Tyler Cowen Sets a Trap

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In an NPR discussion about the deal struck by President-elect Trump with Carrier to keep a plant in Indiana, he says,

There’s plenty of talk that the reason Carrier went along with the deal was because they were afraid their parent company would lose a lot of defense contracts. So this now creates the specter of a president always being willing to punish or reward companies depending on whether or not they give him a good press release.

Why would progressives be inclined to agree with Cowen?

1. They hate Mr. Trump.

2. They do not agree that keeping this plant in Indiana served a compelling and long-standing public purpose. They might even understand that we have an economy in which free trade ultimately is what serves the public purpose.

3. They do not like the idea of businesses being offered carrots and sticks to do things to allow a president to score points with a constituency (“give him a good press release.”)

4. They do not like the idea of policy made in an ad hoc manner between the president and an individual firm, as opposed to policy that is embedded in legislation that affects all firms.

The trap here is that because of (1) progressives might start to reflect on (2) – (4).

Consider, for example, the Obama Administration’s mandate for contraception coverage in health insurance. This forced some businesses, such as Hobby Lobby, to offer contraception coverage when they did not want to do so. How did this differ from what Mr. Trump did to Carrier?

1. Progressives do not hate Obama. However, on reflection they would realize that this cannot be a defense of the contraception mandate.

2. Progressives believe that contraception coverage is important. However, if you took a vote, I bet that more people would prioritize “keeping jobs in America” than having contraception coverage in health insurance. It seems to me that the “compelling and long-standing public purpose” argument would be a stretch.

3. The contraception mandate certainly allowed the Democrats to score points with a constituency that they consider important. It was an important issue for feminists. So I do not think that you can find the difference between the contraception mandate and the Carrier deal here.

That leaves only (4). The contraception mandate was given to all health insurance providers under the Obama Administration’s interpretation of the Affordable Care Act. It represents the rule of law (ish) and not a one-off transaction. Even there, Donald Evans makes the counterpoint (in the same NPR discussion) that

I don’t think it’s a bad thing for the president to send the strong message to the workers of America that he’s going to create the environment for them to do well right here and – and send that same message to the corporations of America.

Mr. Evans seems to me to be saying that Mr. Trump will put generic policies in place that will pursue the goal of keeping plants in America. One can argue that the goal of this deal was not to set a precedent for one-off deals but instead to signal a forthcoming change in policies that will be administered under the rule of law.

As a libertarian, I do not believe that “keeping plants in America” should be a goal for public policy. I believe instead in patterns of sustainable specialization and trade, which includes making efficient use of labor and other resources from other countries. I also believe that contraception coverage is something that should be negotiated between individual households and health insurance providers. Maybe if progressives fall into the trap set by Tyler Cowen, a few of them will start to see where I am coming from in my point of view.

What Signals Should the Left Send to Mr. Trump?

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A famous story about the Cuban Missile Crisis is that at the height of the crisis the Kennedy Administration received two messages from the Kremlin. The first message suggested an interest in resolving the crisis peacefully, but the second message was strictly belligerent. The Kennedy people deliberately chose to ignore the second message and instead reply to the first. This tactic produced a peaceful resolution of the crisis.

In general, when X and Y are in conflict, if each side believes that the other is not interested in a fair resolution, the conflict can only escalate. A necessary condition for the conflict to be resolved is that X must believe that Y is interested in resolution, and conversely. It is each side’s beliefs about the other side’s strategy that matters. If X thinks that Y’s strategy is to prolong or escalate the conflict, then X will tend to adopt a stance that appears intransigent to Y.

A challenge is to send clear signals that you are interested in resolving the conflict. When you send mixed signals, the other side can easily focus on the negative signals and take the view that you are not interested in peaceful resolution.

For example, an often-suggested formula for resolving the conflict between Israel and the Palestinians is “land for peace.” The problem is that many Israelis are convinced that the Palestinians do not really want peace, and many Palestinians believe that the Israelis do not really want to give up land.

Each side sends mixed signals to each other. For example, Israeli leaders might talk about a two-state solution but at the same time expand Israeli settlements. Palestinian leaders might talk about peace but at the same time try to de-legitimize Israel internationally. In this context, each side tends to dismiss any positive signals from the other side. Believing that the other side does not want a settlement reduces your incentive to send only positive signals. So the process of sending negative signals becomes self-reinforcing.

Now, apply this to the left and to Donald Trump. A reasonable “settlement” would be for the Left to stop fighting the election results and for Mr. Trump not to infringe on the rights of gays, Muslims, and other minorities. Right now, I don’t think that either side is concentrating on sending positive signals.

