The Scourge of Communism

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Freedom House reports,

Eurasia has declined to the point where its political rights scores are lower than those of any other region. Russia’s authoritarian regime committed fresh outrages in 2013…It also employed bullying tactics to discourage neighboring countries from initialing agreements with the European Union.

I looked at this report on freedom in the world in light of my essay that used the Fraser Index of economic freedom as an indicator of the quality of governance. Economic freedom and political freedom do not always coincide. Hong Kong and Singapore rank near the top in terms of economic freedom, but they are only partly free in the Freedom House measure.

I used a two-factor model to explain the Fraser Index: country size (larger countries tend to have poorer scores) and national-average IQ (higher IQ tends to be correlated with higher scores).

Looking at the Freedom House index, a third factor stands out: Communist legacy. If you want a country not to be free, regardless of size of national-average IQ, give it a Communist government or a history of Communism.

There does exist a negative correlation between political freedom and size, in that the percentage of countries ranked free is higher than the percentage of the world’s population accounted for by countries that are ranked free. However, China may account for most of that negative correlation.

My guess is that if you want to find a country without political freedom, first look for a country with a Communist legacy. After you’ve gone through those, move on to countries with low national-average IQ. Once you have done that, I am not sure that population size will matter.

The Raj Chetty Paper on Income Mobility

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If you have only seen the blogosphere coverage and not read the paper, co-authored with Nathaniel Hendren, Patrick Kline, and Emmanuel Saez, then here are some findings you have missed.

the strongest predictors of upward mobility are measures of family structure such as the fraction of single parents in the area. As with race, parents’ marital status does not matter purely through its e ects at the individual level. Children of married parents also have higher rates of upward mobility if they live in communities with fewer single parents.

and

high upward mobility areas tend to have higher fractions of religious individuals and greater participation in local civic organizations.

and

no systematic correlation between mobility and local labor market conditions, rates of migration, or access to higher education.

The authors emphasize that these are correlations, not causal relationships. Still, these results seem more promising for social-conservative policy wonks than for progressive ones.

The Gift of Health Insurance

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Megan McArdle writes,

There may be something seriously wrong with our understanding of who the uninsured are, and what they are willing and able to buy in the way of insurance. I don’t know exactly what the fault may be in our understanding. But if the numbers [of previously uninsured signing up for Obamacare] stay this low, I’d say we need to reassess the state of our knowledge about the uninsured — and the vast program we created to cover them.

This reminds me of an essay that I wrote over 10 years ago, called Health insurance do-nots.

In America is Crazy, I wrote that our health care policy reflects mental illness. The fundamental problem is that we believe that health insurance is something that only should be received as a gift — never obtained for oneself. Thus, we immediately assume that when a family does not have health insurance, they are to be pitied for not having received the gift, rather than being blamed for not having taken responsibility.

After the Census report was announced, the evening News Hour on PBS featured a young man (he appeared to be about 30) without health insurance who had been diagnosed with melanoma. The focus of the feature was the financial hardship that the man was going to have to undergo, including putting his family deeply into debt.

While I truly feel sorry for this man, I have so say that the worst of the financial burden of his illness was avoidable. When he was healthy, he could have obtained health insurance. Instead, he chose to spend his income on other things. He was a health insurance “do-not.”

However, the thrust of the story was not, “Let this be a lesson to you. Buy health insurance, because you never know when you may need it.” Instead, as in the Times editorial, the PBS story treated the man as a victim because he did not have employer-provided or government-provided health insurance.

To deal with the problem of health insurance do-nots, I wrote that

some form of catastrophic health care coverage ought to be mandatory

I was naive at that time, thinking that the government could mandate basic catastrophic coverage. The political process instead works in the direction of mandating gold-plated coverage. It works in the direction of rewarding politicians who make the most outlandish promises (“it will lower cost, you can keep your doctor,” etc.), rather than in the direction of rewarding politicians who tell people the truth about the cost of health care or who dare to raise the issue of individual responsibility.

