Guess Who Wrote This

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Historical experience offers little guide to the social and political consequences of the much greater numbers and more pronounced cultural differences at stake in the postwar migrations to Europe, especially from the Muslim world. The incompatibilities are much greater.

The nub of the problem is that contemporary European civilization is secular, whereas Muslim civilization is religious. In Europe, religion has lost its authority over law, legislation, education, morals, and business life. The Islamic world has undergone no comparable process. There is no systematic separation of faith and state; the family, not the individual, remains the basic social unit. The essential elements of modern European political life – individual rights and duties, and the accountability of government to the governed – are lacking, particularly in the Arab Middle East.

Hints:

1. It’s not Steve Sailer
2. He is known mostly for his contribution to economic biography.
3. His macroeconomic views are not at all conservative.

Answer at the link.

Dean Baker’s Libertarian Socialism

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He proposes replacing the corporate income tax with having corporations give government shares of stock. He notes that this could be optional–corporations could choose to opt out of the corporate income tax by donating shares. However, one suspects that the cleaner approach would be to make it a requirement.

The shares would be nontransferable, except in the case of mergers or buyouts, but they otherwise would be treated just like any other shares. If the company paid a dividend to its other stockholders, then it would pay the same per share dividend to the government. If it bought back 10 percent of its shares, then it would buy back 10 percent of the government’s shares at the same price. In the event of a takeover, the buyer would have to pay the same per-share price to the government as it did to the holders of other shares.

Pointer from Mark Thoma.

This approach would get rid of the distortions and rent-seeking of the corporate income tax. It would align the interests of government and corporations, in that costly regulations would cut into tax revenue. In that sense, it is a step in a libertarian direction. Because government would have partial ownership of businesses, it looks like socialism, but I think one can argue that the power to tax is equivalent to partial ownership, and that if anything the government uses its taxing powers in more meddlesome ways.

Faculty Inequality

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Liang Zhang and Ronald G. Ehrenberg write,

The share of part-time faculty among total faculty has continued to grow over the last two decades, while the share of full-time lecturers and instructors has been relatively stable. Meanwhile, the share of non-tenure track faculty among faculty with professorial ranks has been growing. Dynamic panel data models suggest that employment levels of different types of faculty respond to a variety of economic and institutional factors. Colleges and universities have increasingly employed faculty whose salaries and benefits are relatively inexpensive; the slowly deteriorating financial situations at most colleges and universities have led to an increasing reliance on a contingent academic workforce.

Slowly deteriorating financial situations? Then why are the salaries of tenured faculty so high?

The amazing fact about the economics of college teaching is that a subset of professors is completely insulated from the excess supply that is all around them. Between subsidies to demand handed out by the government and restrictions to supply imposed by limitations on tenured faculty, salaries are maintained far above where they otherwise would settle.

I’ll say again. Ask people if they would rather have 1975 health care at 1975 prices or current health care at current prices, and many will admit that they would prefer what we have today. But many people would say that although college education costs far more today, the quality of what students get is actually worse. Of course, the benefits of a college education appear to be higher today, until somebody figures out alternative ways of providing assortative mating and credentialing.

Two Layers of Occupation

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My wife and I are planning a trip to Israel later this month. We also were there in 1980 and a couple of times since 2000. I have been thinking about my impressions about what changed between 1980 and 2000.

1. The economy improved a lot. In 1980, I remember seeing a concerned look on an Israeli’s face when my wife used her dryer, because of the electricity it was consuming. In fact, infrastructure like electricity and telephone service seemed to be at third-world levels.

2. There was hyperinflation in 1980. Around that time, Stanley Fischer advised the government to tighten its budget and issue a new currency that would have stable value. This approach saved the country.

3. By 2000, Israel was clearly a first-world economy.

4. By 2000, Israeli society was much more fractured. Income differences were considerably wider. The division between secular and religious Israelis was sharper. Differences among Israelis of European origin, Russian origin, and Middle Eastern origin seemed more pronounced.

5. In 1980, Israeli Arabs, meaning Arabs living within the pre-1967 borders, were visible everywhere. They appeared to be integrated into the society as a whole. That is no longer the case. Some of the de facto segregation is due to the intifada. But some of it may reflect the same forces that are increasing class segregation in America. When I spoke in St. Louis last March, I pointed out that 50 years ago if you sat in box seats at old Sportsman’s Park, you were as likely to be sitting next to a blue-collar worker as a white-collar worker. Now, if you were to sit anywhere other than the remote outfield seats you would not be among blue-collar workers. Or, to take another illustration, consider the disconnect between typical college-educated Americans and supporters of Donald Trump.

