Russel Arben Fox on Jacob Levy

Posted on January 23, 2016 by Arnold Kling

It introduces, in clear and compelling language, a new way of making sense of the development of liberal ideas, by distinguishing between what he labels “rationalist” (consistent, transparent, state-centric) and “pluralist” (variable, private, culture-dependent) responses to the threats to individual freedom which have arisen throughout the history of liberalism.

Pointer from Tyler Cowen. I also recommend this podcast with Levy, Aaron Ross Powell,, and Trevor Burrus.

Should a restaurant owner be allowed not to serve someone based on race? The “rationalist” theory of liberalism says “no.” The pluralist theory of liberalism says “yes.” An often forgotten aspect of Milton Friedman’s Capitalism and Freedom is that he took the pluralist side on this issue.

Before you jump to the pluralist side of this debate, consider what Fox calls

the rational reformer who wishes to get rid of inconsistent trade barriers and idiosyncratic excise and sin taxes, all in the name of maximizing the benefits of creative destruction

Think of the Commerce Clause as being on the rationalizing side.

Razib Khan on ISIS

Posted on January 19, 2016 by Arnold Kling

He writes,

Being a good parent, friend, and a consummate professional. But not everyone is a parent, and not everyone has a rich network of friends, or a fulfilling profession. Ideologies like communism, and religious-political movements like Islamism, are egalitarian in offering up the possibilities of heroism for everyone by becoming part of a grand revolutionary story.

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

I am reading Fools, Frauds, and Firebrands, by Roger Scruton, the British conservative philosopher. Most of you will not want to read it, because it mostly discusses European philosophers. But I came away with some interesting ideas to chew on, and I may attempt to write an essay on the book. One of his points is that the left-right lens through which we view politics is designed not to be analytically sound but instead to tilt things in favor of Communists. The idea is to put fascism on the far right and Communism on the far left. Since everybody hates fascism, the implication is that you should like Communism, or at least cut it some slack.

I think that a more useful organizing axis for political movements might be satisfied vs. disaffected. People who support Hillary or Jeb are satisfied. They do not want to rock the boat. People who support Trump or Sanders are somewhat disaffected. Extremist groups, like ISIS, appeal to people who are extremely disaffected.

Where would you put libertarians on this axis? I would put them much closer to the satisfied end. As ticked off as they are about government and politics, they tend to be basically happy with their own lives.

Sharing Home Equity

Posted on January 18, 2016 by Arnold Kling

From an NYT blog post,

With the right financial vehicle, Mr. Rampell said, such a fund could invest to co-own houses in, say, pricey Palo Alto, Calif., making it easier for prospective home buyers to make down payments and reduce their mortgage burden. “They could own 10 percent or 15 percent of your house, so you don’t have to borrow as much,” Mr. Rampell said. “I think there’s a lot of room for more of those kind of new asset classes.”

Pointer from Tyler Cowen.

1. This is not the first time someone has proposed such an idea. In the early 1980s, with sky-high interest rates, somebody came up with the Shared Appreciation Mortgage, where you would get a lower interest rate from the lender in exchange for which the lender would get a percentage of the appreciation in 10 years or when you sold your home, whichever came first.

2. So what is the asset, exactly? I think of it as a second mortgage, with a variable interest rate that depends on the rate of appreciation of the property and on the size of what I would call the “discount,” because the third-party owner is going to pay less than $10,000 for a 10 percent share of a $100,000 house. Why? Because the third party does not get to live in the house and enjoy the implicit rental income. In the extreme case where a third party has 100 percent of the equity but for some reason pays the full $100,000 price. In that case, in exchange for giving up all the equity, the “buyer” would be living in the house rent-free!

3. There are no magic tricks in mortgage finance that make housing affordable to people who cannot save enough for a reasonable down payment. The only way to make housing affordable is for the price of homes to come down to where people can afford them. That’s true even in California, although folks there go through periodic episodes where they refuse to believe it.

Opaque Leverage and Self-Deception

Posted on January 11, 2016 by Arnold Kling

Regarding the movie The Big Short, Tyler Cowen wrote,

There is no central villain, none whatsoever. The filmmakers succeed in showing how the collective actions of many, operating together, can give rise to structural problems and systemic risk. And yet the story remains suspenseful.

People prefer stories with villains.

I think that the story of the financial crisis has to include leverage. Individual home buyers did not put up much of their own capital. The lenders did not put up much of their own capital. The mortgage securities were structured and rated so that banks could hold them with minimal capital.

However, some of this leverage was opaque. People did not understand the way that AIG was contractually obligated to put up billions in collateral if prices moved against them. People did not understand that while Fannie Mae and Freddie Mac were reporting that their sub-prime exposure was less than 2 percent, their exposure to risky loans was closer to 30 percent. People did not understand that mortgage securities rated AAA were not really comparable to AAA-rated bonds. People did not understand that banks had created “structured investment vehicles” and other dodges that made them much more levered than they appeared to be. And by “people,” in all cases I mean regulators and investors.

But finally, the opaque leverage was less intentional bad behavior on the part of financial executives than it was self-deception. Suppose that you had asked executives in 2007 to answer honestly, “Relative to what people outside the firm think, how exposed are you to a decline in house prices and problems in the mortgage market?” My guess is that almost all of them would have said, “We are less exposed than other people think.” And they would have been telling the truth from their point of view.

That is what made the speculators in The Big Short so special. They managed to dig through to reality.

