Author Archives: Arnold Kling

Decentralizing science grants

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Eli Lehrer and M. Anthony Mills write,

federal support for basic research should be decentralized and diversified. The current model is almost the inverse of Bush’s model: He envisioned a single independent agency, staffed by scientists, that would disperse funds widely across a range of nongovernmental institutions, and he assumed these institutions would retain autonomy and control over their research agendas and personnel. What Bush recognized is that science is best conducted in a vibrant marketplace of ideas with minimal bureaucratic oversight.

The Monopoly Capital Theorem

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Jose Azar writes,

In an economy where everyone holds the market portfolio, all the companies have the same shareholders. If, in addition, firms act in the interest of their shareholders (i.e., if the agency problem is solved), the equilibrium outcome is equivalent to an economy-wide monopoly.

This is one of those theorems, like the Modigliani-Miller theorem, that tells you more about what has to be false than about what is actually true.

When I was at Freddie Mac in the 1990s, some of the economists there asked, “Why do our shareholders want us and Fannie Mae to compete?” Here you had a situation where we were a duopoly, with a lot of room to charge higher fees without mortgage lenders finding another outlet for their business, and many of our investors also owned shares in Fannie. Yet if a Countrywide Funding or a Prudential Home Mortgage wanted to play Freddie and Fannie off against one another, they could do it. We would cut fees to the bone and lower the standards on the mortgages that we would buy.

Actually, there was one instance where we colluded. Around 1990, there was an outbreak of “low-doc” lending, and Freddie’s CEO went to Fannie and obtained an agreement that neither firm would buy low-doc loans. Of course, low-doc loans made a big comeback during the housing boom, and this time around under different management Freddie and Fannie went all in on “no income, no job, no assets,” meaning that what those lines stated on the loan application went unverified by supporting documentation.

In fact, if there is going to be collusion, the initiative is not going to come from shareholders. Shareholders are represented by the Board of Directors, but you don’t see two companies in the same industry with Board members in common. And if you did, it wouldn’t take a particularly aggressive anti-trust regulator to make an issue out of it.

Some insights from Rene Girard

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In an essay on Peter Thiel by David Perell.

Girard wrote that social differences and rigid hierarchies maintain peace. When those differences collapse, the infectious spread of violence accelerates. The fiercest rivalries emerge not between people who are different, but people who are the same. The more two people share the same desires, the greater the risk of Mimetic competition.

I arrived at this essay following a thread from a link posted by Tyler Cowen. You can tell that Tyler absorbed this idea long ago, because he has often argued that people in the middle of the income distribution are more fiercely jealous of their neighbors than they are of the very rich, who are remote.

Now, think of us in the past two decades being brought closer together by the Internet. What chaos might result?

The math of the UBI

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In a podcast with Erik Torenberg, Bryan Caplan trashes the universal basic income. He gives the following arithmetic example:

UBI for a family of four of $48,000.
Tax rate of 25 percent.

That means that the “breakeven” family income (where you net zero from the government) is $192,000. That is ridiculously high. Ergo, he says, we need targeted welfare policies.

But. . .

What is the target? If your target is to ensure that no family falls below $48,000 a year, then you give a family earning $40,000 a year $8000 and you give a family earning $48,000 a year nothing. Essentially, you have a 100 percent marginal tax rate on any earnings until the family hits $48,000.

Our current welfare system provides nearly this level of disincentive, with tax rates for low income people around 80 percent.

I assume Bryan would agree that these high marginal tax rates are unwise. But he does not articulate his preferred approach.

If you go to my essay on the UBI, you will see that my preferred approach is a smaller UBI, say $10,000 for a family of four, with local governments and charities providing additional targeted support based on family circumstances other than willingness to work. A family with a disabled child would get more local support, for example. So would a family where the parents are unable to work. The low overall UBI would make the breakeven point lower. The targeted support based on family circumstances would keep marginal tax rates low for people who are able to work.

If it will help, you can think of the UBI as a negative income tax. A UBI of $10,000 with a 25 percent tax rate is arithmetically equal to a negative income tax rate of 25 percent for a family with an income of $40,000 or less.

James Flynn censored by his publisher

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He writes,

Discussing why free speech should extend to questions of race and gender necessarily involves presenting views (such as those of Jensen, Murray, and Lynn), if only for purposes of rebuttal, which upset those who believe that racial and sexual equality is self-evident. If upsetting students or staff or the public is a reason for banning speech, all such discussion is at an end. I end the book by quoting from George Orwell’s original preface to Animal Farm, which was itself rejected by Faber and Faber for being too critical of Stalin: “If liberty means anything at all, it means the right to tell people what they do not want to hear.”

His publisher decided not to publish his book on free speech. Read the whole essay. Note that this is the Flynn of “the Flynn effect,” which is the most prominent scientific argument against DNA determinism.

Facebook and countervailing power

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A reader of my post on the podcast with George Will who listened to the podcast asked how I would answer the podcaster’s question of why Facebook is not a power to be checked just as a branch of government is a power to be checked.

1. Facebook’s power is not established by the Constitution. It is a power that emerged from market activity.

2. What the market gives, the market eventually takes away. Only with government protection are monopolies sustained.

3. The history of using government as a “countervailing power” to the private sector is mixed at best. Probably the most positive example one could give is AT&T, which was a regulated monopoly and eventually broken up by a court case. We don’t know what the alternate history would have been had the government stayed out of the telephone market from the beginning, but consumers were generally happy with their phone service before the breakup, and the breakup helped speed the modern communications revolution.

4. There are other prominent cases of government “going after” leading tech companies whose market positions were being undermined by technological forces. For example, the anti-trust case against IBM was launched at the onset of the personal computer revolution, which diminished the importance of the mainframe computer market that IBM dominated. The anti-trust case against Microsoft was launched just as the central role played by the personal computer operating system was diluted because of the Internet.

Elites and the economy

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Donald Schneider writes,

The economy has undergone massive shifts over the last several decades. The opening of new markets exposed domestic workers to fierce competition and increased the returns to scale and management. The evolution of the product cycle contributed to the hollowing out of established industries. A decades-long shift from goods production to service provision changed the allocation and intensity of capital investment. New technologies increased the returns to education and disrupted established occupations. The shifting nature and intensification of competition begat the rise of a “winner take most” model and “superstar” firms. And a rising dispersion of productivity across firms and the slowing diffusion of innovation altered the competitive landscape for businesses.

The thrust of the article is that populist economic resentment is not justified.

1. He argues that average wages have kept pace with productivity. I view all aggregate productivity estimates with suspicion, so I am not a participant in this particular debate.

2. He argues that low-skilled workers have gained in real income. This depends a lot on long-term measurement of changes in the cost of living, which is quite difficult. I lean on the side of those who think that official statistics overstate the increase in living costs and by the same token understate the gains in real income.

3. He argues that although high-skilled workers have gained ground relative to low-skilled workers in recent years, this is not because elites are rigging the game.

I agree that there is no conspiracy to exploit low-skilled workers taking place. And for years I have cited four forces that converge to weaken the relative standing of low-wage workers: the New Commanding Heights (shift of demand toward health care and education; globalization; computerization; and assortative mating.

But I would count credentialism as rigging the game. It artificially inflates the incomes of professors and adminsitrators by raising the demand for higher education. It artificially inflates the incomes of health care professionals. In government, it artificially raises incomes for people who obtain degrees that have no bearing on their ability to perform.