A Simple Theory of Government

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From Kevin Williamson,

The problem for the U.S. political class is that the provision of actual public goods is nowhere near large enough of an enterprise to justify all of the clients they want to pay on the public payroll or all of the large, complex, lavishly funded agencies that they want to establish for the purpose of putting themselves in charge of them. So they have to return to the old protection-racket model: Much of American government today exists simply to stand between you and your own goals to collect a fee.

I agree with the theory that government evolved as a protection racket. I tend to think that protection rackets are very natural forms of business. You start out by protecting someone from another bad guy. And when you become the top-dog shakedown artist, it still pays to claim to be protecting someone from another bad guy. One can argue that this is why disparagement of the market is such a core part of the ideology of government expansion. What this ideology says is, “You don’t want the market to steal from you, right? Give us money and power, and we’ll protect you.”

Of course, from the point of view of those who support government expansion, it is the market that is a protection racket, and those of us who advocate for markets are the ideologues.

Wray on Minsky

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My review of the book says,

While L. Randall Wray also praises Minsky for his anticipation of the financial crisis of 2008, he provides a much more nuanced and complete picture of Minsky’s analytical framework than I had encountered previously. While I am not completely converted, I came away from the book with considerably more understanding of Minsky’s views and a greater respect for them.

I still consider this one of the best books of the year.

Saving and Investment with Rapid Depreciation

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Tyler Cowen writes,

it seems to me highly premature to assume we know what is going on with short-term negative real rates

Let me try to tell the disinflation story again. Suppose that most capital goods these days have computing devices built into them. Consequently, there is rapid improvement in capital. This in turn means that:

1. Today’s capital goods are much more productive then yesterday’s.

2. The real price of capital goods is falling over time.

3. Depreciation of existing capital goods is rapid. What you buy today is obsolete in a few years.

I teach students a basic formula for the profitability of buying a durable good:

profitability = rental rate + appreciation – interest cost

Suppose that the rental rate on new capital is very high. That is, it is very productive. However, the appreciation rate is very negative. You may need a negative interest rate to convince you that it is profitable to obtain capital.

What else would be true if this were the story? Assets that do not depreciate would be very attractive. So if you believe that real estate does not depreciate, you want to invest in it. If you believe that corporate “brand value” does not depreciate it, you want to buy shares in firms that have a lot of brand value.

More needs to be worked out.

Joseph Henrich on Cultural Transmission

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The book is The Secret of Our Success, and I am only a little way into it. An excerpt:

evolutionary reasoning suggests that learners should use a wide range of cues to figure out whom to selectively pay attention to and learn from. Such cues allow them to target those people most likely to possess information that will increase the learner’s survival and reproduction. . .individuals should combine cues related to the models’ health, happiness, skill, reliability, competence, success, age, and prestige, as well as correlated cues like displays of confidence or pride. These cues should be integrated with others related to self-similarity, such as sex, temperament, or ethnicity

I think that by emphasizing how little knowledge we generate internally compared with knowledge we acquire through cultural transmission, this book could bolster libertarian/conservative views. It certainly reinforces my doubts about the ability of technocrats to “fix” society. Henrich does not do much with this, although skipping ahead to the next-to-last paragraph in the book:

Humans are bad at intentionally designing effective institutions and organizations, though I’m hoping that we get deeper insights into human nature and cultural evolution this can improve. Until then, we should take a page from cultural evolution’s playbook and design “variation and selection systems” that will allow alternative institutions or organizational forms to compete. We can dump the losers, keep the winners, and hhopefully gain some general insights during the process.

Yes, Professor Henrich, we have a term for that. We call it “the market.”

No Libertarians in a Civilization vs. Barbarism Wave

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Jonathan S. Tobin makes the case that big cities are experiencing a crime wave, in part because of delegitimization of police.

This may or may not be true. However, I think it does reflect the views of those who think in terms of the civilization vs. barbarism axis.

I think that recent developments in the Middle East, starting with the behavior of Hamas during the Gaza war and continuing with the behavior of ISIS, have struck a nerve among those inclined toward the civilization vs. barbarism axis.

Even if you do not believe that conservatives are right, you have to acknowledge that the news cycle suggests that we are in a civilization vs. barbarism wave. In my opinion, that is why Rand Paul is doing so poorly in the polls. You can criticize him as a candidate, but it is hard to argue that the other candidates are so stellar that they outshine him. I just think that the public is more receptive to the conservative axis than to the libertarian axis. This may always be true, but it is particularly true now.

Good Turner, Bad Turner

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In Between Debt and the Devil, Adair Turner writes (p. 61),

Textbook descriptions of banks usually assume that they lend money to businesses to finance new capital investment…But in most modern banking systems most credit does not finance new capital investment. Instead, it funds the purchase of assets that already exist and above all, existing real estate.

