Revisiting Halberstam’s The Best and the Brightest

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I write,

I have come to see the “can-do” attitude, and its attraction to politicians and the public, as very dangerous. On economic matters, the “can-do” adviser offers the promise of a free lunch: increased access to health care without raising health care spending; tax cuts that “pay for themselves”; budget deficits that will create millions of jobs, projected with outrageously exaggerated precision.

I credit this book with helping to start me on my political journey from left to right. Although it criticizes the Vietnam policy from a left perspective, it never endorses the Chomsky silliness of saying that Vietnam was a capitalists’ war for markets.

Halberstam offers lessons to both sides in the Trump era. The anti-Trumpers would do well to reflect on the way that establishment group-think can be costly. For Mr. Trump himself, I have this admonition.

he should try to restrain the urge to be an intimidator. The office of the President is intimidating in its own right. The President needs honest advisers more than he needs yes-men.

Jeffrey Hummel on central banking

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He writes,

The Fed cannot have much impact on market rates through pure intermediation—borrowing with interest-earning deposits to purchase other financial assets—any more than Fannie Mae or Freddie Mac can. The Fed can do so, even in a highly segmented market, only by altering the quantity of outside money. Only then will it have any temporary effect on the net quantity of loanable funds and the net portfolio of the public’s real assets. Today’s low interest rates are not ultimately the result of Fed policy but of a decline in the natural real rate.

Pointer from Scott Sumner.

If the Fed is just a bank, then it’s just another bank. And that is how I think of it. Where I disagree with Hummel is that I don’t think that altering the quantity of outside money by a few percent does anything, either.

In any event the paper is a good antidote to the magical thinking that tends to surround central banking.

Not surprisingly, Sumner has a take that differs from mine. He writes,

some people claim the Fed has little or no control over the economy. In that case they could set rates where ever they wished, and life would go on as usual. I take almost the opposite view. I believe they have very little room to adjust rates without creating a spiral toward hyperinflation or hyperdeflation. Why don’t we see those disasters more often? For the same reason we rarely see buses plunge off 100 foot cliffs–the Fed usually follows the road.

Think of the financial market as creating the road. I think of it as more like a set of railroad tracks than a paved road. In my view, the Fed has to really jump the tracks to have any effect. Small changes in policy, within the range of what we observe, don’t change where the train is headed.

Russ Roberts on emergent order

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He writes,

Then there are things that are out of our control but that happen on their own through a natural process no human being intends or designs. Breathing. The healing of a paper cut. Staying attached to the earth rather than floating off into space. We don’t have to lean into the curve as we go around the sun to keep the earth on orbit. No human being is in charge of making sure the sun comes up tomorrow. When it rains, we may be frustrated if we had hoped to go on a picnic in the park but there is no one to blame. And if it’s an especially beautiful day, we may thank God or simply be glad to be alive. But there is no person we owe thanks to.

There is more at the link.

From Prosperity to Poverty

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Ricardo Hausmann writes,

Income poverty increased from 48% in 2014 to 82% in 2016, according to a survey conducted by Venezuela’s three most prestigious universities. The same study found that 74% of Venezuelans involuntarily lost an average of 8.6 kilos (19 pounds) in weight. The Venezuelan Health Observatory reports a ten-fold increase in in-patient mortality and a 100-fold increase in the death of newborns in hospitals in 2016.

Pointer from Tyler Cowen.

Justin Fox blames the resource curse.
Pointer from Mark Thoma. I think that Fox, like too many economists, wants to look at material factors and ignore the role of ideas. Venezuela is cursed more by socialism than by oil.

TLP update

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1. A talk I gave for Cato on the Three Languages of Politics. Why don’t I modulate more (i.e., vary my tone of voice)? I sound more boring than I am.

2. Ryan Bourne writes,

The BBC is another example. Natural conservatives feel the need to highlight the Beeb’s historic role as a national institution, creating shared experiences, enriching our culture and providing a reasoned, shared platform in contrast to the brashness of US cable TV. Progressives like to think of the BBC as an island for the oppressed in a sea of commercial TV ruthlessly seeking profit. The classical liberals? They cannot abide that the BBC is funded by a compulsory licence fee, particularly given changing tastes and technologies.

