The Cato Institute on the Future of the Free Society

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They write,

We have reached out to leading thinkers and challenged them to answer the following questions: What are the most pressing challenges that free societies face in the coming years? What is the most important reason for optimism about the free society? What is the most important but still unappreciated idea that lies just ahead? What’s the most important thing that you have learned about free societies that you wish you knew all along?

By “leading thinkers,” they mean only Tyler Cowen. Evidently not me. But here is how I would answer.

I would start with the last question. I think that the most unappreciated idea is that ideas are underappreciated. As I have said before, the social sciences disciplines that study human society are too materialistic. They try to base their explanations and interpretations on material conditions. In economics, it is the rare Joel Mokyr or Deirdre McCloskey who will recognize the significance of the mental-cultural world. Recall also my essay on cultural intelligence.

The most pressing challenges that free societies face are the David Brin challenge and Fear Of Others’ Liberty.

The David Brin challenge is that we live in a world where surveillance is increasingly feasible and arguably necessary. The challenge is to avoid a dystopia of asymmetric power, in which the state has surveillance capability but the ordinary citizen does not. Brin’s distinctive recommendation is to increase the surveillance power of the citizen, rather than make what he predicts will be a futile attempt to reduce the surveillance power of the state.

FOOL makes it possible for politicians to sell the public on policies that take away freedom. People are afraid of what will happen if other people have economic liberty, such as the liberty to decide on a mutually acceptable wage or the liberty to decide what they want in terms of health insurance or the liberty to purchase products from other countries. etc.

Historically, sometimes we overcome FOOL (as in the American founding), and sometimes FOOL overcomes us (as in American slavery and Jim Crow laws). The present day strikes me as a time when FOOL is ascending, both on the right and on the left. Roughly from 1960 through 2000, on the left there was a trend toward increased support for freedom of expression and market economies. That trend has reversed. Today, we have the leading edge of the left openly advocating for suppression of others’ speech and for socialism. To me, this means that the mental-cultural sky is darkening. That bodes ill for the future, especially for when the left returns to power. Which is bound to occur, probably sooner than most people currently expect.

A reason for optimism? In 2017??? Twenty years ago, I was optimistic that the Internet would empower individuals relative to big corporations, government, and the education establishment. I guess that the most optimistic thing I could say is that maybe it will still turn out that I was right then and that I am wrong now.

Household Services: I have a different take

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Timothy Taylor reports,

The value of household services was equal to about 37% of GDP in 1965, but is currently equal to about 23% of GDP.

Tyler Cowen implies that this is a bad thing.

I think of it this way.

“Household production” is inefficient. In the limit, if you produced everything you consume and consume nothing that you do not produce, then you will be at subsistence level–if you are lucky. Our standard of living depends entirely on specialization and trade.

If a surgeon mows her own lawn, it means either one of two things.

a) she likes to mow lawns, so this represents consumption; or

b) this is a market failure, and she would much rather get paid for doing another surgery and use that money to pay for lawn mowing and other things, but for some reason she cannot.

What the Commerce Department is doing is imputing a value to the time that people waste doing housework. All that tells us is the value is lost by not enabling those people to engage in specialization and trade instead of doing housework. It is a measure of market failure.

And of course this imputed (i.e., artificially made-up) value has gone down relative to GDP, because people (women, mostly) are spending less time on housework and more time engaged in specialization and trade. This means that there is less market failure nowadays than there was back then. We should be happy that the number is going down, and we should hope that it heads toward zero.

Health Insurance: Where are the Goal Posts?

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David Cutler writes,

Eighty-four percent of medical spending is for the 50 percent of people with at least one chronic disease; half of spending is for the 16 percent with three or more chronic conditions. People with chronic diseases know they will have them forever; those without have a low chance of contracting one in any year. Nearly half of people who are in the top 10 percent of spending in one year are in the top 10 percent the next year.

The central question for health policy is who should pay for the predictably expensive.

With these statements, David Cutler has not just pushed the goal posts on health care policy a few yards in one direction. He has moved them to the other side of the field.

