Interesting sentences

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From a commenter.

People in education tend to believe two things:

1) School is America’s great driver of social mobility. School lifts up the poor. Without our education system, we would be a terribly unequal, unjust, “rich get richer and the poor stay poor” society.

2) It is not just grudgingly acceptable but good and just that the more education you have, the better you are treated.

This is an interesting dilemma for progressives. They are inclined to see income and status hierarchies as unjust. However, they are inclined to see income and status advantages that accrue from schooling as just. Or, as Orwell put it, some pigs are more equal than others.

Scott Sumner’s macroeconomics: my thoughts

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He writes,

I’ll use “(e)” to denote a (market) expected value.

NGDP(e) is the single most important variable in macro; it should be the centerpiece of modern macro.

How can we work with a central concept that is purely mental? Nominal GDP, or NGDP without the (e), is a measure derived from the market exchange of goods and services. Most concepts in macroeconomics, such as interest rates, or prices, are observable when goods or securities change hands.

NGDP(e) is not an observable result of goods or securities changing hands. It is something in people’s heads.

But it’s even more problematic than that. At least 99.9 percent of all people do not even have an NGDP(e) in their heads. Even most economists do not have one.

Even if you had a futures market in NGDP, NGDP(e) would still be a purely mental concept. In the wheat market, if you sell 1000 bushels of wheat forward, on the day that the contract expires you could deliver 1000 bushels of wheat to fulfill the contract. (Actual delivery does not take place in such markets, because buyers and sellers unwind their positions at expiration.) But nobody can deliver NGDP against an NGDP futures contract. It is a pure bet.

In any event, an NGDP futures market currently does not exist. So the most important variable in macroeconomics is something that exists in people’s minds, and yet in truth it exists in almost no one’s mind. I worry that this is like saying that in physics the most important variable is the ether, even though no one can observe it.

Sumner writes,

Low and stable NGDP growth minimizes the welfare costs of “inflation”, and also leads to approximately optimal hours worked.

NGDP is an observable variable, and Sumner argues that low and stable NGDP growth is associated with good performance of inflation and employment. So why bother with NGDP(e) at all?

At the risk of putting words in Sumner’s mouth, I think he would say that NGDP(e) is important because the Fed affects NGDP by manipulating NGDP(e). How did he get there?

Monetary theorists used to say that the Fed manipulates NGDP by manipulating the quantity of money. The problem with this is that it is impossible to find a definition of money that can satisfy two conditions at the same time: (1) that the Fed can control it; and (2) it closely correlates with NGDP. The former requires a narrow definition of money, and the latter requires a broad definition.

Old Keynesians said that the Fed manipulates NGDP by manipulating the short-term interest rate. When the short-term rate gets stuck at zero, it has to manipulate the long-term rate. Or it becomes impotent. But even when it is not stuck at zero, the Fed’s manipulations often seem ineffective. For one thing, long-term interest rates sometime do not respond, or they respond perversely.

Then there are the New Keynesian types who say that the Fed manipulates NGDP by manipulating expected inflation. But to me that is another ethereal concept. At the risk of putting words in their mouths, the New Keynesians are saying that the Fed can mysteriously change expected inflation through “quantitative easing” even if short-term interest rates and long-term interest rates are both impervious to Fed actions, or even if long-term rates react perversely.

From the New Keynesian view, it is a relatively small step to Sumner’s view. Just swap out the ethereal expected inflation for the ethereal NGDP(e).

Got it? In modern macro, we have everybody working in the GDP factory. And we have everybody forming expectations about the price of the output from this GDP factory, or about the total nominal value of that output. And booms and recessions are caused by changes in these expectations. And the Fed can manipulate these expectations through an immaculate process that cannot be measured using interest rates or the money supply.

Oy.

I know that almost nobody who reads Specialization and Trade buys into my view that movements in aggregate price indices mostly reflect habits and inertia, rather than central bank operations. But when you see the contortions that monetary theorists have gone through over the years, I think I have a fair case.

