Our sin tends to be timidity, not rashness

Saturday, July 22nd, 2017

Arthur C. Brooks’ advice for young people heading out into the world is to be prudent — because prudence means something more than what we’ve been led to believe:

When I finally read the German philosopher Josef Pieper’s “The Four Cardinal Virtues,” which had sat unread on my shelf for years, I was shocked to learn that I didn’t hate prudence; what I hated was its current — and incorrect — definition. The connotation of prudence as caution, or aversion to risk, is a modern invention. “Prudence” comes from the Latin “prudentia,” meaning sagacity or expertise. The earliest English uses from the 14th century had little to do with fearfulness or habitual reluctance. Rather, it signified righteous decision making that is rooted in acuity and practical wisdom. Mr. Pieper argued that we have bastardized this classical concept. We have refashioned prudence into an excuse for cowardice, hiding behind the language of virtue to avoid what he calls “the embarrassing situation of having to be brave.” The correct definition, Mr. Pieper argued, is the willingness to do the right thing, even if that involves fear and risk. In other words, to be rash is only one breach of true prudence. It is also a breach to be timid. So which offense is more common today? [...] Our sin tends to be timidity, not rashness. On average, we say “no” too much when faced with an opportunity or dilemma.

Unemployment is the greater evil

Thursday, July 13th, 2017

Policymakers seem intent on making the joblessness crisis worse, Ed Glaeser laments:

The past decade or so has seen a resurgent progressive focus on inequality — and little concern among progressives about the downsides of discouraging work. Advocates of a $15 minimum hourly wage, for example, don’t seem to mind, or believe, that such policies deter firms from hiring less skilled workers. The University of California–San Diego’s Jeffrey Clemens examined states where higher federal minimum wages raised the effective state-level minimum wage during the last decade. He found that the higher minimum “reduced employment among individuals ages 16 to 30 with less than a high school education by 5.6 percentage points,” which accounted for “43 percent of the sustained, 13 percentage point decline in this skill group’s employment rate.”

The decision to prioritize equality over employment is particularly puzzling, given that social scientists have repeatedly found that unemployment is the greater evil. Economists Andrew Clark and Andrew Oswald have documented the huge drop in happiness associated with unemployment — about ten times larger than that associated with a reduction in earnings from the $50,000–$75,000 range to the $35,000–$50,000 bracket. One recent study estimated that unemployment leads to 45,000 suicides worldwide annually. Jobless husbands have a 50 percent higher divorce rate than employed husbands. The impact of lower income on suicide and divorce is much smaller. The negative effects of unemployment are magnified because it so often becomes a semipermanent state.

Time-use studies help us understand why the unemployed are so miserable. Jobless men don’t do a lot more socializing; they don’t spend much more time with their kids. They do spend an extra 100 minutes daily watching television, and they sleep more. The jobless also are more likely to use illegal drugs. While fewer than 10 percent of full-time workers have used an illegal substance in any given week, 18 percent of the unemployed have done drugs in the last seven days, according to a 2013 study by Alejandro Badel and Brian Greaney.

Joblessness and disability are also particularly associated with America’s deadly opioid epidemic. David Cutler and I examined the rise in opioid deaths between 1992 and 2012. The strongest correlate of those deaths is the share of the population on disability. That connection suggests a combination of the direct influence of being disabled, which generates a demand for painkillers; the availability of the drugs through the health-care system; and the psychological misery of having no economic future.

Increasing the benefits received by nonemployed persons may make their lives easier in a material sense but won’t help reattach them to the labor force. It won’t give them the sense of pride that comes from economic independence. It won’t give them the reassuring social interactions that come from workplace relationships. When societies sacrifice employment for a notion of income equality, they make the wrong choice.

Politicians, when they do focus on long-term unemployment, too often advance poorly targeted solutions, such as faster growth, more infrastructure investment, and less trade. More robust GDP growth is always a worthy aim, but it seems unlikely to get the chronically jobless back to work. The booms of the 1990s and early 2000s never came close to restoring the high employment rates last seen in the 1970s. Between 1976 and 2015, Nevada’s GDP grew the most and Michigan’s GDP grew the least among American states. Yet the two states had almost identical rises in the share of jobless prime-age men.

Infrastructure spending similarly seems poorly targeted to ease the problem. Contemporary infrastructure projects rely on skilled workers, typically with wages exceeding $25 per hour; most of today’s jobless lack such skills. Further, the current employment in highway, street, and bridge construction in the U.S. is only 316,000. Even if this number rose by 50 percent, it would still mean only a small reduction in the millions of jobless Americans. And the nation needs infrastructure most in areas with the highest population density; joblessness is most common outside metropolitan America. (See “If You Build It…,” Summer 2016.)

Finally, while it’s possible that the rise of American joblessness would have been slower if the U.S. had weaker trade ties to lower-wage countries like Mexico and China, American manufacturers have already adapted to a globalized world by mechanizing and outsourcing. We have little reason to be confident that restrictions on trade would bring the old jobs back. Trade wars would have an economic price, too. American exporters would cut back hiring. The cost of imported manufactured goods would rise, and U.S. consumers would pay more, in exchange for — at best — uncertain employment gains.

