Category Archives: links to my essays

Me on Greg Clark’s Latest

Posted on by

I write,

his findings argue against the need to create strong incentives to succeed. If some people are genetically oriented toward success, then they do not need lower tax rates to spur them on. Such people would be expected to succeed regardless. The ideal society implicit in Clark’s view is one in which the role of government is to ameliorate, rather than attempt to fix, the unequal distribution of incomes.

The book I am reviewing is The Son also Rises, in which Clark argues that social status is highly heritable everywhere in spite of many differences in institutional rules. I spend a lot of the review talking about the statistical basis for Clark’s work.

SNEP Solution: Flexible Benefits and Extreme Catastrophic Health Insurance

Posted on by

The problem is high implicit marginal tax rates on many people who are eligible for benefits from means-tested government programs. I think that a generic solution might consist of flexible benefits.

One approach would be to replace all forms of means-tested assistance, including food stamps, housing subsidies, Medicaid, and the EITC, with a single cash benefit. For this purpose, we might also think of unemployment insurance as a means-tested benefit.

The classic approach is the negative income tax. What I would suggest is a modification of the negative income tax, in which recipients are instead given flexdollars. These would be like vouchers or food stamps, in that they can be used only for “merit goods:” food, health care/insurance, housing, and education/training. One way to think of this is that it takes the food stamp concept and broadens it to include the other merit goods.

Flexdollars would start at a high level for households with no income and then fade out at rate of 20 percent of the recipient’s adjusted gross income. This “fade-out” would act as a marginal tax rate on income, so we should be careful not to set the fade-out rate too high.

Suppose that a household receives $7500 in flexdollars per member. Thus, a family of four with zero income would receive $30,000 in flexdollars. A family of four with $20,000 in income would lose 20 percent of $20,000, or $4,000, to fade-out, and hence would receive only $26,000. A family of four with a $50,000 income would receive $20,000. A family of four with a $100,000 income would receive $10,000. A family of four with a $150,000 income would receive nothing.

At the end of the year, unused flexdollars could go into flexible savings accounts. Tghese could be used for medical emergencies, down payments when buying a home, or to save for retirement.

There are two ways in which this represents an improvement over the current approach. First, it ensures that implicit marginal tax rates are low for benefit recipients. As it is now, people with low incomes easily can find that if they work they lose more in benefits than they obtain in pay. I think that is very corrosive, and I would put a high priority on restoring the incentive for people to work, while still giving them the means to meet basic needs.

The second benefit is that it gives recipients more flexibility and choice. Just as food-stamp recipients can decide for themselves what groceries to buy, flexdollar users can decide for themselves how much to allocate to housing vs. food vs. training.

One problem with a negative income tax or with flexdollars is that some families are needier than others, particularly with respect to medical issues. Someone with a lot of ailments and little in the way of resources will not have enough flexdollars to pay medical bills (remember that there is no longer Medicaid in this approach).

The solution I would propose would be to have taxpayers provide extreme catastrophic health insurance that kicks in if a household’s medical expenses exceed $30,000 in a year. For every additional dollar of medical expenses over $20,000, the government would pay 90 percent. For example, a household requiring $100,000 would receive $72,000. Of course, households would be permitted to obtain private insurance to cover lower levels of spending and/or to cover the remaining 10 percent of higher levels of spending. Overall, this idea bears some resemblance to the idea of “catastrophic reinsurance” that was floated about ten years ago.

I am thinking that we would eliminate Federal support for unemployment compensation. Instead, perhaps a private-sector form of unemployment insurance might emerge, and households would be able to buy this using flexdollars. If it turns out that nobody wants to spend their flexdollars on unemployment insurance, then that might be a sign that unemployment insurance is not such a great thing.

It might be best to phase in implementation. The first phase might be to fold in the EITC, food stamps, housing vouchers, and health insurance subsidies. Those are all programs that already take the form of cash or vouchers given to households. A later phase would be to replace Medicaid and unemployment insurance with flexdollars given to households. (Of course, if states want to continue to continue Medicaid or to provide unemployment compensation, without any Federal dollars to support the, they are welcome to do so. I doubt that would happen.) Another phase would be to wind down all forms of housing assistance, mortgage subsidies, Federal aid to education, training programs, Pell grants, and student loan programs, and replace these with flexdollars.

One challenge with implementation is in deciding which goods and services are eligible for flexdollars. Just as the food stamp program has to decide which groceries are eligible, the flexdollar program has to decide what counts as eligible medical services, housing services, and education services. Yes, that opens up the floodgates for lots of rent-seeking. If that gets really out of control, then it would be better to give people a straight cash benefit.

This is just a concept I am toying with. Criticism welcome.

Note that I once wrote an essay that I called The FlexDollar Welfare State that was not about an idea of this character. Instead, the essay criticized the George W. Bush Administration’s domestic policy initiatives. Actually, the best thing about the essay is the discussion of the oxymoron of “company benefits.”