Human conflict: a Girardian view

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Dan Wang writes,

If one is a Girardian, then there is perhaps no greater catastrophe than the growing tendency of the American meritocracy to be incubated in elite colleges. Is it not worth fretting that the people running the country are coming in higher numbers from these hothouse environments at a young age, where one is inflamed to compete over everything and where tiny symbolic disputes seem like life and death struggles? How much of the governing class has fully adopted this attitude, and to what extent can we see our recent political problems to be manifestations of this tendency?

Pointer from Tyler Cowen. Read the entire essay.

Wang links to a useful summary of Girard’s ideas.

If people imitate each other’s desires, they may wind up desiring the very same things; and if they desire the same things, they may easily become rivals, as they reach for the same objects. Girard usually distinguishes ‘imitation’ from ‘mimesis’. The former is usually understood as the positive aspect of reproducing someone else’s behavior, whereas the latter usually implies the negative aspect of rivalry.

Again, there is much more at this link. Wang’s idea is that when you throw a bunch of similar people together ini college, you make it natural for them to desire the same things and to be prone to conflict.

I admit that I am still trying to fully grasp these ideas.

Three Axes, individual reasoning, and social justification

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A commenter writes,

There’s one thing I’m still not clear about from the book. You distinguish talk from thought but … many readers do not make this distinction…

Three antagonistic framings of issues that the three tribes use in a constant intellectual war – the antagonism causing them to represent each issue entirely as one of civilization versus barbarism, or oppressor-victim, or coercion-liberty. This leaves little room for hope as it has nothing to say about what people think: perhaps it’s not simple partisanship but how they really think too.

In theory, I see a distinction between:

1) arriving at an opinion by yourself. Call this private reasoning.

2) justifying your opinion to others. Call this public justification.

I mean for three axes model to apply to (2). But in practice (1) and (2) are so closely related that it is easy to slip into applying the model to (1).

Let’s use an example. Take the travel ban from Muslim countries. Along the oppressor-oppressed axis, what stands out is the fact that many American non-Muslims are wary of Muslims, and to progressives this makes Muslims an oppressed class. For a progressive, this justifies opposing the ban. Along the civilization vs. barbarism axis, what stands out is the threat that Muslim extremism poses to our civilization. For a conservative, this justifies supporting the ban. Along the coercion-liberty axis, what stands out is that the ban coercively deprives innocent people of an important right. For a libertarian, this justifies opposing the ban.

However, I do not wish to say that any person adopts a single-axis reason for supporting or opposing the ban. In fact, a person who self-identifies as progressive and who takes a progressive position on many issues might, for some reason, support the ban. Our tribal axis plays a role in private reasoning, but it is not everything.

When I say “justifies,” I mean public justification, not private reasoning. In public (i.e., talking with others), a progressive is likely to:

a) make oppressor-oppressed arguments against the ban;
b) view favorably others who use such arguments;
c) accuse supporters of the ban of being oppressors

In fact, even if a progressive for some reason had decided to support the ban, that progressive still would be receptive to (a) – (c). With regard to (c), the hypothetical ban-supporting progressive probably would feel a need to say, “Yes, I know there are many Islamophobes out there who support the ban, but my reason for supporting the ban is not Islamophobia.”

It is easier to escape your preferred axis privately than in public. When you are among members of your own tribe, it is almost impossible to escape from your (tribe’s) preferred axis.

I hope that helps.

Ed Glaeser on employment policy

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He writes,

Why, since 1970, has each new downturn added to the ranks of the permanently unemployed? Social science has not fully answered this question, but the best guess involves a combination of a generous social safety net, deindustrialization, and social change.

