Recycling is Not Sustainable

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John Tierney writes,

Despite decades of exhortations and mandates, it’s still typically more expensive for municipalities to recycle household waste than to send it to a landfill. Prices for recyclable materials have plummeted because of lower oil prices and reduced demand for them overseas. The slump has forced some recycling companies to shut plants and cancel plans for new technologies. . . .

Moreover, recycling operations have their own environmental costs, like extra trucks on the road and pollution from recycling operations. Composting facilities around the country have inspired complaints about nauseating odors, swarming rats and defecating sea gulls. After New York City started sending food waste to be composted in Delaware, the unhappy neighbors of the composting plant successfully campaigned to shut it down last year.

Belongs on first-year economics course reading lists everywhere.

Bethany McLean Slips

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In her new book, Shaky Ground: The Strange Saga of the U.S. Mortgage Giants, she writes,

Originally, Fannie and Freddie owned the mortgages they purchased. but over time, as the capital markets in this country evolved, Fannie and Freddie began to package up the mortgages they purchased, stamp them with a guarantee. . .and sell them as securities to investors.

This is true of Fannie. But for Freddie the history is the opposite. They were in the securitization business from the beginning in 1970, and only around 1990 did they start to hold a substantial share of mortgages and mortgage securities as assets. There were several reasons that Freddie shifted to holding a large portfolio, funded by debt.

1. By 1990 Freddie was a shareholder-owned company (before that, they were basically a government agency), and shareholders were interested in profits. Having a large portfolio was profitable.

2. Prior to that, Freddie was concerned about the risk of holding mortgage portfolio. If you fund with short-term debt and interest rates rise, you end up paying more in interest expense than you earn on mortgages. If you fund with long-term debt and interest rates fall, borrowers refinance at lower rates and you are stuck with the high long-term debt costs. But Fannie Mae found a solution, which consisted of issuing callable debt. For example, they might issue a 10-year bond that can be called in 5 years. The market charged a surprisingly low interest rate on such securities, so Freddie started issuing them. Combining callable debt with some interest-rate derivatives gave Freddie and Fannie something close to an arbitrage profit in portfolio lending. They were helped, of course, by their “too big to fail” status, which made investors treat their debt as risk free–until the summer of 2008.

Anyway, I am sorry McLean slipped up on this. I really liked her book with Joe Nocera, All the Devils are Here, and I still have high hopes for her new one, which I have just started. I expect to post more on it.

I found this interesting:

When they were taken over, Fannie and Freddie had a combined $5.3 trillion in outstanding debt,, which, had it been put on the government’s balance sheet, would have increased the public national debt by about 50 percent. Partly to avoid that, the government left 20.1 percent of Fannie’s common stock, as well as other securities known as preferred shares, in the hands of investors.

Fannie and Freddie were originally government agencies. Fannie was privatized not for ideological reasons, but because Lyndon Johnson wanted Fannie’s debt off the government balance sheet. He was trying to fund the Vietnam War, plus the war on poverty, and he did not want Congress bothering him with debt-ceiling issues.

So here we were in 2008, and Fannie and Freddie should have been re-nationalized, but once again, the cosmetics of the government balance sheet took precedence.

Lifted from the comments

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Handle, who is a popular commenter here, wrote a long essay on this post.

I’ll start with my outline/interpretation of Handle’s comment, and then reproduce the comment.

1. Political movements need to coordinate. This requires simplifying messaging. (This may explain why my three-axes model seems to work. While there may be all sorts of subtle nuances to individuals’ thinking, it is easiest for progressives to signal to one another by invoking the oppressor-oppressed axis, or for conservatives to signal using the civilization-barbarism axis, or for libertarians to signal using the freedom-coercion axis.)

2. In a complex world, this sort of simplification can have adverse consequences if one group becomes dominant and tries to cram every issue into its simple framework. We are better off in a society where no one ideological framework takes over.

3. However, the progressive movement seems dominant today. The more that the progressive agenda becomes implemented, the more damage it will cause. Paradoxically, this will lead progressives to become more adamant and less tolerant of dissent.

If you combine Sanders and Warren, what you get is socialism combined with demonization and intimidation of anyone who does not support left-wing views. This is the country that the Democratic left wants to live in?

I take this as a rhetorical question to try and make mainstream elite democrats, who would not be comfortable admitting that they side with Socialist bullies, a little ashamed of not speaking up against them and of belonging to a party increasingly characterized by those types of characters and behaviors.

However, I think the accurate and unfortunate answer is ‘yes’ for a good portion of Democrats, and the reasonable, enlightened and moderate folks for whom the answer is ‘no’, still have no desire or ability to resist it.

Which raises the question as to why that should be, which I think is the most important question about social-psychological dynamics of our era, especially since it could give us some insight into how the near future will unfold.

Please allow me to speculate a little on it. Continue reading →

Cinnabonomics

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I review the latest book by George Akerlof and Robert Shiller. I generally admire both authors. Ordinarily, if I do not like a book, then I do not write a long review. However, because both authors are Nobel Laureates, and because the book has received some positive press, I made an exception and let go with both barrels.

