Author Archives: Arnold Kling

Soon to be canceled?

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Ross Douthat writes,

Are we living through a decisive turn from a liberal culture to an authoritarian “successor ideology” (as conservatives and some liberals fear) or a long-awaited reckoning with white supremacy and and patriarchy and inequality (as many progressives hope)?

. . .My bet is still on the second scenario, stultifying but sustainable, rather than the revolution in full. But then again I haven’t personally experienced a Full Cancellation yet.

Pointer from Tyler Cowen.

When Douthat says “yet,” I sense that he believes he could be next. And that is why he started writing on substack.

Kling Monetary Theory

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In one sentence, KMT says,

There is no scarcity in the means of payment.

Textbooks used to say that money is a unit of account, a store of value, and a means of payment.

The textbook justification for money is that barter is inefficient. Suppose that the butcher walks into the baker and says, “I want to buy bread, and I have meat to sell.” The baker says, “I have bread to sell, but I want candlesticks.” So now the butcher has to try to sell meat to the candlestick maker in order to turn around and get bread from the baker. With way more than three goods, this gets completely crazy. But if everyone agrees to accept money, there is less running around.

I claim that nowadays there are many means of payment. Last March 11, my wife and I locked ourselves down. In the year that has transpired, neither one of us has gone to an ATM for cash. We have no use for it.

The dollar still matters as a unit of account. The baker quotes prices in dollars, not candlesticks. The Fed does not control money as a unit of account. The dollar as a unit of account is firmly established as a social convention.

Currency, checking accounts, and saving accounts are stores of value. But there are other stores of value, including bonds, stocks, and real estate. Some of these stores of value are less liquid than others. People are reluctant to sell stocks in their retirement accounts in order to spend. It takes a while to get a mortgage in order to convert real estate into spendable funds. But you can spend more than what you have in deposit at the bank, and you can have deposits in the bank without spending them.

Total spending in the economy is related to the total amount of wealth that people have in all of their stores of value. The Fed does not control the supply of the stores of value. The Fed mostly controls the supply of Fedcoin, meaning reserves held by banks. Total wealth bears little relationship to Fed actions.

All stores of value differ from one another. They have different risk characteristics. Some require conversion into a different store of value before they can be used as a means of payment, and some do not. But at the margin, variations in the relative supplies of different stores of value are not a big deal.

Cochrane Monetary Theory

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Or should I call it Grumpy Monetary Theory? He calls it the fiscal theory of the price level. In a podcast with Tyler Cowen, John Cochrane explains,

the distinction between money and government bonds isn’t that important. What matters is overall government debt and the government’s ability to pay that debt back. And inflation comes when people lose faith in the government’s ability to pay back its debt. They try to get rid of the debt because they know it’s not going to get paid back. What do you do with it? You buy stuff, and that drives up the price of goods and services.

There is more at the link. I will spell out my own version of monetary theory tomorrow. It also downplays the distinction between money and government bonds. But I don’t have the sort of forward-looking consumer behavior that Cochrane uses as the basis for his thinking.

FITS note: Cowen and Cochrane disagree. They appear to me to be steel-manning one another. So they each would earn an S point if this were the season.

Finally, I like what Cochrane has to say about non-profits and about the economic profession. So go read the whole transcript.

Shorter Martin Gurri

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A reader asks,

How would you encapsulate Martin’s thesis?

1. Starting around 2000, the amount of information on the Internet doubles in a year. If that goes on for ten years, there would have been 420 one thousand times the information in 2010 as in 2000. Even if that number is imprecise (and it has to be imprecise), there is way more information out there than there used to be. The increase is staggering.

2. 20th-century elites and institutions relied on having a much less chaotic and engulfing information environment. Politicians, journalists, and academics now are overwhelmed by: (a) what they don’t know that others do know. Think of citizens using cell phones to cover events sooner and more completely than paid journalists; and (b) by the amount that others know about them that they used to able to keep secret. Think of President Kennedy trying to get away with his sexual escapades today.

