Author Archives: Arnold Kling

The S&P 4

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According to MarketWatch,

Just Apple, Microsoft, Amazon and Google account for 21% of the [S&P 500] index.

Some very important economic analysis was developed without taking this possibility into account.

Consider portfolio theory. The idea is that you diversify by holding the market portfolio. But if the market portfolio is itself not diverse, what does that imply? My first thought is it you should require a higher expected return.

Consider industrial organization. Economists usually measure market power by looking at a firm’s share of market sales. But should share of market capitalization be an indicator? Does Amazon’s share of market capitalization in retail predict its future share of market sales in retail?

When to re-open schools? How about never?

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A commenter asked for my views on re-opening schools this fall.

If “re-open schools” means trying to go back to schooling as it existed before the virus with various rules added in an effort to reduce contagion, then I don’t think you can count me in the re-open camp.

With or without a virus, I want schooling to be reinvented. If it were up to me, I would try to use the virus crisis as an opportunity to be more aggressively experimental. Many of these experiments would enable education to take place with less risk of contagion, but that would not be the main purpose of the experiments.

I want children to learn to read. If the child is already a good reader, or if the parents are likely to teach the child to read, then school may be optional for a child aged 5 to 8. But otherwise, I think that failing to provide the child with school could be tragic.

For the child aged 5 to 8 whose parents are not as capable of teaching reading as the school, I want to see about 2-3 hours a day of school, focused on reading and arithmetic. The school could provide additional hours of day care, mostly in the form of music, art, and outdoor recess, to enable parents to work. Note Bryan Caplan’s rant about the day care issue.

If schools won’t provide daycare, why on Earth should taxpayers continue to pay over $10,000 per year per child? Every taxpayer in Fairfax County now has an ironclad reason to say, “I want my money back.”

The older the child, the less I want to see traditional schooling and the more I want to see a blend of online learning, project-based learning, computer gaming, and some ordinary classroom learning. I want to see much more physical exercise and much less sitting. The online learning would come from specialized companies, not from regular teachers.

Assuming that these ideas work for children near the center of the emotional and cognitive bell curve, you still have children who are far from that center. Those children will require programs suited to their particular traits.

Back to the present. Is it not odd that, because of the way they have lined up on Trump and the virus, that the Right is now pro-school and the Left is now anti-school? I find this amusing.

Also, my guess is that the surge in home schooling is particularly pronounced among progressive parents. I see interesting potential there.

The virus as a PSST shock

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David Autor and Elisabeth Reynolds write,

The COVID crisis appears poised to reshape labor markets along at least four axes: telepresence, urban de-densification, employment concentration in large firms, and general automation forcing. Although these changes will have long-run efficiency benefits, they will exacerbate economic pain in the short and medium terms for the least economically secure workers in our economy, particularly those in the rapidly growing but never-highly-paid personal services sector.

Pointer from Tyler Cowen. Also discussed by Timothy Taylor.

I keep emphasizing that a recovery in terms of employment will require a massive amount of entrepreneurial experimentation. I think that deregulation and cutting payroll taxes are the best hope there. If instead you get a lot government debt/money being issued with an inflexible economy, the only result will be bidding up prices for the offerings of the surviving businesses.

On the payroll tax cut, I believe that President Trump is correct. I wrote,

government ought to be encouraging the transition to new activities that are profitable in a virus-conscious economy. One way to do so would be to pay businesses a wage subsidy to hire workers. Another method would be to cut the payroll tax. An economy-wide incentive to add workers would have more bang for the buck than a costly effort to keep uneconomical businesses afloat.

It is sad that even some Republican Senators prefer Keynesian remedies. Shows you how little influence I have.

Thoughts on vaccine effectiveness

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We tend to think of a vaccine in binary terms: it is either totally effective or totally ineffective. But who knows, especially with this weird virus? Maybe a given protocol with a vaccine will only work on 80 percent of people. What would that mean?

The good news is that it would still be great for society. Suppose we have 1 million cases, and every ten days they are doubling. But tomorrow everyone gets a vaccine that is 80 percent effective, so now every tend days the number of cases only increases by 0.4. So in 10 days we have 400k cases, then 160k, then 64k, then 25.6k, then 10.2k, then 4k, then 1.6k. . .in less than six months you have it essentially eradicated.

The bad news is that people would be slow to take up the vaccine, and meanwhile some of those vaccinated will get the disease, which will not be good PR for the vaccine campaign.

Other bad news is that when you are doing testing it can be very hard to distinguish 80 percent efficacy from placebo efficacy (i.e., zero efficacy). That is, I can imagine a testing protocol in which you give somebody a placebo and the vast majority of those people don’t get the virus.

So you don’t have to

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I read Stephanie Kelton’s The Deficit Myth and wrote a review.

It is indeed correct to say that when the government is bidding for resources, the risk of inflation is low if those resources are idle. It is also correct that unemployment is an indication of idle resources. But just because some resources are idle does not mean that the government can spend wherever it would like without affecting prices. The government would have to be an especially perspicacious and adroit entrepreneur to advance its priorities while only using idle resources.

By the way, as I read the market for U.S. Treasuries, investors are betting that Kelton is right.

The virus in mid-July

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1. The 7-day average daily death rate was about 430 a couple of weeks ago, but it is up to about 830 now.

2. Holman Jenkins in the WSJ writes,

The Denver Post interviewed a couple in their 70s who were risking the virus to resume weekend junkets to Las Vegas. Their only concession to Covid-19 was a plan to quarantine for 10 days before seeing their grandkids again.