Read the whole essay. He takes a supply-side, incentives-oriented approach to dealing with the employment problem. For example,

We also need to make hiring workers less costly for employers. Temporarily cutting the payroll tax was one of the most constructive policies adopted during the Great Recession. We could enact a permanent payroll-tax reduction. The tax could be gradually phased in for workers once their hourly earnings went beyond a certain threshold. The payroll tax could be eliminated for workers who had been unemployed, at least for an initial period. The costs of reducing the payroll tax could be offset by raising the minimum retirement age for employees who hadn’t paid these taxes for enough years. Reducing mandated benefits, like health care, that employers must provide lower-income earners would help encourage work, too. Ideally, the reform of our health-care system will ensure that workers have health-care options that don’t unduly burden employers.

Pointer from John Cochrane, who comments,

Reforming the incentives of social programs could be a bipartisan effort (if anything can be a bipartisan effort these days). We spend less, we help people more.

But our social programs are based on normative sociology, not economics. That is, they have found that the cause of poverty is that rich people are mean to poor people, and the solution is redistribution (although in practice, most of the redistribution is taking money from some non-rich and giving it to other non-rich).

Douglas Holtz-Eakin on the health care bill

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He writes,

the CBO is required to compare the BCRA with current law. For Medicaid, that means it must assume that the financially unsustainable entitlement will continue to swell to cover about 5 million more people, accounting for the bulk of the remaining 7 million uninsured. Not likely. For the individual ACA markets, it means the CBO assumes that enrollment rises by 30 percent over the next 10 years — a sharp contrast to the reality of insurer after insurer walking away.

Some remarks:

1. I have not been following the health care bill at all. Of all the commentators on it, I trust Holtz-Eakin the most. He is for the bill.

2. If the Republicans do not fix Obamacare, then the Democrats will. That means single-payer. That is another reason to be in favor of the bill.

3. My longstanding analysis of health care remains: as individuals, we wish for unlimited access to medical services without having to pay for them. But the more people who are granted our wish, the more that health care spending will soar. What we need is not more people to be granted our wish, but fewer people granted our wish. But pity the politician who runs on the platform of granting fewer people their wish.

4. The libertarian approach to health care is to have people make their own decisions and trade-offs about health care. The bleeding-heart libertarian approach is to give poor people and people with chronic conditions subsidies, but still let individuals make their own decisions and trade-offs. I am not convinced that there are many Americans who want to make choices and trade-offs when it comes to health care. When it comes down to it, they would rather have government make those decisions for them.

5. The CBO’s role in this has been a disgrace. The model that they use to predict consumer insurance choices way over-states the sensitivity to mandates, so it over-estimated how many people would choose Obamacare and it over-estimates how many people will “lose” (i.e., choose not to obtain) insurance without the mandate. The CBO should not be in the business of making this sort of forecast in the first place. The CBO should not be “scoring” the effects of policy, such as the effect of the stimulus on employment. The CBO should be restricted to making budget forecasts and nothing else. When it tries to forecast any other policy impacts, it ends up harming the decision-making process. Holtz-Eakin, a former CBO director, might not agree with me on this point.

Martin Gurri on Post-Truth

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He writes,

For liberals, “post-truth” is the only possible explanation for Donald Trump’s somersault to the presidency. At some point, liberals believe, fake news metastasized into false consciousness: hence Trump. For conservatives and libertarians, the phrase aptly describes an information environment dominated by the liberal news media and entertainment industry.

Read the whole essay. I interpret one of the main points to be that the bond of trust between elites and the public has been broken, so that there is no longer a shared truth concerning the interpretation of events. I interpret his conclusion as being that we need to discover a new elite, one which has credibility. Easier said than done, to say the least.

Russ Roberts on The Three Languages of Politics

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He sketches the main ideas of the book, and then he uses the three-axes model to discuss the blind spots of each tribe. For example,

Liberals first. In their eagerness to empathize with the victim, they can turn the victim into an object rather than an independent actor. Poor people are so oppressed in the liberal view, they don’t just have limited agency to choose and live life in meaningful ways. They have no agency. They are simply objects manipulated by powerful people around them.