Everyone is talking about how many households have insurance and acting as if the main challenge is to get healthy people to buy insurance. If Cutler is right, then health care policy boils down to:

1. Finding a fair way to share financial the burden of chronic illnesses. (Obviously, “fair” involves value judgments.)

2. Putting resources into public health measures and efforts to induce people to comply with behavioral advice that would help to prevent chronic illness.

If Cutler is right, then it seems to me that Obamacare and its relatives are beside the point. And I believe that he is right.

See also Benjamin Domenech, who writes,

By providing catastrophic care for all, President Trump could ensure that everyone has an ultimate backstop against medical bankruptcy, while freeing the states to experiment with options for reform. It would also enable the private sector to offer new insurance products to supplement the basic catastrophic care coverage.

That strikes me as much closer to the correct policy than either Obamacare or Repeal-ish. It certainly aims more squarely at the goal posts as placed by Cutler.

Sociologists and Humility

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Neil Irwin writes,

If the White House Council of Social Advisers did exist, one of its great challenges would be to convert some of these findings into actual policy proposals that might help. Part of the ascendance of economics in the policy-making sphere comes from the fact that economists tend to spend more time looking at specific legislative or regulatory steps that could try to improve conditions.

And trying to solve social problems is a more complex undertaking than working to improve economic outcomes. It’s relatively clear how a change in tax policy or an adjustment to interest rates can make the economy grow faster or slower; it’s less obvious what, if anything, government can do to change forces that are driven by the human psyche.

He is referring to sociological research that shows, for example, that the decline in blue-collar jobs has an effect on men’s sense of identity. In the article, the sociologists come across as jealous of economists, because policy makers respect economists.

I do not think that economic advice is necessarily better than advice based on sociology. I disagree with Irwin that economic issues are more clear-cut.

I do believe that economists have less humility than the sociologists. I would actually score that as a point for sociology.

On the other hand, sociology is blinded by ideology. Sociologists only want to interpret the world through the lens of power and privilege. That is their hammer, and everything looks to them like a nail.

Economists as individuals may be no less ideological. But the profession as a whole has much more ideological diversity than does sociology. That may not last. I believe that the trend is for conservative economists to fall in status, and if this keeps up, academic economics will look like sociology in another decade or two. In the meantime, I hope that economists somehow develop the humility of sociologists, but I fear that may not happen.

Health Care Vs. Rationality

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A commenter wonders,

I’ve never been told by my doctor “This medicine will cost you 47.50. It will only help 25% of the time. After 10 days your ailment may cure itself.”

Why is this not mandated?

A reader asks (referring to the prices for medical services),

How are people supposed to make decisions/ration their savings (if they have any) when no one can give you a straight answer about how much things cost?

In the United States, about 90 percent of health care spending is paid by third parties. The remaining 10 percent is called out-of-pocket. We have one of the lowest rates of out-of-pocket spending the world, even lower than that in Canada and other countries with more socialized systems.

Much of what seems economically irrational about health care comes from this use of third-party payments. Doctors do not themselves make hard-headed probability calculations, much less give patients the information to make such calculations. Prices are hidden from patients. We waste a lot of money on medical procedures that have high costs and low benefits.

It is natural for economists, like me, to suggest that the way to make the system more rational is to reduce the extent of third-party payments. In my book, Crisis of Abundance, I offered suggestions for reducing third-party payments from 90 percent to 50 percent. I do not think you can reduce them much below that. A large share of health care spending is on a small fraction of the population where the cost of treatment is high, and some combination of government/charity and health insurance is inevitable in those cases. Also, there are people who are so poor that somebody else has to pay for even basic health care for them.

Why do we have a system with such a high proportion of third-party payments? I do not think it is because some evil demon foisted it upon us. I think it is because people like it.

Fifty years ago, doctors liked it, because it encouraged demand. In those days, there were not so many expensive treatments out there, and insurance companies could operate by approving pretty much anything the doctor ordered and paying whatever were the “usual and customary” rates. More recently, as health care costs have started to take a larger and larger share of worker compensation, insurance companies are starting to negotiate harder, and friction is growing between doctors and insurance companies. Still, most doctors would rather take insurance than give up on it altogether. As frustrating as it can be, it is still less trouble than dealing directly with patients on money matters.

