Greg Ip on The Big Short

Posted on January 17, 2016 by Arnold Kling

But what I think it’s not including in that story is the extent to which these Wall Street guys honestly thought that what they were doing wasn’t that risky. They thought that a Double-A- or Triple-A-rated security had so much protection through various ways, there’s just no way this thing could blow up. And I would say that, in terms of going forward, one of the challenges we as the public and citizens and our government is: How do you create a financial system, how do you create an economy that both gives us the safety that we need to both be happy and to prosper and to take risks without destroying our selves but doesn’t create those fatal levels of complacency?

This is from a Russ Roberts podcast, with much more in the conversation.

The Libertarian Solution to College Sports

Posted on January 17, 2016 by Arnold Kling

Glenn Reynolds wrote,

If the NFL and NBA want farm teams let the build their own.

The Washington Post has done a nice expose series on the money that gets spent on college sports. But even on its editorial page, the Post only talks about reforms that tinker around the edges.

I agree with Reynolds. I suspect that the romanticization of college sports comes from the same human tendency that produces the romanticization of government. Lots of people will tell you that they hate pro football and hate pro basketball, but they love college sports. Because it is non-profit.

I have the same problem with the Olympics.

And with non-profits organizations.

We over-rate the status of people who do things for “free” and we under-rate the status of those who seek to earn profits.

What was Chicago Economics?

Posted on January 16, 2016 by Arnold Kling

Bueller? Peter J. Boettke and Rosolino A. Candela write,

Chicago price theory in the Friedman/Stigler/Becker generation was not defined by the comparative analysis of the institutional conditions within which the constant adjustments and adaptations by economic actors to changing conditions produces a tendency towards equilibrium, as it had been under the Knight/Simons/Viner generation. Instead, price theory in the hands of Friedman/Stigler/Becker became an exercise in defining the optimality conditions given any situation within which human actors find themselves.

From the conclusion:

The Chicago “Tight Prior Equilibrium” imposes a logical discipline on the world of human affairs, but it does not invite an inquiry into the diversity of institutions that arise to ameliorate our human imperfections and potentially turn situations of conflict into opportunities for social cooperation. As a result, the “fresh water” economics of Chicago still leaves us thirsty, and the “saltwater” economics of MIT/Harvard cannot serve to quench our thirst, so we must look to those alternative streams of thought for satisfaction in our quest to understand the dynamics of the market process.

In short, as I once put it,

Chicago economics: Markets work, so use markets

Harvard-MIT economics: Markets fail, so use government

Masonomist: Markets fail, so use markets

For Masonomist, the authors substitute the ABC’s. They write,

Outside of the University of Chicago, a “neglected” branch of Chicago price theory emerged among economists Armen Alchian, James Buchanan, and Ronald Coase, who provided an understanding of the market economy not by assuming the conditions [of] equilibrium, but by focusing their analysis on the dynamic adjustments required in the presence of market failures. By drawing attention to institutional solutions and the role of entrepreneurial action in discovering such solutions, they illustrated how market processes ameliorate social conflict and open up the possibility of realizing the gains from productive specialization and peaceful cooperation through voluntary exchange. It is this argument we contend that fulfills Simons’ plea for academic economics, and proves to be a better prophylactic against popular fallacies.

Noah Smith’s Five Books

Posted on January 16, 2016 by Arnold Kling

He writes,

2015 is the perfect year for me to list my recommendations, since this was a particularly epic time for books about the discipline of economics. In no particular order, here is a short list of good ones:

He goes on to cite books by Bernanke, Rodrik, Thaler, Ebenstein, and Tetlock. Interestingly, all of these books were on my radar screen, but I have not read through any of them, because of issues with the authors that rubbed me the wrong way.

My issue with Bernanke is that I believe that the driver of policy during the financial crisis was Hank Paulson. Bernanke’s role was to make Paulson’s bailout of his Wall Street cronies look intellectually respectable. Maybe I’ll read Bernanke’s book on my trip. I need to make sure that I am reading it with an open mind, but I fear that I will be inclined to view it as just more lipstick on Paulson’s pig.

My issue with Rodrik is that while he correctly sees that economic interventions often are based on analysis that is narrow and imperfectly informed, he thinks that interventionism is still the way to go.

My issue with Thaler is that he does not share Rodrik’s awareness of how economists’ imperfect knowledge can mess things up.

My issue with Ebenstein is that what I think is wrong with Chicago economics is not what he thinks is wrong with it.

My issue with Tetlock is that I don’t buy the reliability of what he does. And what exactly is a superforecaster? Winston Churchill had a horrible record of being wrong on many things. He was wrong during the abdication crisis. He was wrong about Indian independence. He was wrong to return England to the pre-war gold parity. But he happened to be right about Hitler. Probably any sort of “base rate” prediction would have been that Hitler would mellow once he took office and the Nazis could be easily managed. A Tetlockian superforecaster probably would have behaved more like Chamberlain.

