Category Archives: books and book reviews

Technology or the Safety Net?

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The Financial Times reports,

Non-store retail, which includes online shops, recorded a boom in sales – up 31 per cent to $380bn. But the number of establishments rose only 12 per cent to 66,339 while employment in the sector was down slightly.

Pointer from Tyler Cowen. The gist of the article is that the U.S. economy is becoming more capital intensive.

Casey Mulligan, who gave a talk yesterday on his book The Redistribution Recession, says that 2/3 of the shortfall in employment can be explained by additions to the safety net. The big ones are extending unemployment compensation from 26 weeks to 99 weeks and taxpayers now supplying 65 percent of the cost of COBRA (health benefits) for people who lose jobs. Mulligan combines the various safety-net enhancements made since 2007 with standard estimates of how the “wedge” between the net gain to the worker from employment and the cost of compensation to employers affects hours worked, and that is how he arrives at his 2/3 figure.

In short, the economy has become more capital intensive since 2007 in large part due to the expansion of the safety net. Mulligan pointed out that this does not mean that the expansion was wrong, but he says you should not expect to return to the same rate of labor force participation that we had a few years ago as long as the new measures remain in place. And it will get worse once health care reform takes hold–including many Republican proposals as well as Obamacare. I do not have details on how health reform affects employment–that is the topic of Mulligan’s new book.

Mulligan would like suggestions for a title for the new book. I might suggest “Side Effect: Health Care Reform and the Job Market”

Shiller-Bashing

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Scott Sumner writes,

I distinctly recall that Robert Shiller did not recommend that people buy stocks in 2009. That made me wonder when Robert Shiller did say it was a good time to buy stocks.

Barry Ritholtz writes,

By one metric — Yale professor Robert Shiller’s cyclically adjusted price-to-earnings ratio, or CAPE ratio — stocks are especially pricey. This has become the bears’ favorite valuation measure. But beware of cherry-picking any particular metric that rationalizes your position. Indeed, over the past 20 years, the CAPE measure has pegged U.S. equities as “overvalued” 85 percent of the time.

But for me, the most interesting Shiller-bashing is in the book I am reading by Duncan Watts, Everything is Obvious. He reproduces a chart created by David Pennock and Dan Reeves, using option prices to derive the probability distribution of future stock prices. The chart shows clearly that the uncertainty about future stock prices is much higher than the variation of past stock prices. That is exactly the criticism that I made of Shiller’s famous “variance bounds” estimates when he first published his work on that topic, and which he told the journal editor to reject. I still think that I was right. I should note that Watts does not make the Shiller connection in his book. However, I think that Watts gives us plenty of reason to be cautious about making statements like “Shiller called the housing bubble.”

I wish that more economists were aware of Watts.

My Review of Brynjolfsson and McAfee

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Is here. An excerpt:

Back at the turn of the millennium, these applications seemed to Kurzweil to be on the near-term horizon. These strike me as the same applications that Brynjolfsson and McAfee suggest are on the near-term horizon today. While a few of Kurzweil’s other predictions did materialize, and while some of these applications are certainly closer to reality today than they were in 1999 or 2009, we should be wary that some of what The Second Machine Age tells us to expect may not in fact appear for several decades, if ever.

Trying to Understand

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I was sent a review copy of The Moral Foundation of Economic Behavior, by David C. Rose. Here is what I think is a key passage, which is italicized in the book, on p. 140:

the moral foundation of economic behavior is a norm of unconditional trustworthiness made possible by a preponderance of people possessing an ethic of duty-based moral restraint while not regarding moral advocacy as a moral duty.

I have not been able to follow the argument in the book. This podcast with Russ Roberts gets me closer. Here is what I think Rose is saying.

1. Trust is difficult as groups get large. You cannot completely rely on incentives, reputation, and the like.

2. The best way to obtain trust in a large group is for people in the group to be committed to following moral rules. They won’t cheat, even if they can get away with it, because they think that it is wrong to cheat.

3. People have two potential motives to break rules. One motive is to obtain personal gain. Another motive is to achieve some higher moral objective. Rose wants to say that either motive serves to undermine trust. Therefore, telling someone to focus on higher moral objectives (to “think globally, act locally”) is to encourage that person to break rules, which ultimately will lead to a breakdown in trust.

Again, I do not necessarily get the argument, so do not take my interpretation as gospel. In a way, I see this through the lens of the alleged distinction between act-utilitarianism and rule-utilitarianism. Act-utilitarianism says that you should choose each act in order to make people better off. Rule-utilitarianism says that you should follow rules that, if they were always followed, make people better off. I see Rose as saying that rule-utilitarianism is better, because act-utilitarians cannot be trusted. The act-utilitarian may break his promise for what he sees as perfectly defensible reasons. The rule-utilitarian keeps his promise, regardless. (There is a well-known philosophical problem with the distinction between act-utilitarianism and rule-utilitarianism. You can argue that the former reduces to the latter, or vice-versa. Try to ignore that philosophical problem here, since Rose himself does not rely on that distinction.)

