A Commenter’s Suggestion

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He writes,

May I humbly/respectfully suggest, Arnold, that you consider replacing your economics-is-not-a-science meme with an economics-is-like-applied-science (i.e. engineering and medicine) one.

Reading a draft of Jeffrey Friedman’s next book, I gather that this was John Dewey’s notion. Just as doctors often “treat empirically” (by trial and error), policy science can improve by trial and error.

The parallels with medicine are interesting. Just as it seems to be the case that a lot of health care spending goes to medical treatments with high costs and low benefits, it is the case that a lot of government programs and regulations have high costs and low benefits.

I reject Dewey’s model as a description of actual policy practice. Policy makers almost never design proper trials, and they almost never correct errors. Pretty much every anti-poverty program that has been tried since the 1960s is still around, regardless of how (or whether) it was evaluated.

In my latest book, I argue that the profit system does a much better job of trial-and-error learning. The incentives to learn are much stronger. If you make enough mistakes, you lose money and go out of business. Also, upstart companies are much more willing to attempt a radical innovation than are established organizations, whether those established organizations are corporations or government agencies.

Also, I believe that social phenomena are more complex than the problems that engineers encounter. That is why I see mathematics in economics as pretentious. More than that, it can be harmful, as it focuses economists on building models that are so simple that they are deceptive rather than helpful.

All that said, I prefer that economists present themselves as doctors than as scientists, as long as they make it clear that they have not discovered the cures for the diseases with which they are presented.

How Should Europe be Organized?

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In the wake of the Brexit vote, here are my thoughts. I view the issue primarily from a libertarian perspective, which means a bias in favor of free trade and free movement and a bias against centralized bureaucracy.

1. The actual Brexit vote, as I interpret it (and I make no claim to expertise at reading voters’ minds) seemed to rest mostly on hostility to free trade and free movement, with some hostility toward centralized bureaucracy. And if you have not already followed my recommendation and read Martin Gurri’s The Revolt of the Public, the Brexit vote is another reason you should.

2. I think that a common currency is a good thing. As readers of my new book will realize, I don’t subscribe to the sort of monetarist macroeconomics that would lead one to say otherwise.

3. I think that freedom of movement is a good thing. Border checkpoints are a bad thing.

4. However, you have to think about how to reconcile freedom of movement with welfare-state benefits. The libertarian approach is to get rid of the welfare-state benefits. A less radical approach is to clarify which benefits are limited to citizens and specify the qualifications for becoming a citizen.

5. As for terrorism coming from immigrants, it seems that we can choose two of the following three: privacy, open borders, and security. I am willing to toss out privacy, as long as the government actors providing security are not themselves able to hide what they are doing. Few card-carrying libertarians would agree with this view. Before you blast away at it, read or re-read David Brin’s Transparent Society Revisited. In any case, I interpret the voters as saying that we should toss out open borders.

6. Some people equate a strong EU with technocrats being able to solve/avert the sovereign debt crisis that threatens several countries. I do not.

7. Some people see the EU as a force for free trade. I see it as a force for trade that is managed, regulated, and harmonized. Is this more or less free than what we would see if trade policies were left up to individual governments? I would guess it is somewhat less free, particularly as we move through time, and the bureaucratic tentacles of the EU tend to spread.

8. Of all the reasons for selling stocks, I think this was the least compelling. I wonder if the stock market was simply poised for a decline, anyway, but it needed some sort of focal point to get the selling going.

On net, I would have voted “Leave.” But I don’t like the anti-immigrant, anti-trade rationale.

Set Up for Failure

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W. Scott Frame, Kristoper Gerardi, and Joseph Tracy write,

The extinction of the private subprime market and the rapid rise of the government insurance programs may strike many as a largely positive development. After all, it was the subprime segment of the mortgage market that triggered the global financial crisis and subsequent Great Recession as subprime loans defaulted at an astronomical rate during the housing bust. However, while government-insured mortgages are typically underwritten with more rigor and discipline than private subprime loans, they are not low-risk loans. The combination of high leverage and low credit scores documented above translates into extremely high default rates. The table above shows that five-year cumulative default rates (CDRs) by year of origination varied between 5 and 25 percent over our sample period. To put these numbers into perspective, the five-year CDRs associated with loans insured by Fannie Mae and Freddie Mac (the housing government-sponsored enterprises, or GSEs) are typically an order of magnitude lower. According to our calculations, the 2002 and 2009 vintages of GSE loans had five-year CDRs of approximately 2 percent, while Ginnie Mae’s same vintages had five-year CDRs of almost 10 percent and 13 percent, respectively.