I also think that there is a status issue involved. If the doctor does not have to talk about price with the patient, then the doctor is in the position of offering “the gift” of health care. That gives a doctor higher status than that of somebody who is selling you something.

Another point is that when we need health care we are vulnerable, and there is resentment involved in having to pay when you are vulnerable. We feel the same way about charging interest to people who are desperate for money. 2000 years ago, if the only lending had been to growing corporations, then nobody would have complained a bit about the practice of charging interest. Instead, usury was declared a sin because borrowers tended to be people in desperate straits. Even today, the sense of outrage at making vulnerable people pay interest can be seen in the stigma attached to payday lending. Similarly, if you break your arm, having to pay thousands of dollars in hospital bills feels cruel.

Let me repeat Josh Barro’s point that health care is 1/6th of our economy but nobody wants to spend 1/6th of their income on it. When health care spending was lower as a share of GDP, we had the luxury of setting up a system dominated by third-party payments, without the insurance companies or the government imposing difficult restrictions on what procedures could be approved or what doctors could receive in compensation. But health care spending has gotten to be too large a fraction of GDP to be handled that way. The system is bound to change, and the change is bound to feel uncomfortable to many people.

The Alleged Problem of Crony Capitalism

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This commenter is not buying it.

It exists in some industries but it’s swamped by other factors, which creates the high turnover among the Fortune 500. Name an industry outside of healthcare or utilities that is “crony capitalist.” Technology? Retail? It’s hard to name an industry. You could name banking but remember that the ROE at Citi and Bank of America is in single digits. Goldman Sachs isn’t doing much better. A good example of crony capitalism is the mutual fund industry, which benefits from the complexity and limited selection of corporate 401k and IRA plans. But even the asset management industry is being decimated by Vanguard. Overall, the ROE for most of corporate America is around 10-12%, and that’s been true for a long time. It’s been going up recently but mostly due to the effect of low-capital technology firms like Google and Apple, which are not crony capitalist. So my argument is, name a crony capitalist outside of healthcare. It’s hard to do.

My thoughts:

1. I am sympathetic to some of his other comments on the same post, where he argues that right-of-center groups are using the crusade against crony capitalism as a positioning tool. I have never bought into the idea of making that crusade a focal point.

2. It is possible that the forces of market competition tend to win out in the long run, in spite of attempts at government interference. Ray Kurzweil used to say that about government regulation of technology–that regulations were merely stones in the river and the river just rolled over them.

3. Citibank is a dubious example. Without cronyism, I don’t think Citi would have a single digit ROE. I think it would have gone under.

4. If Goldman Sachs is not doing well, it is not for lack of government help. GS was the main beneficiary of the AIG bailout intervention.

5. Although creative destruction still exists, there are many indicators that its pace has been slowing down. See Tyler Cowen’s The Complacent Class.

6. For me, the poster child of crony capitalism is cable TV. From its very inception, it was a corrupt bargain between local governments and the cable companies. A lot of telecom in general is crony capitalist, as can be seen by the large lobbying expenses of the main players. If your measure of competition is firms going under, then telecom seems more cronyist now than it did twenty years ago.

7. If your measure of croynism is lobbying expenses, then the big industries include health care, finance, and housing. Energy is up there. Education is surprisingly big, considering that we think of it as mostly non-profit.

8. If your measure of cronyism is absence of creative destruction among the industry leaders, then higher education should be top of the list.

Michael Mauboussin on Luck

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A commenter recommended him, and I watched this video.

Some interesting points:

1. As skill in an activity becomes more refined, differences in skill at the high levels tend to narrow. As a result, luck starts to play a relatively larger role. In some sense, it took more luck for George Brett to hit .380 than it did for Ted Williams to hit .400. The standard deviation among major league hitters was higher in Williams’ day, so that when batting averages are scaled by standard deviation, Brett’s best year has a higher Z score than Williams’. The AP statistics text that I use has a problem in which the student calculates this. Mauboussin also refers to this example.

