He notes that the new risk-retention rules in mortgage securities mandate a lower rate of losses than the securitizers actually took in the subprime crisis. In other words, Congress claims to have improved the safety of securitization by mandating “skin in the game” that amounts to less than what the securitizers actually had.
Who Says These Are Public Goods?
By paying for public goods like education and health care, governments can improve efficiency as well as welfare.
That is from John Micklethwait and Adrian Wooldridge, writing in The Fourth Revolution. I have just started to read it, based on Tyler Cowen’s recommendation.
If one of my high school students wrote the quoted sentence, it would receive a bad grade. The standard economic definition of public goods is that they are neither excludable nor rivalrous. That means that once the good is produced, it is hard to stop anyone from enjoying it, and one person’s enjoyment does not interfere with someone else’s enjoyment. National defense and pubic public safety are classic examples. Sanitary conditions in a city would qualify.
However, education and health care do not qualify as public goods under the standard definition. If it chooses to, a school or hospital can exclude non-paying customers from obtaining its services. And your use of a teacher’s or a doctor’s time can reduce my ability to use that person’s time.
Another characteristic of public goods is that the social benefits exceed the private benefits. One can make a case that vaccinations have that property. In theory, driver education would have that property also. However, for the most part, the benefit I receive from your education and health care is extremely low, particularly relative to the benefit that you receive from those goods.
In my opinion, casually making the case that government should pay for health care and education by asserting that these are public goods sounds to me like what Tyler would call “mood affiliation,” not sound reasoning. I hope that his endorsement of the book does not turn out to be mood affiliation.
Who Says Markets Work Perfectly?
I know of no Econ 101 course or its equivalent that talks just about “a world where free markets work perfectly and government intervention is always bad.” Zero, none, nada.
I can confirm that the AP economics curriculum, which is based on freshman economics, does not contain either the phrase or the implication that markets work perfectly and government intervention is always bad. On the contrary, it includes a major section on market failure and on government’s (presumably perfectly executed) role in correcting it.
When I see the phrase “markets work perfectly,” I know that I am going to see a straw-man argument against conservative economists. I know of no instance in which someone who is berated for believing that markets work perfectly has actually claimed to hold that belief. Zero, none, nada.
If you want to pass an ideological Turing test, then drop the phrase “markets work perfectly” from your vocabulary. What conservative economists do believe is that government has a propensity to fail that often exceeds the propensity of markets to fail.
In Debt to Social Engineering
What is needed, they argue, is to make debt contracts more flexible, and where possible, replace them with equity. Courts should be able to write down the principal of mortgages as an alternative to foreclosure. They recommend “shared-responsibility mortgages” whose principal would decline along with local house prices. To compensate for the risk of loss, lenders, they reckon, would have to charge a fee equal to 1.4% of the mortgage, or receive 5% of any increase in the value of the property.
Pointer from Mark Thoma. “They” are Mian and Sufi, in House of Debt. Avent argues similarly that student loans should have an equity component.
What these forms of bad debt have in common, in my view, is that they reflect clumsy social engineering. Public policy was based on the idea that getting as many people into home “ownership” with as little money down as possible was a great idea. It was based on the idea of getting as many people into college with student loans as possible.
The problem, therefore, is not that debt contracts are too rigid. The problem is that the social engineers are trying to make too many people into home “owners” and to send too many people to college. Home ownership is meaningful only when people put equity into the homes that they purchase. College is meaningful only if students graduate and do so having learned something (or a least enjoyed the party, but not with taxpayers footing the bill).
As long as we still have these sorts of public policies, monkeying around with the nature of the loan contract is simply doubling down on clumsy social engineering.
Computers and Go
The rate at which possible positions increase is directly related to a game’s “branching factor,” or the average number of moves available on any given turn. Chess’s branching factor is 35. Go’s is 250. Games with high branching factors make classic search algorithms like minimax extremely costly. Minimax creates a search tree that evaluates possible moves by simulating all possible games that might follow, and then it chooses the move that minimizes the opponent’s best-case scenario. Improvements on the algorithm — such as alpha-beta search and null-move — can prune the chess game tree, identifying which moves deserve more attention and facilitating faster and deeper searches. But what works for chess — and checkers and Othello — does not work for Go.
Pointer from Tyler Cowen.
My theory of skill at these sorts of games is that it involves making the correct move a high percentage of the time. With games that last many moves, eventually the weaker player will make a mistake. For example, I can get into a favorable position against Zebra Othello any time it plays a suboptimal opening, but I can almost never maintain my lead.
Another theory that I and others have is that top players use pattern recognition, based on experience. For computers, databases of games can be used to build experience and the ability to recognize patterns. The real dominance of computers in Othello took place when somebody accumulated a large database of games, so that the programs could start looking for statistical patterns in evaluating positions. My guess is that the same is true in chess.
My advice to “Go” programmers is to
1. Amass a large databases of games played by top players, with positions annotated in terms of quality at each step in the game.
2. Then, using your knowledge of Go, construct an algorithm that will rate a position by measuring its similarity to positions in the database and their ratings. (This is the hard part, and it is where the program will have to be constantly revised.)
3. Choose a move that produces a position that appears to least resemble a weak position in the database. That is, go for a mistake-avoidance approach.
Once a Go program gets good enough to come close to being able to beat a top player, the ability to use computer vs. computer games to enlarge the database will come into play. At that point, progress in computer Go will be very fast.
Matt Bruenig vs. Larry Summers on Piketty
He accuses Piketty of confusing gross returns to capital with returns net of depreciation. But in the book, Piketty specifically says that his figures are net of depreciation. If you want to quibble with his specific data or how he accounts for depreciation in it, then you can do that, but you can’t just say “I think he misreads the literature by conflating gross and net returns to capital.” He doesn’t conflate them. He’s careful to explain the importance of depreciation and tries to account for it.
