Wisdom from Hal Varian

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He writes,

Self-driving cars are rapidly becoming a reality. In fact, we would have self-driving cars now if it weren’t for the randomness introduced by human drivers and pedestrians. One solution to this problem would be restricted lanes for autonomous vehicles only. Self-driving cars can communicate among themselves and coordinate in ways that human drivers are (alas) unable to. Autonomous vehicles don’t get tired, they don’t get inebriated, and they don’t get distracted. These features of self-driving cars will save millions of lives in the coming years.

It is a wide-ranging essay. Here is more:

Back in 2000, about 80 billion photos were taken worldwide—a good estimate since only three companies produced film then. In 2015, it appears that more than 1.5 trillion photos were taken worldwide, roughly 20 times as many. At the same time the volume exploded, the cost of photos fell from about 50 cents each for film and developing to essentially zero.

So over 15 years the price fell to zero and output went up 20 times. Surely that is a huge increase in productivity. Unfortunately, most of this productivity increase doesn’t show up in GDP, since the measured figures depend on the sales of film, cameras, and developing services, which are only a small part of photography these days.

In fact, when digital cameras were incorporated into smartphones, GDP decreased, camera sales fell, and smartphone prices continued to decline. Ideally, quality adjustments would be used to measure the additional capabilities of mobile phones. But figuring out the best way to do this and actually incorporating these changes into national income accounts is a challenge.

Wisdom from Erik Hurst

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He says,

The facts are real wages moved very strongly with employment across regions. Nevada was hit very hard by the recession, for example, while Texas was hit much less hard. Wage growth, both nominal and real, was about 5 percent higher in Texas than it was in Nevada during the Great Recession.

Pointer from Tyler Cowen.

The point is that we do not have a single aggregate economy. If you think that every state faced identical demand conditions, then the state with the higher real wage growth (Texas) should have had the worse unemployment. And Hurst goes on to point out how the regional data make it difficult to defend the view that wage stickiness is the cause of unemployment. In fact, he refers to work, which I noticed earlier, that suggests a PSST story.

I don’t think I previously knew about this thinking, which also agrees with mine:

When we all come together as individuals, we may create agglomeration forces that produce positive or negative consumption amenities. Thinking about it this way, when a lot of high-income people live together, maybe there are better schools because of peer effects or higher taxes. Or maybe there are more restaurants because restaurants are generally a luxury good. Or maybe there’s less crime because there is an inverse relationships between neighborhood income and crime, which empirically seems to hold. So, while we value proximity to firms, that’s not the only thing we value.

Who Needs Liquidity?

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Lynn Stout writes,

Wall Street is providing far more liquidity (at a hefty price—remember that half-trillion-dollar payroll) than investors really need. Most of the money invested in stocks, bonds, and other securities comes from individuals who are saving for retirement, either by investing directly or through pension and mutual funds. These long-term investors don’t really need much liquidity, and they certainly don’t need a market where 165 percent of shares are bought and sold every year. They could get by with much less trading—and in fact, they did get by, quite happily. In 1976, when the transactions costs associated with buying and selling securities were much higher, fewer than 20 percent of equity shares changed hands every year. Yet no one was complaining in 1976 about any supposed lack of liquidity. Today we have nearly 10 times more trading, without any apparent benefit for anyone (other than Wall Street bankers and traders) from all that “liquidity.”

Pointer from Mark Thoma.

I was appalled by this paragraph (and by others in her essay), for a number of reasons.

1. It appears on a site calling itself “pro-market.” The conceit is that they are battling crony capitalism. However, the essay does not assert, much less establish, any connection between cronyism and trading volume.

2. Note that since 1976, some activities have been affected by the advent of a device known as the computer chip. The fact that we have nearly 10 times as much trading as then should be no shock. The cost of trading has likely fallen by way more than 10 times (feel free to compare brokerage charges adjusted for inflation). Who is Lynn Stout to suggest that the price elasticity of trading ought to be zero?

3. I would appreciate it if Lynn Stout could tell us how she thinks we should measure the benefit of liquidity. I believe that any thoughtful economist would say that this is a difficult issue. I have said that as individuals and nonfinancial firms we wish to hold liquid, riskless assets and issue risky, illiquid liabilities. Financial firms do the opposite. I am quite sure that this produces real benefits. But I would be hard pressed to arrive at even a conceptual approach to quantifying those benefits.

I believe that there is cronyism embedded in the relationship between Wall Street and Washington. But that does not justify pure demagogic bashing of investment bankers.