…Different categories of credit perform different economic functions and have different consequences. Only when credit is used to finance useful new capital investment does it generate the additional income flows required to make the debt certainly sustainable. Contrary to the pre-crisis orthodoxy that the quantity of credit created and its allocation between different uses should be left to free market forces, banks left to themselves will produce too much of the wrong sort of debt.

What is good about the book is that he invites us to examine how credit is created and where it goes. As he points out, standard macro models have totally ignored this issue.

What is bad about the book is embedded in the last sentence quoted above. We are left to assume that the huge allocation of credit toward housing was the operation of “free market forces.” I do not know about other countries, but for the United States this is totally false. The government was very much involved in channeling credit, and it channeled as much as it could toward housing finance.

Still, I think that what is good about the book makes it worth reading. I plan to say more when I have finished it.

Trying to Reconcile These

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As you know, bakers who would not bake a wedding cake for a gay couple ran afoul of the legal system. Now, we find that Muslims who would not deliver alcohol were protected by the legal system.

I am trying to avoid the conclusion that the legal system is here to protect people with whom the judge is sympathetic and to punish people with whom the judge is not. So here is my best shot:

1. The trucking company that fired the Muslim workers had many alternatives. They could have easily accommodated the wishes of the Muslim workers and still delivered the beer. Firing the Muslim workers for not delivering beer was equivalent to firing an observant Jew for not working on Saturday.

2. For the gay couple, however, there was close to no alternative but to go to this particular bakery for a wedding cake. By refusing to bake for this couple, this bakery was forcing the couple to either forego a cake, pay a high price to a different baker, or travel far to obtain a cake.

So if your religious beliefs to do not severely constrain the alternatives of the other party, then your religious beliefs take precedence. If they do severely constrain the alternatives of the other party, then the other party’s needs take precedence.

Does that work? If not, can you come up a better way to rationalize these two decisions?

Oops, Maybe You Should Not Annuitize

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Felix Reichling and Kent Smetters write (gated–ungated version here),

But the presence of stochastic mortality probabilities also introduces a correlated risk. After a negative shock to health that reduces a household’s life expectancy, the present value of the annuity stream falls. At the same time, a negative health shock produces potential losses, including lost wage income not replaced by disability insurance, out-of-pocket medical costs, and uninsured nursing care expenses, that may increase a household’s marginal utility. Since the value of non-annuitized wealth is not affected by one’s health state, the optimal level of annuitization falls below 100 percent.

I once wrote,

An annuity is risk-reducing if the only risk you face is additional longevity. In fact, other risks may be more serious. You could easily find yourself needing to take out a loan if your savings are tied up in an annuity and your spouse requires a home health aide.

Economists have been preaching for 50 years that the low usage of annuities illustrates a market failure. In fact, what it may illustrate is that economists who relied on a mathematical model left out some important considerations. We need a term for this. I propose model failure.

Trade Facilitation

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Timothy Taylor writes,

reforming the legal and regulatory processes around customs, and reducing delays, means that there is less reason to pay bribes to facilitate the process–and thus reduces corruption.

Read the entire post. It takes some nuggets from one of those reports that only Taylor seems to find, the source in this case being the World Trade Organization. The point is that there are many administrative and legal processes that inhibit cross-border trade, and reform of these processes could generate a lot more trade and economic improvement.

Peter Berkowitz on Higher Education

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He writes,

As a consequence of the decline of liberal education in the United States, most American Jews will also graduate college without a basic knowledge of the virtues that underlie free societies; the institutional arrangements through which constitutional government secures liberty and equality under law; and the assumptions, operations, and achievements of free markets.

This a symposium on the future of Jews, but his comments apply to the future of well-educated Americans in general. I am afraid to say that

a) I agree with Berkowitz about the way higher education now works, or does not work.

b) I think that unless new institutions emerge that solve this problem, one has to be very pessimistic about the future.

Other contributions to the symposium that I found interesting include that of Eliot Cohen (whose brilliant daughter I taught in high school) and Eric Cohen, who writes,

in the realm of politics, Jews seem pathologically silly…

In America, Jews should be focused on promoting school vouchers, the only hope for expanding the day-school movement and unleashing a new generation of Jewish educational entrepreneurship; on fighting to defend religious liberty, the only hope for ensuring that traditional Jewish beliefs and institutions are not marginalized by a hostile secularist culture; and on electing political conservatives, the only ones who still believe that Jewish nationalism is a noble cause and that American power is necessary to preserve decency and order in the troubled Middle East.

I am quite sure that the phrase starting with “American power” will turn off libertarians, including many Jewish libertarians.