Virginia Postrel on Martin Gurri

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She writes,

As information becomes abundant, he writes, “the regime accumulates pain points.” By this he means that problems like police brutality, economic mismanagement, foreign policy failures and botched responses to disasters “can no longer be concealed or explained away.” Instead, “they are seized on by the newly empowered public, and placed front and center in open discussions. In essence, government failure now sets the agenda.”

She says that Gurri’s thinking is that notwithstanding their greater awareness of failure, people are expecting more from government and other organizations.

In my mind, I keep going back and forth between seeing our political sectarianism as unprecedented on the one hand and seeing it as a replay of 1968 on the other. In the 1968 election, the public, preferring a representative of the existing order against the forces of rebellion, ultimately turned to a familiar face, even though he was widely disliked and viewed as unscrupulous. Thus, although right now I do not know a single person who is positively disposed toward Hillary Clinton (and almost all of my friends are Democrats!), it is conceivable that she will win a landslide.

Read Postrel’s whole essay. I will put Gurri’s book on my list of items to read. And is Martin any relation to Adam?

Four Forces Watch

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Tyler Cowen writes,

One study indicated that if the marriage patterns of 1960 were imported into 2005, the Gini coefficient for the American economy — the standard measure of income inequality — would fall to 0.34 from 0.43, a considerable drop, given that the scale runs from zero to one. That result is from the economist Jeremy Greenwood, a professor of economics at the University of Pennsylvania, and other co-authors.

Read the whole piece. I think Tyler is right to consider this a bottom-up exercise in eugenics. My guess is that his NYT readers will hate that analysis, while at the same time behaving in ways to reinforce it.

Real Estate is a Difficult Market to Arbitrage

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Nick Timiraos has some useful charts related to house prices. The ones that interest me the most are the last ones, which show price-rent ratios. For LA, it is 25, and for SF it is over 30. But for NY, Boston, and DC it is all under 20.

I think of the inverse of the price-rent ratio as a measure of the real interest rate. Thinking of it that way, the real interest rate in San Francisco is about 3 percent, while the real interest rate in New York is about 7 percent. That suggests that you want to borrow in SF to lend in NY. Or, in this case you want to go short housing in SF and go long housing in NY.

Some reasons why this does not happen:

1. It is hard to go short in real estate.

2. It is hard to go long the “average” price in a city. You can only buy specific houses.

3. The market can stay mis-priced (and get more mis-priced) longer than you can stay solvent.

Tort Insurance for Immigrants? for Everyone?

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A reader (not Steve Sailer) asked me to comment on this suggestion that immigrants be required to purchase insurance.

Think of immigration as being like driving. If you are going to go hurtling about the landscape in a multiton projectile, it’s only fair to others that you demonstrate that you are able to pay for any damage you might do. Thus, practically every state requires car owners to have driver’s insurance or otherwise post bond in some kind of quasi-insurance system.

The idea of requiring insurance is that it allows victims to sue and obtain compensation, which they could not do for harms caused by individuals with low net worth who do not have insurance. My reaction is to wonder why only immigrants should be required to carry insurance. Any of us has the potential to inflict harm that would cost far more than our net worth. Maybe everyone should be required to obtain some sort of catastrophic liability insurance.

This would put insurance companies in an interesting position. They would want to find out a lot of information about individuals and then attach prices to various risk factors. Criminal history? Gun ownership? Diagnosis for mental illness? Hostile postings on social media? Position in the financial industry?

My own sense is that the concept is unworkable and distasteful. In general, I am not a big fan of tort law as a social regulatory mechanism, and I am not a big fan of the insurance industry.

As I recall, around 1975-1985 the Wall Street Journal editorial page was really enamored of this idea, but they have subsequently gone in the other direction. They now tend to take the view that lawsuits in this country are excessive and often socially harmful. I am inclined to agree.

Inequality and Team Performance

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An alert commenter points to a more recent study of baseball team performance.

Having a larger Gini coefficient (as you’d see in a stars-and-scrubs roster) is ever so slightly associated with better outcomes over the rest of the season. However, the effect wasn’t large enough to be statistically significant, so this analysis says a team should probably just be indifferent about which approach it uses to build a roster.

I believe that the study that Turchin cited looked at inequality in terms of salary, whereas this study appears to look at inequality in terms of players’ contributions to wins. In any case, this study finds the opposite result, although it is not statistically significant.

Even the original study cited by Turchin does not quite say what he claims it says. The abstract reads,

in the latter part of the 1990s and continuing into the 21st century, the greater the team payroll and the more equally this payroll is distributed among team members, the better the on-field performance of the team.

