Author Archives: Arnold Kling

Speaking of Institutional Irrationality

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Ben Weingarten writes,

If Afghanistan should have taught us anything, it is this: When confronting an enemy, we need a clear set of goals, a reasonable plan to achieve those goals as efficiently as possible and an ironclad exit strategy.

He argues that the virus response failed to do this.

Go back to the quoted passage and for “When confronting an enemy” substitute “When our organization undertakes an initiative…” That might make for a pretty good definition of institutional rationality. It leaves out the possibility of rationally setting out to undertake an activity permanently. But in fact it is hardly ever viable to do the exact same thing in the exact same way long term.

Paper wealth watch

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Two from the WSJ.

1. Tech firms buying commercial real estate.

The biggest U.S. companies are sitting on record piles of cash. They are getting paid next to nothing for holding it, and they are running out of ways to spend it.

So they are buying a lot of commercial real estate.

I don’t get it. Commercial real estate seems to me to be an investment that is likely to lose money. Instead of a post-pandemic return to the office, my prediction is that firms are going to develop and deploy even more “remote capital,” so that in a few years office vacancies will only increase. That means that the return on investments in office buildings will be negative, which is below the return on cash. Why don’t these companies just pay dividends (or engage in stock buybacks) and let their shareholders decide how to invest the excess cash?

2. Some university endowments have soared.

Large college endowments have notched their biggest investment gains in decades, thanks to portfolios boosted by huge venture-capital returns and soaring stock markets.

Someone once called Harvard a hedge fund with a university attached to it. But it sounds like for these universities you should replace “hedge fund” with “venture capital partnership.”

The financial model I carry around in my head is this:

1. Government prints paper wealth–money and Treasury securities–to finance deficits.

2. This wealth increases the assets of the rich (and wealthy universities).

3. In the short run, the increased wealth is used to bid up asset prices, increasing the paper wealth of the rich even more.

4. The ratio of paper wealth to real economic activity gets higher and higher, until Stein’s Law kicks in.

5. Then we get a collapse of paper wealth and/or a big increase in the prices of real goods and services, in order to bring the ratio of paper wealth to real economic activity back to normal.

A conservative approach to poverty and homelessness

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From a commenter.

Homelessness is easy to solve.

A) Universal basic dorms for the poor but otherwise normal adults of sound mind.

B) Mandatory institutionalization for adults with severe mental health issues who are found living on the street.

Crime is easy to reduce.

A) Mandatory long sentences for serious crimes, particularly violent crime.

B) Penalties and prosecution for even small offenses, like shoplifting and graffiti, though not incarceration. Fines, public shaming, long periods of community service, etc.

C) Readjust the welfare system to favor nuclear families with fathers.

D) Decriminalize most drugs, with penalties for public use while driving while using, rather than manufacture & distribution. In essence, you can buy heroin at your local pharmacy, but if you shoot it up in the park, you get a citation and a $500 fine.

Inequality isn’t a huge issue and it’s really not solvable. If you raise the minimum wage to $20/hr and eliminate 99% of Mark Zuckerberg’s wealth, there’s still a crazy amount of inequality between him and the minimum wage worker.

Rather than focus on inequality, focus on three issues:

1) Ensure that there’s a decent minimum beneath which you cannot easily fall (universal basic dorms, employer of last resort jobs).

2) Ensure that men in particular can get a decent living so as to be attractive to women, allowing them to get married and have families. This is a hard one, outside of direct subsidies to men, the only thing I can think of is state owned enterprises that employ men specifically at good salaries.

3) Reduce the power of the oligarchs to set and guide policy. A lot can be done here, though it’s hard to say what would be best.

Unrealistic, of course. But it would be nice if somehow the Overton Window would move in this general direction, instead of the other way.

I would note that the fact that inequality is not solvable makes it the ultimate backstop for the left. If everything else is going well with capitalism, you can always complain about inequality and insist that it’s a crisis for government to solve.

More FITs links

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Including links to two essays from the prolific Joel Kotkin. Also,

John Cochrane interviews Casey Mulligan about the massive budget reconciliation bill (Mulligan actually knows what’s in it). It sounds like it was written by Wesley Mouch. I say that in practice government policies subsidize demand and restrict supply. So the bill will subsidize day care and insist that day care be unionized. If you think that the total spending in the bill is what is wrong with it, you are wrong. If the bill did not increase spending by a dime but all of its disincentives to work and invest were imposed, it would be an economic disaster.

Have a nice day.

Are the laws of supply and demand broken?

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Everywhere, one hears about shortages. Not enough trucks to pick up goods at ports. Six-month waits for appliances. Car dealers with empty lots. Grocery shelves with missing goods. Book releases postponed because of lack of paper and printing facilities.

None of that is supposed to happen. When you have an adverse supply shock, prices are supposed to rise to clear markets. Even if a higher price does not summon more supply, it serves to ration demand. A shortage, where people have to wait or the quantity is rationed, only takes place when the price is artificially held down.

Why are markets not clearing? More remarkably, why aren’t economists talking about it?

The best explanation this economist can offer is that firms do not want to raise prices because they are afraid of blame. If you walk into a store and the price has gone way up, you blame the owners and managers, because the store has discretion over the price. But if the store runs out the stuff, a typical customer will think, “They couldn’t help it. It’s a supply shortage.”