6. In 1980, Israel still controlled Gaza, and we visited settlements there. The Arabs living there were the poorest people I had ever seen–starving and dressed in rags. I have not been back to Gaza, so I have no idea how things have changed. I certainly hope that there has been at least some improvement.

7. In 1980, the Arabs of East Jerusalem seemed well-dressed, animated, and cultured. There was genuine economic activity and commerce. My sense is that since then among those Arabs, there has been a decline. Certainly spiritually, if not materially. Some of that you might attribute to the Israeli occupation. But I think that East Jerusalem and the West Bank are in a sense victims of a double occupation. In 1994, the Olso accords imposed on the Arabs there a Palestinian Authority which was not really indigenous. Yasser Arafat and his government were outsiders, and their control reduced the status that had been achieved by the local Arabs that made an impression on me in 1980. The way to obtain a living changed from one of commerce to one of control over the disbursement of foreign aid.

I don’t see much discussion in the press of the impact of the imposition of the Palestinian Authority on Arab society in the West Bank and East Jerusalem. Perhaps my casual impressions are wrong. But I wonder whether this second layer of foreign occupation is what did the most significant damage to the economy and the morale there.

Meanwhile, the fraction of Israelis who are militant and extremist has grown over the last 15 years.

PSST?

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A reader asks if John Hussman is stealing the PSST story.

Emphatically, recessions are primarily points where the mix of goods and services demanded by the economy becomes misaligned with the mix of goods and services being produced. As consumer preferences shift, technology introduces new products that dominate old ones, or market signals are distorted by policy, the effects always take time to be observed and fully appreciated by all economic participants. Mismatches between demand and production build in the interim, and at the extreme, new industries can entirely replace the need for old ones. Recessions represent the adjustment to those mismatches. Push reasonable adjustments off with policy distortions (like easy credit) for too long, and the underlying mismatches become larger and ultimately more damaging.

Looking over the entire piece, I would say that the Hussman is 90 percent generic Austrian and maybe 10 percent PSST. I find Hussman worth reading when people point me to his commentaries, but I do not go all in on his or any other market/macro analyst’s viewpoint.

The Academic Ecosystem

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About a year ago, Aaron Clauset, Samuel Arbesman, and Daniel B. Larremore wrote

A strong core-periphery pattern has profound implications for the free exchange of ideas. Research interests, collaboration networks, and academic norms are often cemented during doctoral training. Thus, the centralized and highly connected positions of higher-prestige institutions enable substantial influence, via doctoral placement, over the research agendas, research communities, and departmental norms throughout a discipline . The close proximity of the core to the entire network implies that ideas originating in the high-prestige core, regardless of their merit, spread more easily throughout the discipline, whereas ideas originating from low-prestige institutions must filter through many more intermediaries. Reinforcing the association of centrality and insularity with higher prestige, we observe that 68 to 88% of faculty at the top 15% of units received their doctorate from within this group, and only 4 to 7% received their doctorate from below the top 25% of units.

The top graduate schools in any field form a tight club, into which it is nearly impossible to break in. This allows disciplines to easily be captured by fads, because the voices that would reveal the emperor’s nakedness are so completely marginalized.

In economics, I have argued that this phenomenon produced the spread of really silly approaches to macroeconomics, which is still a problem in the profession. This topic will be explored more in what I am calling The Book of Arnold.

The Case Against Economic Sanctions

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Branko Milanovic writes,

They impose a collective punishment, over people who have no influence on the policies for which they are sanctioned.

Pointer from Mark Thoma. There is more at the link.

My view of economic sanctions is that they are an act of war. If you are not willing to declare war against another country, then my presumption is that economic sanctions are morally wrong.

Razib Khan on ISIS

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He writes,

Being a good parent, friend, and a consummate professional. But not everyone is a parent, and not everyone has a rich network of friends, or a fulfilling profession. Ideologies like communism, and religious-political movements like Islamism, are egalitarian in offering up the possibilities of heroism for everyone by becoming part of a grand revolutionary story.

There is much more at the link. Pointer from Tyler Cowen.

I am reading Fools, Frauds, and Firebrands, by Roger Scruton, the British conservative philosopher. Most of you will not want to read it, because it mostly discusses European philosophers. But I came away with some interesting ideas to chew on, and I may attempt to write an essay on the book. One of his points is that the left-right lens through which we view politics is designed not to be analytically sound but instead to tilt things in favor of Communists. The idea is to put fascism on the far right and Communism on the far left. Since everybody hates fascism, the implication is that you should like Communism, or at least cut it some slack.