3. The elites cannot accept the new reality that there is so much information that they cannot control. They see new competitors as illegitimate (“fake news”) and they blame others for elites’ loss of status and respect.

4. The general public is frustrated by the arrogance of the elites, and they have the means to assemble revolts. This has happened everywhere, from the Arab Spring to the Yellow Vests to the January 6 riot. These revolts have no organization and so they end up not accomplishing much.

5. Society requires authority. But the existing authorities can seemingly do nothing other than hope for a return to the 20th century when they had closer to a monopoly on information. And they seem to be completely incapable of dealing with the digital world. They cannot operate at Internet speed (it takes the bureaucracy too long to react to events) or at Internet scale (the Obamacare web site fiasco).

6. Maybe a new generation of elites and/or institutions will emerge that is more adept at dealing with technology and sufficiently humble to deal with a situation in which information is more dispersed than it was last century.

VC’s and non-profits

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Jeffrey Funk writes (American Affairs Journal, only one free article for non-subscribers),

In total, 2020 set a new record for the number of companies going public with little to no revenue, easily eclipsing the height of the dot-com boom of telecom companies in 2000.

He says that Internet start-ups are not undertaking any technological innovation.

Ridesharing and food delivery use the same vehicles, driv­ers, and roads as previous taxi and delivery services; the only major change is the replacement of dispatchers with smartphones.

Twenty years ago, I wrote a book advising Internet entrepreneurs not to seek venture capital. “Fundraising is for charities,” I sniffed. I was probably wrong–we would not have Amazon or Google today if everyone had listened to me. But if Funk is correct, then the VC industry may have gotten too big and too warped in its approach. He writes,

The poor performance of VCs and start-ups and the corresponding sense that they are mostly trend-chasing copycats are both indirect results of superficial training, and so part of the blame for these prob­lems must fall on business schools and universities. In recent decades, business schools have dramatically increased the number of entrepreneurship programs—from about sixteen in 1970 to more than two thousand in 201426—and have often marketed these programs with vacuous hype about “entrepreneurship” and “technology.”27 A recent Stanford research paper argues that such hype about entrepreneurship has encouraged students to become entrepreneurs for the wrong rea­sons and without proper preparation, with universities often presenting entrepreneurship as a fun and cool lifestyle that will enable them to meet new people and do interesting things, while ignoring the reality of hard and demanding work necessary for success.

Funk sees too much focus on business strategy (“build a platform!”) and not enough on science and engineering.

technologies, not business models, enabled many of the successful start-ups of the previous generation to succeed.

Funk points out that corporate research labs pre-1970 seemed better at producing technological breakthroughs than our current system of government-funded research at universities. I do think that government money has corrupted universities.

Marriage and inequality

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Gregory Clark writes,

a recent study from the UK Biobank, which has a collection of genotypes of individuals together with measures of their social characteristics, supports the idea that there is strong genetic assortment in mating. Robinson et al. (2017) look at the phenotype and genotype correlations for a variety of traits – height, BMI, blood pressure, years of education – using data from the biobank. For most traits they find as expected that the genotype correlation between the parties is less than the phenotype correlation. But there is one notable exception. For years of education, the phenotype correlation across spouses is 0.41 (0.011 SE). However, the correlation across the same couples for the genetic predictor of educational attainment is significantly higher at 0.654 (0.014 SE) (Robinson et al., 2017, 4). Thus couples in marriage in recent years in England were sorting on the genotype as opposed to the phenotype when it comes to educational status.

The paper is entitled “For Whom the Bell Curve Tolls.” Pointer from Tyler Cowen. The conclusion points to a very strong Null Hypothesis view of all forms of social intervention.

n aspirations that by appropriate social design, rates of social mobility can be substantially increased will prove futile. We have to be resigned to living in a world where social outcomes are substantially determined at birth.

Clark has been finding evidence for heritability and for the broader Null Hypothesis for some time. See my essay on The Son Also Rises.

He is one of the few people doing this sort of research. Here is why. Pointer from Tyler Cowen.

