we may be giving up autonomy too readily Continue reading
Author Archives: Arnold Kling
A cynical view of the UK-US relationship
Most of the pro-Brexit crowd voted the way they did because they don’t like faceless European bureaucrats deciding issues for Britain. The reality is that Britain’s only way forward post-Brexit is to assign even greater levels of authority to American bureaucrats.
Read the whole essay. Tart and idiosyncratic, as always.
Essay backup: mental transaction costs
why micropayments don’t work well and Amazon Prime does Continue reading
A few reflections on Paul Volcker
1. After I earned my Ph.D, my first job was as an economist at the Fed. Volcker was chairman. The staff was happy that he greatly increased the prestige of the Fed. But he had no use for anyone on the staff, other than Stephen Axilrod. In contrast, Alan Greenspan made extensive use of the staff, mostly looking into minute details. For many, but not all staff economists, being used this way was preferable to being ignored.
2. Volcker wanted to raise interest rates but to deflect some of the responsibility for doing so. Axilrod devised a monetary control technique called “non-borrowed reserves targeting.” I think that the staff paper that explained this was something like 50 pages long. The more obscure, the better, for Volcker’s purposes. I don’t think that non-borrowed reserves targeting was ever used before or since the period in which Volcker was trying to raise interest rates to bring down inflation.
3. My view, which makes me a real outlier, is that the Fed does not control inflation. The disinflation that took place during the Volcker years is the most outstanding apparent counter-example to my view. My view is that inflation is influenced by habitual expectations. Inflation and expectations thereof took off in the late 1960s with the breakdown of fiscal discipline and especially after the end of Bretton Woods made the value of the dollar subject to floating. I would choose to interpret the “Volcker disinflation” as a return to normal expectations, aided by a sharp decline in oil prices.
Essay backup: Let’s compete with Facebook
rather than play fantasy-despot regulator Continue reading
Adversity and SAT scores
The WSJ, had an article in the print edition on November 27 that I cannot find on line (their search function is not helpful). The print article was called ‘Adversity’ Has Big Effect on SAT Scores. What I can find online instead is this:What Happens if SAT Scores Consider Aversity? Find Your School.
Anyway, the WSJ uses a Georgetown education researcher’s regression equation relating SAT scores to “adversity scores” to make inferences such as
Top public magnet schools performed exceptionally well in adjusted SAT scores, meaning their scores jump when adversity is accounted for.
To see why this is not a valid inference, suppose that there were two students of identical backgrounds but different ability levels. Presumably, the magnet school would select the student with higher ability, leaving the other student to attend a regular school. The more able student would get a higher SAT score, but that would say nothing about the magnet school’s “performance.”
I sent a letter to the editor of the WSJ about this, but they did not print it. But I hope that someone there gets the message that this was statistical malpractice.
Essay backup: complex is not the same as complicated
Falling back on consequentialism
In a review of a book by Dan Moller, I write,
In appealing to our moral intuition against committing armed robbery, has Moller found a philosophical trump card that libertarians can play against their opponents? I am doubtful. In fact, in the game of intellectual bridge, I would suggest that moral intuition is the wrong suit for libertarians to bid.
I find the consequentialist case for libertarianism more solid than the moral intuitionist case. And in the review I point out that Moller has to fall back on consequentialist arguments.
Essay backup: the game-playing society
life and business increasingly involve score-keeping and strategy Continue reading
Daniel Markovitz interview, annotated
Markovitz is the author of The Meritocracy Trap. The interviewer is from Spectator Books. I listened on The Podcast Browser. This is the sort of essay I used to post to Medium, but I am now putting on the blog.
min 1 We now have an aristocracy based on schooling.
min 3-5 The economy creates unhappy winners and losers. Losers don’t get enough parental investment in their education, so they suffer from bad job prospects. Winners suffer because they have to work very hard for their wealth. It used to be if you inherited land or a factory, you didn’t have to work hard. Now, wealth consists of human capital, and you have to use it to profit from it.
min 6 a lot of income that looks like capital income is labor income; e.g. hedge fund carried interest. A reasonable guess is that the top 1 percent get 75% of income from labor. Rent-seeking is limited. Managers are not taking advantaged of dispersed shareholders because when shareholders become concentrated by private equity firms taking over, executive compensation does not fall.
min 10 in old days, top manager was lazy, middle managers ran firm; you can think of the management function in those days as dispersed among middle managers and workers.
min 11 management function is now concentrated in elite of executives, and consequently so is wealth.
min 11-12 The economy has been remade the economy around highly educated people. They have tasks involving a lot of abstraction.
Other workers are left with tasks that are more concrete–they might be done by robots.
min 14 This is not inevitable. The technology we invent is socially determined. We are inventing technology that empowers the highly-educated elite because that is the technology that the elite wants.
min 15 first generation of meritocrats got rid of old elite. Then it started to draw technology in its direction, in finance for example. Then they developed an insatiable taste for educating and training their children.
min 16 how much training can one person absorb? how much inequality can a society absorb?
min 17 why don’t the children of elites get off the treadmill? In part, the economy has not created any choices for them that fall somewhere in between investment banker and barista.
min 18 in part, younger meritocrats are conditioned to stay on the treadmill. Older meritocrats have hobbies, but younger ones are such workaholics that they don’t
21 Marx was in one way better than today’s left, because he doesn’t go around looking for villains. But what Marx gets wrong about today’s economy is that we have human capitalism–capital embodied in humans.
23 The liberal response to inequality is to double-down on equality of opportunity. But this is at best a fantasy, and we need to focus on equality of outcomes.
27 Markowitz makes the claim that academicians and journalists could have made it finance, but they chose a higher calling [me:
gag]
30 There is unsustainable growth in university endowments–they are on a path to end up with all wealth
My comments:
Markovitz is offering a theory of economic structure in which schooling determines earning ability. People who obtain a lot of schooling want to:
(a) tighten the connection between schooling and earnings by creating and deploying technology that is complementary with schooling;
(b) make sure that their own children get the best schooling, so that they inherit high social positions.
The result is a distribution of occupations that has high-end jobs that require lots of skill and effort and low-end jobs that offer little reward. He would prefer a distribution of occupations that includes more middle-level jobs that require less intensive training and effort but more reward than low-end jobs.
For (a), Markovitz assumes that schooling works through human capital. You might be able to tell a similar story with schooling working through signaling, but it probably would be harder to tell.
For (b), Markovitz assumes that the Null Hypothesis is false. That is, when parents put a lot of money into getting their children in to exclusive schools, this makes a big difference.
I am more inclined to see the distribution of outcomes as determined by the distribution of personality characteristics, including IQ. Unlike Markovitz, I think that a lot of highly-educated people would fail in the world of business and finance, because of personality shortcomings.
I think that the biggest shortcoming that keeps highly-educated people in narrow occupations is an inability to interact with a broad spectrum of people. I mean by that something more than just introversion. I would describe the problem I see in many academics is that they have a very limited comfort zone in terms of the people they can befriend or have as colleagues.
I am an introvert, but compared to most academics I know, I have a much wider comfort zone in terms of people. In my entrepreneurial days, my main business partner did not even graduate high school, and I don’t think there are many people with my education credentials that could have handled that.
So I do not fully agree with Markovitz. But I give him credit for shifting the focus away from the neoclassical thinking about income distribution between labor and capital. In that regard, his view of the world is much less distorted than neo-Marxists of the Piketty persuasion.