I think that a more useful organizing axis for political movements might be satisfied vs. disaffected. People who support Hillary or Jeb are satisfied. They do not want to rock the boat. People who support Trump or Sanders are somewhat disaffected. Extremist groups, like ISIS, appeal to people who are extremely disaffected.

Where would you put libertarians on this axis? I would put them much closer to the satisfied end. As ticked off as they are about government and politics, they tend to be basically happy with their own lives.

Still Trolling Anarchocapitalists

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David Henderson writes,

A problem that any stock exchange must deal with is enforcement of contracts. Imagine, for example, that someone sells a stock short, but contrary to his expectations the stock price rises, and he must satisfy his contract by buying the shares come settlement time. What if the short seller balks and doesn’t stick to his agreement? This did not happen often, writes Stringham, because traders had to worry about their reputations.

But couldn’t those who were cheated by short sellers have gone to the government to make the short sellers keep their word? They could not, and the reason is simple. Stringham points out that short selling was illegal and, therefore, going to the government was futile. If anything, those who had wanted to renege on their short-selling contracts could have gone to the government to get it to support their reneging. But Stringham quotes an analyst of the time pointing out that this didn’t happen much. People were expected to keep their commitments and largely did.

This is strong evidence against the claim that complex market transactions between strangers need some form of external government enforcement.

Some remarks.

I am not claiming that private governance in the absence of government support is impossible. I am claiming that it is costly. In this example, my claim would be that short selling is more costly when it is illegal than when it is legal, because short-sale contracts are perceived to be more difficult to enforce when they are illegal. That claim may be incorrect, of course. But I would bet that if you compare markets where short-selling is legal with markets where short-selling is illegal, the transaction costs will be lower in the former.

Also, consider alcohol and drug prohibition. Both of these almost surely raised the costs of transactions, and in both cases violence plays a role in market governance.

Having said that, I would point out that examples of markets that the government treats as illegal are not good examples to prove my point. When government makes something illegal, it artificially raises transaction costs in those markets, because people fear prosecution. So even if costs turn out to be higher in illegal markets, I cannot argue that this is due to absence of government. It may be due to the hostile presence of government.

As far as I can tell, we are left with purely hypothetical thought experiments. Take an example of a complex economic activity that involves a lot of specialization and trade. The famous pencil, or a toaster, or an I-phone. The parties involves in the process of assembling such goods involves do not know one another. They cannot gauge reputations, nor can they even know whether other parties care about their reputations. Now, remove all government enforcement of contracts, and imagine what happens.

What I imagine is that the parties have to come up with multi-layered contractual arrangements and enforcement mechanisms that are incentive compatible and fully state-contingent, so that everyone can be sure that disputes won’t erupt into violence. I am not arguing that this cannot be done. What I am claiming is that these transaction costs will be lower when in the back of everyone’s mind there is the understanding that there are government courts that have coercive powers to enforce decisions.

Government does not provide optimally or costlessly the legal infrastructure that facilitates complex trade among strangers. However, my intuition is that in the absence of government such infrastructure would cost much more to put in place.

Sharing Home Equity

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From an NYT blog post,

With the right financial vehicle, Mr. Rampell said, such a fund could invest to co-own houses in, say, pricey Palo Alto, Calif., making it easier for prospective home buyers to make down payments and reduce their mortgage burden. “They could own 10 percent or 15 percent of your house, so you don’t have to borrow as much,” Mr. Rampell said. “I think there’s a lot of room for more of those kind of new asset classes.”

Pointer from Tyler Cowen.

1. This is not the first time someone has proposed such an idea. In the early 1980s, with sky-high interest rates, somebody came up with the Shared Appreciation Mortgage, where you would get a lower interest rate from the lender in exchange for which the lender would get a percentage of the appreciation in 10 years or when you sold your home, whichever came first.

2. So what is the asset, exactly? I think of it as a second mortgage, with a variable interest rate that depends on the rate of appreciation of the property and on the size of what I would call the “discount,” because the third-party owner is going to pay less than $10,000 for a 10 percent share of a $100,000 house. Why? Because the third party does not get to live in the house and enjoy the implicit rental income. In the extreme case where a third party has 100 percent of the equity but for some reason pays the full $100,000 price. In that case, in exchange for giving up all the equity, the “buyer” would be living in the house rent-free!

3. There are no magic tricks in mortgage finance that make housing affordable to people who cannot save enough for a reasonable down payment. The only way to make housing affordable is for the price of homes to come down to where people can afford them. That’s true even in California, although folks there go through periodic episodes where they refuse to believe it.