Jonathan Haidt Podcast

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With Russ Roberts. An excerpt:

if you expand the moral domain as I did and you are interested in group loyalty and respect for authority and the idea of making things sacred, boy, these things don’t make a lot of sense from reciprocal altruism. But they make perfect sense if you think about tribes competing with other tribes. And if you think as Darwin did that group cohesion matters when you have intergroup competition. So, what I’m saying here is that almost all human nature can be explained without group selection. We are 90% chimps. Chimps are not really group-selected. So, as Frans de Waal says, all the building blocks of human morality can be found in chimps. And I think almost all can. So that’s the 90% chimp. But I think that, beginning with Homo heidelbergensis, which is about 800,000 years ago, beginning with that species, which is thought first to tame fire, have campsites, hunt large game cooperatively, bring it back to the campsite, butcher it–well, this group probably also, they had spears. They probably also were engaged in intergroup conflict. And it’s this species that also begins to have cumulative cultural evolutions–the first signs of culture building on previous innovations. So, that I think was our Rubicon–Homo heidelbergensis, 800-500,000 years ago. So that opens up the possibility of true group selection aided by gene culture co-evolution. Now, bees are group selected. The bee doesn’t live or die based on its ability to outcompete other bees. Bees live and die based on the hive’s ability to prevail over other hives. So that’s what I mean by we are 10% bee.

Russ chimes in:

one of the things I think libertarians sometimes miss, which is our desire to be part of something larger than our self. I think the Left romanticizes, say, our democracy or political process and takes away some of the realities of it to make it look more appealing than it actually is. But I think libertarians have no ability, almost no ability, to even appreciate the idea of the body politic or collective decision-making. And I understand the harm of it, the dangers of it. But it seems to be an important part of our humanity in lots of ways. And for some people, their political persuasion is their religion; for other people, their sports is their religion; and for some folks, their literal religion is their religion.

Russ and I are both fans of Haidt’s work. See this review essay, where I stirred Haidt’s ideas around, ultimately leading to my e-book.

The Next Financial Crisis

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Tyler Cowen writes,

When the U.S. real estate bubble burst in the late 1980s, there was a downturn in output and employment but no financial crisis. No capital markets froze up for instance and risk premia never deviated much from normal in the first place. And if that late 1980s-like path is what someone is predicting for the Nordics, Canada, or Singapore, well maybe so. I’m not predicting it myself but I certainly can see that within the realm of the plausible.

Much is within the realm of the plausible. Too much.

If you are a creditor of a government or of a large bank, your thoughts are probably along the lines of, “All of the governments and regulators of the world are doing everything that they can to prevent me from suffering from a default. So I’ll just hang in there.”

That is one equilibrium. But it is easy to transition to another equilibrium. Suppose that, in spite of all the best efforts of the same folks who were not able to stop the financial crisis of 2008, there is a large painful default by any one of the countries on Tyler’s list. If that happens, then a likely scenario is that all of the rest will go down very quickly.

The current policy approach perhaps reduces the probability of any one nation or one bank going under. However, it increases the probability of a huge, horrible, systemic collapse. A benefit of reducing government budget deficits is that it helps to reduce the probability of this Armageddon scenario. Even if you believe that reducing government deficits is painful austerity, from my perspective the benefit exceed the costs.

Explain This

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Jaison R. Abel, Richard Deitz, and Yaqin Su write,

the broader V-shaped pattern in the underemployment rate over the past two decades is also consistent with new research arguing that there has been a reversal in the demand for cognitive skills since 2000. According to this research, businesses ramped up their hiring of college-educated workers in an effort to adapt to the technological changes occurring during the 1980s and 1990s. However, as the information technology revolution reached maturity, demand for cognitive skill fell accordingly. As a result, during the first decade of the 2000s, many college graduates were forced to move down the occupational hierarchy to take jobs typically performed by lower-skilled workers.

They refer to a paper by Beaudry, Green, and Sand.

This is an important observation. Some possible explanations:

1. The empirical finding is mistaken. If you do the analysis correctly, the demand for cognitive skills has not reversed. Perhaps jobs that are classified as not requiring a college degree in fact have become much more cognitively challenging. [note: I am not claiming that the empirical analysis is incorrect. I just want to include that as a possibility.]

2. Assume that the distribution of jobs in terms of skill requirements has remained approximately fixed. Assume, perhaps reasonably, that college selects students on the basis of cognitive ability, but it does nothing to change the distribution of skills or ability. As more students go to college, this means more low-ability students go to college, and they wind up in the same jobs that they would have obtained without going to college.

3. There has been an actual deterioration in the quality of college education, at least relative to the needs of employers. An individual who graduated in 1995 was more likely to have gained skills in writing and thinking than if that same individual had graduated in 2005.

A Statistic to Know

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Last fall, Jesse Colombo wrote,

it is important to realize that around 50 percent of the SP500’s earnings are generated overseas

This means that our stock market is to some extent decoupled from our economy. Statistics like ratios of corporate profits to GDP are not necessarily going to be indicative of movements in income shares. Imagine a foreign subsidiary getting profits without generating and GDP whatsoever.