4. Another way to put this is that there are two types of opportunism. There is selfish opportunism, which is breaking the rules to gain for yourself. And there is what I might call utilitarian opportunism, which is breaking the rules in order to achieve what you think is a higher good. About this utilitarian opportunism, Rose would say that:

a) our moral intuition, which is based on based on small-group society, is that utilitarian opportunism is fine. However, this is incorrect.
b) in fact, in a large-scale society, utilitarian opportunism does as much to undermine trust as selfish opportunism.
c) our current educational system and elite culture, rather than urging people to follow rules, urges them to behave morally. It encourages, in both individuals and politicians, utilitarian opportunism.
d) This trend in education and culture threatens to undermine trust.

Again, I am just trying to understand. Had I been the editor of this book, I would have gone back and forth with the author until I was satisfied that the points were made clearly.

Mokyr vs. Phelps

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Joel Mokyr’s review of Mass Flourishing (ungated version, anyone?), and it is not glowing.

Mokyr refers to Mariana Mazzucato’s The Entrepreneurial State, which argues contra Phelps (and contra nearly everyone on the libertarian side of things) that the state has been the font of much innovation.

Mazzucato’s bullishness on government as a source of entrepreneurial flourishing is a strong antidote to Phelps’s dismissive view of corporatism as the source of all evil, although her enthusiasm for state-led innovation is at times overblown; the truth is somewhere in between. Like a bad marriage, innovation and the State cannot live with or without one another. It is a standard dilemma for all capitalist societies.

There must be something about Phelps–style, substance, or both–that puts people off. Recall that he received a lot of pushback when he spoke at a dinner last month. My own review was more on the positive side.

Mokyr locates Phelps’ antipathy toward Schumpeter:

I argued at length in Mokyr (2002) [that] It was not either science or business, but the realization that there are huge complementarities between them that led to success. Phelps notes that Schumpeter made this very point, but then dismisses him as a “pied piper” who misled historians and the general public (p. 10).

Off Topic

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Tyler Cowen links to a new book by John Judis on Jewish influence on President Truman’s Middle East policy. I have read and suggested to friends another book on Israeli history that Tyler recommended, Ari Shavit’s My Promised Land. Also, I recommend Like Dreamers, which looks at the 1967 war in terms of intended and unintended consequences. I will not read Judis, because of some completely unrelated personal issues, which I will put below the fold.

Consider this exercise: flesh out an alternate history in which President Truman does not recognize the Jewish state and Israel’s war for independence fails. State what happens to

1. Arabs in the region
2. Jews in the region
3. Jewish holocaust survivors
4. Jews in Russia
5. Jews in the U.S.
6. The rest of the world

Let me sketch out one ideal scenario: Arabs become secure in terms of sovereignty and status. Feeling good about themselves, they give Jews full rights to own property anywhere and engage in commerce with anyone. They establish democratic modern states embodying civil rights and the rule of law. Holocaust survivors and Russian Jews migrate to the region, as do some American Jews (although not as many as actually migrated). The rest of the world lives quite happily.

I do not think of that as the only scenario, or even the most likely. But the larger alternate-history concept might make for an interesting discussion, if it can be kept civil. Continue reading →

Velasquez-Manoff on Causal Density

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From An Epidemic of Absence.

The scientific method that had proven so useful in defeating infectious disease was, by definition, reductionist in its approach. Germ theory was predicated on certain microbes causing certain diseases. Scientists invariably tried to isolate one product, reproduce one result consistently in experiments, and then, based on this research, create one drug. But we’d evolved surrounded by almost incomprehensible microbial diversity, not just one, or even ten species. And the immune system had an array of inputs for communication with microbes. What if we required multiple stimuli acting on these sensors simultaneously? How would any of the purified substances mentioned above mimic that experience? “The reductionist approach is going to fail in this arena,” says Anthony Horner, who’d used a melange of microbes in his experiment. “There are just too many things we’re exposed to.”

In an essay over ten years ago, I wrote,

E.D. Hirsch, Jr., writes, “If just one factor such as class size is being analyzed, then its relative contribution to student outcomes (which might be co-dependent on many other real-world factors) may not be revealed by even the most careful analysis…And if a whole host of factors are simultaneously evaluated as in ‘whole-school reform,’ it is not just difficult but, despite the claims made for regression analysis, impossible to determine relative causality with confidence.”

In the essay, my own example of a complex process that is not amenable to reductionist scientific method is economic development and growth. In that essay, I also provide a little game, like the children’s game “mastermind,” to illustrate the difficulty of applying reductionism in a complex, nonlinear world. Try playing it (it shows up better in Internet Explorer than in Google Chrome).

The phrase “causal density” is, of course, from James Manzi and his book, Uncontrolled.

Peak Political Psychology

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Chris Mooney gives a careless, almost entirely uncritical review of two books that I recently read: Predisposed, by John R. Hibbing, Kevin B. Smith, and John R. Alford; and Our Political Nature, by Avi Tuschman. Mooney writes,

Liberals and conservatives, conclude Hibbing et al., “experience and process different worlds.” No wonder, then, that they often cannot agree. These experiments suggest that conservatives actually do live in a world that is more scary and threatening, at least as they perceive it. Trying to argue them out of it is pointless and naive. It’s like trying to argue them out of their skin.

