How to Fix Infrastructure

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Scott Sumner writes,

I think a better comparison for New York would be a high income, world-class city like Singapore or Hong Kong or Dubai. Those places are able to build very good infrastructure quickly and at low cost. They might use Bangladeshi migrant workers at $1/hour instead of American “prevailing wage” workers at $50/hour. Indeed even cities like Paris and Berlin build new subway lines at 1/7th the cost of the New York project. A small part of this cost gap may be due to physical differences between the various cities, but by no means all of it…

This demonstrates one of the many internal contradictions of American progressivism. (And by the way, American conservatives have just as many internal contradictions.) You can have your strong public employee unions, “prevailing wages” and restrictive work rules, or you can have nice infrastructure. New Yorkers have (perhaps unknowingly) made their choice. Now they must live with the consequences. Few progressives (with the notable exception of Matt Yglesias) understand these internal contradictions.

Economists Heart Banks

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The IGM forum polls responses to this statement:

There is a social value to having institutions that issue liquid liabilities that are backed by illiquid assets.

Not one of the economists polled disagrees.

For mood-affiliation purposes, I would have said “agree.” But I think it is uncertain, only because such institutions seem to always end up codependent with government in ways that detract from social value.

The Prisoner Swap

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I should not comment on this sort of news, but there is nothing else going on right now. [ed. so how about just not posting for a while?] Anyway, this caught my eye.

Todd Sandler, an economist at the University of Texas-Dallas, studied four decades of data and found that, for every kidnapper paid, 2.5 more abductions occurred.

I look at this from a spy-novel perspective. In that case, the American intelligence community might send an American to “wander off,” get captured, pretend to be a deserter, and gather intelligence. When his usefulness has ended, you swap five ex-Taliban for him. Of course, you have convinced those ex-Taliban to spy for you.

Surely, the Israelis only exchange prisoners who they believe will provide them, wittingly or otherwise, with useful intelligence when they are released?

Of course, if the terrorists keep kidnapping Americans and Israelis, that means they either (a) don’t know about the spy-novel stuff or (b) don’t think that Americans or Israelis are that clever/dastardly or (c) don’t mind absorbing new spies, because the publicity from kidnapping and exchanging prisoners helps with fundraising and recruiting.

If I Gave a High School Graduation Speech

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I am going to talk about community service…and why I am against it.

Today, you will see students given awards for community service. I want to explain why I disagree with that.

I think that young people can learn to be good citizens at least as well by day-dreaming, playing, socializing, or working for paying jobs at profit-making enterprises. I am tired of seeing them indoctrinated to believe that only volunteer work for no-profits qualifies as doing good.

We live in a complicated world. Many people try to simplify difficult moral issues by using the shortcut that some of us call the intention heuristic. With the intention heuristic, you say that if your intentions are good, then you are doing good, and conversely. Moreover, most people apply the intention heuristic by saying that non-profits have good intentions while profits are an indicator of bad intentions.

In fact, there are many well-intentioned people involved in profit-making enterprises. And non-profits are hardly free from venality and corruption. But leave that aside. The important point is that in a complicated world intentions do not correlate with outcomes.

If you judge people by how their life’s work contributed to better lives for people and less poverty in the world, then I will gladly stack up the Henry Fords and Thomas Edisons against the Mother Theresas. Collectively, the capitalists and entrepreneurs have a much better claim on our gratitude than do the icons of community service.

What would you rather have in your community? Would you rather have the Wal-mart that hires the workers that other businesses cannot use and for whom politicians can offer no assistance–people with little education or training, including people with disabilities? Or would you rather have the “activists” who fight to keep out Wal-Mart or who insist that they should dictate Wal-Mart’s labor policies?

In a complicated world, good intentions can have terrible consequences. One hundred years ago, many well-intentioned people championed Communism. When Lenin took power in Russia in 1917, he actually believed that the economy would organize itself, and that without profits production would be more efficient and more equitable. When both his ideas and his leadership proved unpopular, he responded with ruthless tyranny. His took his self-righteousness to a mad extreme, but I am afraid that there is a little bit of Lenin lurking among all of those who are so certain that community service is morally superior to business.

If those of you who are graduating today go on to attend a liberal arts college, you will hear constantly from people who equate moral character with political expressions of approval for non-profits and disapproval of business. They judge you not by the content of your character but by the conformity of your political expression. I urge you to reject their doctrines.