I interpret this as saying that teams with higher total salaries for players were winning more. Given an aggregate salary level, it was better to have it more evenly distributed among team members. But that might indicate that, other things equal, it was better to have a balanced roster than a stars-and-scrubs roster.

Turchin uses this one study, which he interprets as showing that unequal salaries per se cause poor performance, to argue that inequality will lead to social collapse. Seems like quite a stretch.

Re-Reading Douglass North

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When I read Peter Turchin’s Ultrasociety, I thought that it covered some of the same ground and had some similar ideas as Douglass North’s Structure and Change in Economic History, which appeared in 1981. In fact, it is hard to find anything in Turchin’s book that supercedes North, notwithstanding 35 more years of anthropological research and the new discipline of cultural evolution. It seems that North’s intuition was pretty sound.
Continue reading →

Social (In-) Security

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Erzo F.P. Luttmer and Andrew A. Samwick write,

On average, our survey respondents expect to receive only about 60 percent of the benefits they are supposed to get under current law. We document the wide variation around the expectation for most respondents and the heterogeneity in the perceived distributions of future benefits across respondents. This uncertainty has real costs. Our central estimates show that on average individuals would be willing to forego around 6 percent of the benefits they are supposed to get under current law to remove the policy uncertainty associated with their future benefits. This translates to a risk premium from policy uncertainty equal to 10 percent of expected benefits.

My comments:

1. I believe that most economists think that even in the worst case individuals would get more than 60 percent of the benefits that they are promised.

2. Somehow, I am reminded of Foolproof, in which the attempt to reduce risk has the reverse effect. That is Social Security was supposed to increase the certainty of people’s retirement incomes, but apparently it is not doing so.

Peter Turchin on Cultural Evolution

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The new book is called Ultrasociety. It has many interesting ideas. However, some of them I find quite unpersuasive.

One of his core ideas is that because groups need to cooperate, competition within groups is harmful. Meanwhile competition among groups is helpful, because it promotes cultural adaptation. So if players on a basketball team or soccer team are competing with one another, the team will do poorly because they are not cooperative. But competition between teams will lead to improvement, as good ideas from one team get copied by another.

Turchin equates inequality within a team to competition within a team. He claims that this has empirical support, in that teams with less unequal salaries tend to win more games. This makes me think of Lebron James getting paid a lot more than a teammate who spends most of the game on the bench. If you really believe Turchin’s analysis, the team would cooperate better and win more games if it did not have Lebron. I call baloney sandwich.

Outside of sports, I am not sure that the terms “group,” “cooperation,” and “competition” can be defined clearly enough. Is a professor of ecology at the University of Connecticut a member of the “UCon group,” cooperating with other members of that group while competing against the “Harvard group?” Or is he a member of the “ecology group,” cooperating with other ecologists while competing against the “economist group” or the “sociologist group?” To me, neither description seems appropriate.

Turchin is quite contemptuous of the “Rank and Yank” personnel policies practiced by Enron, in which employees were ranked and those who did not make the grade are let go. But what is academic tenure other than a “Rank and Yank” system? The top law firms and management consulting firms also tend to operate on a “Rank and Yank” basis. Wouldn’t Turchin’s framework predict the collapse of these institutions?

If and when I review the book, I will have to remark on the irony that it is filled with mood affiliation for progressive attitudes and yet he keeps stumbling on ideas that are part of bedrock conservatism. These include the importance of culture, the fragility of civilized society, the benefits of traditional marriage, and the value of keeping nations culturally homogenous.

Scott Sumner on Robert Hetzel

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Scott writes,

Friedman, Hetzel, and I all share the view that the private economy is basically stable, unless disturbed by monetary shocks.

Scott refers to this paper by Hetzel.

Very broadly, I place explanations of cyclical fluctuations in economic activity
into two categories. The first category comprises explanations in which real
forces overwhelm the working of the price system. . .

In the second class of explanations of cyclical fluctuations, the price system
generally works well to maintain output at its full employment level.

My own mantra is that all recessions are adjustment problems, and that adjustment problems are local. Do not think of the economy as one big GDP factory governed by the relationship between “the” wage, “the” price level, and the money supply. Instead, think of it as patterns of specialization and trade, with the sustainability of those patterns determined by profits. When patterns are disrupted by innovation or by changes in credit conditions, the economy must re-allocate resources. It takes time for entrepreneurs to figure out how to do that.

So, relative to Sumner and Hetzel, I am in the “other” camp.

By the way, in about a week, I should have up a review of Sumner’s treatise on the Great Depression, The Midas Paradox.