Indeed. I would say that the oppressor-oppressed axis attaches too little agency to the individuals in the oppressed categories. Also, it attaches too much agency to the individuals put into the oppressor category. Progressives prefer to explain market outcomes as deliberate exploitation rather than the operation of supply and demand.

I would say that conservatives have a blind spot when abandoning tradition can enhance civilization rather than threaten it. Think of abandoning the tradition of Jim Crow in the South.

Concerning libertarians, Roberts writes,

We often romanticize the power of economic freedom. We struggle to imagine that some people are poorly served by markets, that some transactions involve exploitation of ignorance and that the self-regulation of markets can fail. In our zeal to de-romanticize government, we often ignore the good that government does especially in cases where freedom might perform badly. Our worst mistake is to defend the freedom of business to do what it will in situations where government has hampered or destroyed the feedback loops of profit and loss that make economic freedom successful.

I get what he is driving at with the last sentence–the problem sometimes called crony capitalism–but it comes across as more of a humble-brag than a blind spot.

What might I see is the libertarian blind spot? Perhaps it is the tendency to view coercion as a binary phenomenon. We speak as if you either are coerced by the government or you make a free choice. Perhaps it is more reasonable to think in terms of a continuum. There are many government policies that people do not experience as horribly coercive. Traffic regulations are one obvious example. There are market situations where people do not sense that they have free choice–remember the guy who got thrown off a plane by the airline? And what if a gay couple could not find any convenient baker willing to bake them a wedding cake?

Teleological political theory

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Timothy Taylor writes,

It can be hard for group with weak hierarchies to make decisions. Group members need to find a balance between making their own contributions in some areas but acquiescing to the group in others. To make this work, it takes a skilled political leadership with a combination of policy-related and hands-on managerial skills, together with group members who see themselves as acting in the context of a broader whole, not just as grandstanding individuals. The US political system seems lacking in these areas.

He is discussing Alan Blinder’s latest thoughts on political economy.

I think that Taylor (probably Blinder, also) starts with what I might call a teleological political theory. That is, the political process is trying to achieve some end. When you think of the desired end result as, say, the greater foodgood, then you wonder what sorts of individuals and reforms will best achieve that end.

An alternative perspective, which comes automatically to someone familiar with public choice theory or Austrian economics, is that markets and political processes produce outcomes on the basis of behavior. Behavior in turn is governed by incentives and cultural norms. Neither market processes nor political processes can be understood in teleological terms. You have to try to understand them as they are.

I think that the belief that we would have better political outcomes if we had “skilled political leadership with a combination of policy-related and hands-on managerial skills” is naive and dangerous.

The left, the market, and economists

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In a recent exchange with Don Boudreaux, Bryan Caplan writes,

The heart of the left is being anti-market.

From the standpoint of the oppressor-oppressed axis, it may make sense to be anti-market. If you look at market outcomes, you see some people do much better than others. It is natural to assume that those doing well are oppressors and those doing not as well are oppressed.

As an economist, I look at the market as impersonal. It is a process. As a process, it has many virtues.
Competition helps to regulate exploitation. The profit motive spurs innovation that helps people in general. You know the drill.

Bryan is among those who believe that teaching people economics can help them to understand the process perspective and to see the market in less personal terms. Hence, if you confront people on the left with economics, their leftism will soften. That indeed has happened to many economists. Vernon Smith and Deirdre McClosky are two prominent ex-socialists.

Unfortunately, I think that going forward we are going to see the opposite effect of confronting leftists with economists. That is, I think that the academic economics will be converted to an oppressor-oppressed view of markets. Not that I think that such a view is more justified now than in the past. Rather, I think that the leftism in academia is stronger than in the past. See my recent essay. As I have pointed out in previous posts, we are already seeing much more focus in academic economics on anti-market perspectives that align with the oppressor-oppressed framing.