Category Archives: Tyler Cowen is my Favorite Blogger

Ralph Nader’s Worldview

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From an interview with Tyler Cowen.

If you look at the history of nations, major redirections for justice were brought about by never more than 1 percent of the active citizenry. Whether it was civil rights, the environment, or consumer protection, they had one asset: They represented what Abraham Lincoln called the “public sentiment.” Nowadays people give up on themselves and rationalize their own powerlessness, but it takes very few people in congressional districts and around the country to make major, long-overdue changes in American society that are supported by large numbers of people.

In other words, the Ralph Naders of the world are the heroes. People with great moral vision who use the forces of activism and government to overcome the evils of the private sector.

Unfortunately, what is required to become a Ralph Nader is an unshakable belief in your own righteousness and in the wrongheadedness of those with whom you disagree. Tyler tries to get Nader to admit that he has gotten something wrong, and all Nader can come with is

I underestimated the power of corporations to crumble the countervailing force we call government.

To me, Nader’s absolute certainty about his own righteousness makes the whole idea of an alliance involving him untenable. If you are that certain of yourself, then you cannot accept other people on equal terms. Working with him cannot involve give-and-take. It has to be obedience.

Larry Summers on SecStag

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He writes,

With very low real interest rates and with low inflation, this also means very low nominal interest rates, so one would expect increasing risk-seeking by investors. As such, one would expect greater reliance on Ponzi
finance and increased financial instability.

Pointer from Tyler Cowen.

Larry thinks that if the government spends more money, it will work on improving JFK airport. If government does not spend more, then the private sector will take crazy risks.

I mean, if you think that government spends money wisely and the private sector does not, you do not need a whole theory of secular stagnation. To me, it looks like an opinion masquerading as a theory.

Maybe I am being too grumpy. The actual grumpy economist™, John Cochrane, has this to say.

The natural rate is per Laubach and Williams, about -0.5%. But we still have 2% inflation, so the actual real interest rate is -1.5%, well above -0.5%. With 2% inflation, we need something like a 4-5% negative “natural rate” to cause a serious zero bound problem. While Summers’ discussion points to low interest rates, it is awfully hard to get any sensible economic model that has a sharply negative long run real rate.

And he adds this:

From my point of view, the focus on and evident emptiness of the “demand” solution — its reliance on magic — just emphasizes where the real hard problems are.

Boomerang Kids

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Adam Davidson writes,

Nearly 45 percent of 25-year-olds, for instance, have outstanding loans, with an average debt above $20,000…And more than half of recent college graduates are unemployed or underemployed, meaning they make substandard wages in jobs that don’t require a college degree.

…In 1968, for instance, a vast majority of 20-somethings were living independent lives; more than half were married. But over the past 30 years, the onset of sustainable economic independence has been steadily receding. By 2007, before the recession even began, fewer than one in four young adults were married, and 34 percent relied on their parents for rent.

Pointer from Tyler Cowen.

Some comments:

1. Segments of our society are falling apart. The left’s treatments are exacerbating the problem. That is why I think that changing our system of means-tested benefits ought to be a high priority.

2. I chide my daughters for not working for a profit. But they are all out of the house. I am not a total failure.

3. Government-subsidized college loans contribute more to the problem than to the solution.

Good Sentences, Bad Sentences

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1. From Edward Conard:

The key to accelerating the recovery is not to generate unsustainable consumption, as Mian and Sufi propose. Rather, we must find sustainable uses for risk-averse savings

Mian and Sufi make a big deal over the fact that consumer spending fell in places where housing prices fell. Conard suggests that this is because consumers in those areas were spending at an unsustainable rate, based on capital gains in housing that disappeared.

2. From Alex Ellefson:

Laplante said he expects all 50 states to require software engineering licenses within the next decade, and possibly much sooner.

Not surprisingly, most software engineers endorse this. [UPDATE: from the article “The licensing effort was supported by nearly two-thirds of software engineers surveyed in a 2008 poll.” Commenters on this blog dispute that most software engineers endorse licensing. They may be correct.] But it is really, really, not a good idea. Bad software may be created by coders. But its cause is bad management. The typical problems are needlessly complex requirements, poor communication in the project team between business and technical people, and inadequate testing.

