Culture, trust, and economics

I reviewed Why Culture Matters Most, by David Rose.

According to David C. Rose, trust is essential for prosperity. A high-trust society is one in which almost everyone is trustworthy almost all of the time. . .

Rose’s thesis is interesting. But his focus is narrow in two respects. He boils culture down to a single variable, namely trustworthiness. And he boils trustworthiness down to an individual’s taste or inclinations.

I spell out these criticisms in the essay.

Colleges’ right to discriminate

Dennis L. Weisman writes,

On what basis can we credibly claim that a university that trades off academic talent for diversity or financial resources (to a degree disciplined by market forces) is discriminating and not simply selecting the optimal set of inputs to maximize its objective function in furthering the university’s institutional mission?

The court in the Harvard discrimination case may further delineate the boundaries of university discretion insofar as the admissions calculus is concerned. Whereas the court’s job is to enforce the law dispassionately, a ruling that eliminates or even tightly circumscribes the use of racial preferences while leaving athletic and legacy preferences largely intact would send a message that is likely to cut against the grain in the arena of social discourse: not all preferences in college admissions are created equal.

1. Note that if a university has the right to discriminate in favor of blacks, then it has a right to discriminate against them. That would seem rather awkward, except to a libertarian who subscribes to the view that only the government has an obligation not to discriminate.

2. I restate my suggestion, which is to abolish the admissions office and admit applicants by lottery. Then ruthlessly flunk out the lottery winners who cannot pass their courses. If the football team is more amateurish, so be it. If wealthy alumni have less incentive to contribute bribes on behalf of their children, so be it.

3. The issue of racial bias in college admissions is not high on my list of concerns. My concern is that the elite institutions of higher education may have reached a point where they do more harm than good, because of the way that they inculcate progressive dogmas.

4. Those of us who are worried about the issue of progressive dogmas in higher education have three avenues. One, which I call the Samizdat approach, is to utilize alternative media and hope that the availability of our point helps to save our culture. A second is to support Jonathan Haidt’s efforts to reform the academy from within, although I give these efforts almost no chance of succeeding. A third is to promote competing avenues for attaining access to wealth and status. The Thiel fellowship is one drop in what I would like to see fill a large bucket.

Libra’s red flags

1. Many large, established firms involved, before it even gets off the ground. How many successful innovations can you name that began with that organizational structure?

2. No clarity on what is the consumer’s pain point. For payments, cash still works well. Credit cards are so efficient these days that for many transactions they have replaced cash. And payment apps on phones are quite popular, particularly outside the U.S.

3. An apparent fascination with the solution. There is a lot of technical jargon floating around, which creates some buzz within a niche of software engineers. But if you think that they are a representative market segment, then you probably predicted that Unix would out-sell Windows in the market for home computers.

My impression is that the Libra project simply assumes that if you put together a reliable new digital currency, then the world will beat a path to your door. But nobody needs a reliable new digital currency per se. Show me a class of transactions that I want to undertake for which a reliable new digital currency is likely to be significantly more efficient than the next best alternative.

George Will’s Conservative Sensibility

Perhaps I will have finished the book by the time this post goes up. Or I will have finished without making it to the end.

Early on, he writes,

Politics originates in nature, in the constancy of human nature, which impels people to associate in society to avoid violent death and other inconveniences, and then to gain other, positive advantages. If, however, there is no universal human nature, then there can be no universal principles of political organization and action. If what we call human nature is but the distillation of a particular people’s traditions and experiences, then nature, at bottom, has no bottom. It is merely the most durable aspect of something that is ultimately not durable–the sediment of history from transitory cultures.

Will sees the left-right divide in these terms. The right sees human nature as fixed, and we must arrange our institutions to best accommodate this fixed human nature. The left sees human nature as malleable, and we must arrange our institutions to improve human nature.

There is something to this. But I think that Will’s emphasis on human nature, which leads to an emphasis on natural rights, is more libertarian than conservative.