Trump Explanation to Flatter the Right

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William Voegeli writes,

When Trump says political correctness cripples our ability to think, talk, and act against terrorism, he’s signaling that our response to terrorism is severely compromised by Islamophobia-phobia—the closed-minded, contrived, overwrought, unwarranted, misdirected, counterproductive fear that accurate threat assessments and adequate self-defense might hurt a Muslim’s feelings. “Public sentiment is everything,” said Lincoln of a republic’s political life, which means that those who mold public sentiment are more powerful than legislators and judges, because they make “statutes and decisions possible or impossible to be executed.” Our molders of public sentiment have made citizens more worried about accusations of bigotry than they are determined to report possible terrorism. A man working near the San Bernardino shooter’s home, according to one news account, “said he noticed a half-dozen Middle Eastern men in the area” before the attack, “but decided not to report anything since he did not wish to racially profile those people.”

The essay is long, but I recommend all of it. Along the way, Voegeli quotes Megan McArdle approvingly and refers to Bryan Caplan disparagingly.

Voegeli links Trump’s surge in popularity to the high-profile attacks by Islamic terrorists. While I believe that those helped him, and that another one could hand him the election, I am inclined to believe that he would have obtained the nomination even if those attacks had not taken place. If my guess is correct, then by seeing Trump support primarily as a reaction against political correctness, Voegeli is overly uncharitable to the left and he is overly flattering to the right.

Voegeli sees Trump as comparable to Senator Joseph McCarthy. Voegeli sees each as a champion of a good cause, which they ultimately discredit with their idiosyncratic and erratic behavior. My thoughts:

1. McCarthy’s cause was anti-Communism. His enemies complained of anti-Communist hysteria. I am so steeped in David Halberstam that I am not ready to concede that McCarthy discredited anti-Communism or to concede that the anti-Communists had it right. What discredited anti-Communism was the Vietnam War, which the anti-Communists got wrong.

2. I think that Voegeli somewhat mis-characterizes Trump’s cause. Trump does not want to slay the dragon of Islamic radicalism. In my reading, Trump’s cause is anti-cosmopolitanism. Cosmopolitans see the world through the eyes of an affluent tourist. Foreign countries are places that take Visa, with interesting foods and friendly people speaking accented English. Anti-cosmopolitans might see the world through the eyes of an American soldier sent to Iraq or Afghanistan. Foreign countries are places where barbarians lurk. Even when we succeed for a while at protecting ordinary people from these barbarians, the people are neither grateful to us nor inspired by us to keep the barbarians from returning.

The anti-cosmopolitan motto might be “Keep the U.S. out of the Middle East, and keep the Middle East out of the U.S.” The conservative establishment is heavily invested in keeping us in the Middle East. The liberal establishment is heavily invested in allowing Middle Easterners to come here. Perhaps it was inevitable that the champion of anti-cosmopolitanism was an outsider with many off-putting personality traits. But it could be that a loss by Trump will only discredit Trump, and anti-cosmopolitanism will, for better or worse, remain a force that affects American policy going forward.

Trump Explanation to Flatter the Left

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Arlie Russell Hochschild writes,

You are patiently standing in the middle of a long line stretching toward the horizon, where the American Dream awaits. But as you wait, you see people cutting in line ahead of you. Many of these line-cutters are black—beneficiaries of affirmative action or welfare. Some are career-driven women pushing into jobs they never had before. Then you see immigrants, Mexicans, Somalis, the Syrian refugees yet to come. As you wait in this unmoving line, you’re being asked to feel sorry for them all. You have a good heart. But who is deciding who you should feel compassion for? Then you see President Barack Hussein Obama waving the line-cutters forward. He’s on their side. In fact, isn’t he a line-cutter too? How did this fatherless black guy pay for Harvard? As you wait your turn, Obama is using the money in your pocket to help the line-cutters. He and his liberal backers have removed the shame from taking. The government has become an instrument for redistributing your money to the undeserving. It’s not your government anymore; it’s theirs.

Pointer indirectly from Tyler Cowen.

She sees this as a narrative that explains Trump. Perhaps she is correct. But it is suspiciously self-serving to the sociologist-author who is proud to be more properly attuned to the oppression of minorities) and uncharitable to the Trump supporters.

I am not the first person to notice that many economists came up with books after the financial crisis of 2008 that purported to show how the crisis confirmed their worldview. Yet none of these economists predicted the crisis. For example, Joseph Stiglitz will gladly tell you that the crisis confirmed his worldview, even though he notoriously co-authored a paper which concluded that Freddie Mac and Fannie Mae were completely sound.

So with the unexpected emergence of Donald Trump, I get very suspicious of “explanations” that flatter the author and members of the author’s intended audience.

Instead, I again recommend the Martin Gurri explanation, which he wrote before Trump became a candidate.