I would favor licensing for journalists if I thought that it would keep incompetent stories like this one from appearing. But I don’t think that would work at all.

The pointers to both of these are from Tyler Cowen.

Rognlie > Piketty

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Matt Rognlie writes,

[If house values continue to rise], Piketty (2014) will be right about the rise of capital in the twenty-first century. But the mechanism is quite distinct from the one proposed by Piketty (2014) (a better title would be Housing in the Twenty-First Century), and it has radically different policy implications. For instance, the literature studying markets with high housing costs finds that these costs are driven in large part by artificial
scarcity through land use regulation—see Glaeser, Gyourko and Saks (2005) and Quigley and Raphael (2005). A natural first step to combat the increasing role of housing wealth would be to reexamine these regulations and expand the housing supply.

Pointer from Tyler Cowen, who writes

Piketty’s mechanism of accumulation, as laid out in his book, is simply the wrong mechanism for understanding growing inequality, both theoretically and empirically.

That would appear to be the correct post-mortem on Piketty.

Central Banking’s New Normal

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Tyler Cowen writes,

Were not these exit strategies supposed to be easy and painless? Maybe they are, except having no exit strategy is all the more easy and painless.

The title of his post is Will the major central banks evolve into mega-hedge funds? But perhaps the title should be, will the major central banks ever give up their mega-hedge fund activities?

In the wake of the financial crisis, the Fed has decided that credit allocation is too delicate and important to be left alone. The financial crisis did to the Fed what the 9-11 attacks did to national security agencies. I think that the chances that central banks will decide that they no longer need to behave like hedge funds are about as high as the chances that our national security apparatus will decide that they no longer need to treat terrorism as a major threat.

Larry Summers on Mian and Sufi

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He writes,

They argue that, rather than failing banks, the key culprits in the financial crisis were overly indebted households. Resurrecting arguments that go back at least to Irving Fisher and that were emphasised by Richard Koo in considering Japan’s stagnation, Mian and Sufi highlight how harsh leverage and debt can be – for example, when the price of a house purchased with a 10 per cent downpayment goes down by 10 per cent, all of the owner’s equity is lost. They demonstrate powerfully that spending fell much more in parts of the country where house prices fell fastest and where the most mortgage debt was attached to homes. So their story of the crisis blames excessive mortgage lending, which first inflated bubbles in the housing market and then left households with unmanageable debt burdens. These burdens in turn led to spending reductions and created an adverse economic and financial spiral that ultimately led financial institutions to the brink.

Pointer from Tyler Cowen.

Summers points out that Mian and Sufi’s suggestion that we should have bailed out homeowners is probably not correct. I feel even more strongly than Summers does about this.

Suppose that we accept the balance-sheet recession story. Some comments and questions.

1. Vernon Smith is also a proponent.

2. What was the difference between the damage to consumer wealth caused by the dotcom crash of 2000 and by the housing crash of 2007-2008? Was it solely the fact that the latter had been financed more by borrowing?

3. Suppose that there had been no debt-fueled consumer boom in 2005-2006. What would there have been instead? A sluggish economy? A more sustainable boom?

4. Suppose that we take a PSST perspective. Then the period from the late 1990s to the present is one long, painful, still-unfinished adjustment to the Internet and factor-price equalization. We happened to have a sharp boom-bust cycle in home construction in the middle of it, but even during the boom we did not have four consecutive months of gains in employment over 200,000. Then, in 2008 we had a panic about large financial institutions, leading to a big increase in government intervention, which mostly consisted of transfers of resources to less-productive businesses, such as GM, Citigroup, and Solyndra.

Herbert Gintis on the Economics of Public Policy

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It his Amazon review of Complexity and the Art of Public Policy: Solving Society’s Problems from the Bottom Up.

First, neoclassically inspired public economics provides a very powerful and largely correct framework for analyzing when markets work well and when they fail. Second, markets are often fragile and easily destabilized unless properly regulated. Third, markets and regulating institutes are not alternatives but rather complements. Fourth, neoclassical economics cannot model state failure, and therefore overstates the latitude for government intervention in stabilizing the economy and correcting market failures. On reason for this failure is that government is subject to political forces that lead it to favor special interests rather than the general good. What Colander and Kupers tell us is that there is a second reason: the market economy is a complex, dynamic, and adaptive system more like a natural ecology than a man-made machine.