Hybrid schools

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Michael McShane explains,

The Regina Caeli network of Catholic hybrid home schools offers another successful example of this model. Students attend school in a classroom setting for two days per week and then are homeschooled for the rest of the week. For the 2020-2021 school year, the cost of full enrollment at Regina Caeli for two days per week, along with a program of instruction for the home-school days, is $3,500 for students in kindergarten through sixth grade, $4,000 for those in grades seven through eight, and $4,500 for those in grades nine through 12. Tuition is capped at four children per family; any additional children attend for free.

This sounds good to me. I could see many parents adopting such a model, but it would be easier if government money followed students rather than teachers’ unions. And, yes, you should have more government money follow students with severe disabilities.

Question from a commenter

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He asks,

If I buy a bond to sell it back to you tomorrow morning at a profit, am I borrowing the bond, or am I lending the money? . . . And doesn’t this all unravel by 8am, so what’s the point?

Arnold owns a bond. Arnold wants to finance that bond with (very) short-term money. Daniel lends Arnold money, with the bond as collateral. The mechanics of this are that Daniel takes possession of the bond until Arnold repays the loan. Daniel does this by buying the bond today with an agreement that Arnold will buy it back tomorrow. It could be said that Daniel borrows the bond and lends money, while Arnold borrows the money and lends the bond. But I prefer to think of it as Daniel lending to Arnold with the bond as collateral.

It may seem silly to do this just for one day. But (a) these agreements often get renewed and (b) both parties are better off. Arnold’s bond typically is accruing interest at a higher rate than what he pays, so he is earning a spread while he carries the bond in inventory. Meanwhile, Daniel, who has excess funds on hand for a few days (think of a corporate Treasurer with funds that came in from goods sold Monday but who will need to pay suppliers on Wednesday in order to restock) gets to earn some interest without making a long-term commitment of funds and with essentially zero risk.

The repo market works smoothly when the bonds are widely viewed as having no risk. In 2008, some mortgage securities became perceived as high risk, and the repo market for them dried up. Gary Gorton and Andrew Metrick called this a run on repo. Until they wrote the paper, 99.9 percent of academic economists had no idea what repo even was. There was, and still is, a huge gap between practitioners’ knowledge and academic understanding. Tim Taylor’s original post speaks to that.

The future of cities

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1. Joel Kotkin writes (American Affairs, only one free article for non-subscribers),

To survive after the pandemic, great cities need to become healthier, less centralized, and less dependent on mass transit. Urban areas must find ways to facilitate walking, biking, and driving, ultimately in sterile autonomous vehicles. Cities will have to become more dis­persed, cleaner, better ventilated, and less transit dependent.

2. Richard Florida and Adam Ozimek write (WSJ),

The most lavish office towers in superstar cities like New York could survive and even thrive as brand statements for major companies and amenity-filled experiences for their tenants. Even in the midst of the pandemic, the premier office districts of New York and San Francisco remain the priciest in the country. But older buildings in less exclusive commercial areas in those cities are sure to suffer. And office and commercial rents are likely to decline even further in those second- and third-tier cities that have been losing business and professional services to larger cities for some time.

I don’t think that a lavish office tower holds much appeal. Certainly not for me. About the future of New York, I probably err too much on the side of pessimism.

FITs update

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1. We have ten teams, but there is still room for a few more co-owners, where you would share a team with another owner.

2. I am proposing a scoring rules change, but I will take input from the owners. I want to combine the pairings category (P) and the wins category (W) into a single category, called Steel-manning (S). A player scores an S whenever that player does a fair job of representing the point of view of another qualified player (someone who has been selected by any team in the league or someone else who appears on the pre-season cheat sheet). Examples would include a typical joint podcast or a fair book review, like Scott Alexander’s review of Freddy de Boer. To get an S, the discussion of the player has to be extensive–not just a few sentences.

John McWhorter and Glenn Loury appearing together would count as an S for each. But any given pair can only get one S per season. Glenn could get an additional S by appearing with Coleman Hughes, for example.