If you undertake community service, do so quietly, without righteousness. Do not celebrate community service. Do not give a special place of honor to community service. Above all, do not demean those who serve the community by helping to provide ordinary goods and services through profit-making enterprises. Their community service is honored not by wealthy donors or by doctrinaire teachers. Instead, their community service is honored by ordinary people who voluntarily choose to spend money to obtain what the profit-seekers have to offer. These willing consumers are all the evidence that is needed to show that the occupation of those in business has decent moral worth.

Inequality Measured Using Longitudinal Data

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I review a book by three sociologists.

Most of the conventional wisdom about relative economic well-being, including the famous studies by Thomas Piketty and Emmanuel Saez, commits the time-series cross-section fallacy. Rank, Hirschl, and Foster did not set out to debunk this fallacy or to attack the many economists guilty of it. Instead, they took what seemed to them a natural approach for studying the evolution of wealth and poverty: longitudinal data. The result, in my reading, is that, like the boy in the fable, they have in an innocent, unintended fashion exposed statistical nakedness among many economists who are regarded as experts on the topic of inequality.

The Federal Government and Occupational Licensing

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Morris Kleiner writes,

There is good reason for workers in licensed fields to push for the laws. Jobs in a service-oriented economy are more likely to be licensed, which raises wages by about 15 percent, as I found in research with the Princeton economist Alan B. Krueger, the former head of President Obama’s Council of Economic Advisers. This is largely because of the ability of regulated professions working through state legislators and regulatory boards to limit the supply of practitioners and to drive up costs to consumers.

What can the Federal government do about this? Some options:

1. Require states to accept licenses from other states unless there is a compelling case that other states’ qualifications are not relevant (might be the case with lawyers, for example, because you need to know a different set of laws).

2. Strong-arm states by making federal aid for worker training, unemployment benefits, and other programs conditional on a state getting rid of anti-competitive licensing laws.

3. Pass a “right to provide service” law that permits any firm to provide a service, regardless of whether it uses licensed personnel. For services that potentially endanger consumers, require providers to undergo periodic audits to ensure that their safety practices are state of the art. Also, require service providers to obtain insurance against lawsuits for fraud or malpractice. This would lead the insurance companies regulate the service providers. Perhaps such a law could only apply to firms that do business in more than one state (I am really fuzzy on how the Commerce Clause separates state from federal power these days. My sense is that it doesn’t.)

Taking Gains as Leisure

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The BLS’ Shawn Sprague writes,

workers in the U.S. business sector worked virtually the same number of hours in 2013 as they had in 1998—approximately 194 billion labor hours.1 What this means is that there was ultimately no growth at all in the number of hours worked over this 15-year period, despite the fact that the U.S population gained over 40 million people during that time, and despite the fact that there were thousands of new businesses established during that time.

And given this lack of growth in labor hours, it is perhaps even more striking that American businesses still managed to produce 42 percent—or $3.5 trillion—more output in 2013 than they had in 1998, even after adjusting for inflation.

Pointer from Timothy Taylor.

Some comments:

1. The gains in real well-being can be vastly under-estimated or over-estimated, depending on how well one adjusts for inflation and other factors, like un-measured consumers’ surplus and the greater variety of goods and services to choose from. My own view is that the gains are somewhat under-estimated.

2. There has been a large increase in leisure. How much of this is a welfare gain, though? My hypothesis is that many more people would work if government policy did not create so many disincentives to supply and demand labor. Just look at Social Security, with its huge payroll-tax disincentive for young people to work and its large subsidy to older people to consume leisure. If my hypothesis is right, then reducing these disincentives would lead to a lot more market work and a slower growth rate in leisure.

3. What accounts for the increase in leisure since 1998? The biggest factor is probably demographics, as many Baby Boomers have gone from prime working years to retirement years. Next, I point to factor-price equalization and to an increase in the wedge between compensation and take-home pay represented by health insurance costs. For the most recent five years, give some weight to Casey Mulligan’s narrative. A lot of economists would point to aggregate demand, but I no longer respect that concept.

Student Loans and Risk

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Atif Mian and Amir Sufi write,

We believe they should recognize that the central problem with student loans is that they force graduates to bear a disproportionate amount of risk for circumstances completely outside their control.

