Category Archives: Tyler Cowen is my Favorite Blogger

Jonathan Haidt’s six-step program

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for viewpoint diversity on campus. The steps include

Look inside the mind. Learn a little bit of psychology to see the tricks the mind plays on us, making us all prone to be self-righteous, overconfident, and quick to demonize “the other side.”

Understand the moral matrix. Learn how each team or tribe builds a comprehensive worldview that can explain everything, while making it harder for its members to think for themselves.

Venture beyond your moral matrix. Step outside your own moral matrix by exploring the mindsets, perspectives, and principles of progressives, conservatives, and libertarians.

Pointer from Tyler Cowen.

I think that my book, The Three Languages of Politics, does a good job with these three steps. For the remaining steps, Haidt’s other resources are needed. My book will be out in two days, and it is available now for pre-order.

Emotions about winning and losing

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Tyler Cowen writes,

In venture capital, I suspect that hatred of losing may be a disadvantage. No matter how successful you may be, most of your individual investments will lose money and hatred of losing may make you too risk-averse. It might be better to have the ability to simply forget your losses and put them behind you.

I discovered in high school playing poker with friends that I hated losing, but I didn’t enjoy winning very much in that context. So I stopped playing poker. Decades later, I hated “angel investing,” perhaps for the same reason, and I stopped doing that.

Romance is probably another area in which you probably take a different approach if you love winning more than you hate losing, or vice-versa. Think of it as a game in which your self-esteem is at stake.

But I wonder if the relative strength of your feelings about winning or losing is generic or instead is specific to context. As Tyler points out, there are some activities where losses are relatively costly, and in that context I would say that it makes sense to be averse to losing.

My advice to people is to take chances that have high upside and low downside, while avoiding the reverse. It is relatively simple, obvious advice, and in some sense it is neutral with respect to winning and losing per se.

Affordable Housing is a Supply Problem

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Ed Glaeser writes,

If demand alone drove prices, then we should expect to see places that have high costs also have high levels of construction.

The reverse is true. Places that are expensive don’t build a lot and places that build a lot aren’t expensive. San Francisco and urban Honolulu have the highest ratios of prices to construction costs in our data, and these areas permitted little housing between 2000 and 2013. In our sample, Las Vegas was the biggest builder and it emerged from the crisis with home values far below construction costs.

Pointer from Tyler Cowen.

Glaeser also writes,

No locality considers the impact that their local rules may induce more building elsewhere.

This suggests a new maxim: Environmentalists impose negative externalities. If construction harms the environment, then diverting construction elsewhere harms someone else’s environment. Along the same lines, when we regulate fossil fuels in the U.S., we probably shift production to other countries which have a higher intensity of fossil fuel use than we do.

Adam Ozimek’s Doubts about Libertarianism

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He writes,

you can argue that places with big government are great for other reasons, and this draws people there despite the big government and not because of it. And I think there’s a lot of truth to this. But what it tells you is that revealed preferences show that having a small government is less important to people than the other things that make a place great, like culture, quality of life, agglomeration, and economic dynamism.

Pointer from Tyler Cowen. In response, David Henderson points out that what is unrealistic today can change if you can change people’s opinions. My thoughts:

Find the locality with the most freedom of all of the localities in the U.S. Call it Libertymax. If economic liberty is what is most conducive to wealth creation, then why is Libertymax not the richest town in the country? If personal liberty is your highest priority, then why are you living where you are instead of moving to Libertymax?

Here is the way that I think about it. Statism comes from the Fear Of Others’ Liberty. The statists are more than 90 percent wrong. As people, they represent a positive externality–they make me wealthier, and I enjoy being around them. But as FOOLs, they represent a negative externality–their wrong views lead to statist policies that are clumsy, ineffective, and based on delusional notions of the benevolence and wisdom that political leaders can possess.

You cannnot escape from the statists. But it is still worth trying to convince them not to be FOOLs.