Many of my friends on the left insist that we cannot wait until something bad happens–we have to denounce Mr. Trump and Mr. Bannon right now. The alternative that I have suggested is that people on the left (and others) should send a positive message of support and solidarity with Muslims and gays anxious to preserve their legal rights. This message would not include any denunciation of the Trump Administration.

Such a message would send a signal that we will not sit idly by while rights are infringed. It would implicitly offer a reasonable settlement of the conflict, and put the onus on Mr. Trump for refusing to settle.

The more aggressive and pre-emptive confrontational approach that many are taking gives Mr. Trump little or no incentive to change his behavior. In effect, people are saying, “We are going to assume that you have no desire to peacefully resolve our conflict, and you can assume the same thing about us.” If your goal is to try to escalate the conflict, then that is exactly the right approach. But if you have more constructive goals in mind, then I suggest thinking carefully about the signals that you choose to send.

College Inefficiency

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Steve Pearlstein writes,

“The American university is a grand political accommodation,” says Richard Vedder, an Ohio University economist and founder of the Center for College Productivity and Affordability. College presidents, he argues, appease faculty members by giving them control over what and how they teach. They appease students and parents with high grades and good facilities. They appease alumni with expensive sports teams. They appease politicians with shiny new research centers. “The idea is to buy off any group that might upset the political equilibrium,” Vedder said.

Pearlstein goes on to suggest four steps that colleges could take (but won’t) to cut costs.

Higher education in America is a classic case in which public policy seeks to subsidize demand while restricting supply. Just as in the case of housing, the subsidies largely serve to drive up prices. And as Alex Tabarrok points out,

Prices aren’t rising because costs are rising, however, costs are rising because prices are rising.

Accountability and the Administrative State

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On Thursday, I attended an event at Cato where the authors of a new book, What Washington Gets Wrong, presented some of their findings. They had the cute idea of doing an opinion survey of Washington insiders, to find out what they think about the public and to find out how well the insiders’ views correlate with those of the outsiders. I purchased the book and at some point I will check out its contents. Meanwhile, I found myself more stimulated by a conversation I had afterward with Cato’s Mark Calabria, who has experience as a Senate aide.

What Mark believes, and it sounds right to me, is that we have the Administrative State (in which unaccountable and un-elected bureaucrats make important decisions) because Congress wants it that way. For Congress, making the actual policy decisions has more down side than up side. Constituents whose families or businesses are adversely affected will cause a lot of trouble.

Thus, the Administrative State is an adaptation that emerged with the purpose of moving decisions away from a body that is relatively responsive to the people (Congress). You may not like it, but there it is.

There may even be reasons to believe that this adaptation is a feature rather than a bug. That is, you might want decisions to be made by people who have expertise and who are focused on the general interest rather than the particular interests of constituents. This was the view offered by a (non-libertarian) guest speaker at the Cato event.

If what you want is an organization that is accountable to its constituency, then I would argue that you want is a market process rather than a government process. While the government process adapts to diffuse accountability, the market process forces businesses to be accountable to their customers.

In the 1980s and 1990s, many American businesses discovered that their bureaucracies were undermining the firm’s responsiveness to its customers. Under competitive pressure, businesses reformed by adopting “business process re-engineering” and other management tools to ensure a better customer experience. Prior to this wave of reform, a customer’s problems would get buried in the corporate bureaucracy, with no one taking responsibility for finding a solution. Following these reforms, customers encountered businesses that were capable of solving problems, and better yet, anticipating the customer’s wants and avoiding causing problems in he first place.

Government agencies are capable of making these sorts of organizational changes. The guest speaker cited the passport office of the State Department as having become much more responsive in recent years. In side conversations afterward, a couple of Cato folks admitted that the infamous Department of Motor Vehicles in DC is better than it was twenty years ago. But I think you get improvement more rapidly and more reliably when there is market competition.

Peter Turchin’s Latest Book

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It is called Ages of Discord: A Structural-Demographic Analysis of American History, and I received a review copy. I am not very far into it. An alternative title might be “Average is over. . .and maybe so is everything else.” From the back cover:

Historical analysis shows that long spells of equitable prosperity and internal peace are succeeded by protracted periods of inequity, increasing misery, and political instability. These crisis periods–“Ages of Discord”–have recurred in societies throughout history. Modern Americans may be disconcerted to learn that the US right now has much in common with the Antebellum 1850s and, more surprisingly, with ancien regime France on the eve of the French revolution.

I will have some problems with his approach to history, if what he says on p.6-7 is any indication.