Pointer from Mark Thoma. Unlike Bruenig, Summers is very clear to distinguish Piketty’s data from Piketty’s analysis. The data may include depreciation, but the analysis, in which Piketty argues for an elasticity of substitution between capital and labor greater than one, evidently does not include depreciation. I give this point to Summers, not to Bruenig.
Bruenig goes on,
Additionally, when economists start going into the substitution elasticity stuff (on which Summers himself admits there is not good data), they appear to me to be pushing Piketty into a physicalist capital framework that is totally different from what he is talking about. As I explained in a prior post, Piketty has a social constructivist account of capital. The “capital” he is discussing in his book refers to all tradeable assets that deliver passive returns, not just physical buildings and machines and the like. Models that try to show adding more machines will cause the rate of return to fall proportionally such that the owners of the machines won’t grab increasing shares of the national income do not actually address Piketty’s “capital.” Summers falls into that trap here.
Right. Who cares about all this neoclassical production function, Solow growth model stuff, anyway? Instead, give a “social constructivist account of capital,” and just make statements about how this capital accumulates, earns returns, and becomes concentrated in the hands of a few.
I can be sympathetic to that approach. I would be the last person to defend the neoclassical aggregate production function. But a “social constructivist account of capital” leaves a lot of room for reasonable people to disagree about whether Piketty has discerned the true nature of capitalism or is instead being highly speculative.
A Scientist Shunned
Patrick Brennan reproduces a letter from a scientist pressured to resign from a climate skeptic group.
I had not expect[ed] such an enormous world-wide pressure put at me from a community that I have been close to all my active life. Colleagues are withdrawing their support, other colleagues are withdrawing from joint authorship etc.
I see no limit and end to what will happen. It is a situation that reminds me about the time of McCarthy. I would never have expecting anything similar in such an original peaceful community as meteorology. Apparently it has been transformed in recent years.
I do not know the full background. Perhaps there is a charitable interpretation. However, unless there are particulars that justify this instance, I am inclined to think that shunning of a former colleague for joining a climate skeptic group is a sign of intellectual weakness, not strength.
The list of speakers dis-invited or withdrawn from commencement addresses because of a purge mentality is also a source of concern. I wish that there were stronger voices on the left denouncing this phenomenon.
Occupational Licensing and Anti-trust
Aaron Edlin and Rebecca Haw write,
Some recent additions to the list of professions requiring licensing include locksmiths, beekeepers, auctioneers, interior designers, fortune tellers, tour guides, and shampooers.
They argue that when licensing boards are made up of professionals who are currently licensed, they should be subject to antitrust laws.
Pointer from Timothy Taylor.
What to do about occupational licensing?
I think that the best idea would be to eliminate it. Instead of occupational licensing, have occupational certification. A consumer would still be free to accept services from an individual who is not certified.
Assuming that elimination of licensing is not going to fly, then I think that Congress should require states to accept licenses from other states except in cases where a fundamental difference in professional requirements exists across states. If being a dental assistant in Alabama is pretty much the same job as in Wyoming, then someone who is licensed in one state should be entitled to practice in the other. To deny the licenses from another state is a violation of the Commerce clause, which is intended to prevent states from setting up barriers to trade with one another.
Tim Geithner on Freddie and Fannie
Nick Timiraos extracts from the new Geithner book.
But the erosion in underwriting standards, the rush to provide credit to Americans who couldn’t have gotten it in the past, was led by consumer finance companies and other nonbank lenders that did not have to comply with the Community Reinvestment Act—which, after all, discouraged redlining for nearly three decades before the crisis. These firms took credit risks because they wanted to, not because they had to; they believed rising home prices would protect them from losses, and their investors were eager to finance their risk-taking. Fannie and Freddie lost a lot of market share to these exuberant private lenders, and while they did belatedly join the party, the overall quality of mortgages they bought and guaranteed was significantly stronger than the industry average.
That strikes me as beside the point. The comparison to make is not between risk of the mortgages Freddie and Fannie bought with some industry average. The comparison that matters is between the mortgages that they bought and their capital and loss reserves. With enough capital, they could have taken on the worst of the subprime mortgages and survived. Conversely, even relatively safe mortgages can take you under if you do not maintain the loss reserves and capital that are needed in an adverse house price scenario.
This defense of Freddie and Fannie comes across to me as purely rhetorical. I hope he is too smart to really believe it. Otherwise, I would say that if this is the way that high government officials think about finance, then anyone who thinks that such people can prevent crises is making a really unsound wager.
Having said that, much of the rest of the article makes Geithner sound a lot more sensible than the typical progressive housing policy type. He recognizes that the key to housing finance reform is bringing back a reasonable down payment. He also seems to be one of the few people who gets it that the attempts to bail out homebuyers were based on unrealistic expectations of the mortgage servicing industry.
Rubio Touches the Third Rail
Included in Sen. Rubio’s ideas are:
–Social Security solvency: Rubio would gradually increase the retirement age in line with life expectancies and reduce the growth of benefits for higher-earning individuals. In addition, Rubio favors strengthening the safety net for lower-income retirees.
–Delayed retirement: Rubio would eliminate the 12.4% payroll tax for retirement-age individuals to encourage them to stay in the work force. I really like this idea and wrote on it for the Wall Street Journal.
–Open the TSP: Rubio would allow workers who are not offered retirement plans by their employers to participate in the federal government’s Thrift Savings Plan, the DC pension for government employees. In a way, this builds upon the President’s myRA proposal, but allows for greater choice in investments.
I am a big fan of indexing the age of eligibility for retirement benefits to average life expectancy at age 60. I would like to see that done for Medicare as well. People can still retire when they are younger and healthier, but not on someone else’s nickel.