Broadberry and Wallis: A Suggested Interpretation

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The Economist reports,

Stephen Broadberry of Oxford University and John Wallis of the University of Maryland have taken data for 18 countries in Europe and the New World, some from as far back as the 13th century. To their surprise, they found that growth during years of economic expansion has fallen in the recent era—from 3.88% between 1820 and 1870 to 3.06% since 1950—even though average growth across all years in those two periods increased from 1.4% to 2.55%.

Instead, shorter and shallower slumps led to rising long-term growth. Output fell in a third of years between 1820 and 1870 but in only 12% of those since 1950. The rate of decline per recession year has fallen too, from 3% to 1.2%.

Tyler Cowen inspired me to find the article.

Set up two random-number generators, each producing a normal distribution. Give generator M a mean of 2.55 and a standard deviation of 1.5, and give generator H a mean of 1.4 with a standard deviation of 3. Take about 100 draws from those two random-number generators, and then separate the results into positive and negative numbers.

Presumably, the negative numbers from generator H will be more numerous and have a more negative average than those from M. The positive numbers from H, although fewer, could turn out to be larger on average than those from M. That is, by truncating the results from H at zero, the larger standard deviation might lead to a higher average for H than for M. If it does not, then tweak the difference in standard deviations between the two generators a bit more.

In other words, you can replicate the Broadberry-Wallis results without the nature of booms or recessions having any causal role. If modern economic growth, M, is higher with a lower annual standard deviation than historical economic growth, H, then you would observe these sorts of results if you arbitrarily select 0 as your dividing point between booms and slumps.

[UPDATE: a reader writes,

1. With the parameters you suggested, the conditional expectation for H is 2.99, whereas the conditional expectation for M is 2.7.

2. To reproduce their results with the Gaussian model, we’d need to have a standard deviation of about 4.16 for (H), and a standard deviation of about 2.2 for situation (M).

I would add that as you go back in history, much of output is agricultural, and subject to annual variation in weather. So variance might well have been higher for that reason.]

Deep State?

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Tyler Cowen writes,

I don’t believe in many (any?) conspiracy theories, and if there hasn’t been talk about “the deep state” on MR to date, there is a reason for that. Still, I have been wondering how one might think about the deep state in public choice terms, even if you have a rather modest view of what it is all about. Day to day, we mostly get “the shallow state,” so what might the deep state mean?

I immediately think of J. Edgar Hoover. A lot of Presidents did not like him, but no one dared to get rid of him. To me, that is the ultimate in “deep state” power. It is the ability of some bureaucrats, particularly within the national security apparatus, to hold onto their budget and autonomy even when their policies and/or personalities clash with those of the “shallow state” (elected officials).

I also think of Mark A. Zupan’s Inside Job, which I have just read. He talks about the ability of government officials to act on behalf of proprietary interests, including their own. It is a depressing book. The least compelling chapter is the one where he suggests reforms to try to improve the situation. As long as the public, particularly the educated public, has such a naive support for government power, things seem pretty hopeless to me. In some sense, perhaps the real Deep State is the education establishment, which serves as an anti-market, pro-government propaganda machine. That may be more important than the leverage that the security establishment has with politicians.

State Capacity

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Noel D. Johnson and Mark Koyama write,

The origins of modern economic growth are to be found in the expansion of market exchange and trade that gave rise to a more sophisticated and complex division of labor that rewarded innovation and to the cultural and potentially non-economic factors that helped spur innovation (Howes, 2016; McCloskey, 2016; Mokyr, 2016). The importance of the rise of high capacity states to this story is that these states helped to provide the institutional conditions that either enabled growth and innovation to take place or at least prevented their destruction through warfare or rent-seeking

we suggest that the long-run relationship between culture, social capital, identity, and state capacity has only just begun to have been studied and awaits much future research.

Pointer from Tyler Cowen.

The authors say that state capacity consists of the capacity to enforce laws and the capacity to collect taxes in order to provide public goods.

Best Book of the Year?