What we need is theory in the broadest sense, which includes general principles that explain the functioning and dynamics of societies and models that are built on these principles, usually formulated as mathematical equations or computer algorithms. Theory also needs empirical content that deals with discovering general empirical patterns, determining the empirical adequacy of key assumptions made by the models, and testing model predictions with the data from actual historical societies.

This sounds like it borrows some of the more dubious methodological doctrines of economics. I have been arguing that mental processes are important in explaining social outcomes. I fear that the emphasis on mathematical equations and data leads instead to a focus on physical processes, to the neglect of mental processes. I do not think that Turchin will turn out to be such a physical determinist. But we will see.

Somewhat related: Yascha Mounk on indicators of fragility in democracy.

The first factor was public support: How important do citizens think it is for their country to remain democratic? The second was public openness to nondemocratic forms of government, such as military rule. And the third factor was whether “antisystem parties and movements” — political parties and other major players whose core message is that the current system is illegitimate — were gaining support.

Pointer from Tyler Cowen.

Turchin also uses indicators, but his set is different.

Freddie, Fannie, and so-called Privatization

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The WaPo reports,

Steven Mnuchin, President-elect Donald Trump’s nominee to lead the Treasury Department, said Wednesday that privatizing Fannie Mae and Freddie Mac is “right up there on the top-10 list of things we’re going to get done,” setting off a buying frenzy among investors.

I am very leery of this. My preferred approach for getting the government out of the mortgage market is the following:

1. Immediately stop any government support for cash-out refinances, second mortgages, and investor loans. Restrict support to owner-occupied purchase mortgages or refinances that lower the rate and term of the mortgage without the borrower taking out equity. Leave all the other mortgages to the private sector.

2. Gradually lower the maximum loan amounts for government support. As you do this, the private sector will have to fill in. If somebody steps up to issue mortgage-backed securities, fine. If instead what emerges is a model with banks holding the mortgages they originate while using long-term funding methods, then that is fine, too.

If you were to suddenly “privatize” Freddie and Fannie, you might end up restoring the status quo prior to 2008, with these institutions enjoying “too big to fail” status. They can use that status to borrow cheaply in credit markets and behave like hedge funds. I can remember when they were doing exotic things involving securities denominated in foreign currency that had nothing to do with their supposed “mission” of helping housing. These exotic transactions did not cause the firms to blow up then–because they blew up on credit risk instead.

I really detest the model of privatized profits and socialized risks. If you are going to privatize Freddie and Fannie, then you have to figure out a regulatory scheme to avoid socializing the risks. It’s not easy.

Trumpophobia Wager Update

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I received a couple of interesting proposals in response to my post that asked if this is really 1933. One of the authors gave me permission to reprint his proposal.

I’d want to bet on whether, between January 20, 2017 and January 20, 2021, Congress will pass and the President will sign legislation that does one or more of the following.

(a) compels the registration, internment, or deportation of a class of US citizens based on their ethnicity, national origin, or peacefully expressed religious beliefs;

(b) confiscates firearms from members of such a class based on one of the above (this would have to be across-the-board confiscation from all members of the class: the proposed restrictions on people on the “no-fly list” would not, however odious in themselves, qualify);

(c) compels members of such a class to sign loyalty oaths or face criminal penalties;

(d) empowers domestic law enforcement agencies to carry out warrantless searches and seizures of the physical property of US citizens beyond the existing recognized “Fourth Amendment exceptions” like airport security;

(e) allows _indefinitely extensible_ administrative detention of US civilian citizens without right of habeas corpus, whether “terrorist suspects” or otherwise (as I understand it, the PATRIOT Act already allows short-term administrative detention but with clear time limits);

(f) criminalizes “false or malicious writing” opposing US government policies or officials, in the senses previously criminalized by the Sedition Acts of 1798 or 1918.

In order to bet, we would have to negotiate further. I do not think that each of the possibilities in his list rises to the level of the steps that the Nazis took that I listed in my original post. However, this proposal does serve the purpose of expressing reasonable concerns.

What I come away with in the case of both proposals is that a reasonable concern is over-reaction to terrorism. For example, if Mr. Trump had been in office when Monday’s attack at Ohio State occurred, it is conceivable that some broad measures against Somali immigrants would have been adopted. I believe that if terrorist attacks escalate in terms of frequency or casualties, the possibility of a reaction of this sort will increase. It is reasonable to warn against an over-reaction.

However, I would consider such an over-reaction more comparable to FDR’s internment of Japanese than to Hitler’s war on the Jews. Jews did not commit the equivalent of 9/11 or Pearl Harbor against Germany.