Thoughts on Crowding Out

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Tyler Cowen writes,

None of this has to involve higher interest rates, whether on government securities or corporate bonds, yet still there is an opportunity cost from the new decisions. Do interest rates have to go up every time resources are switched across sectors? No. Will there in general be a significant “multiplier” from these sectoral shifts? I say that question is a category mistake, but if you insist the multiplier could easily be negative rather than positive.

My comments:

The crowding-out that he is talking about refers to specific sets of skills. In GDP-factory macro, there is no wuch thing. We all have the same skills, so if government demands more from the GDP factory, there is no crowding out. From a PSST perspective, or from any sensible economic perspective, if the government hires more workers whose skills are already in demand, this causes crowding out. Since many of the workers who have lost jobs over the past two decades are workers whose skills were of a sort where demand has been falling on a secular basis, chances are that when the government tries to spend more it will tend to increase demand for workers who already have jobs. Hence, crowding out.

Obamacare Reality

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Reed Abelson and Margot Sanger-Katz (NYT, the Upshot) write,

Competition, at least in theory, helps keep premiums low and service high. That’s the whole point of having a market for health insurance. But 17 percent of people eligible for this market might have no choice of carrier next year.

…People who do not receive federal tax credits to help pay for their coverage are particularly hard hit by having to pay higher premiums and could be unable to afford the cost. They are a small minority of people currently in the Obamacare marketplaces, but more than a third of all people buying their own insurance, according to recent estimates.

…There are currently about half as many people in the exchanges as the Congressional Budget Office expected…. About 27 million Americans still don’t have insurance

Read the whole thing. My prediction is that in order to keep the system going under the Clinton Administration, much more taxpayer money will be spent and consumers and health care providers will face more coercive rules.

Excellent Sentences

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From Alex Tabarrok.

What bothers me about these stories is not the rent-seeking–that is to be expected. What bothers me is that there is a law that prescribes how mutual funds must inform their customers. Why must every aspect of commercial life be governed by a gun? And this is where I expect pushback–the mutual funds will rip us off if we don’t have these laws, blah, blah, blah. Fine, believe that if you must, but then you have no cause to complain about rent seeking. You created the conditions for its existence.

Hundreds of millions of dollars have been spent on designing and implementing disclosure rules for such products as home mortgages. Has there been a single case of a consumer who read such a disclosure and made a better decision as a result?

Modernity is a Package

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I have just started reading Leviathan 2.0, by Charles S. Maier. I could not find a Kindle edition when I was ordering the book. Here is a quote from p.5-6:

The winners were the well-organized representatives of Europeans and their American or African or Asian descendants organized into the most efficient engine of expansion and governance that the world had seen for centuries: the modern nation-state. This was a large-scale unit organized to permeate and master territory, to pursue sedentary agriculture and industrial technology, possessing complex legal systems that allowed the preservation and transmission of family and individual property, the salaried employment of large-scale private and public workforces, the rapid communication of commercial and policy decisions by electrical telegraph, the ministerial archives and records that ensured institutional memory, and ideologies of rivalry and group purpose that generated intense loyalties.

Reading this passage, I came up with a catch-phrase “Modernity is a package.” Libertarians see the evils of the state–wars, inefficient and harmful policies, rent-seeking–and they imagine a utopia with a minimal state or no state at all. Progressives see the evils of capitalism, and they imagine a utopia with minimal or no use of markets.

But both capitalism and the state are deeply embedded in modernity. To eliminate either is to pull the rug out from under the system that supports prosperity an innovation.

To take a less politically fraught example, consider urbanization. We know that in small villages people feel a stronger sense of community. They know one another’s names. When they meet on the street, they take time to have a conversation, whereas in a large city people hurriedly rush past one another–friends might say “Oh, hi! We should have lunch, strangers might mutter “good morning.” People look out for one another.

And yet, the overwhelming majority of people who migrate from one to the other move from small villages to large cities, not the other way around. The city offers better employment opportunities, more variety of consumption options, and more overall effervescence.

The city represents the package of modernity, both good and bad. You cannot enjoy both the pre-modern charm of the small village and the modern wonders of the city in the same place.

Daniel Sarewitz on Bubbe-Meisis

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He writes

Technology keeps science honest. But for subjects that are incredibly complex, such as Alzheimer’s disease and criminal behavior, the connection between scientific knowledge and technology is tenuous and mediated by many assumptions — assumptions about how science works (mouse brains are good models for human brains); about how society works (criminal behavior is caused by brain chemistry); or about how technology works (drugs that modify brain chemistry are a good way to change criminal behavior). The assumptions become invisible parts of the way scientists design experiments, interpret data, and apply their findings. The result is ever more elaborate theories — theories that remain self-referential, and unequal to the task of finding solutions to human problems.

In a world of causal density, such theories amount to bubbe-meisis.

The article is long with many themes, enough to offend just about everyone.