For me, conservatism means a belief that cultural change is better accomplished by evolution than by revolution. There is wisdom in traditions, and we do not grasp that wisdom sufficiently well for it to be safe to impose dramatic changes. I see markets (or decentralized innovation) as a more effective evolutionary mechanism than government. Hence, I come down on the side of libertarianism from that perspective.

Moral intuition vs. tradition

From a comment:

Does your disagreement with Bryan Caplan really hinge on a contrast between reason and tradition? Bryan (like Michael Huemer and Jason Brennan) grounds his arguments for radical policies in widely shared, fundamental moral intuitions, and in the best evidence from the disciplines that study human behavior. Bryan starts from where people are.

But he does not start from where culture is. Moral intuition is largely grounded in sub-Dunbar society. Our intuition tells us what is fair and just in a small tribe doing simple tasks. Tradition is how we were able to achieve cooperation at scale and complexity. We gradually evolved cultural norms and institutions that allow millions of people to cooperate and to participate in complex enterprises. Markets, corporations, and government are among these evolved institutions.

If you think that you can radically re-engineer society based on moral intuition, you risk taking us back to a primitive state. This is true whether your moral intuition is derived from Communism (our governing principle should be caring and sharing), environmental sustainability (we should leave the environment exactly as we found it), or libertarianism (don’t let a government do to us what we would not let another private individual do to us).

The UBI is radical

From a comment:

Does your endorsement of a UBI square with your broad insistence that new policies should start from where we are?

No. It is a radical idea to replace food stamps, housing subsidies, EITC, TANF, Medicaid, and even Social Security and Medicare with a UBI.

How could we experiment gradually with a UBI? One approach would be to replace everything except Medicaid, Social Security, and Medicare with a small UBI. Try it for five years, and see what happens. If the consequences are not dire, then enlarge the UBI and replace Medicaid with a mandate to purchase at least catastrophic health insurance.

If my view of the incentive effects is correct, then after about 15 or 20 years we should see higher rates of labor force participation and marriage, as people start to notice that they are not losing benefits by working or by marrying someone who works.

Regarding non-profits

A reader asks my thoughts on these remarks by Russ Roberts.

As much as I like the nonprofit world as an alternative to government and business, in my experience, they often tend toward mission creep, to expand budget rather than to achieve what was their original goal and the problem they were trying to solve.

That’s a tragedy. It’s evidently a very human tragedy. It’s very hard to avoid that, so I think that’s a very good reason for philanthropists to sunset their foundations and have them die after a certain amount of time.

The reader asks whether this also might apply to think tanks. Perhaps. I don’t know enough about the inner workings of think tanks. I’ve never had an office at one or been on salary at one. I’ve only had “adjunct” status, and that is a comparable to being an adjunct professor.

My general view on non-profits is that their status is too high relative to profit-seeking firms. In the for-profit sector, I think of the example of Elizabeth Holmes, the founder of Theranos. The company had a noble vision, and she made compelling presentations, but the product didn’t work. Because she claimed that the product worked better than it did, she got in trouble. She was ousted as CEO, and she faces a lot of legal jeopardy.

In the non-profit world, there are no end-users to hold you accountable if what you are doing doesn’t work. Just having the noble mission and being able to make compelling presentations to donors is sufficient.

I think that on the margin out society should invest less money in non-profits and more money in profit-seeking enterprises. and we should have fewer people making a living at non-profits and more people making a living in profit-seeking enterprises.

The climate-change scapegoat

A site calling itself Issues and Insights reports,

Lake Erie and Lake Superior — two of the five that make up the Great Lakes — broke records for water levels this May. Lakes Michigan and Huron could follow suit.

Naturally, climate change is getting the blame. “We are undoubtedly observing the effects of a warming climate in the Great Lakes,” says Richard Rood, a University of Michigan climate scientist.