What is interesting is that workers are not naturally suspicious of companies that pay “good benefits.” Apparently, most people believe that “good benefits” reflect generosity and sharing by the company, rather than a shrewd, calculated effort to save on compensation costs. My guess is that the people who see through the scam of “good benefits” tend to gravitate toward self-employment, which allows them to take their payments in cash and buy benefits themselves.

Thoughts on Charter Schools

Posted on by

My latest essay, which is a bit unusual for me in that it promotes a national government policy.

It would provide grants to states to support the administrative apparatus needed to ensure that charter school operators are given both a fair opportunity to offer educational alternatives and timely audits to ensure that they meet their responsibilities to students and parents. The grants should be sufficient to cover much more than the cost of this administrative apparatus. That way, recalcitrant states will have a strong incentive to adopt best practices for approving and evaluating charter schools.

I am not entirely sure that this is a good idea. But living in charter-hostile Maryland, I think it would take something like this to get charters going here.

Karl Zinsmeister writes,

Twenty-five years ago, charter schools hadn’t even been dreamed up. Today they are mushrooming across the country. There are 6,500 charter schools operating in 42 states, with more than 600 new ones opening every year. Within a blink there will be 3 million American children attending these freshly invented institutions (and 5 million students in them by the end of this decade).

1. As I see it, the main advantage that charter schools have over public schools is fact that bad teachers will tend to be fired and bad charters schools will tend to be closed.

2. Charter schools may follow a Clayton Christensen “disruptive innovation” path. That is, at first they will cater to low-income consumers. However, as they prove themselves in that niche, they may rapidly move up-market. Right now, many affluent parents are very attached to their public schools. However, that is an equilibrium that could tip. If parents come to view charter-school children as having an advantage in, say, college preparation, they will exit the regular public school system with great haste.

3. Another reason that charters may take off quickly in states and school districts that allow them to compete is that good young teachers are likely to prefer working at charter schools. If this happens over the next five to ten years, parents will notice that it is getting difficult to find good public school teachers and easier to find good teachers at charters.

4. If there is a rapid move toward charter schools, I think that this exacerbates the problem of unfunded pensions for retired teachers. If public school enrollment levels off or declines, I believe that the share of the budget devoted to paying for pensions is bound to increase.

5. I suspect that, relative to public schools, on average charters undertake less left-wing indoctrination of students. This is possibly the main reason for conservatives and libertarians to get excited about charter schools.

6. The political opponents of charters have to prevent them from getting started. Where I live, the opponents have succeeded. But once charters become entrenched, getting rid of them is quite difficult. See NYC.

Ignorance, Exit, and Voice

Posted on by

In this essay, I suggest that even if voters were knowledgeable about issues, our democratic process would still not be as desirable as having the exit option. This is in the context of talking about a recent book by Ilya Somin. In my view, an even more frustrating problem than voter ignorance is the enchantment that many people have with democratically elected leaders.

As I see it, reasonable government, including the protection of liberty, requires those in office to follow norms of behavior that are bound by Constitutional constraints and principles of limited government. The problem with democratic enchantment is that it sanctions whatever majority-elected political leaders can get away with.

My Review of Brynjolfsson and McAfee

Posted on by

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.

The Danger of Bond Bubbles

Posted on by

Gillian Tett writes,

In recent years an astonishing amount of money has quietly flooded into fixed income funds, which buy corporate bonds, emerging markets bonds and mortgage debt. And as the US looks more likely to raise interest rates, creating potential losses for bondholders, the flows could reverse – creating destabilising shocks for regulators and investors alike.

Read the whole thing. Pointer from Phil Izzo. My thoughts:

1. The last time I talked about a “bond bubble” was in 2003. Subsequently, I wrote that only a bursting of the bond bubble could undermine high house prices. I was wrong about that one.

2. Larry Summers would explain the “bond bubble” as secular stagnation. In his view, there is low demand for capital. As you know, I have little regard for this thesis.

3. Perhaps I feel burned by the way that the housing bubble burst on its own, but I would not focus on a bursting of the bond bubble as the key risk today. I find myself sympathetic to Seth Klarman on the stock market (Klarman is cited by Tett, and if you search diligently you can find copies of his investor letter posted on the web). I am skeptical of contemporary market arithmetic.

4. Klarman blames the Fed for low interest rates, and so do many people of my ideological stripe. My view is that if the markets wanted high interest rates, they could have them, notwithstanding the Fed’s efforts. Perhaps we now live in a world in which the primary threat to saving comes from political risk. In that world, savers are not looking for the assets with the best financial characteristics. Instead, they are hoping to invest where they will not lose their capital to taxation and confiscation. This might explain why a lot of foreigners still prefer to invest in low-yielding U.S. assets.

But the bottom line is that today’s financial markets have me puzzled.

The State, the Clan, and Liberty

Posted on by

At Cato Unbound,

Mark S. Weiner argues that, while the state does often destroy individual liberty, an even greater danger lies in the rule of the clan. Clan-based societies have been found throughout the world, in many different times and places. In general they have been highly resilient, successful at replicating themselves – and markedly illiberal. Individual freedom may need a strong central state after all, one that can provide the rule of law, enforce contracts, and suppress clan-based feuds and prejudices. Without the state, we may find ourselves regressing from an egalitarian society of contract to a hierarchical society of status….

