters. I just think that the wisdom of crowds is channeled more effectively through exit than through voice. As for democracy, it is a good way of arranging for the routine replacement of high-level officials. It is otherwise much over-rated.

3. Gruber is paid the big bucks because he has a quantitative model of how insurance health reforms will play out. Relative to most academic economists and policy makers, my level of trust in such models is rather low. For me, it would be a better world if Gruber and his model were not held in such high regard. But I would have made this point, and probably did so, before the recent controversy.

4. If you need proof of Gruber’s contempt for your intelligence, all you need to do is skim the comic book to which Tyler refers. The comic book left me with the impression that Gruber lives in a Krugmanesque bubble, in which any disagreement must be dismissed as stemming from extreme ignorance and/or evil intent.

5. I think that the extent to which the attacks on Gruber have become personal is something that every economist, regardless of ideology, will come to regret. I am all for criticizing the ideas and the world view that underlie Obamacare. However, a world in which every economist who steps into the policy arena is subjected to opposition research and “gotcha” attacks is not going to be pretty.

Political Donations vs. Industry Affliation

Business Insider reports,

Lobbyists are, perhaps unsurprisingly considering their role in the political system, similarly split

Actually, you need to read the article. Pointer from Tyler Cowen. Some remarks.

1. Although both liberals and conservatives receive large donations from lobbyists, the donations of people in the media skew very heavily liberal. I am not sure that this is easy to explain. I would think that the market would produce a bulge in the media at both extremes, not at one.

2. I am not surprised that the auto, banking, pharmaceutical, and real estate industries donate heavily to both liberals and conservatives. When you have a close relationship with government, you need to hedge your bets.

Larry Summers on Upward-Sloping AD

He writes,

Notice that as Keynes, Tobin and subsequently Brad Delong and I have emphasized, wage and price flexibility may well exacerbate the problem. The more flexible wages and prices are, the more they will be expected to fall during an output slowdown leading to an increase in real interest rates. Indeed there is the possibility of destabilizing deflation with falling prices leading to higher real interest rates leading to greater output shortfalls leading to more rapidly falling prices and onwards in a vicious cycle.

Read the whole thing. There were many sentences I wanted to excerpt. Pointer from Mark Thoma.

In AS-AD, if your Y-axis is inflation rather than the price level, then AD slopes upward. That is, the more inflation you have, the lower the real interest rate, and the higher is AD. If AD gets steeper than AS, then have a nice day. Because if that happens, then a “favorable” supply shift leads to lower employment and output. One way to interpret secstag is as a claim that we have been experiencing an AD curve that is upward-sloping and steeper than AS.

Keep in mind that Summers and other mainstream macro economists talk about potential GDP as if it were some tangible quantity, rather than a made-up number. In mainstream macro, we all work in a GDP factory, and the factory has a capacity that we call potential GDP.

The PSST story rejects that. It says that we produce many different types of output, and we only have the potential to produce the output for which we have discovered patterns of sustainable specialization and trade. If we could discover other patterns of sustainable specialization and trade, we could produce a different mix of output, and perhaps this would raise the level of GDP. But raising GDP by discovering patterns of specialization and trade is akin to raising GDP by discovering a practical cold fusion technology. Complaining about the economy operating below potential is like complaining that we do not have cold fusion.

Related: Tyler Cowen on the difficulty of disentangling AD from AS. Plus Scott Sumner commenting on Tyler Cowen.

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.

A Thought From Marc Andreessen

He says,

what if we had Math 101 online, and what if it was well regarded and you got fully accredited and certified? What if we knew that we were going to have a million students per semester? And what if we knew that they were going to be paying $100 per student, right? What if we knew that we’d have $100 million of revenue from that course per semester? What production budget would we be willing to field in order to have that course?

Pointer from Tyler Cowen.

I might push back and say that the same course is unlikely to work well for all one million students. As I have said before, the key is not so much in presenting content. It’s giving students feedback in a way that maximizes their rate of progress.

“Scott Alexander” on Political Tribalism

He writes,

How did both major political tribes decide, within a month of the virus becoming widely known in the States, not only exactly what their position should be but what insults they should call the other tribe for not agreeing with their position?

Pointer from Tyler Cowen.

Of course, my answer to his question is in The Three Languages of Politics. What Alexander calls the “red tribe” narrative does indeed have a civilization-barbarism feel, and what he calls the h”blue tribe” narrative has an “oppressor-oppressed” feel.

Anyway, read the whole piece. Another excerpt:

Daily Kos or someone has a little label saying “supports liberal ideas”, but actually their incentive is to make liberals want to click on their pages and ads. If the quickest way to do that is by writing story after satisfying story of how dumb Republicans are, and what wonderful taste they have for being members of the Blue Tribe instead of evil mutants, then they’ll do that even if the effect on the entire system is to make Republicans hate them and by extension everything they stand for.

Note that on the issue of a quarantine of countries where Ebola has broken out, the three-axes model might predict that if Ebola had broken out among Jews in Israel instead of in West Africa, there might well have been a reversal in which tribe favored quarantine. The “conservative germophobia” theory would predict otherwise.