Revisiting My Former Life

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Susan Wharton Gates, a former Freddie Mac employee, recently published a book delving into the collapse of that housing finance enterprise. In my review, I write,

The fall of Freddie Mac came as a shock to those of us who were there in the late 1980s and 1990s, who refer to ourselves as “old Freddie.” Was the tree that seemed so sturdy twenty-five years ago knocked down by a storm or did it rot from within? Gates says that it was both. She tells the story of Freddie Mac’s fall as a combination of both external pressure and internal rot.

My review essay is long and personal. You might see at as an exercise in therapeutic reminiscence.

War, State Capacity, and Economic Growth

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Jared Rubin looks at the literature which says that European states fought many wars, that this required them to add “state capacity,” and this in turn produced economic growth. He concludes,

while the war argument has many merits, it needs to be complemented by other arguments for “why the West got rich.” Specifically, we need to understand i) why Europe was so fractionalized in the first place, and ii) why northwestern Europe pulled ahead first. As I noted at the beginning, I think that combining the war argument with ones that look at other aspects of political institutions (especially legitimacy!) and certain aspects of culture paints a more complete story.

Pointer from Mark Thoma. Read Rubin’s whole post. A few quick points.

1. For libertarians, the idea that state capacity is important for economic growth is hard to swallow. But it may be correct. Remember your North, Weingast, and Wallis.

2. I am looking forward to Rubin’s discussion of “certain aspects of culture.” As you know, I take the view that mental-cultural factors are under-emphasized in most of the disciplines that study human behavior, including economics.

Narrower, Deeper, Older

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Phil Moss writes,

But the plethora of new dances comes at a cost. It increases our fragmentation. It creates a barrier to entry for both veterans (who come and go at various points in their lives) and for newbies who have to “drink from a firehydrant” in order to become regulars. For veteran non-regulars it becomes daunting to come back and see so many dances they haven’t learned. Unless one attends regularly, one becomes a stranger in a strange land instead of feeling comfortable when “coming home.”

The article is about Israeli folk dancing, which I know interests me a lot more than my readers, so I won’t say “read the whole thing.” Instead, I want to talk about the general trends I see in the way people engage with their interests. You can become engaged with any number of interests, including your religion, a sport, a hobby, your profession, a charitable cause, etc.

I want to offer some observations that apply to the entire class of interests, and I will suggest that “matching technology” (Tyler Cowen’s term) plays a role in these trends. Then I will come back to Israeli Dancing.

My central claim here is that the nature of engagement has changed over the past fifty years, in these three ways:

1. Narrower. There are fewer people casually engaged.

2. Deeper. Those who are engaged are more committed and have deeper knowledge.

3. Older. For any interest that has been around for a long time, the demographics of those interested now skews older.

For example, consider the game of bridge. A social bridge game is four friends getting together in someone’s house to play. A bridge tournament is many strangers competing against one another in a large room. In high school and college, I played a lot of social bridge. In college, I also played some tournament bridge. I then stopped playing for decades.

Fifty years ago, I believe that there were more social bridge players than tournament players. Today, it is closer to the reverse.

When I tried to get back into tournament bridge a few years ago, I found that the “barrier to entry” had gotten much higher. Players expect you to know a plethora of new tactics, which in bridge are known as “conventions.”

The other point to notice was that the median age of players at the tournament seemed to be about 70. Not many young people are willing to get past the barrier to entry.

As another example, consider people with an interest in baseball. Fifty years ago, many casual fans knew the batting averages and home run totals of well-known players. Today, there are fewer fans with that knowledge. Instead, there is a relatively small group of fans whose knowledge includes arcane statistics that did not exist when I was growing up.

Also, I think that interest in baseball skews older, in spite of marketing efforts aimed at the young. My sense is that in the ballpark it is mostly people over age 50 who are paying close attention to the action on the field. The younger people are on their cell phones and/or watching the JumboTron.