The complex economy cannot be controlled, as the planners would like, but it can be influenced by very carefully formulated and judiciously applied “rules of the game” that move market dynamics in preferred directions. In this respect, traditional planners are like the Queen of Hearts in Through the Looking Glass who cannot stand the fact that she cannot order the flowers in her garden to heed her bidding, and employs a bevy of “gardeners” to paint the flowers to her specifications. The situation is worse for an economy because there is no regulatory counterpart to painting the flowers. “The [effective] government does not impose norms, or even force individuals to self-regulate. Instead it attempts to encourage the development of an econstructure that encourages self-reliance and concern about others.” (p. 9).

Gintis’ Amazon review essays, such as this one, are often outstanding. For the pointer to the book, I thank Tyler Cowen.

More Contra Piketty.

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1. From a Francophone blogger.

comparing the mean wealth of the x% through time is an implicit selection process where you only select the winners and forget the losers.

In other words, there are two ways to explain why the mean wealth of the x% has grown faster than the mean wealth of the whole population. According to Piketty, it means that the richer you are in the first place, the faster your capital grows over time (hence, the dynastic wealth world he foresees). But it might also be the opposite: this phenomenon is exactly what we should expect to see in a world of high wealth turnover, a world where fortune rewards skills, hard work and risk taking. Quite symptomatically, Piketty and its numerous followers have completely dismissed that possibility.

Pointer from Tyler Cowen.

The phrase “the income of the top X percent grew by z percent” is always a mis-statement, because of turnover among the top x percent. The point made above is that such a figure is always an upward-biased estimate of the actual growth of the actual incomes of actual people in the top x percent.

2. From Martin Feldstein.

his thesis rests on a false theory of how wealth evolves in a market economy, a
flawed interpretation of U.S. income-tax data, and a misunderstanding of the current nature of household
wealth.

These two criticisms cast aspersions on Piketty’s empirical analysis, which Feldstein’s former student Larry Summers said deserves a Nobel Prize.

David Brooks Plays Fantasy Despot

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He writes,

The process of change would be unapologetically elitist. Gather small groups of the great and the good together to hammer out bipartisan reforms — on immigration, entitlement reform, a social mobility agenda, etc. — and then rally establishment opinion to browbeat the plans through. But the substance would be anything but elitist. Democracy’s great advantage over autocratic states is that information and change flow more freely from the bottom up. Those with local knowledge have more responsibility.

Pointer from Tyler Cowen. An example of what Brooks may have in mind is the Regulatory Improvement Commission suggested by the Progressive Policy Institute.

Originally conceived by PPI economists Michael Mandel and Diana Carew, the RIC is modeled after the highly successful military base-closing commission. It would consist of nine members appointed by Congressional leadership and the President to consider a single sector or area of regulations and report regulations in need or improvement, consolidation, or repeal.

The spirit of the proposal is fine, but I do not see why we need a commission appointed by Congressional leadership. Any Administration has the power to improve, consolidate, or repeal regulations, without requiring a special commission.

Modern democracy gives rise to what Kenneth Minogue called “fantasy despot syndrome.” You imagine that policies would be wise and benign if you became despot, and then you project this onto your favorite candidate. Each of these steps involves an error. It is unlikely that your policy ideas are so wonderfully wise and benevolent, and it is very unlikely that your favorite candidate is going to follow wise and benevolent policies. With Barack Obama, I believe that Brooks committed both of these errors.

Brooks can be very insightful, but he has a wet dream any time he contemplates “unapologetic elitism.” I don’t find it such a turn-on. Being somewhat older than Brooks, my visceral attirude toward elites in power is much more strongly influenced by the Vietnam war.

Both David Brooks and Tyler Cowen seem to have liked The Fourth Revolution. I am almost finished with the book, and apart from an anecdote here or a statistic there, I do not feel I profited from it. It felt dumbed down, either because they were trying (probably unsuccessfully) to appeal to non-libertarians or because that is how they roll.

Sorry if I seem off my meds today.