Pointer from Mark Thoma.

The Federal Housing Administration, FHA, sets up many borrowers to fail. One could argue that these borrowers put up so little of their own money that this is a worthwhile risk from their point of view. It is the taxpayers that are being set up to fail.

Advice for Gary Johnson

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Shikha Dalmia writes,

He needs to create a bigger agenda based on what’s on voters’ minds. That means focusing on Libertarian solutions for core economic, social, and national security issues—not just bloodless opinions on them when queried, which is what he’s been doing. He has to offer Libertarianism not as an ideology but as a solution.

I disagree. The only realistic scenario by which Johnson wins is one in which both leading Democrats and Republicans start talking him up between now and November, so that the election gets thrown into the House and he emerges as the compromise candidate.

I think that as long as Mrs. Clinton is heavily favored to win, the Democrats will not budge in their support for her. However, suppose that Mr. Trump moves up in the polls, perhaps because of some exogenous event. Once Democrats become frightened that Mr. Trump could win, they may be willing to deal with Johnson. And if they signal such a willingness, that could in turn convince some #neverTrump Republicans to endorse Johnson. Perhaps he could win enough states to throw the election into the House.

At that point, even if Republicans have a majority in the House, I do not think that they would unite behind Johnson. Instead, he would have to promise enough to Democrats (say, no Supreme Court nominees that lack bipartisan support) and enough to Republicans (say, that he won’t single-handedly abolish the NSA) to convince a bipartisan coalition to elect him President.

No, I did not say that this is realistic enough to bet on, even at generous odds.

On a related note, Jennifer Rubin suggests questions for reporters to ask Johnson.

How much government do we need? Can we afford? In contrast with the presumptive GOP nominee, they may have something enlightening to say.

Consolidating the Central Bank and the Treasury

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Thomas Klitgaard and Harry Wheeler write,

The discussion above offers up a perspective on what is meant by “monetizing debt.” This term refers to a central bank buying government bonds and promising to keep them on its balance sheet with the result that the increase in reserves in the banking system translates into higher prices. This outcome, though, requires that the central bank not pay the appropriate interest rates on reserves. If it does, then an asset purchase program is just an effort that shortens the maturity of public-sector debt and will likely have few or no implications for future inflation.

Pointer from Mark Thoma.

Another implication is that it makes the interest cost of the government more sensitive to movements in short-term interest rates. So a sudden loss of confidence in the government by investors which raises interest rates would become self-reinforcing. And if the only way out of such a debt crisis is to print money, then there are implications for future inflation.

What I’m Reading

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Scientific Perspectivism, by Ronald N. Giere. Based on a reader’s suggestion that I try to get up to speed on philosophy of science since the 1960s. He is trying to find a middle ground between scientific objectivism and social constructionism. The former says that there is absolute truth, and science is the process for discovering it. The latter says that all scientific beliefs are socially constructed, and hence none can claim to be Truth.

From p. 15:

Perspectivism makes room for constructivist influences in any scientific investigation. The extent of such influences can be judged only on a case-by-case basis, and then far more easily in retrospect than during the ongoing process of research. But full objectivist realism (“absolute objectivism”) remains out of reach, even as an ideal. The inescapable, even if banal, fact is that scientific instruments and theories are human creations. We simply cannot transcend our human perspective, however much some may aspire to a God’s-eye view of the universe. Of course, on one denies that doing science is a human activity. What needs to be shown in detail is how the actual practice of science limits the claims scientists can legitimately make about the universe.

In economics, we want to make is seem as though the “science” is objective, and all policy differences are ideological. In fact, differences of “scientific” opinion are not so objective. Many economists process this as “the other guy is a blinkered ideologue, but I’m not.” But nobody has a God’s-eye view of the economy.

Illiberalism

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Sohrab Ahmari writes,

there are common patterns that range vastly different geographies and political contexts, suggesting that this illiberal ascendance will be a defining feature of the 21st century.

…These are the three psychological planks on which all such movements rest…

…The restoration of a prouder, more wholesome, more coherent past…

…Collective grievance and a desire for national recognition

…a desire that politics reflect the dark realities of the present. That means: a recognition that enmity can be permanent, that bad actors cannot be transformed into good ones…

This sounds to me like the recipe for Nazism. Germans wanted to recover their pride, they felt a sense of collective grievance, and they saw permanent emnity all around (Jews, Russia, France, Britain).