I believe that religion is becoming narrower, deeper, and older. A smaller fraction of the population is affiliated with a place of worship, but there may be an uptick among those deeply committed, such as Orthodox Jews. Otherwise, many congregations are thinning out as their populations age and die off.

I suspect that what Tyler Cowen calls “matching technology” (the Internet) plays a big role. Instead of settling for a lowest-common-denominator activity, like a game of social bridge, you can find something that really excites you and connect with people who share your excitement. With better matching technology, the total number of viable interests goes up, and the share of people who settle for activities in which they are only moderately interested goes down.

“Matching” means that any given interest draws a narrower set of people. Those people are more committed, so that the interest becomes deeper, with a higher barrier to entry in terms of study and practice. Finally, as new interests emerge, the population engaged in traditional interests gets older.
Continue reading →

A Seasteading Skeptic

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Reviewing a new book on seasteading by Patri Friedman and Joe Quirk, Shlomo Angel writes,

there is also no particular urgency to settle the oceans, as plenty of land remains for building cities: They occupy only about 1% of the land of countries today. And it is much cheaper to build cities on land than on the oceans.

That is somewhat beside the point. All of that land is now claimed by governments, and those governments will not allow you to build a city with its own set of rules.

I hope to review the book at some point.

Interfirm Inequality

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Timothy Taylor writes,

a rise in between-firm inequality suggests that the US and other leading economies are becoming a more economically segregated, in the sense that those with high pay and those with lower pay are becoming less likely to have the same employer. It means that the classic “American dream” success story, of someone being hired in the mailroom or as a secretary or janitor, and then getting promoted up the company ladder, is less likely to occur. Nowadays, those jobs in the mailroom or the secretarial pool or the janitorial work are more likely to involve working for an outside contractor. In that sense, some of the rungs on the bottom of the ladder of success have been sawed off.

My thoughts:

1. Perhaps there has been an increase in specialization and a decline in substitutability in labor. In the 1950s, there were a lot of good jobs around that anyone could be trained to do. Today, most of the good jobs require that you have a strong mix of training and credentials to get started. George Romney (Mitt’s father) rose through the ranks at a large automobile company. Today, his lack of formal training would make that impossible.

Note that if there has not been a decline in substitutability, then one is probably going to have a very difficult time explaining this “segregation” phenomenon using strictly economic analysis.

2. Perhaps the phenomenon can be explained in part by Tyler Cowen’s “matching” story. Even among people with equal levels of formal training, perhaps the strongest firms have gotten better at finding the workers with the greatest intangible strengths. Perhaps the ability to match in that way is what makes the strongest firms strong and what enables workers with great intangible strengths to get rewarded.

3. Perhaps what is needed and rewarded in today’s workplace is the ability to work adaptively in teams. That makes organizational culture a key determinant of success. A firm with a better organizational culture can maintain a large advantage over other firms. Such a firm can hire better workers and also reward them better.

4. Speaking of “culture matters,” I recommend Scott Sumner’s post on two Michigan cities.

The Case for Government Statistics

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Nicholas Eberstadt, Ryan Nunn, Diane Whitmore Schanzenbach, and Michael R. Strain write,

Objective, impartial data collection by federal statistical agencies is vital to informing decisions made by businesses, policy makers, and families. These measurements make it possible to have a productive discussion about the advantages and disadvantages of particular policies, and about the state of the economy. This document demonstrates a portion of the breadth and importance of government statistics to public policy and the economy.

Pointer from Timothy Taylor. who adds his endorsement.

Cynics who have read James Scott would mutter something about making the citizenry more “legible.”

So be it. I think that the private sector also benefits greatly from government statistics.

But are the data any good? Thomas Piketty, Emmanuel Saez, and Gabriel Zucman write,

Macroeconomics relies on national accounts data to study the growth of national income, while the study of inequality relies on individual or household income, survey, and tax data. Ideally all three sets of data should be consistent, but they are not. The total flow of income reported by households in survey or tax data adds up to barely 60% of the national income recorded in the national accounts, with this gap increasing over the past several decades.

