Et tu, Tyler?

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Tyler Cowen writes,

inflation would leave many workers with permanently lower wages, as in essence the central bank would be giving them a wage cut that their own employers probably would not have dared. Maybe wages would adjust upward over the years, but workers would not be guaranteed this recompense.

I disagree with many of the views that are either explicit implicit in this column.

1. I do not endorse the view that economy-wide increases in prices help to increase employment by lowering real wages. To put this another way, I do not endorse the view that the real wage rate is countercyclical.

2. I do not endorse the view that the Fed can fine-tune the rate of inflation.

3. I do not endorse the view that higher inflation would be easier to live with. Prices are signals, and higher inflation creates more distortion in those signals.

Final Meditations on the Election

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Tyler Cowen writes,

Now, social media make it possible for a candidate’s reach to far exceed his or her internal capabilities to formulate policy. Even at this very late stage, we still don’t have much sense who Trump’s advisors would be or what his cabinet would look like.

I recommend the whole column. Meanwhile, here are my final thoughts.

1. I can think of two positives for Mrs. Clinton. One is that she strikes me as more capable then Mr. Trump of reading and digesting information. Another is that she will have access to the best and the brightest among Democratic advisers. On the Republican side the best and the brightest are NeverTrumpers, and I don’t see Mr. Trump reaching across those burned bridges. I do worry that Mrs. Clinton is so personally insular that instead of relying on wise figures on her side she will remain ensconced with her immediate entourage of unimpressive long-time aides.

2. Unfortunately, the best and the brightest on the Democratic side are not as good as they were two decades ago, because the whole country has moved to the left. Indeed, Mr. Trump strikes me as more like Huey Long than Barry Goldwater. When Bill Clinton was President, a lot of leading figures in the Democratic establishment had genuine respect for markets. Today, that is not the case.

3. I can think of one positive for Mr. Trump. He would sign a bill to repeal and replace Obamacare with a more market-oriented alternative. Instead, with Mrs. Clinton, government will try to fix the problems it has caused by exerting more control, which is likely to make things worse.

4. I think that the main theme of the election is cosmopolitan vs. anti-cosmopolitan. I take the cosmopolitan side, which alienates me from Mr. Trump and his supporters.

5. Another theme is elite vs. anti-elite. There, I don’t have a dog in the race. I would generally side with an elite, but it needs to be a humble elite. We mostly have an arrogant elite, which I fear is even worse than a non-elite.

6. When I was in Boston last week, I overheard a concierge in an apartment building claim that Mr. Trump is one of the greatest businessmen of all time. Similarly, I have seen Facebook posts from supporters of Mrs. Clinton extolling her long career in public service. I get the sense that there is a tendency to vastly over-rate the candidate that one supports. I find that sad and troubling.

7. As the campaign has progressed, my impressions of Mrs. Clinton, Mr. Trump, and Gary Johnson have all suffered declines. Still, I plan to vote for Mr. Johnson.

Health Care Policy and Reality

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CNN reports on the way that my own Obamacare expenses (my premiums plus deductible for next year will be close to 40 percent of my 2015 adjusted gross income) are not unusual.

“These costs are largely a symptom of the fact that medical costs in this country are extraordinarily high,” said Kevin Counihan, CEO of the federal exchange, healthcare.gov. “We have an 800-lb gorilla here, which is exploding health care costs.”

1. Regardless of what economic theory suggests about health care policy, the political system is heavily biased toward stimulating demand while restricting supply. For example, Obamacare stimulated the demand for health insurance through a combination of mandates and subsidies, and yet it restricted supply in that it gave consumers fewer choices. Hence, the “exploding health care costs.”

However, this political bias has operated much more broadly and for much longer. Medicare and Medicaid stimulated demand, while supply has been tightened by restrictions on medical licensing, practice regulation, and regulatory limits on hospital construction.

The most economically beneficial reforms of health care would run counter to this political bias. That is, they would serve to increase supply and cut back on the stimulus to demand. Of course, such reforms are not going to be popular politically.