The authors do not deny that markets often work. However, if phishing equilibrium is limited to specific types of products, then the authors do not say so, nor do they give any criteria or characteristics to look for in order to predict in which markets phishing equilibria will be most prevalent.

But you have to read to the whole review to get the flavor.

Recall that Alex Tabarrok did not much are for the book, either.

Research with Pre-commitment

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Kimberly G. Noble writes,

In a study published this year in Nature Neuroscience, several co-authors and I found that family income is significantly correlated with children’s brain size — specifically, the surface area of the cerebral cortex, which is the outer layer of the brain that does most of the cognitive heavy lifting. Further, we found that increases in income were associated with the greatest increases in brain surface area among the poorest children.

…I am part of a team of social scientists and neuroscientists planning a large clinical trial in which 1,000 low-income mothers will be randomly assigned to receive either a large ($333) or small ($20) monthly income supplement for the first three years of their children’s lives. Periodic assessments of the children and their mothers will enable us to estimate the impact of these cash supplements on children’s cognitive, emotional and brain development, as well as the effect on family functioning.

…Our clinical trial is designed to provide strong evidence regarding whether and how poverty reduction promotes cognitive and brain development. This study, however, will take at least five years to complete — far too long for young children living in poverty today. We should not wait until then to push for policies that can help inoculate young children’s pliable brains against the ravages of poverty.

Pointer from Mark Thoma.

Her policy suggestions seem to me to be based quite a bit on emotion, and some of them do not even (to me) seem related to children’s brain development. This makes me concerned that perhaps she is so emotionally attached to her preferred policy solutions that she is pre-committed to finding that poverty causes small surface area of the cerebral cortex, rather than finding that the correlation comes from income and brain characteristics being correlated between parents and children. This my be an example of a study where only a positive finding will be published; a null finding may never see the light of day.

I am glad that she wants to do a controlled experiment. If the results come out the way she would like, then it will be an important finding. I would be happy to volunteer to help audit the study.

More Thoughts on Economic Methods

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Diane Coyle writes,

Rodrik supports the mathematical nature of economics as bringing clarity of meaning, and argues that the subject is far more applied and empirical than its detractors realise. But he criticises large-scale macro models and time series regressions. “I cannot think of an important economic insight that has come out of such models,” he writes. He also flags up the lack of testability of many economic models: they purport to be deductions from theoretical principles, but as they are ‘deduced’ to explain a particular phenomenon (credit rationing, say), then that phenomenon cannot be used to test the model. “Very few of the models that economists work with have ever been rejected so decisively that the profession discarded them as clearly false.”

Pointer from Mark Thoma.

My line is that economists deal in non-falsifiable interpretive frameworks. Read Coyle’s entire post. She makes Rodrik sound like someone I would agree with, although not everything I have read of him would indicate that.

The conversation between Tyler Cowen and Dani Rodrik keeps circling back to methodological issues. For example, Rodrik is wary of overrating randomized control trials. Rodrik suggests that graduate students should spend more time in the real world.

I keep thinking of the quote of Minsky writing that economists are well trained but not well educated. You are trained to solve equations. Nowadays you are trained to do the sort of narrow empirical studies that Rodrik thinks are overrated. But you are not educated in history or financial institutions or secular changes in the economy.

Also, Noah Smith has more to say.

philosophical empiricism is far more frightening for economists than for natural scientists. Living in a world of theoryderp is easy and comforting. Moving from that world into a Popperian void of uncertainty and frustration is a daunting prospect. But that is exactly what the credibility revolution demands.

Read the whole post. As I read it, he thinks that economists will have to reconcile themselves to less theory and more empirical work. I do not really agree:

1. I think that economists rely a lot on what I call interpretive frameworks. These do not have standing in philosophical empiricism, because they are not falsifiable.

2. Philosophical empiricism does not provide a guide to evaluating interpretive frameworks. Unfortunately, economists have not thought about this question. Frameworks become popular because they are tractable or interesting, and they stay popular without ever being evaluated for usefulness.

3. I think that an interpretive framework is strong if it offers explanations in many contexts, if it does not encounter too many anomalies (phenomena that seem to run counter to the framework), and if it is reinforced by other beliefs.

4. Supply and demand is an example of an interpretive framework that is very strong. That is, it seems to explain a lot, one rarely encounters anomalies, and it is consistent with other beliefs that we tend to hold.

5. Keynesian macro is an example of an interpretive framework that is not very strong. Many anomalies have cropped up over the decades: the ability of the U.S. economy to rebound after World War II in spite of the staggering drop in government spending; the breakdown of the Phillips Curve in the 1970s; the failure of many Keynesian stimulus policies in many countries, including the U.S. And Keynesian macro is notoriously inconsistent with many other beliefs that economists tend to hold.

Did Scott Sumner Stumble?