Arnold Kling argues that human beings require institutions to interact on the basis of trust and cooperation. Kling argues that the resurgence of the clan is possible but unlikely in Anglo-American societies because the nuclear family rather than the clan is our distinctive form of non-state order. Kling concludes that the natural individualism fostered by the nuclear family makes prospects bright for shrinking the state without the risks of clannism. He calls on libertarians to advocate institutions that would accomplish this task.

Feel free to follow the link and read these essays, as well as others that will be posted on the topic.

Innovation

Posted on by

Yesterday, I attended a discussion held at the Hudson Institute on the topic of innovation. I go to these sorts of things because every once in a while one hears a stimulating idea. Most of the time, one doesn’t, but for me the occasional gain makes up for the frequent loss.

This was for me one of the winners. I will assume a Chatham House Rule, and not associate ideas with names. Some ideas that came up.

1. The presumption is that more innovation undertaken in the U.S. would be better for us. The main fear is that innovation is being held back by cultural and regulatory factors. Assuming that you want the innovation to occur in this country, then encouraging highly-skilled, entrepreneurial immigrants would seem to be the most reliable, least politically fraught way to make that happen.

2. In the area of science, government funding is a two-edged sword. Perhaps we have gotten to the point where the academic community in this country now selects for grant-writers rather than for people who can think outside the box. The most extreme claim was that the last 30 years have produced a “massacre” of genuine innovative scientists at our universities.

I did not bring this up, but I would be happy to offer macroeconomics as an example to illustrate that the use of the term “massacre” may not be too strong.

It had not occurred to me that part of my inability to fit in with academia might be that I might be too willing to challenge the status quo. But it sure would be an affirming notion to believe. Indeed, given my memoirs, I am prepared to consider that perhaps my willingness to challenge the status quo was better received at Freddie Mac in 1988-1994 than it was in academia. Not that Freddie was exactly all gung-ho for innovation (nor should it have been), but compared with the DSGE cartel…and then, just when I was getting worn out from trying to be an “intrapreneur” at Freddie Mac, along came the Web, with the opportunities it opened up for challenging the status quo. hmmm….

3. Maybe where we need innovation is in the area of sovereignty and governance. No, I was not the one who brought this up–someone else did. From that person, I got a tip about some literature that was new to me. I’ll let you know if it proves interesting.

4. Is innovation the product of just a small proportion of the population, or does the entire cultural milieu matter? What if these days, in order to be a significant innovator, you need to be in the 99.5th percentile in terms of cognitive ability?

5. One participant claimed that the existing telecom regulatory structure (the FCC, primarily) has slowed digital communications progress by ten years. Although I often think that markets find a way around regulation, I am afraid that I found this estimate plausible. The FCC is one of the more evil agencies around, and I am afraid that libertarians are less aware of the FCC’s evil than they are of that of the FDA, for example.

6. Since 2008, the number of startups has slowed from 600,000 per year to just over 400,000 per year. This leads me to wonder–has the success rate of startups gone up? If so, then the decline it startups may suggest an unfortunate increase in risk aversion. If not, then it could be a rational responses to an adverse environment.

7. Is there a causal relationship between cultural attitudes toward innovation and entrepreneurs, and which way does it run? It was suggested that support for innovation would go up if somebody discovered, say, a cure for cancer or Alzheimers’.

8. Is innovation dominated by a few really important creations, or by the cumulative effects of lots of incremental improvements? Your answer to that probably is correlated with our answer to (4).

9. One scenario for the future is that perhaps 30 percent of the population is intelligent and adaptive enough to contribute in the work place. The rest enjoy the “narcotics” of digital entertainment, recreational drugs, and so forth, while being supported by, well, I wasn’t the one who made this point, but if I had I would have used the term Vickys.

10. How much has IT contributed to productivity growth? There were optimists as well as pessimists. You know where I stand, given my article on Diane Coyle’s book on GDP.

11. Is there too much separation between value creation and value capture? It was suggested that finance captures too much value, and one effect of that is to draw people with STEM aptitude and skills away from science and engineering. I admit to being sympathetic to that view, although I think you want to try to fight the bias that sees finance as entirely parasitical. It really is important that capital flow to its most efficient uses, and if that means that we need smart people involved in financial markets, then so be it.

I think where finance goes wrong is in allowing people to capture value from inflated prices. So my Internet company gets sold in 1999 for more than what it was really worth (good for me, great for our main backers, not good for whoever ended up owning shares in the company that bought us). Or WhatsApp gets $19 billion today. But if the problem with Wall Street is a lack of wisdom, do you want to subtract talent from Wall Street? If so, which talent?

Another suggestion is that the “winners-take-most” nature of certain markets means that excess value gets captured. Think of Bill Gates in the heyday of Windows, or Google today. Maybe, although I would argue (and did) that, throwing consumers’s surplus into the mix, it’s not clear that the value captured by corporate winners is so excessive.

Velasquez-Manoff on Causal Density

Posted on by

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

Posted on by

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.