2. The hope that a single-payer system will reduce costs is misplaced. Compared to what many major industrial countries spend on health care, we spend a higher proportion of our GDP on Medicare alone. [UPDATE: a commenter pointed out that I need to include Medicaid. In fact, I also need to include government employee benefits. See the table from the OECD which is found in this piece by Megan McArdle. As I pointed out ten years ago in Crisis of Abundance, our high spending reflects a willingness to undertake a lot of medical procedures with high costs and low benefits.

3. As individuals, each of us would like unlimited access to medical services without having to pay for them. Collectively, we cannot afford this, because it leads to over-utilization and waste. As our rate of health care spending becomes unsustainable, we are going to get a combination of third-party rationing (denial of coverage for some medical services in some situations) and self-rationing (insured individuals facing higher deductibles and co-pays will choose not to obtain some medical services). If the left has political control over health care policy over the next ten years, I expect to see more third-party rationing. If the right has political control over health care policy over the next ten years, I expect to see more self-rationing.

4. A two-tier health care system is all but unavoidable. If the government provides basic health care for all, then the rich will go outside the system for expensive procedures. For example, Canadians can come to this country for treatments that they cannot obtain in Canada. If the government limits its involvement to providing health care vouchers to poor people, then they will not be able to afford the services that the rich are able to obtain.

5. New discoveries in health care tend to make existing programs and policies anachronistic. The FDA is often a roadblock to innovation. Medicare and Social Security have not adapted to greater longevity. Incentives for innovation are too dependent on the patent system, as opposed to prizes or other methods. New forms of health insurance, such as “insurance against becoming uninsurable,” need to be tested in the market.

Defining Culture: A Good Question

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From a commenter.

if you read a book from another culture, or even an older time period, and it influences you, is it part of your culture?

In everyday use, the term “culture” usually connotes thought patterns and behavioral tendencies that are widely shared within a community, and they may be unique to a particular time and place. The definitions I have been proposing do not included this connotation.

For now, I am willing to stick to the simple definition of culture as socially communicated thought patterns and behavioral tendencies. I would remark that these patterns are almost always shared within a community, because most communication takes place within a community. When you are influenced by a source outside of your usual community, you are going to be a bit of an oddball, unless you can convince your close associates to adopt the novel influence.

I would add that an interesting issue within a community is the kind of alternatives and alien influences that people are willing to tolerate among other members. I do not think that “tolerance” is a purely scalar variable, with some communities having more and some having less. Rather, I think that tolerance is multidimensional, with some communities more tolerant along some dimensions and less tolerant along others. So if in 1950 the typical American could tolerate the N-word but not the F-word, and today it is the reverse, that fact does not tell us that people today are more or less tolerant along some non-existent scale.

Joseph Henrich Defines Culture

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Since I was talking about the challenge of defining culture, we should look at how Joseph Henrich defines it in The Secret of Our Success, an important book that I have referred to often (most notably in this piece for National Affairs). On p. 3, he writes

By “culture” I mean the large body of practices, techniques, heuristics, tools, motivations, values, and beliefs that we all acquire while growing up, mostly by learning from other people.

That’s all he has to say in terms of definition, which leaves some questions unanswered.

1. Why the qualifier “while growing up”? It implies that we reach an age at which the receipt of cultural transmission stops, which seems odd. What empirical or theoretical problems does Henrich think he is avoiding by including the qualifier, rather than taking the view that cultural transmission can be received at any age?

2. Why the qualifier “mostly”? If it were me, I would be tempted to partition our personalities into three components: biologically innate; acquired through our own experience with nature; and learned from other people. Of course, any single behavioral tendency or thought pattern can be the product of all of these components, so that the precise partition may not be readily applicable. Still, I would make the general point that much of our behavioral tendencies and thought patterns are learned from other people, either directly or indirectly. In fact, that might serve as a one-sentence statement of the thesis of Henrich’s book. But in the definition of culture, I would drop the “mostly” and say that to the extent that a behavioral tendency or thought pattern is not learned from other people, then it is not cultural. In that case, it is mostly innate and/or learned through our own experience. If culture includes more than what we learn from other people, then what does it not include?

3. Note the inclusion of “tools,” which goes beyond my shorthand of “behavioral tendencies and thought patterns.” While we are at it, why not include consumer goods, or at least say that consumer goods are included as “tools” that help satisfy our wants? If we are going to include tools, then don’t we have to include institutions? Note that “institutions” is another term that gets used to mean many things, so we would do well to define it, also.

