Category Archives: links to my essays

Reason Roundtable on Reform Conservatism

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Self-recommending.

Ben Domenech writes,

[Yuval] Levin’s lofty governing philosophy is at odds with the incongruent grab bag of policies that reformocons offer.

That pretty much summarizes my reaction to Room to Grow, which took me several blog posts to articulate.

In terms of Jonathan Rauch’s dichotomy, the reform conservatives are closer to professional politicians, who scorn ideological purity that leaves you unable to exercise power. Libertarians behave more like amateurs. It certainly is unrealistic to expect a candidate to appeal to the Republican base by taking a libertarian view of immigration, just as it would be unrealistic to expect a candidate to appeal to the Democratic base by taking a libertarian view of education policy, health care policy, etc.

However, even if I try to think like a “professional,” I have problems with what we have seen from the reform conservatives thus far.

On foreign policy, I would like to see reform conservatives commit to not getting bogged down in another nation-building exercise. Can they stay away from promises to Americanize the Middle East and instead acknowledge that many societies around the world are not ready to become open-access orders (in North-Wallis-Weingast terminology)?

On the issue of domestic security, I have long been influenced by David Brin, and consequently I support government surveillance but with vigorous, independent auditing. Read what I wrote eleven years ago.

On economic issues, I start out by doubting that any collection of econo-wonk policy proposals is going to define the reform conservative “brand.” I certainly cannot get excited by a grab bag of tax credits.

To bring me on board, reform conservatives will have to do more than just play small ball. They will have to come front and center on one or both of two issues. One is fundamental health policy reform that leads to a higher proportion of medical services paid for by the people who obtain those services, rather than by third parties. The other is changing the path of entitlement spending to one which is sustainable.

Stability of Government

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In this essay, I write,

Ultimately, it is the cultural beliefs of citizens that determines whether a limited-access order or an open-access order can remain stable. For a limited-access order, the necessity is for citizens to give enough legitimacy to the monarch to enable the monarch to rule without having to give way to an open-access order. For an open-access order the necessity is for citizens to withhold legitimacy from the government when it tries to expand too much.

Since I first composed that essay, I have come to think that open-access orders have two sources of stability. One is the fact that nearly everyone feels that they have a stake in the system. The other source is the set of norms and beliefs that had to develop to make an open-access order possible in the first place. Those layers of beliefs provide a strong counter-weight to disorderly political activism.

Do I Heart Elizabeth Warren?

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Simon Johnson writes,

Senator Warren puts forward two main sets of proposals. The first is to more strongly discourage the deception of customers. This is hard to argue against. Some parts of the financial sector are well-run, providing essential services at reasonable prices and with sound ethics throughout. Other parts of finance have drifted, frankly, into deceiving people – on fees, on risks, on terms and conditions – as a primary source of profits. We don’t allow this kind of cheating in the non-financial sector and we shouldn’t allow it in finance either.

…The second proposal is to end the greatest cheat of all – the implicit subsidies received by the largest financial institutions, structured so as to encourage excessive and irresponsible risk-taking. These consequences of these subsidies have already caused massive macroeconomic damage – this is why our crisis in 2008-09 was so severe and the recovery so slow. Yet we have made painfully little progress towards really ending the problems associated with some very large financial firms – and their debts – being viewed by markets and policymakers as being too big to fail.

Pointer from Mark Thoma.

It may seem surprising that I agree with Senator Warren on both of these points. However, I disagree that the Consumer Financial Protection Board is taking the best approach to solving the problem of skilled financial firms exploiting less-skilled consumers. As I wrote here,

Regulated industries are always ready to complain about the cost of complying with bright-line regulations. However, I have the opposite objection. Particularly when it comes to the financial sector, compliance with BLR is far too easy. The bankers are always able to outmaneuver the regulators, staying within the letter of the rules while mocking their spirit.

That essay is where I proposed principles-based regulation as an alternative.

Regulators and the Socialist Calculation Problem

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My latest essay is on Engineering the Financial Crisis, by Jeffrey Friedman and Wladimir Kraus. I think that their book demonstrates that regulation falls victim to the socialist calculation problem.

Centralizing risk assessment through regulatory risk weights and rating agency designations has several weaknesses. Local knowledge, such as detailed understanding of individual mortgages, is overlooked. At a macro level, regulators’ judgment of housing market prospects were no better than those of leading market participants. Moreover, regulators imposed a uniformity of risk judgment, rather than allowing different assessments to emerge in the market.

Gary Solon on Gregory Clark

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Solon writes,

Evidently, the results reported by Clark do not reflect a universal law of social mobility. Quite to the contrary, other studies based on group-average data, even surnames data, frequently produce intergenerational coefficient estimates much smaller than Clark’s.

If you are interested in the issues raised by Clark, read the whole thing. Solon’s interpretation of Clark’s thesis as involving errors-in-variables is similar to mine.

The Age of Creative Ambiguity

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Tyler Cowen writes,

File under “The End of Creative Ambiguity.” That file is growing larger all the time.