Of course, if you had internalized freshman econ, you would not blame the store for high prices, because the the price comes from market supply and demand conditions. And you would blame the store for being out of stuff and thereby making you wait or else run all over town trying to find stuff. They are just as responsible for setting their price too low. But because most customers have not internalized freshman econ, stores think they will have better customer relations if they run out of stuff than if they raise prices.

If this is the explanation, then I think that the price stickiness will not last forever. Over time, firms will gradually raise prices. I believe that what we are seeing right now is a considerable amount of repressed inflation, and it won’t stay repressed for much longer. By the end of next year, I predict that “shortages” will have been replaced by higher prices.

Remote capital

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Joel Kotkin writes,

In the post pandemic future of work, nine out of 10 organizations will be combining remote and on-site working, according to a new McKinsey survey of 100 executives across industries and geographies. According to the Wall Street Journal, technical and engineering employees applicants are insisting on being able to work from home part of the time. “It’s become really sort of a requirement if you’re looking for top talent,” according to a software executive.

One consequence of the pandemic is that our businesses created a lot of what I call “remote capital,” meaning the ability to handle work remotely. The most obvious example is the use of Zoom. But managers had to learn to deal with remote work forces, and workers had to learn how to get things done and learn things when not in the office.

I understand the argument that young people need mentoring and networking, and the office is better for that. I understand the phenomenon of “Zoom fatigue.” And I think that the generally bad reviews given to remote K-12 education tell us something the disadvantages of not being together in person–although some of what it may tell us is that giving parents a window into the classroom exposes them to some disappointing realities of K-12 pedagogy.

But I think that the winning businesses will be those that can creatively deal with the challenges posed by remote work, as opposed to those that try to force as many employees into the office as much as possible. The more effectively you can use remote workers, the less you will have to pay a premium to get people to work for you, since the vast majority of workers prefer not to have to go to the office five days a week. And, of course, you save on office rent.

I think that within a few years we will see more remote work than during the pandemic. I would bet on remote capital.

Explaining our moral framework

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I review The Mind Club, one of the most insightful books that few people have read.

Wegner and Grey say that we use two different approaches for trying to enter the minds of others. When we try to understand their feelings, we use simulation. We try to imagine ourselves in a similar situation. When we try to understand their actions, we use theorizing. We try to imagine the chain of reasoning that someone used in order to arrive at an action.

It seems that often we can understand either feelings or motives, but not both. When we perceive only feelings, we see a moral patient. When we see only motives, we see a moral agent.

Although the book was written several years before the death of George Floyd, it clearly anticipates the frequent depiction of Floyd with the features of a big baby.

A lighter note–fantasy baseball season ends

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The team that won the most games in real baseball, the Giants, won 66 percent of their games in spite of having no hitter score more than 79 runs and no pitcher win more that 14 games. Somebody do a search through major league baseball history since 1950 (not counting strike-shortened seasons) for every team where the leader in runs had 79 or fewer and the leader in wins had 14 or fewer. I’d say that the chances are more than 99 percent that within that set the maximum winning percentage is less than 55 percent, and the average winning percentage is less than 45 percent. My expected value for the winning percentage in that set would be 35 percent, barely more than half of what the Giants managed to pull off.

Continue reading →

Kling’s ideas for state-capacity libertarianism

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Russ Roberts interviews me. It’s a high-energy interview about my suggestion for having a more rigorous and constrained administrative state.

So, one of the ideas that I have, they’re kind of twin ideas for improving the administrative state. One is to actually have the administrative state organized like a business organization, not[?]–profit-seeking, obviously, there obviously are things you can’t have.

But, actually to have a Chief Operating Officer [COO] who can reorganize, fire, hire, put in systems of accountability. . .
And the other key element, structurally, is I think we need a very powerful audit agency. An agency that can step in and evaluate how the regulatory agencies are doing, make sure that they’re not abusing power, and question them when they’re not being effective.

Russ ends up giving the idea a B-/C+. He likes FITs better.

A listener wrote to me about the audit agency idea:

For what it’s worth, such an organization already exists in [North] America. It’s called the Office of the Auditor General of Canada. Each Canadian province has one of its own too.

Thanks to our first-past-the-post electoral process (with more than two parties participating), we too often get majority governments that are able to ride out the scathing criticism that is often to be found in an auditor general’s annual report. But if the election is near or a minority government has been elected, an auditor general’s report can have quite an impact.

Of course, the U.S. also has the GAO and various Inspectors General. Getting the process to be effective requires more than just creating the position.

Schools and restorative justice

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Michael Goldstein writes,

Here’s sort of what you wanted to read about: Rand Corporation RCT of “Restorative Justice” which includes measures of achievement.

“The most troubling thing: There were significant and substantial negative effects on math achievement for middle school students, black students, and students in schools that are predominantly black.”

As background, I had come across an article about a high school in my old neighborhood. The school was troubled, and it tried a “restorative justice” program. The article reported that the program reduced suspensions and absenteeism. This smelled to me like “p-hacking,” in which you measure a bunch of different outcomes and only report the ones with good news. I hinted at my suspicions near the end, and Goldstein’s comment, which has more than what I excerpted here, confirmed those suspicions.

My essay is mostly wistful and autobiographical, and you’re welcome to read it if that appeals.