Note that it is conservatives who Mooney characterizes as intractable. The implicit assumption is that progressives have it right. Political psychology helps to explain the persistence of the wrong-headed view.

Mooney waxes enthusiastic about the genetic/psychological explanations for political differences. The authors of both books are careful to point out that the correlations between personality traits and political beliefs are, while statistically significant, not overwhelmingly large. They explain much less than half of the variation in political beliefs.

Mooney leaves readers with the impression that psychologists explain a larger share of political differences than they themselves claim to explain. In contrast, my guess is that they explain less. These are the sorts of studies that tend to suffer from publication bias (20 studies are tried, one out of 20 passes the “significance test” of having a 5 percent probability of being true by chance, and that study gets published). In these sorts of studies, attempts at replication sometimes fail completely, and even when successful the effects are smaller than in the original published study.

In fact, my guess is that we are approaching peak political psychology. I would bet that ten years from now the links between political beliefs and psychological traits will be regarded as a very minor field of inquiry.

For me, the main problem with this research is that it is almost impossible to reconcile with well-established findings on voting behavior. In my own review of Tuschman’s book, I wrote,

Consider, for example, the fact that Jews and blacks vote predominantly for liberal Democrats. According to Tuschman’s model, this must mean that Jews and blacks are less ethnocentric than other voters (notwithstanding the apparent tribal solidarity of their voting behavior), as well as more Open and less Conscientious. That seems doubtful.

In his conclusion, Mooney advocates tolerance for other political points of view. That is generous of him. Others who have thought that their political opponents had psychological issues came up with idea of the Gulag.

Want more fun? Read Ethan Watters on the germ theory of political beliefs.

he is certain that the most effective way to change political values from conservative to liberal is through health-care interventions and advances in providing clean water and sanitation. “That is clearly the conclusion that the bulk of evidence supports,” Thornhill says. “If you lower disease threats in countries they become more liberal, and that is true for states in this country. The implication is that if you effectively target infectious diseases then you will liberalize the population.”

That explains why Japan liberalized earlier than England. It explains why Germany turned to Hitler. I don’t know why I didn’t think of this theory before. Pointer from Tyler Cowen, who is not buying it, either.

This is not charitable, but what I want is a psychological explanation for why progressives need to make disagreement with their outlook a pathology. I want to know why their capacity for critical thinking disappears when they read studies that make them feel better about being on the left.

My next reads

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1. Everything is Obvious, by Duncan Watts. In the section available as a free sample, he writes,

whereas a formal system of knowledge would try to derive the appropriate behavior in all these situations from a single, more general “law,” common sense just “knows” what the appropriate thing to do is in any particular situation, without knowing how it knows it.

I think that there is something to be said for framing the “macro wars” as a tussle between a formal system of knowledge (microfoundations) and common sense (Keynesian macroeconomics). In this instance, I think that neither formal knowledge nor common sense delivers helpful answers.

More generally, Watts has a theme that we should be careful to question what we strongly believe to be true. I am quite sympathetic to that position.

2. An Epidemic of Absence, by Moises Velasquez-Manoff. The topic is not economics. It is the “hygeine hypothesis” as a possible explanation for a rise in autoimmune diseases. In this case, it is the Russ Roberts podcast that caught my interest. The author says,

When you have a peanut allergy, the immune system sees the peanut and rejects it, and sees it as an enemy. Now, what the parasites do is they convince you to tolerate them and treat it like some food that’s supposed to be there. That’s how they live for years inside of their hosts. And by strengthening that part of your immune system, the thinking goes, they then prevent allergic disease and possibly the autoimmune disease from ever emerging. So now you back up for a second. You realize that that kind of tweaking of your immune system was constant throughout not just our evolution but through probably most animals’ evolution. You rarely find an animal that is not parasitized by a few parasites at some point in its life. Usually early in life you are parasitized the most. And that’s when of course these diseases tend to emerge these days in humans, early in life. So you have this strengthened, let’s just call a part of the immune system that’s like a muscle, that helps you tolerate things. That helps you not respond; that helps you, say if you are a very well-balanced person and people provoke you in a way that could lead to some sort of conflagration, you are just very well balanced; you have an equilibrium, you don’t respond. That’s what those parasites help you do–they help strengthen that part of your immune system, that aspect of yourself.

My Review of Calomiris and Haber

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Is here. An excerpt:

The authors posit a contrast between what they call liberal democracy and populist democracy. Liberal institutions are designed to limit the power of what James Madison called factions, in part by making the government relatively unresponsive to public clamor. Populist institutions are designed to increase the power of those who can command electoral majorities.

A central claim of the authors is that banking crises are more likely in heavily populist countries than in countries that are less populist. They cite Canada as an example of the latter. For instance, in Canada, Senators still obtain office by appointment, rather than by direct election.