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Kevin Laland’s Darwin’s Unfinished Symphony is sure to make my top five and the early favorite to make number one. It got a mention from Tyler Cowen and a brief review from Robin Hanson. I would be curious to know what Jason Collins thinks of it. Laland is a person I would very much like to spend a few hours with batting ideas around.

Laland’s field is evolutionary neuroscience, or so I would guess. The book is focused on the co-evolution of brain capabilities and culture in humans. A central question is how culture came to be so advanced in humans relative to animals. To address that, one must try to understand how culture is developed, transmitted, and retained.

On page 7, Laland offers his definition of culture as

the extensive accumulation of shared, learned knowledge, and iterative improvements in technology over time.

Recall that my working definition of culture is “socially communicated thought patterns and behavioral tendencies.”

Late in the book, Laland uses dance as an example of culture.

The social structure of many communities. . .gain much of their cohesion from the group activity of dancing. Historically, dance has been a strong, binding influence on community life, a means of expressing social identity of the group, and participation allows individuals to demonstrate a belonging. . .there are as many types of dances as there are communities with distinct identities.

Of course, I like this choice of examples. I think that dance illustrates what I see as a trend in recent decades toward narrower, deeper, older.

One of the central scientific studies in the book is the social learning strategies tournament. In the tournament, each player faces an environment that changes gradually over a sequence of turns. To cope with this environment, at each turn the player can choose one of three moves. Quoting from the article,

INNOVATE, OBSERVE and EXPLOIT. INNOVATE represented asocial learning, that is individual learning stemming solely through direct interaction with the environment, for example, through trial-and-error. An INNOVATE move always returned accurate information about the payoff of a randomly selected behavior previously unknown to the agent. OBSERVE represented any form of social learning or copying through which an agent could acquire a behavior performed by another individual, whether by observation of or interaction with that individual An OBSERVE move returned noisy information about the behavior and payoff currently being demonstrated in the population by one or more other agents playing EXPLOIT. . . Finally, EXPLOIT represented the performance of a behavior from the agent’s repertoire

As long as the environment stays reasonably stable, you profit most from EXPLOIT. But as the environment changes, you can obtain higher payoffs by learning. In the simulation exercise conducted in the study, the social learning strategy OBSERVE worked much better than the asocial learning strategy INNOVATE. It seems to me that people who play OBSERVE get to free ride on others who are playing EXPLOIT and to free ride especially profitably on others who play INNOVATE.

Think of a factory worker in Ohio in 1999. If you just go to work every day expecting your job to last forever, you are playing EXPLOIT. If you decide to study the career choices and location decisions of people you think are similar to you, you are playing OBSERVE. If you decide to pick a new career and/or location based mostly on your own instincts, you are playing INNOVATE. The signals you get from playing OBSERVE are noisy. You could end up copying someone who develops computer network management skills and moves somewhere to run a data center. Or you could end up copying someone who goes on disability and gets addicted to opioids.

I think that this very simple model helps one to think about the PSST story for a recession. During boom times, people find patterns of specialization and trade that are rewarding, and they EXPLOIT them. But people may over-estimate the stability of that environment. They think that house prices will never go down. They think that manufacturing jobs are going to last. Then, as the environment changes and as those changes become manifest, a lot of people’s EXPLOIT strategies start to work out badly. They have to go into learning mode. They are used to having OBSERVE work out best, and that may still be the case from the perspective of the individual, but it means that the process of establishing new patterns of specialization and trade will take a long time. To speed up that process, from a social perspective we may need more people to play INNOVATE.

Anyway, there is a lot to the book, and I plan to write a fuller review.

Patrick Collison and Tyler Cowen

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Tyler says a lot of things to be provocative, including arguing that it is good to say things to be provocative.

the universal basic income. It does make logical sense, especially as we get wealthier. But it, for me, was a kind of formative experience, about 2009, in response to the financial crisis. One of the better policies would have been mortgage cramdowns and write-offs for many afflicted people, and many economists agreed with this. Larry Summers pushed it.