He argues that Brexit produces divisions within the tribes. One can argue that the 2016 election did the same thing in the U.S. For conservatives, the divisions are obvious. Progressives are divided about what to do about white working-class voters–should progressives write them off as racist and sexist or try to win them over? As for conservatives and libertarians, the inability to coalesce around an alternative to Obamacare exposed the divisions between and within those tribes.

Write no matter what

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Joli Jensen says,

I recommend spending at least 15 minutes a day in contact with your writing project. This offers frequent, brief, low-stress daily contact with your writing project which helps keep the project “write-sized.” It can include “ventilation,” which is spending 15 minutes writing about how you don’t want to work on your project at all.

Pointer from Tyler Cowen.

I don’t ventilate. Instead, sometimes I change the subject. If I have a project that is stalled, I might write about something else completely, like folk dancing. A few times I’ve even started to write short stories. Interesting characters and situations, weak plots. I seem to stop writing before I get to any action scenes.

I need long walks and bicycle rides to get writing done. I put ideas together in my head, and then I transcribe them when I get home. That way, I have built up momentum before I sit down at the computer.

Blogging is a form of “write no matter what.” A significant proportion of my longer projects began as blog posts.

Thoughts on Sociology

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1. What we call social science ought to be called the study of human conflict and cooperation.

2. Sociology ought to be the study of human conflict and cooperation in the larger society, in the realm of informal authority, its sources and uses. Social norms and hierarchies are important components of informal authority.

3. When we study human conflict and cooperation in close personal relationships, we are mostly in the realm of psychology.

4. When we study human conflict and cooperation in the larger society in the realm of specialization and trade, we are mostly in the realm of economics.

5. When we study human conflict and cooperation in the larger society in the realm of formal authority, we are mostly in the realm of political science.

I use the phrase “mostly in the realm” because I doubt that any of the four disciplines can be totally isolated from the others.

6. When we study human conflict and cooperation in a specific time and place, we are mostly in the realm of anthropology. Anthropologists might study the psychology, economics, politics, and sociology of the unit under observation.

7. A business manager needs to handle conflict and cooperation within a firm, which also requires all four basic disciplines. There are aspects of political science (think of corporate governance). Business strategy deals with specialization and trade. Understanding “office politics” requires knowledge of psychology. And managers have to understand the informal sources and uses of authority within the firm, also known as “corporate culture.”

8. Informal authority is complex because there are many intangible factors involved. Sociologists do a disservice when they try to reduce their discipline to the study of tangible factors, such as race, gender, or Marx’s dichotomy of labor and capital.

I also believe that economists and political scientists are guilty of shying away from intangible factors. In Invisible Wealth (first appeared as From Poverty to Prosperity, Nick Schulz and I tried to point out how much you miss when you ignore the intangibles in economics.

9. One can do sociological analysis of particular groups within society. One can do sociological analyis of economists. Or of sociologists. The book I am reading about Pierre Bourdieu has him doing exactly the latter.

10. One of Bourdieu’s themes is that people who are discontented with their social status are prone to make trouble.

11. Without using the term “status-income disconnect,” he suggests that a source of discontent for those in academia is that their economic capital does not match their cultural capital.

Americans are super-rich

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Tyler Cowen writes,

Consumption in the U.S., per capita, measures about 50 percent higher than in the European Union. American individuals command more resources than people in countries such as Norway or Luxembourg, which have higher per capita GDP. The same American consumption advantage is evident if you look at dwelling space per person or the number of appliances in a typical home.

He says to look at total U.S. health care spending relative to the size of our economy in this context. If you put GDP in the denominator, we look like an outlier. But if you put consumer spending in the denominator, it looks fairly normal.

And yes, I too have cited the Random Critical Analysis piece.