And don’t forget that I coined the term, “Suits vs. Geeks Divide.”

Four Forces Watch

Posted on December 31, 2015 by Arnold Kling

Tyler Cowen writes,

One study indicated that if the marriage patterns of 1960 were imported into 2005, the Gini coefficient for the American economy — the standard measure of income inequality — would fall to 0.34 from 0.43, a considerable drop, given that the scale runs from zero to one. That result is from the economist Jeremy Greenwood, a professor of economics at the University of Pennsylvania, and other co-authors.

Read the whole piece. I think Tyler is right to consider this a bottom-up exercise in eugenics. My guess is that his NYT readers will hate that analysis, while at the same time behaving in ways to reinforce it.

Intelligence, Leftism, and Academia

Posted on December 23, 2015 by Arnold Kling

Noah Carl tries to sort out the relationships. (pointer from Tyler Cowen.)

I first bring together data on the political beliefs of three separate populations: academics, the general population, and a high-IQ population. I then calculate the proportion of each population that identifies with various political positions (e.g., thinking of oneself as a liberal, supporting the Democratic Party). The extent of overrepresentation for any particular position is simply the percentage-point difference between academics and the general population (i.e., the total length of the right-hand bar in Fig. 1). And the fraction of this overrepresentation that can be explained by intelligence is simply the percentage-point difference between the high-IQ population and the general population divided by the percentage-point difference between academics and the general population

The results:

Overall, intelligence may account for: most of the disparity between academics and the general population on the issues of abortion, homosexuality and traditional gender roles; none of the disparity on the issue of income inequality (but see Section 3.2); less than half the disparity on liberal versus conservative ideology; and much less than half the disparity on Democrat versus Republican identity.

The conclusion:

Possible explanations for the remaining overrepresentation comprise: self-selection on personality, interests, cognitive style or preferences; social homophily and political typing; self-selection on strength and stature; individual conformity; status inconsistency; and discrimination.

I have to believe that a lot of the over-representation comes from discrimination. If you ask left-wing academics, they will tell you that essentially all of the over-representation comes from intelligence. This tells you that they associate conservative beliefs with stupidity and are therefore almost certain to under-rate the intelligence of anyone who fails to chime in with the appropriate left-wing dogma when relevant topics come up in casual conversation.

But read the paper for yourself. I think it is an important one.

Significance Comparisons and Measurement Error

Posted on December 22, 2015 by Arnold Kling

Leilan Shu and Sara Dada report,

We first use a simple linear regression model of average test score and average household income to first establish a positively correlated relationship. This relationship is further analyzed by differentiating for other community-based factors (race, household type, and educational attainment level) in three multiple variable regression models. For comparison and to evaluate any consistencies these variables may have, the regressions were run on data from both 2007 and 2014. In both cases, the final multiple regressions found that average household income was not statistically significant in impacting the average test scores of the counties studied, while household type and educational attainment level were statistically significant.

Pointer from Tyler Cowen. If this were credible, it would seem to suggest that “schooling inequality” is really ability inequality.

BUT…Whenever somebody says that “X1 does better than X2 at predicting Y,” watch out for the impact of measurement error. A variable that is measured with less error will drive out a variable that is measured with more error.

In this case, suppose that the variable that matters is “parents’ resources.” Income could measure that variable. Educational attainment could predict that variable. Income has many sources of measurement error–if nothing else, one year’s income could be high or low due to volatility. Educational attainment has fewer sources of measurement error. So even if parents’ resources is the true cause of children’s test scores, you could wind up with a zero coefficient on income, particularly if you include another regressor with lower measurement error.

And this is one of many reasons to prefer experimental data to regressions.

Four Forces Watch: Assortative Mating Has Gone Up

Posted on December 17, 2015 by Arnold Kling

Tyler Cowen quotes a paper by Robert D. Mare.

Spousal resemblance on educational attainment was very high in the early twentieth century, declined to an all-time low for young couples in the early 1950s, and has increased steadily since then. These trends broadly parallel the compression and expansion of socioeconomic inequality in the United States over the twentieth century. Additionally, educationally similar parents are more likely to have offspring who themselves marry within their own educational level. If homogamy in the parent generation leads to homogamy in the offspring generation, this may reinforce the secular trend toward increased homogamy.

Commenters here have argued about this in the past. Evidently, the facts show that the Mad Men era did indeed have lower assortative mating.

They Dared to Report This

Posted on December 17, 2015 by Arnold Kling

Peter Arcidiacono and Michael Lovenheim write,

The evidence suggests that racial preferences are so aggressive that reshuffling some African
American students to less-selective schools would improve some outcomes due to match effects dominating
quality effects.

Pointer from Tyler Cowen, who indicates that it is forthcoming the Journal of Economic Literature. Even Donald Trump finds this offensive.

More Hospital Access Does Not Equal More Health

Posted on December 16, 2015 by Arnold Kling

Nathan Petek writes,

I construct a hospital-level panel using American Hospital Association data from 1982-2010 that includes measures of the quantity of health care and indicators for hospital entry and exit. I combine this file with county-level measures of health, including mortality rates from 1982-2010 and self-reported health from 2002-2010, and detailed health care utilization and mortality data for all Medicare fee-for-service enrollees from 1999-2011.

He finds that having more hospitals in an area does increase the utilization of medical resources. It does not improve health outcomes. Like all studies, this one by itself is not convincing. But it does add to the huge pile of studies that go into the Hansonian medicine file.