The Expert or the guy in the Bar?

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Sebastian Mallaby writes,

The saving grace of anti-expert populists is that they do discredit themselves, simply because policies originating from the gut tend to be lousy.

…Democracy is strengthened, not weakened, when it harnesses experts.

Read the whole essay, which gives you insight into Mallaby’s world view, as well as a few tidbits from his biography of Greenspan. I strongly recommend the book, although I am quite opposed to his world view.

A Sebastian Mallaby or David Brooks will ask: who would you rather have in charge? An expert, or a random guy in a bar?

If that indeed is the choice, then give me the expert. But I want an option that says “None of the above.” Or, to put it another way, I want an expert with so much humility that the expert does not try to mess with orders that emerge naturally. Unfortunately, we live in a society in which “humble expert” has become an oxymoron.

Tyler Cowen on the Universal Basic Income

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He writes,

If two able-bodied people live next door to each other, and one works and the other chooses to live off universal basic income checks, albeit at a lower standard of living, I wonder if this disparity can last. One neighbor feels like she is paying for the other, and indeed she is.

Compared to what, Tyler? Today’s fragmented hodge-podge of programs puts many of the working poor in 100 percent tax brackets. If the problem is to give able-bodied males an incentive to participate in the labor force, the solution is not to maintain a system in which somebody who earns $30,000 a year is no better off than someone who earns $10,000 a year.

Maybe the term “universal basic income” sends the wrong signal. How about “repeal and replace food stamps, housing subsidies, welfare, and Medicaid with a negative income tax?”

Brad DeLong on Joel Mokyr’s New Book

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DeLong writes,

perhaps 10,000 well-educated Europeans thought of themselves as participants in the search for useful knowledge. Knowledge flowed between them and the tens of thousands of “trained engineers, capable mechanics, and dextrous craftsmen”, the (rather few) industrialist-inventors such as Josiah Wedgwood, and the (rather more) entrepreneurs who had little abstract interest in science or innovation, but found that in a competitive market economy, the dynamic few drag along the inertial many.

DeLong says that he prefers the view of Robert Allen. who

places the origins of the Industrial Revolution in the British Midlands in the eighteenth and early nineteenth centuries. In Allen’s view, the only route to modern economic growth required an array of elements never seen together before in Britain. Among them were high, imperialism-driven wages; cheap coal next to an ample canal network; and an open trading network allowing for a vast expansion of textile exports.

Here, you can see the contrast between a materialist view (Allen’s) and an idea/culture view (Mokyr’s). I think that this is a very important division in economics, and I am strongly on the idea/culture side.

I have been thinking about this in the context of my latest book Specialization and Trade. I ask myself, what would make someone unable to grasp its insights? I think that the bias toward materialist explanations of social phenomena is a major factor. What seems obvious to me, coming from a culture/idea perspective, is just downright baffling to people who instinctively think the other way. (Note that Brad has thought about these issues–he is not just coming at them from instinct.)

Michael Mandel and Dietrich Vollrath on Manufacturing Productivity

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Mandel writes,

Since 1994, multifactor productivity has declined in nine out of 18 domestic manufacturing industries. And if domestic manufacturing can’t become more efficient, it will have a tough time competing in the global economy and an even tougher time adding jobs.

Multifactor productivity sounds like something that is tangible and very important. But it is basically what is left over after you subtract from the value of output the measured value of all inputs, including capital. So, if you under-estimate the value of some input, you over-estimate multifactor productivity, and conversely.

Mandel goes on to write

there’s a simple way that domestic factories can increase their productivity, expand their market share, and hire more workers. The answer (perhaps surprisingly) is to invest more in information technology.

Actually, if the value of new capital investment is properly measured, more investment will not increase multifactor productivity at all. Mandel may be correct that manufacturing is ripe for more investment in information technology. But basing his argument on multifactor productivity does not persuade me.

Speaking of the meaning of productivity measurements, Dietrich Vollrath has a nice rant (pointer from Mark Thoma). One of many excellent paragraphs:

If MFP is stagnant but the manufacturing sector has shed workers, then this means either value added in manufacturing has fallen (it has not) or the other inputs like capital have risen (they must have). This indicates that labor productivity, value-added divided by number of workers only, must be rising.

Interventionism

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Noah Smith writes,

economists were more likely than the public to support the U.S. auto bailouts, by 58.6 percent to 52 percent. They were also more likely to support President Barack Obama’s economic stimulus bill, by 52.8 percent to 43.4 percent. More economists — over 97 percent — were in favor of tax hikes, and fewer supported school-voucher programs.

He cites a paper by Sapienza and Zingales.

On a related note, Barry Eichengreen praises capital controls.

It’s fair to say that the vast majority of economists are deeply skeptical about (if not downright hostile toward) their imposition. Yet it is not hard to find evidence in international financial markets of the kind of distortions that are likely to lead to imperfect information and, as a result, to economically inefficient and socially undesirable outcomes.