Pointer from Mark Thoma.

The authors proceed to use this data to make dramatic pronouncements and to propose major policy changes. This is the sort of move that disturbs Russ Roberts and me. If you know that the data are too inconsistent to be allowed to speak for themselves, and you know that other methods of working with the data might yield very different results, why do you pretend to speak with the voice of divine revelation?

Banking vs. Transparency

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Tri Vi Dang, Gary Gorton, Bengt Holmstrom. and Guillermo Ordonez write,

banks produce private money because they can keep the information that they produce about backing assets secret. By being opaque, banks can produce bank money more efficiently. Opacity makes it prohibitively costly for an expert investor to find out information about the details of the bank’s balance sheet, eliminating the expert’s informational advantage. Opacity also mutes the effects that public information may have on the value of the bank’s assets. By keeping information symmetric among traders, opacity makes trading in bank money liquid.

All of this was explained in chapter 6 of From Poverty to Prosperity, the book that I wrote with Nick Schulz in 2009 (later re-issued as Hidden Wealth). On p. 224-225, we write

the assumption of complete transparency, in which any individual knows all of the risk being taken by everyone in the economy, is not merely unrealistic, it assumes away the reason for financial intermediation in the first place. . .a lack of complete transparency is built into the basic function of financial intermediation.

In my admittedly biased opinion, the narrative description in that chapter is much richer than the “model” that the four authors (including the most recent Nobel Prize winner) develop. Information about risks is not a binary phenomenon in which it is either public or not. People and the institutions that employ them have different access to information and different skills in processing it. That is what makes financial intermediation in the real complex–more complex than any model can capture.

Applying Nondiscrimination to Markets

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Mark J. Perry writes,

Although workers outside the US are not protected by US civil rights laws, doesn’t “Buy America” legislation still make it legal to discriminate against workers in Mexico, China and Russia who make iron and steel by denying them equal access to employment opportunities for infrastructure projects spending taxpayer dollars? Should that worker discrimination based on national origin from “Buy America” legislation be acceptable if discrimination against those same workers would be illegal if they were on this side of an imaginary line called the US border?

It will be a great day when the ethics of “buy American” and “buy local” are viewed skeptically.

Political Language Appropriation

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A web site called Campus Reform reports,

A conservative student at Orange Coast College has filed a civil rights violation report after a knife was found lying near hateful graffiti messages targeting him by name. . .

“I am personally appalled by the fact my case was never reported as a hate crime, even though in the state of California it is one by law,” Recalde-Martinez continued. “I wasn’t notified that the incident occurred until the case was already closed, and am also shocked [that] all evidence of the incident was destroyed by campus employees before the incident was reported to the Costa Mesa Police Department.”

“Hate crime” is a term that fits with the progressive oppressor-oppressed axis. It is meant to refer to a crime against a member of an oppressed group that appears to be motivated by hatred of that group.

Set aside the question of whether it is possible to tell when an assault/threat includes “hate” and when it does not. I want to make the point that trying to call an attack on a conservative student a hate crime amounts to appropriating the progressive oppressor-oppressed axis in a way that will not compute with progressives. They are not going to see conservatives as an oppressed class. I would advise conservatives not to bother trying this linguistic trick.

Restrict Supply, Subsidize Demand

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The Los Angeles Times reports,

Home builders are not keeping up with demand for homes in California. There just aren’t enough homes being built relative to the growing number of households in California.

What is the “solution” to this supply problem? Subsidize demand:

a lot of local municipalities have first-time home buyer-assistance programs, and people should look at those programs in their area. You also may be able to qualify for additional assistance as a first-time home buyer based on your occupation, for folks like teachers, firefighters and law enforcement.

And people wonder why housing in California keeps getting less affordable.