Why is this now being felt,as the essay argues, in the U.S., Arab countries, European countries and Russia?

The author suggest a dynamic in which elites do not trust their populations and vice-versa. So the elites look to non-democratic means to enact policies, and the populations see this happening and rebel. In the U.S., we have courts and regulatory agencies. In Europe, they have the EU institutions.

The author suggests that the forces of liberalism, meaning something closer to classical liberalism, require someone who believes in liberal ideals and yet who also can connect with ordinary people. Whatever charitable you might say about President Obama, Winston Churchill he is not.

Stability Leads to Instability

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What Hyman Minsky said about finance, others say about global politics. Stephen M. Walt writes,

prolonged periods of peace may also have a downside: They allow divisions within different societies to grow and deepen. Even worse, they may eventually drive the world back toward war.

A book I recently finished reading, Peter Turchin’s War Peace and War, offers a similar thesis.

It is an idea that puts libertarians in a bind. A progressive can advocate for “the moral equivalent of war” to try to hold together a strong state. Libertarians do not want a strong state to begin with. On the other hand, we do not want to see violence among ethnic groups or populist illiberalism, either.

Michael Barone praises my new book

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At the end of his piece, He writes,

Donald Trump’s promise to “make America great again” promises restoration of a rosily remembered but largely mythical past. Abrogating trade agreements won’t create half a million auto and steel jobs. Trump’s penchant for deal-making and crony capitalism means propping up insiders and preventing job creation.

Kling says he’s voting for Gary Johnson. You can see why.

So evidently he reads the blog, also.

By the way, there are only two reviews of the book on Amazon, and both are rather terse. So when you’re finished reading it, . . .

A Modern Jubilee Year?

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In an email exchange, I wrote

“I have been reading War Peace and War by Peter Turchin, and I came across this:

When land becomes a scarce commodity. . .Those who do not have enough land to feed themselves will have to start selling what they have to make up the difference. As a result, they become poorer. By contrast, those who have more land than they need to feed themselves will have a surplus income that they can use to acquire even more land. Thus, the rich get richer.

This might explain the custom of the Jubilee year. To stop what otherwise would be a strong tendency for wealth to concentrate, particularly when a society is typically operating close to the Malthusian margin. If you don’t employ such a custom, the society is likely to disintegrate.

This also may account for the laws against usury. People on the brink of starvation will need to borrow. If they are charged interest, you will have poor people getting poorer and rich people getting richer.”

To which, my correspondent replied,

That makes sense. Does this spark any more thoughts on how this concept/phenomenon plays out in today’s world where land isn’t necessarily the key commodity and what an equivalent system might be to abate the issue?

My thoughts.

1. As an aside, land is still an important source of wealth, but it is not the land per se. Rents are high in Cambridge, but that is not because of the fertility of the soil.

2. That is not the only difference between our economy and the sort of agrarian society that Turchin is focused on or which gave rise to the Jubilee year. We no longer are in a Malthusian population situation. In the developed world already, and pretty soon almost everywhere, we have the demographic transition, in which the number of children born to each woman falls dramatically. Humans have created many tangible assets (roads, sewer systems, communication tools, factories, etc.) as well as intangible assets (rule of law, pro-social norms and customs, knowledge, etc.) As a result, there is no reason that people have to be pushed to the margin where they have to sell everything they have in order to eat.

3. Still, there may be other forces that cause the rich to get richer and the poor to get poorer. Let’s not worry about the rich getting richer, but instead worry about why the poor might be getting poorer. Maybe poor people pass along genetic endowments to their children that are adverse. Maybe poor people lack access to mainstream banking, and this makes their everyday transactions more costly. Maybe poor people are stuck with bad schools.

4. Suppose we believe that poor people themselves best understand why they are poor. In that case, it would be better to give them money than to have legislators and bureaucrats design packages of benefits like food stamps and Medicaid and so on. My own guess is that this is the best way to go (although like anything else, it would not be perfect). In that case, the modern equivalent of the Jubilee year would be to get rid of all the social programs and replace them with a fairly large cash payment. This is known these days as Universal Basic Income. It has proponents and opponents on both ends of the political spectrum.