Pointer from Mark Thoma.

In a related essay, Smith argues that the current debate in economics is between the center-left and the radical left.

The New Center-Left Consensus is attractive to academics and policy wonks. It draws on an eclectic mix of mainstream economic theory, empirical studies and historical experience. It refuses to assume, as many conservatives and libertarians do, that free markets are always the best unless there is a glaring case for government intervention. It’s more willing to entertain all kinds of ways that government can improve the economy, from welfare to infrastructure spending to regulation, but it also recognizes that these won’t always work. . .

But there’s a second strain of progressive economic thinking that is gaining attention and strength. This alternative could be called the New Heterodox Explosion. It’s basically a movement to purge mainstream economics from progressive policy-making and thought.

Smith and the left dismiss those of us who favor free markets as outmoded and simple-minded. So the real debate is between economists who believe that elite mainstream economists know best how to fix the economy and others who believe that complexity theorists or evolutionary economists know best how to fix the economy.

I think that he accurately portrays the state of the discussion. I cannot think of a period in my life when market-oriented economists had less respect, unless it was the early 1960s when “fine tuning” had yet to be discredited.

AT&T and Time-Warner

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Tyler Cowen writes,

it is hard to see where the efficiencies from the deal are supposed to come from

That is an understatement. AT&T seems to have some combination of excess cash and ability to borrow at attractive interest rates. If I were a shareholder, I would want the company to pay me a large dividend, and then leave it up to me how much I want to invest in Time-Warner.

My guess is that the people who want to block the merger are concocting scenarios of bad behavior or excessive control that are highly implausible. However, I find scenarios in which the merger provides social benefits to be at least as implausible.

I see this sort of transaction as indicative of some sort of distortion in capital markets. One or both of those companies should have returned more cash to shareholders, and for some reason they didn’t.

Timothy Taylor on Home Ownership Trends

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He writes,

Notice that homeownship rates tend to be much lower in large cities: indeed, if a homeownership rate below 50% seems implausible to you, you might reflect on the fact that this is already a reality in US cities. Notice also that homeownership rates in the Northeast and West regions are already below 60% (of course, this is in substantial part because there are more large cities in these regions). Thus, one’s belief about the future of homeownership is in some ways a statement about where people choose to live in the future.

In my view, the main drawback to renting (government distortions aside) is that you have to negotiate with the owner concerning maintenance and renovations. Perhaps somebody should work on contracts that address this.

As of now, one party (typically the landlord) must bear all of the costs, but maintenance and renovation is only done at the landlord’s discretion. One can imagine a different arrangement that allows the tenant to have discretion, but with incentive to protect the landlord’s interest.

For example, the cost of basic maintenance, such as fixing the HVAC system when there is a problem, could be split 80-20 between the landlord and the tenant. Because the tenant has skin in the game, the tenant gets to be in charge of getting the system fixed.

On the other hand, the cost of renovation, such as a kitchen remodeling, might be split closer to 50-50. Again, the tenant is in charge. The tenant pays a higher share than in the case of basic maintenance, because the renovation might prove less valuable to a subsequent tenant.

Another contractual possibility would be to address the state of the dwelling when the tenant leaves. In principle, the landlord could be compensated by the tenant for damage (that is what security deposits do, up to a point), and the tenant could be compensated by the landlord for increases in property value due to upgrades paid for by the tenant.

What Socialism Looks Like in America

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New York state legislature effectively bans airbnb. It does so by imposing a $7500 fine on anyone who so much as advertises a short-term rental.

“The bill says: You can’t advertise an illegal activity,’” Assemblywoman Deborah Glick, a Manhattan Democrat who supported the bill, told the Wall Street Journal in June. “I don’t know what the big confusion is.”

Actually, those of us who favor free speech probably should argue that you should be able to advertise to sell heroin or any other illegal good or service. Prosecution should take place for the sale, not for the advertisement.

My larger point is that people who favor socialism here seem to think that it will somehow turn out to be pristine and un-corrupt. Instead, as Milton Friedman pointed out, the attempt to regulate markets eventually undermines every other form of freedom.

Doug Elmendorf on the Debt

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He writes,

Together with Brookings Senior Fellow Louise Sheiner, I have analyzed alternative explanations for low Treasury rates and the implications of each for budget policy (Elmendorf and Sheiner, 2016). We found that most explanations imply that the country should have a higher debt-to-GDP ratio than otherwise. We find that most explanations also imply that federal investment should be higher than otherwise, and I will come back to that later. The intuition for these results is that interest rates show the direct cost to the Treasury of its borrowing and provide information about the indirect cost to the economy of Treasury borrowing—and if costs will be persistently much lower than we are accustomed to, then more borrowing, especially for investment, passes a cost-benefit test.

Pointer from Tyler Cowen.

Of course, one possible explanation for low interest rates is that growth prospects are poor. Another possible explanation is that we are in a bond bubble. If either of those turns out to be the case, then we are going to wish that we had less debt to contend with.