But just a few years ago, climate scientists were insisting that a warming climate would cause water levels to decline.

They go on to cite several examples from a few years ago of scientists pointing to low lake levels as a phenomenon explained by climate change.

If I were a climate scientist, I would be saying something like, “People, just pay attention to the Greenland ice sheet. That’s what matters, not weather blips. If you keep scapegoating anthropogenic climate change for every weather blip, you’re just going going to lose credibility.”

David Henderson attacks the UBI

He writes,

A UBI, moreover, would create more of a welfare culture than we have now. Imagine four young men meeting in college and figuring out that when they reach age 21, they can each get $10,000 a year from the federal government forever. There are a lot of places they could go in America and rent a three- or four-bedroom house for $1,500 a month ($18,000 a year), leaving $22,000 a year to spend on food, cable, and various amenities. Would they want to stay out of the labor force forever? Probably most of them would not, but the UBI could easily postpone their becoming responsible adults for five years or more.

I think that this is probably wrong. If it is wrong, it is demagogic.

Henderson writes as if our current welfare programs do not cover everyone. In fact, those four young men could be eligible for Medicaid, food stamps, housing vouchers, and so on. They could stay out of the labor force just about as easily as they could under a UBI.

I really think that my essay on the basic trade-offs of the UBI is the most objective, least demagogic piece you can read about the idea. That essay points out that a UBI has two parameters with which to try to manipulate three objectives. The parameters are the amount of the UBI and the tax rate on earned income. The objectives are offering a generous benefit, keeping the disincentive to work low, and keeping the budget cost low.

Henderson is correct in pointing out that giving every adult about $10,000 a year would strain the budget. In my essay, I propose giving an entire family of four $10,000, which is half of what they would receive under many current proposals. Most people would not want to live on the UBI that I would offer. To the extent that they were able to work, I believe that they would do so.

The problem with my proposal is that it does not provide for a family that is unable to work and/or has special needs, such as a child with an expensive medical condition. I suggest that those special needs be met by charities and local governments.

House flipping

From the WSJ:

The investment house known for corporate takeovers [KKR} has agreed to pump another $250 million into Toorak Capital Partners LLC, which buys short-term loans made to real-estate investors who purchase, renovate and resell residential properties.

. . .Builders have struggled to produce homes affordable for many first-time buyers. The median sales price of newly built homes was $342,000 in April, according to the Federal Reserve Bank of St. Louis. That has left a big market for rehab specialists who can get their hands on physically distressed or out-of-date properties for peanuts. The median sales price of flipped homes during the first quarter was $215,000, according to Attom Data Solutions, a real-estate information firm.

From The Real Deal:

According to a recent study by CoreLogic, 10.6 percent of U.S. home sales in the fourth quarter of 2018 were flips, close to the 2006 house flip rate of 11.3 percent. The market these days is quite different that the one that preceded the recession: flippers in the fourth quarter on average made a nearly 23 percent profit on flips, compared to 6 percent in 2006. Institutional investors comprise more than 40 percent of flippers today, with companies like Opendoor, Zillow and Redfin all placing big bets on the space.

The markets where this is popular seem to be quite different from the high-cost urban markets that get most of the media attention.

I think that this is a difficult phenomenon to explain. Why has there been a profit opportunity in buying a run-down house and fixing it up in Memphis, but new construction there doesn’t pay off so much (or does it)?

The WSJ has a subsequent article, focused on Phoenix. The WSJ also has this article, which says

Big private-equity firms, real-estate speculators and others that buy properties comprised more than 11% of U.S. home purchasers in 2018, according to data released on Thursday by CoreLogic Inc.

It used to be extremely risky to be residential property without a lot of local knowledge. Now, with more data available, these big companies believe they can buy in distant locations without running into adverse selection (aka the “lemons” problem).

It wouldn’t surprise me to see the profits from this activity quickly fall to zero–or less.