What is Creative Ambiguity? I would define it as the attempt by policy makers to ignore trade-offs and to deny the need to make hard choices. Consider the Fed’s balance sheet. One hard choice might be to sell its gigantic portfolio of bonds and mortgage-backed securities. That would depress the prices of those assets and make it harder for the government to borrow and to provide mortgage loans. The other hard choice might be to provide whatever support is necessary to enable the government to borrow and to provide mortgage loans, even if it means printing enough money to risk hyperinflation. Creative ambiguity means convincing investors that neither hard choice will be necessary. Perhaps that is even true.

However, if the Fed’s hard choices are to be avoided, then at some point the government must get its fiscal house in order. That is where the real creative ambiguity comes in. See Lenders and Spenders.

Sentences I Might Have Written

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from Megan McArdle:

1950s health care isn’t expensive; this same regimen would be a bargain at today’s prices. What’s expensive is things that didn’t exist in 1950. You can say that “health care” has gotten more expensive—or you can say that the declining cost of other things has allowed us to pour a lot more resources into exciting new health products that give us both longer and healthier lives.

In Crisis of Abundance, I wrote,

The American middle class can still afford the wonderful health care that was available in 1975–easily. . .as a thought experiment, a return to 1975 health care standards would completely resolve what is commonly described as America’s health care crisis.

You know, that book was written 10 years ago (it came out in 2006), and at the time I said it would have a shelf life of ten years, meaning that I thought that it would still accurately describe the issues for another decade. In fact, it is looking like it will be valid for another ten years. I would say that the majority of popular books on politics and economics expire much more quickly.

Four forces watch: In addition to the New Commanding Heights, McArdle’s essay also touches on the Demographic Divide.

while the college educated class seems to have found a new equilibrium of stable and happy later marriages, marriage is collapsing among the majority who do not have a college degree, leaving millions of children in unstable family situations where fathers are often absent from the home, and their attention and financial resources are divided between multiple children with multiple women.

Other sentences are reminiscent of The Reality of the Real Wage. There, I recycled a bit from my book.

My guess is that if you could find a health insurance policy today that only covered diagnostic procedures and treatments that were available in 1958, the cost of that policy would not be much higher than it was then. Much of the additional spending goes for MRIs and other advanced medical equipment, as well as for health care professionals with more extensive specialization and training than what was available 50 years ago.

I recommend McArdle’s entire essay. Brink Lindsey adds more statistics, such as

In 2011, 87 percent of kids who had at least one parent with a college degree were living with both their parents. For the children of high school dropouts and high school grads, the corresponding figures were 53 and 47 percent, respectively.

Finally, on this same topic, a reviewer (Francis Fukuyama) of an about-to-be-released Robert Putnam book writes,

One of the most sobering graphs in Our Kids shows that while the proportion of young children from college-educated backgrounds living in single-parent families has declined to well under 10 per cent, the number has risen steadily for the working class and now stands at close to 70 per cent.

Pointer from Tyler Cowen.

Old Predictions of Mine, Mostly Wrong

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An editor of a publication asked if it would be ok to reprint this essay. Since it is 15 years old, I thought it would look pretty silly if it were reprinted now. There are a few lines in the essay that I still like.

All of these features are feasible with existing technology. The problem is that if you tried to combine them into a single device, you’d probably need to carry around a power pack the size of a cantaloupe.

Today, a teacher in a classroom or a speaker in a meeting has a presumptive ownership over the attention of the audience. My guess is that within five years or so this will have broken down completely. You simply will take it for granted that while you address an audience, people will be engaged in electronic communication with external parties, only intermittently tuning in to what you have to say.

But mostly, there are clunkers like this:

I do not see signs of mobile Internet devices crossing the chasm. Palm Pilots have been around for a few years now, and I am still waiting for a compelling reason to buy one. I’m sorry, but the way see it, if I need something to keep myself occupied when I’m traveling, I can pack a book.

George Selgin on Calomiris and Haber

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He reviews their book Fragile by Design.

the observed interdependence of states and banks isn’t as deep-seated and inescapable as Calomiris and Haber claim. Consequently, keeping bankers and governments from getting too cozy with one another isn’t quite so difficult as they suppose.

Later, Selgin writes,

they seem unaware of the adverse effects of the “bond-deposit” provisions included in misnamed state “free banking” laws. These provisions allowed banks to issue notes only after tendering eligible securities to state authorities for the ostensive purpose of securing the notes’ holders from loss. Calomiris and Haber (p. 169) note that, by making their own bonds eligible for this purpose, states were able to force banks to lend to them “in exchange for their right to operate.” Still they fail to point out that some states force-fed their banks, not “high-grade” bonds (ibid.) but junk ones, and that it was this practice, rather than unit banking, that was the main cause of bank failures during the so-called “free banking” era

…In Canada, in contrast, banks’ almost unrestricted ability to issue notes
contributed to the banking system’s stability no less than banks’ branch networks did.

You may also wish to read my review of the book.