Larry Summers on Sectoral Productivity Disparities

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He says,

people with higher wages now work more hours than people with lower wages. The time series tracks the cross section. Over time, as we have all gotten richer, the number of hours worked for many people has risen

and also

the simple fact is that the relative price of toys and a college education has changed by a factor of ten in a generation

Pointer from Timothy Taylor.

How do you connect these dots? One way is to scream “We need more government!” Because look at the inequality! Look at the low productivity in education and health care, and we know government ends up running the low-productivity sectors!

I had another way to connect the dots. You could say that the cost of living has gone way down for people who do not measure their self-worth by the prestige of the college to which their kids go and the breadth of their health insurance coverage. Many people can now afford what they think is a decent lifestyle without earning so much in the labor market. However, the anointed look at such people and say, “But you must attend an elite college. But you must have health insurance that covers all manner of medical services, not just major medical.”

A Robot-Friendly Environment?

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I am still reading The Second Machine Age. The section on the improvements in robotics made me think about creating a city that is robot friendly. Imagine a city with “self-driving car lanes” comparable to bike lanes today. My guess is that self-driving cars could be more efficient without humans.

But why not go further? Instead of making robots adapt to the human environment, why not put RFID’s on every object and surface, to make it easier for robots to operate. The place to try this out might be at an expensive resort or a cruise ship. You could be in your room and say to your phone or wristband, “I am ready for lunch.” You listen to a menu, you make your choices, and robots assemble and deliver your meal. If you are at a golf resort and are ready to play, you could summon a self-driving golf cart to take you around the course. Maybe each hole could adapt to your level of skill, with the location of the pin and various sand traps moving while you come toward the tee.

Fischer Black on the ZLB

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On the topic of aggregate demand, he writes,

When people say that they see shifts in aggregate demand, they mean that they see changes in the match between wants and resources. Thus in a more specific sort of model, high aggregate demand can be a good match. If this is what “aggregate demand” means, we could also call it “aggregate supply.”

That is from p. 87 of the 2010 edition of Exploring General Equilibrium. Basically, he sees a cyclical slowdown as a reflection of capital investments that were made with good intention but turned out to be wrong. In my terminology, people bet on certain patterns of specialization and trade, and those turned out not to be sustainable patterns.

On the Great Depression, he writes,

Firms made investments during the 1920s based on their beliefs about what tastes and technology would be, along many dimensions, during the 1930s. These beliefs turned out to be very wrong, so the investments were not worth much and ability to produce what people wanted was low…

But monetary forces played a big role too…many countries experienced sharp deflation, which drove their nominal interest rates down. Normally, very low nominal interest rates mean a big demand for currency [but] some countries stopped supplying currency passively. This meant a serious breakdown in financial markets.

…the deflations forced short-term nominal interest rates to zero in some countries, and would have made these rates negative were it not for the effective floor at zero. This caused disequilibrium in real asset markets. The real interest rate was forced above its natural level. It was a kind of “currency trap.”

Longer-term nominal interest rates did not fall to zero, because they reflected the chance that the nominal short rate would bounce back to positive levels. But they were artificially high, so longer-term real rates were artificially high, even more so than short-term real rates.

Some notes:

1. He does not believe in AD, but he thinks that the ZLB mattered in the Great Depression. He thinks that the artificially high real interest rates accentuated the mismatches between previous investments and prevailing wants. He does not give any examples. But imagine that you are a farmer, and you invested in farm machinery, and now crop prices are falling. Are you going to throw more money at your investment by buying seeds and fertilizer? Will the bank lend you the money to do so? If growing crops is no longer profitable, then the value of your investment in farm machinery is looking bad.

2. He is saying that just because you observe positive long-term interest rates, that does not mean that the ZLB is unimportant.

3. What about the U.S. in the last five years? On the one hand, we have seen low short-term interest rates. On the other hand, we have not had deflation, so the short-term real interest rate has been low rather than high. Has the long-term real interest rate been artificially high because of the ZLB?

4. In explaining unemployment, I would be inclined to focus more on mismatches involving human capital. In the 1930s, men who had been farm laborers and tenant farmers were thrown out of work by tractors, trucking (which made it possible to shift production away from relatively poor farmland close to cities to better farmland farther away), refrigeration, and so on. Also, workers whose human capital was in cigar rolling or lightbulb glass-blowing found themselves obsolete. In hindsight, these guys should have stayed in school instead of dropping out without completing high school. But as it was, there were too many of them relative to the technology of the 1930s, which ultimately called for a work force with at least a high school education.

Today, I would say that, in hindsight, more people should either have acquired computer skills or prepared for life providing elder care or otherwise engaged in personal services.