James Poterba on the Mortgage Interest Deduction

Posted on January 15, 2016 by Arnold Kling

He says,

the real place where the tax code provides a subsidy for owner-occupied housing is not by allowing mortgage deductibility, because if you or I were to borrow to buy other assets — for instance, if we bought a portfolio of stocks and we borrowed to do that — we’d be able to deduct the interest on that asset purchase, too. If we bought a rental property, we could deduct the interest we paid on the debt we incurred in that context. What we don’t get taxed on under the current income tax system is the income flow that we effectively earn from our owner-occupied house, what some people would call the imputed income or the imputed rent on the house. The simple comparison is that if you buy an apartment building and rent it out, and you buy a home and you live in it, the income from the apartment building would be taxable income, but the “income” from living in your home — the rent you pay to yourself — is never taxed. This is the core tax distortion in the housing market: the tax-free rental flow from being your own landlord.

Pointer from Timothy Taylor. The interview covers other topics, all interesting.

He goes on to say that it is unlikely that people would accept being taxed on a made-up number representing this “rental flow from being your own landlord.” However, people do accept being taxed on the appraised value of their property, which is arguably also a made-up number. It seems to me that you could tax homeowners on a made-up “appraised rental value” just as easily. Or just tax them a percent of the appraised value, as is done now.

Let’s go with the notion that the goal is to tax owner-occupied and investment property identically. Then my thought is you should just exempt landlords from paying tax on their rental income. But I find the whole notion of how the tax system should and should not work to give me a headache. Even if you start with the idea of a consumption tax, do you want to include the use of housing as consumption? Presumably you do, and then you are right back into these conundrums of rental vs. owner-occupied, are you not?

Deirdre McCloskey at the AEA

Posted on January 15, 2016 by Arnold Kling

She writes,

The second element, universal dignity—the social honoring of all people—was necessary in the long run, to encourage people to enter new trades and to protect their economic liberty to do so. The testing counter-case is European Jewry down to 1945, gradually liberated to have a go in Holland in the seventeenth century and Britain in the eighteenth century and Germany and the rest later. Legally speaking, from Ireland to the Austrian Empire by 1900 any Jew could enter any profession, take up any innovative idea. But in many parts of Europe he was never granted the other, sociological half of the encouragement to betterment, the dignity that protects the liberty.

Read the whole essay. Pointer from Don Boudreaux.

Another excerpt, from earlier in the piece:

North, Wallis, and Weingast treat only England, France, and the USA, which obscures the ubiquity of what they call “doorstep conditions”—the rule of law applied even to elites, perpetually lived institutions, and consolidation of the state’s monopoly of violence. Such conditions characterize scores of societies, from ancient Israel to the Roman Republic, Song China, and Tokugawa Japan, none of which experienced a Great Enrichment.

And much later in the piece:

The important “institutions” were ideas, words, rhetoric, ideology. And these did change on the eve of the Great Enrichment. What changed circa 1700 was a climate of persuasion, which led promptly to the amazing reflection, entrepreneurship, and pluralism called the modern world.

Justin Fox on Academic Journals

Posted on January 14, 2016 by Arnold Kling

He writes,

in economics almost every paper of significance is now available in some form free on the Internet before it is published in a journal. Yet economics journals that keep their articles behind paywalls and charge hundreds or thousands of dollars a year for library subscriptions continue to thrive.

This is apparently because the journal editors and referees are still needed to certify the quality of research, certification that informs hiring and tenure decisions and provides information on the relative quality of university academic departments. Also, scholars who want to cite others’ work in their own academic papers need access to the published versions to make sure they get the wording and the page numbers right.

Pointer from Mark Thoma.
These days, I am seeing the world through Martin Gurri’s lenses, as a conflict between the uncredentialed public and the credentialed elites. Thanks to the Internet, the uncredentialed public now has as much access to information as the credentialed elites. One consequence of this is that institutions like accreditation, selective college admission, faculty tenure, and publication come to be seen less and less as essential tools to promote scholarly quality and more and more as artificial gate-keeping.

Steven Pinker on Utopian Ideologies

Posted on January 14, 2016 by Arnold Kling

Quoted at Fee.org

There are ideologies, such as those of militant religions, nationalism, Nazism, and Communism, that justify vast outlays of violence by a Utopian cost-benefit analysis: If your belief system holds out the hope of a world that will be infinitely good forever, how much violence are you entitled to perpetrate in pursuit of this infinitely perfect world?

…Moreover, imagine that there are people who hear about your scheme for a perfect world and just don’t get with the program. They might oppose you in bringing heaven to Earth. How evil are they? They’re the only thing standing in the way of an infinitely good world. Well, you do the math.

I think that it is the conservatives who are most willing to see extreme, utopian ideology as a threat can only be stopped by government leadership. Conservatives emphasize the barbarism in human nature and the need for institutions to protect civilization. Progressives are less worried about utopian ideology, because they tend to see humans as inherently good but held back by oppression. Libertarians see human nature as flawed, but they are reluctant to endorse strong government for protection. Instead, they believe that coercion in any form, including government, is more of a problem than a solution.

In fact, some conservatives fear that libertarianism is itself a utopian ideology. Remember Whitaker Chambers thinking that Ayn Rand’s subliminal message was “To a gas chamber–go!”

The Quotable Martin Gurri

Posted on January 13, 2016 by Arnold Kling

In The Revolt of the Public, he writes,

The rhetoric of democratic politics seems to have gotten out of whack with the reality of what democratic governments can achieve.

Actually, his book has many quotable soundbites, but this one is very central to his main theme. The public has become more informed about the failures of government, but politicians are not encouraging people to lower their expectations. On the contrary, the competitive equilibrium seems to lead toward politicians making ever more extravagant promises.

The Future of the Automobile