But politically, it proved impossible. People didn’t hate all of the bailouts as much as they claimed, but they hated the idea of the person next door getting a break that they didn’t get, when they had, in their own mind, worked harder and paid all their bills.

The economists and others who thought that mortgage forgiveness was the solution had no idea of the logistical challenges involved. In the old-fashioned world where your bank or savings and loan lent you the money and held the mortgage, it would have been reasonably simple. But in the contemporary world, the investors differ from the servicers. Investors are entitled to various portions of the principal and interest that you owe, based on how securities are structured. The securities had gotten complex–recall the CDO-squared? Meanwhile, the loan servicer is responsible for collecting the payments and passing them along. Mortgage modification imposes huge administrative costs on servicers, who operate on a thin margin to being with. And it raises all sorts of issues with investors, because you end up giving them very different loss allocations than what they signed up for. I predicted back in 2008 that the government would never be able to get mortgage modification to work, and I think that prediction held up well.

Also, the mortgage modification programs were limited to owner-occupants. We now know that a lot of the bad mortgages were for non-owner-occupied houses. These were speculators. If you think that people who were paying their mortgages on time would have resented having delinquent owner-occupants bailed out, imagine how they would have felt having house-flippers bailed out.

I think we’ll actually evolve disability insurance, in some way, to become an obfuscated form of a partial universal basic income.

Commenters on this blog also have pointed out that we like to obfuscate our government charity programs, even though straight tax/transfer schemes would appear to be more efficient. Commenters here also have said things along these lines:

A United States with open borders, I think, politically, would be unworkable in less than 10 years, even though it makes economic sense. It gets back to this optimal degree of insulation. There’s a political culture here, which requires a certain common language, common set of delusion, common set of myths, common set of things we understand. This country does it pretty well, not perfectly, and I don’t think open borders is compatible with that. I think it would kill the goose laying the golden egg. So I favor much more immigration, but not unrestricted immigration.

If you read or listen to the whole discussion, you will find a bit that makes it sound as if I am on the faculty of George Mason. That is not the case.

When Tyler talks about the blogging world, I thought of narrower, deeper, older.

I liked the last section of the conversation, on “over-rated and under-rated,” the best.

Macroeconomics is just restin’

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The parrot is not dead, insists Ricardo Reis.

these dissertation theses are fairly representative of what modern research in macroeconomics looks like. . .

used micro data to show that it is mostly young people who adjust their consumption when monetary policy changes interest rates. Younger people are more likely to obtain a new mortgage once interest rate changes, either to buy a new home or to refinance an old one, and to spend new available funds. Her research has painstaking empirical work that focuses on the role of mortgages and their refinancing features, and a model with much heterogeneity across households…

There is more at the link. Pointer from Tyler Cowen.

Work of the sort described above sounds promising. It differs from traditional macroeconomics in a refreshing way.
Traditional macroeconomists take some very dodgy averages and call them “aggregates.” If that practice comes to be replaced by work that takes seriously the variation that underlies the averages, then we will have reason to celebrate. Unfortunately, many of the other papers Reis describes sound to me more like traditional macroeconomics.

What is wrong with the aggregation exercise? Just off the top of my head:

1. Wages and unemployment rates vary by demographic groups more than the aggregate wage and unemployment rate vary over the medium run (which is the typical period for macroeconomic analysis.

2. Inflation rates vary more across industries (health care vs. computer chips) than the average inflation rate varies over the medium run.

3. Saving rates vary more by household characteristics (including cultural background) than they vary over the medium run.

4. Much of work does not produce final output. Instead, much of the labor force has become Garett Jones workers, producing organizational capability.

5. There has been a steady increase in hard-to-measure components of the economy: the value of medical services; the value of employee benefits; the value of consumers’ surplus derived from information and communication technology; etc.

My preferred alternative to traditional macro is PSST. Traditional macroeconomists are more likely to think in terms of a single labor market. In the PSST view, unemployment is a phenomenon that results when patterns of specialization need to be reconfigured. Thinking in terms of a single labor market model is wrong-footed from the get-go.