But perhaps instead of broadening the definition of culture, why not narrow it? Tools and institutions in part act as channels for socially communicating thought patterns and behavioral tendencies. But why not define culture itself as socially communicated thought patterns and behavioral tendencies (which I think covers everything other than “tools” in Henrich’s definition)?

Anyway, I think that if Henrich were to embark on another edition of the book, I would encourage him to spend several pages discussing the definition of “culture” and related terms, rather than leaving it to one off-handedly casual sentence.

Ben Bernanke takes on Sebastian Mallaby

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Bernanke writes,

Mallaby’s argument that Greenspan should have known that a tighter monetary policy was appropriate in 2004-2005 (if that was in fact the case!) strains credulity. In 2003 the Fed was navigating a deflation scare and a jobless recovery from the 2001 recession—no net payroll jobs were created in the U.S. economy over 2003—which had led the Federal Open Market Committee to cut the fed funds rate to a record-low 1 percent. The FOMC did not stay at that level for long, however; Greenspan began to prepare the ground for a rate increase in January 2004, when the Committee’s language about keeping policy accommodative for a “considerable period” was modified. As Brad DeLong has pointed out, citing the FOMC transcript, at that point Greenspan was far from certain that the rise in housing prices was a nationwide bubble or that it could pose a threat to financial stability. Indeed, much of the increase in housing prices was still to come

Pointer from Tyler Cowen. Read the whole thing. I take Bernanke’s side on this one. Feel free to re-read my earlier post on Mallaby.

Confirmation Bias in Macroeconomics

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Prakash Loungani writes,

The evidence shows the “cycs” have been proved largely right. U.S. unemployment has fallen pretty much in line with the recovery in output. U.S. states where growth was stronger than the national average had declines in unemployment greater than the national average. And looking across the globe, countries which experienced more rapid growth than the global average — a group which includes the United States and the United Kingdom — had declines in unemployment greater than the global average.

Pointer from Mark Thoma. His point is that this vindicates the theory of aggregate demand. My response: as opposed to what? A theory that output and employment are totally unrelated? Whose theory is that? In fact, employment and output should be correlated whether one is telling a PSST story or an aggregate demand story.

The usual notion of confirmation bias is that people over-rate findings that favor their preferred point of view. But macroeconomists go beyond this. They take findings that are completely neutral in their implications for one point of view vs. another and claim that these findings confirm their preferred point of view.

Mugged by Reality: My Obamacare Notice

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Yesterday in the mail, my wife and I got our premium notice from the health care exchange. Our monthly premium is going up 70 percent, and our deductible is going up also.

I wonder if any of the pundits who claim that Obamacare is working are actually getting their health insurance through an exchange.

I wonder how many of us who have not supported Donald Trump are feeling mugged by reality.

Joel Mokyr Interviewed

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He says,

It isn’t just that China doesn’t have an Industrial Revolution, it doesn’t have a Galileo or a Newton or a Descartes, people who announced that everything people did before them was wrong. That’s hard to do in any society, but it was easier to do in Europe than China. The reason precisely is because Europe was fragmented, and so when somebody says something very novel and radical, if the government decides they are a heretic and threatens to prosecute them, they pack their suitcase and go across the border.

Without an exit option, voice does not get you very far.

Honestly, I did not notice the small type in Mokyr’s new book until commenters pointed it out to me. Maybe at my age, every type face looks small.

What I did notice is the tsunami of citations. There are something like 40 pages of references, with something like 20 works listed on each of those pages. It is quite overwhelming. That, along with the fact that Mokyr usually refrains from making definitive judgments* makes the book somewhat ponderous. But I will withhold overall judgment until I am finished.

*As my father used to say, the First Iron Law of Social Science holds (“Sometimes it’s this way and sometimes it’s that way”)

And Again

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Jason Richwine writes,

Last year the Education Department announced that math and reading scores on the National Assessment of Educational Progress had declined since 2013. Though the decline was small (and not much to worry about), the announcement ruined the Obama administration’s case that its education policies were vindicated by rising scores. Now a new report from the Institute of Education Sciences (IES) has questioned the efficacy of one of the most consequential of those policies – the “Race to the Top” grants.