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He wrote,

Unfortunately, the Fed doesn’t get to decide the path of interest rates. It looks like they do, but that’s a cognitive illusion. The bond market determines the path of interest rates, reflecting factors such as global credit markets, as well as NGDP growth and the level of NGDP in the US.

I am fond of Winston Churchill’s remark about someone who “stumbles across the truth, but then picks himself up as if nothing happened.”

That is what I feel took place here. I think that the implication of the quoted sentences is that it is the bond market, not the Fed, that is in control. As I write in the Book of Arnold, the Fed is just another bank. It has no more ability to “target” macroeconomic variables than does Citibank. Of course, Citibank is free to set a ridiculous interest rate for its on loans and deposits, and so is the Fed. And if the Fed set a ridiculous rate on reserves (right now negative 1 percent would be ridiculous, as would positive 5 percent) lots of crazy things would happen. With a negative rate on reserves, cash would dominate reserves as an asset. With a rate of 5 percent, reserves would dominate pretty much any loan as an asset.

But leave aside such hypotheticals. The Fed is not the macroeconomic driver it is made out to be.

The Disappearance of the Tea Party

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Peter Spiliakos writes,

I suspect that many Republican politicians sincerely see their own party as composed of sober businessmen, plus crazy people wearing tricorne hats, plus crazy people waving fetus selfies, plus crazy people jabbering about Mexicans. The behavior of establishment Republican politicians can be seen as trying to placate/gull the various crazies so that the real work of the business lobbies can finally get done.

Amusing sentences (“fetus selfies”). In thinking about this, I am inclined to differentiate between two aspects of the Republican base. On the one hand, there is the Tea Party. On the other hand, there is the Trump/Fiorina Party.

At one point, I thought that the Tea Party’s issues were the bailouts, government spending in general, and Obamacare. On those issues, I am with the Tea Party and I share their disappointment with the Republican establishment, as represented by John Boehner, Mitch McConnell, and John Roberts.

The Trump/Fiorina party looks different. Trump wants to appeal to xenophobia, and Fiorina wants to mobilize the right-to-lifers. If the Republican establishment would prefer to be softer on immigration and less obsessed with the abortion issue, then I am with the establishment.

Of course, Democrats and the media do not see this distinction between the Tea Party and the Trump/Fiorina Party. They use Tea Party as an all-purpose boo-word. So they treat Trump and Fiorina are synonymous with Tea Party.

But to me the difference matters. And I am struck by the disappearance of what I thought of as the Tea Party as a factor in current politics. I hope that in the next several months the Tea Party comes back and the Trump/Fiorina Party recedes.

In an essay that I saw after writing this, Jerry Taylor makes the case that the Republican race, and in particular Rand Paul’s poor showing, is an indication that libertarianism is weak among the masses. And he also throws some cold water on my own hopes:

According to a survey conducted by the Public Religion Research Institute, more than half the Tea Party is made up of the religious right while only 26 percent—the smallest ideological bloc within the group—can be loosely described as Libertarian. And Tea Partiers have always manifested a large degree of nativist populism.

Have a nice day.

The Third C is Conscientiousness

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Broadly speaking, our results point to a quantitatively large and significant role for credit scores in the formation and dissolution of committed relationships. Three sets of empirical results support this conclusion: First, credit scores are positively correlated with the likelihood of forming a committed relationship and its subsequent stability. Second, partners positively sort into committed relationships along the credit score dimension even after controlling for other similarities between the partners. Third, a positive correlation notwithstanding, within-couple differences in credit scores are apparent at the start of relationships. Notably, the initial match quality in credit scores is highly predictive of subsequent separations even when controlling for other factors, such as couples’ use of credit and the occurrence of financial distress.

Jane Dokko, Geng Li, and Jessica Hayes write,

These results lead us to hypothesize that credit scores, in addition to measuring an individual’s creditworthiness regarding the repayment of debt obligations, reveal information about an important relationship skill. We argue that one such skill could be an individual’s general trustworthiness and commitment to non-debt obligations. To make this argument, we turn to survey-based measures of trustworthiness to show that the average credit score of a geographic area (typically a county) is highly correlated with the same area’s average level of trustworthiness. We also find that when individuals have a long exposure to greater trustworthiness, as measured by surveys, they tend to have higher credit scores even years after they leave those areas. Similar to how credit scores predict the formation and dissolution of committed relationships, we find that survey-based measures of trustworthiness also have predictive power for these outcomes. Interestingly, such statistical relevance diminishes when the couples’ credit score levels are controlled for, underscoring the overlapping between credit scores and survey-based measures of trustworthiness.

Pointer from Tyler Cowen.

In mortgage underwriting, they used to talk about the three C’s: collateral (the house, particularly the borrower’s equity in it), capacity (the borrower’s income relative to mortgage payments and other debt obligations), and credit history.

In fact, I think that the third C should be called conscientiousness, one of the Big Five personality traits. The authors of the paper instead use the term trustworthiness. That this trait should matter for relationship stability, and that it is well measured by credit scores, should surprise no one.

I worry that pursuit of this line of inquiry, like research on the role of IQ, will not be good for the career of a young researcher.