Moreover, no one foresees a scenario in which Mr. Trump’s personal paramilitary force rounds up and shoots political opponents. And no one foresees a scenario in which Congress votes to effectively abolish itself and grant all power to Mr. Trump, as the 1933 Enabling Act did in Germany.

In general, I think that the cries of outrage at Mr. Trump’s victory are a risky strategy for his opponents. If he indeed commits some outrage against a group of citizens, then you get to say “I told you so.” Meanwhile, however, I suspect that social media outcries and demonstrations will alienate everyone who is not already inalterably opposed to Trump, particularly those of us who are prepared to give him a chance.

A Note on the Oppressor-Oppressed Axis

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A commenter writes,

It seemed obvious to me that one could apply the oppressor-oppressed axis by noting that Castro was the oppressor and the Cuban people were the oppressed.

I need to clarify that the oppressor-oppressed axis is not about oppression per se. It is about classifying certain groups as inherently oppressed and others as inherently oppressors. A couple of generations ago, the Left would have considered manufacturing workers to be oppressed. Today American manufacturing workers (and former manufacturing workers) are treated as oppressors, because they are white. Meanwhile, very affluent people can be seen as oppressed, because of their skin color or sexual orientation.

In the case of Cuba, poor Cubans were granted the status of “oppressed,” and rich individuals and corporations had the status of oppressors. Castro, who personally accumulated hundreds of millions of dollars in net worth while he was dictator, was regarded as a friend of the oppressed because the government provided the health care system.

When it is applied appropriately (for example, during the Civil Rights movement in the early 1960s), the oppressor-oppressed model is to the Left’s credit. However, when applied unthinkingly or hypocritically, I think it discredits the Left. Some progressives realize this, but many do not. I think they would benefit from reading my revised Three Languages of Politics when it appears next year.

The Fake News Problem

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Typical Washington Post Headline:

D.C. Council to vote on nation’s most generous family leave law: 11 weeks off, up to 90 percent pay

Note the modifier “generous.” Not “intrusive” or “coercive” or “attempting to be generous with other people’s money” or “blithely unaware of unintended consequences.” Just “generous.” Why didn’t every government think of that? Why not have a whole year off, with 150 percent of pay? That would be even more “generous.”

Interestingly, the print edition had a much more neutral headline, but the lead paragraph still refers to the potential for a “generous” paid leave policy.

I see this editorial bias in many stories, particularly the local ones. I have remarked before how the Montgomery County School system is always described as having an “excellent reputation,” when the only thing that is excellent about it is the pay and benefits lavished on the employees, most of whom are not classroom teachers. The outcomes, which the Post never looks at, but which are readily available on the state department of education web site, are mediocre.

Finally, I would note that the Post‘s coverage of Fidel Castro was much less antagonistic than its coverage of Donald Trump. This is a case where I think that the attempt to view a phenomenon along the progressive oppressor-oppressed axis, and accepting Castro’s self-designation as a savior of the oppressed, is pathetically misguided. Instead, conservatives who view Castro as barbaric along the civilization-barbarism axis and libertarians who view him as coercive along the liberty-coercion axis strike me as much more sensible.

One of my fantasy jobs is “conservative curmudgeon” at the Post. I would write a weekly column listing all of the biases I find each week in the paper, most of which are not even in the editorial section. Maybe next year I will start a regular weekly series of blog posts along those lines.

Defining Terms in the Social Disciplines

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Chelsea Leu writes,

Chemists don’t squabble about what oxygen is, but if psychologists convene a conference on a fuzzier concept like “trust,” says Colin Camerer, an economist at Caltech, they’ll spend the first two days disagreeing about what the word actually means.

Pointer from Tyler Cowen.

I agree that many important terms in the social definitions are poorly defined. Examples include trust, culture, and happiness. Ethnicity, which is very important in political studies, may not be well defined. I am not sure that such terms as extroversion or openness are well defined. Even IQ may not be that well defined.

Security prices are well defined. As a result, theory and empirical research in finance tends to be more robust than elsewhere in economics. However, even finance has its less well-defined concepts, such as “expectations.”

I should point out that the problem of poorly-defined terms arises not because social scientists are less intelligent or careful than natural scientists. The problem is that social science has to deal with phenomena of the mind. Oxygen is part of the physical world. Trust and extroversion exist in the mental world.

I have noted that in all of the social disciplines there is a bias in favor of explaining outcomes on the basis of physical phenomena, such as natural resources and physical capital, rather than on the basis of mental phenomena, such as culture and institutions. In part this may reflect frustration with the challenge of defining terms when describing mental phenomena.

Although exhortations to social scientists to define terms may be helpful, I think it is important to understand that exhortations alone cannot solve the problem. Mental phenomena are harder to pin down.