Wow. Not what I would do at all. Imagine if we lived in a country where either I could impose my lifestyle on them. Or they could impose their lifestyle on me. Unfortunately, we live in a country where so-called “public health experts” are being granted such power.

3. I think that as an individual I could calibrate virus risk more reasonably if I had two pieces of information. The goal would be to enable me to have a better sense of my risk of getting a severe case, which we might define as causing me problems for more than 30 days; alternatively, we could define a severe case as requiring more than 48 hours of hospitalization.

One of the numbers that I want is what I call a “personal safety factor.” The scale would go from zero to one hundred. It would be based on a statistical model that combines age with polygenic analysis. My thinking is that the polygenic statistical analysis would pick up the likelihood of known risk factors (such as a tendency toward obesity) as well as other factors that are not currently known. In order to know my personal safety factor, I would have to have a DNA test. A personal safety factor of 90 means that I am in the top 10 percent, so that I am relatively unlikely to get a severe case. A personal safety factor of 10 means that I am in the bottom 10 percent, which means I really want to try to avoid getting the virus. If it turns out that I have a low personal safety factor, then I want to be in the front of the line to get a vaccine. Otherwise, I probably would be happy to wait.

The other number that I want is a “community safety factor.” This would estimate the probability that if I am in the same room with 50 people at least one of them will have the virus. If that probability is more than 10 percent and my personal safety factor is less than 90, then I am not ready to try a live dance session. Somebody else might be more risk tolerant.

4. Victor Chernozhukov and others write,

Our counterfactual experiments suggest that nationally mandating face masks for employees on April 1st could have reduced the growth rate of cases and deaths by more than 10 percentage points in late April, and could have led to as much as 17 to 55 percent less deaths nationally by the end of May, which roughly translates into 17 to 55 thousand saved lives. Our estimates imply that removing non-essential business closures (while maintaining school closures, restrictions on movie theaters and restaurants) could have led to -20 to 60 percent more cases and deaths by the end of May. We also find that, without stay-at-home orders, cases would have been larger by 25 to 170 percent

I would note that the economic cost of people wearing masks is considerably less than the cost of staying at home.

Bad debt

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Amir Sufi talks about consumer debt in this podcast. He makes the point that an economy with a lot of consumer debt is fragile, which is a point I make in my essay on economics after the virus.

He makes interesting points about wealth inequality and consumer debt. He says that when the savings of rich people are channeled into loans for poor people, risk get transferred away from people who can bear it and toward people who are less able to bear it.

Hardly anyone remembers “petrodollar recycling,” which was oil-rich countries lending to underdeveloped countries in the 1970s. The IMF and other “experts” were very keen on it. It worked out poorly. See Latin American debt crisis.

In general, channeling savings from rich to poor in the form of loans is not a good idea.

Martin Gurri on the religion that persecutes heretics

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Martin Gurri writes,

No less a figure than Andrew Cuomo, governor of New York, waved the white flag. “You don’t need to protest,” he said. “You won. You won. You accomplished your goal.” Then, plainly baffled, Cuomo added, “What do you want?”

Here is an exercise. Try to write the ending to the following story.

Once upon a time, people fleeing religious persecution came to the New World and built a nation that would have no nationally established religion. True, the nation would experience political movements that included religious impulses: anti-slavery; temperance; eugenics; civil rights; environmentalism. But none of these movements embraced persecution of heretics.

Recently, unlike any of these movements, the social justice movement has become animated by the thrill of identifying and persecuting heretics. The end result will be. . .

I don’t know how to fill in the ending. In the near term, demographics favor the social justice religion. Its most vociferous opponents are almost all over 50. Among people under 40, it seems to be a juggernaut.

As Gurri points out, it is the nature of the religion not to accept victory. It seems likely that no matter how many heretics it cancels, there will still be more to be rooted out.

But neither will it accept defeat. The temperance movement faded with the failure of Prohibition. The eugenics movement faded because it became linked in the popular mind to the bad guys in the World War II movie.

So what will happen?

Yoram Hazony on the Harper’s letter

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Yoram Hazony writes,

the liberals behind the Harper’s letter still think they’re going to get an alliance with the very same neo-Marxists who are out to destroy them. And they truly believe the way they’re going to get there is by putting conservatives down.

Liberals only have two choices: Either they’ll submit to the neo-Marxists or they’ll try to put together a pro-democracy alliance with conservatives. There aren’t any other choices.

An interesting take.

Handle on the Harper’s letter

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He writes,

If there were no excommunications or fear of potential excommunications, then people could resume the more open norms around discourse that prevailed a generation ago, and assume that there are plenty of people of good will and good faith on the other side who have good arguments that are worth trying to understand, and whose lives and situations are also important to know about so that one can empathize, mentally walk a mile in their shoes, and see where they are coming from.

. . . the only situation that allows for civil, quality discourse is when all other avenues and channels for coalition-struggle are *blocked off by Power* as costly and unprofitable. If good arguments are the only way to move the ball forward, as with lawyers in a fair trial constrained by the power of the judge and the court and the bar over them, insisting they behave, play fair, and play by the rules, then you will invest your effort in making good arguments. And so will the other guy.

Read the whole thing. It’s not actually a comment on the Harper’s letter, but I think it applies.

The point that I would make is that Demonization and Persuasion are mutually exclusive rhetorical modes. The former is dehumanizing and the latter is humane. The young social justice activists employ Demonization with pride. Again, think of them as adherents of a religion that seeks to identify and persecute heretics.