Changes in the corporate landscape

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Kathleen M. Kahle and René M. Stulz write (link now fixed),

US public firms are very different now compared to 1975 or 1995: fewer, larger, older, less-profitable, with more intangible capital, less investment, and other changes. The US firms that remain public are mostly survivors. Few firms want to join their club. A small number of firms account for most of the market capitalization, most of the earnings, most of the cash, and most of the payouts of public firms. At the industry level, revenues are more concentrated, so fewer public firms are competing for customers. A large fraction of firms do not earn profits every year and that fraction is especially large in recent years, which helps to explain the high level of delists. Accounting standards do not reflect the importance of intangible assets for listed firms, which may make it harder for executives to invest for the long run.

The authors discuss various explanations for this, but my inclination is to tell the story as follows:

Think of any investment project as going through two phases. First, there is the start-up phase, which may or may not produce profitable results. Then, for successful projects, there is the cashing-in phase, where the profitable enterprise gets sold to a wider set of investors.

Forty years ago, a lot of investment projects were started within large public firms. With the firm already public, there was no need for an additional cash-in phase. The stock already was widely held. Meanwhile, if a not-yet-public firm launched a successful enterprise, the best deal it could get in the cash-in phase was often to go public.

Today, large public firms are doing less of the first-phase risky investment. Instead, they are letting private firms take the risks and then handling the successful start-ups’ cash-in phase for them by buying them.

So that’s a story. A leading example of that model would be pharma. A lot of the speculative research gets done at small start-ups. Once a start-up is successful, its best option is to be acquired by big pharma. The legacy firms have a comparative advantage in handling the second phase. The start-ups have a comparative advantage in the first phase.

Scarcity of financial intermediation?

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Ricardo J. Caballero, Emmanuel Farhi, and Pierre-Olivier Gourinchas write,

For the last few decades, with minor cyclical interruptions, the supply of safe assets has not kept up with global demand. The reason is straightforward: the collective growth rate of the advanced economies that produce safe assets has been lower than the world’s growth rate, which has been driven disproportionately by the high growth rate of high-saving emerging economies such as China. If demand for safe assets is proportional to global output, this shortage of safe assets is here to stay.

The signature of this growing shortage is a steady increase in the price of safe assets, necessary to restore equilibrium in this market. Equivalently, global safe interest rates must decline, as has been the case since the 1980s. Simultaneously, we observed a surge in cross-border purchases of safe assets by safe asset demanders—many of them located in emerging economies—from safe asset producers, mostly the United States.

I get their point, but I do not like the idea of talking about the quantity of safe assets as the problem. Remember my view of finance: people want to issue risky, long-term liabilities and hold riskless, short-term assets. Financial intermediaries accommodate this by doing the opposite. Hence these thoughts:

1. What my framework suggests is that if there are too few riskless, short-term assets, then there must also be too few risky, long-term liabilities. That is, there is a general shortage of financial intermediation.

2. There does not appear to be a general shortage of financial intermediation. Relative to the economy, the financial sector has been growing, not shrinking.

3. In the “safe assets” framework, government helps to solve the problem of safe-asset scarcity by printing more money and issuing more short-term debt. In my framework, more government liabilities are not helpful. Government’s short-term, riskless liabilities are not backed by long-term risky assets.* So government is not increasing the amount of financial intermediation. Government instead is crowding out financial intermediation.

*You could say that the government’s risky, long-term assets are future tax revenues. But it is not the case that governments are raising money in order to invest in projects that will lead to increased future tax revenues. They are mostly making transfer
payments.

4. In fact, a lot of financial activity is associated with funding the government. So it could be that what I think of financial intermediation has declined even though financial activity has increased.

5. In other words, perhaps the financial sector is growing but not increasing its holding of risky, long-term assets. If so, this could be due to many things, but I think that the political assault on banks (regulations, “settlements” with prosecutors) comes to the top of my mind. Politicians bash the financial sector as being unproductive even as they increase the intensity of their utilization of the financial sector to channel money toward political ends.

6. The interest rate on safe assets is not a good measure of where interest rates are relative to some Wicksellian natural rate. In other words, don’t worry about the interest rate on safe assets being too low. Worry about the interest rate on a typical risky, long-term asset being too high relative to its natural rate. But changes in any given market interest rate on long-term, risky assets get confounded with changes in expected inflation and in risk perception.