The right way to think about student loans is that they are a gift from taxpayers to the higher education industry, both non-profit and for-profit. Most of the benefit goes to those who work in that industry, not to students. Most of the risk is borne by students and taxpayers, not by those who work in the industry.

The main risk for students is not, as Mian and Sufi imply, macroeconomic risk. Instead, the biggest risk is not graduating. Another risk is not getting a useful education.

The obvious reform is for the higher education industry to have more skin in the game. For example, the institution could be responsible for paying the first ten percent of any losses on a loan undertaken to attend that institution.

Actually, I do not believe that the public interest is served at all by government student loan programs. If the government got out of the business, then it would be up to the market to supply loans to students. Lenders (either the schools themselves or third parties) would have to try to identify students who are likely to profit from attending college, and there would be much more pressure on colleges to pay attention to graduation and to value added.

Some further points:

1. Keep in mind that if government student loan programs went away, tuition probably would fall.

2. Colleges retain the ability to engage in price discrimination, offering lower tuition to students who otherwise would not attend.

Timothy Taylor on Economics and Morality

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He writes,

After all, many academic subjects study unsavory aspects of human behavior. Political science, history, psychology, sociology, and literature are often concerned with aggression, obsessiveness, selfishness, and cruelty, not to mention lust, sloth, greed, envy, pride, wrath, and gluttony. But no one seems to fear that students in these other disciplines are on the fast track to becoming sociopaths. Why is economics supposed to be so uniquely corrupting?

I think that economics is singled out for opprobrium because of the way that it challenges the intention heuristic. The intention heuristic says that if the intentions of an act are selfless and well-meaning, then the act is good. If the intentions are self-interested, then it is not good.

The intention heuristic is what generates the veneration of non-profits. One can readily suppose that the intentions of a non-profit are better than those of a for-profit institution. Accordingly, it seems morally superior to work at a non-profit. However, once one drops the intention heuristic, the case for non-profits becomes much weaker.

I think that the ability to think beyond the intention heuristic is very important in social and political philosophy. However, there are many people who are heavily invested in the intention heuristic, and it is my hypothesis that such people are anxious to discredit economics.

Ben Hunt on Financial Narrative

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He wrote,

the current Narrative associated with Federal Reserve policy is just as powerful and just as real as any historical Narrative I am aware of, including the Narratives of global religions and major nationalities. Fifty years from now, will we look back on Central Bank Omnipotence as a dead myth, as something akin to Manifest Destiny, or will it continue to shape our expectations and behaviors as the Founding Fathers

…What you want to know is what everyone thinks that everyone thinks about the Fed statement, and you can’t find that in the Fed statement, nor in any private information or belief. You can only find it in the Narrative that emerges after the Fed statement is released. So you wait for the talking heads and famous economists and famous investors to tell you how to interpret the Fed statement, but not because you can’t do the interpreting yourself and not because you think the talking heads are smarter than you are. You wait because you know that everyone else is also waiting. You are playing a game, in the formal sense of the word. You wait because it is the act of making public statements that creates Common Knowledge, and until those public statements are made you don’t know what move to make in the game.

I visited the web site because a John Mauldin email newsletter reprinted a different Ben Hunt essay. From yet another Ben Hunt essay:

the Narrative of Central Banker Omnipotence. Like all effective Narratives it’s simple: central bank policy WILL determine market outcomes. There is no political or fundamental economic issue impacting markets that cannot be addressed by central banks. Not only are central banks the ultimate back-stop for market stability (although that is an entirely separate Narrative), but also they are the immediate arbiters of market outcomes. Whether the market goes up or down depends on whether central bank policy is positive or negative for markets. The Narrative of Central Banker Omnipotence does NOT imply that the market will always go up or that central bank policy will always support the market. It connotes that whatever the central bank policy might be, it will drive a market outcome; whatever the market outcome, it was driven by a central bank policy.

…debate over the merits of open-ended QE only intensify the Common Knowledge that Fed policy was responsible for market outcomes in 2012.

In some sense, it does not matter whether you are in favor of QE or against it. If you are passionate about it, you reinforce the Narrative of Central Banker Omnipotence. Regular readers will know that I instead hold a view of central banker near-impotence. That makes me quite out of tune with the conventional narrative.