2. He says that luck is difficult to define, but a key element is that it is reasonable to say that the outcome could have been different. He opens the talk by telling a story of how he interviewed for his first job out of college and noticed that highest level executive with whom he interviewed had a trash can with a logo of the Washington Redskins. Because he praised the trash can, the high level executive eventually overrode all the other interviewers and gave Mauboussin the job. I have a similar story about getting into Swarthmore College, which I have told here before. A local alumnus interviewed me, and I guessed that he was the father of a guy I had seen wrestle for the state championship. I talked about that match, and when I came to Swarthmore the Dean of Admissions said that the wrestling coach, Gomer Davies, was looking forward to having me on the team. Having no aptitude for wrestling myself, I never went near Coach Davies.

3. He says that extraordinary success comes neither from pure skill or pure luck. You need a high skill level to compete. But beyond that it takes luck to have extraordinary success. Bill Gates had the skill to do well in technology, but his extraordinary success required luck. If you do not know the story of how Microsoft was awarded the role of providing the operating system for the IBM PC in the early 1980s, then you can get an abbreviated version by listening to the Q&A at the end of the talk.

4. He says that when you are the less skilled player, you need to try to complicate the game. Try a trick play, for example. I would add that you should look for short games. The longer the game goes on, the more likely it is that the other player’s skill advantage will win out. Think of a board game (or a business competition) that consists of many moves. Suppose that on each move, the player with more skill has a 51 percent chance of doing better than the less-skilled player, and conversely the less-skilled player has a 49 percent chance of making a better move. In a short game, the lesser-skilled player might win. But if the game goes on for hundreds of moves, the chances of the lesser-skilled player dwindle. I first wrote about this twenty years ago. I still love that essay.

5. He says that our brain has an “interpreter” that is determined to tell causal stories, even if it has to make them up. There are some famous split-brain experiments that demonstrate this. The interpreter prefers explanations that make something appear inevitable, rather than lucky.

I would illustrate this with the financial crisis of 2008. Although economists did not anticipate the crisis beforehand, they explain it now as if it were inevitable. I just finished Days of Slaughter, Susan Gates’ insider’s account of the fall of Freddie Mac, and it reminds me of the role played by bad luck, in particular the unfortunate choice made by Freddie Mac’s Board to install as CEO in 2003 one Richard Syron, who combined an absence of experience in mortgage lending with an arrogant unconcern for that lack of experience. Another CEO might have charted a different course for Freddie Mac, and for the entire housing market.

Another illustration is the election of Donald Trump. It was very much a random event, but everyone’s interpreter strains to see it otherwise.

6. During the Q&A, he considers the issue of whether popular opinion is right or wrong. When does the wisdom of crowds become the madness of crowds? He says that a necessary condition for wisdom of crowds is diversity of opinion. The crowd is most at risk of going wrong when there is what he calls a “diversity breakdown,” and everyone is thinking alike.

And a Lot Less Rock ‘n’ Roll

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Peter Beinart thinks we need a whole lot more religion.

Maybe it’s the values of hierarchy, authority, and tradition that churches instill. Maybe religion builds habits and networks that help people better weather national traumas, and thus retain their faith that the system works. For whatever reason, secularization isn’t easing political conflict. It’s making American politics even more convulsive and zero-sum.

For years, political commentators dreamed that the culture war over religious morality that began in the 1960s and ’70s would fade. It has. And the more secular, more ferociously national and racial culture war that has followed is worse.

My thoughts.

1. He is not the first to suggest that bad things happen when politics comes to fill a void left by a decline in religion.

2. I am glad that there are people on the left who would like to see the heat turned down in politics. The Three Languages of Politics is my attempt to help with that project. The revised edition is due out soon.

3. I hope that the left did not discover that political warfare is ugly only because of their shocking defeat in November. Instead, I would prefer to believe that Beinart would have written the same essay decrying politico-religious movements on both sides even if the requisite thousands of votes in key states had gone a different way and Hillary Clinton had won the Presidency.