The techno-futurist narrative holds that machines will displace most workers, eventually. Social peace will be maintained only if the armies of the jobless are kept quiet with generous universal-income payments. This vision recalls John Maynard Keynes’s 1930 essay “Economic Possibilities for Our Grandchildren,” which predicts a future world of leisure, in which his grandchildren would be able to satisfy their basic needs with a few hours of labor and then spend the rest of their waking hours edifying themselves with culture and fun.

But for many of us, technological progress has led to longer work hours, not playtime. Entrepreneurs conjured more products that generated more earnings. Almost no Americans today would be happy with the lifestyle of their ancestors in 1930. For many, work also became not only more remunerative but more interesting. No Pennsylvania miner was likely to show up for extra hours (without extra pay) voluntarily. Google employees do it all the time.

Joblessness is not foreordained, because entrepreneurs can always dream up new ways of making labor productive. Ten years ago, millions of Americans wanted inexpensive car service. Uber showed how underemployed workers could earn something providing that service. Prosperous, time-short Americans are desperate for a host of other services — they want not only drivers but also cooks for their dinners and nurses for their elderly parents and much more. There is no shortage of demand for the right kinds of labor, and entrepreneurial insight could multiply the number of new tasks that could be performed by the currently out-of-work. Yet over the last 30 years, entrepreneurial talent has focused far more on delivering new tools for the skilled than on employment for the unlucky. Whereas Henry Ford employed hundreds of thousands of Americans without college degrees, Mark Zuckerberg primarily hires highly educated programmers.

How the Democrats lost their way on immigration

Monday, July 3rd, 2017

Peter Beinart explains how the Democrats lost their way on immigration:

If the right has grown more nationalistic, the left has grown less so. A decade ago, liberals publicly questioned immigration in ways that would shock many progressives today.

In 2005, a left-leaning blogger wrote, “Illegal immigration wreaks havoc economically, socially, and culturally; makes a mockery of the rule of law; and is disgraceful just on basic fairness grounds alone.” In 2006, a liberal columnist wrote that “immigration reduces the wages of domestic workers who compete with immigrants” and that “the fiscal burden of low-wage immigrants is also pretty clear.” His conclusion: “We’ll need to reduce the inflow of low-skill immigrants.” That same year, a Democratic senator wrote, “When I see Mexican flags waved at pro-immigration demonstrations, I sometimes feel a flush of patriotic resentment. When I’m forced to use a translator to communicate with the guy fixing my car, I feel a certain frustration.”

The blogger was Glenn Greenwald. The columnist was Paul Krugman. The senator was Barack Obama.

[...]

Unfortunately, while admitting poor immigrants makes redistributing wealth more necessary, it also makes it harder, at least in the short term. By some estimates, immigrants, who are poorer on average than native-born Americans and have larger families, receive more in government services than they pay in taxes. According to the National Academies report, immigrant-headed families with children are 15 percentage points more likely to rely on food assistance, and 12 points more likely to rely on Medicaid, than other families with children. In the long term, the United States will likely recoup much if not all of the money it spends on educating and caring for the children of immigrants. But in the meantime, these costs strain the very welfare state that liberals want to expand in order to help those native-born Americans with whom immigrants compete.

What’s more, studies by the Harvard political scientist Robert Putnam and others suggest that greater diversity makes Americans less charitable and less willing to redistribute wealth. People tend to be less generous when large segments of society don’t look or talk like them. Surprisingly, Putnam’s research suggests that greater diversity doesn’t reduce trust and cooperation just among people of different races or ethnicities—it also reduces trust and cooperation among people of the same race and ethnicity.

One should pack the lunchbox with quinoa crackers and organic fruit

Thursday, June 29th, 2017

Thorstein Veblen’s conspicuous consumption has evolved into conspicuously inconspicuous consumption:

Eschewing an overt materialism, the rich are investing significantly more in education, retirement and health – all of which are immaterial, yet cost many times more than any handbag a middle-income consumer might buy. The top 1% now devote the greatest share of their expenditures to inconspicuous consumption, with education forming a significant portion of this spend (accounting for almost 6% of top 1% household expenditures, compared with just over 1% of middle-income spending). In fact, top 1% spending on education has increased 3.5 times since 1996, while middle-income spending on education has remained flat over the same time period.

[...]

While much inconspicuous consumption is extremely expensive, it shows itself through less expensive but equally pronounced signalling – from reading The Economist to buying pasture-raised eggs. Inconspicuous consumption in other words, has become a shorthand through which the new elite signal their cultural capital to one another. In lockstep with the invoice for private preschool comes the knowledge that one should pack the lunchbox with quinoa crackers and organic fruit.

One might think these culinary practices are a commonplace example of modern-day motherhood, but one only needs to step outside the upper-middle-class bubbles of the coastal cities of the US to observe very different lunch-bag norms, consisting of processed snacks and practically no fruit. Similarly, while time in Los Angeles, San Francisco and New York City might make one think that every American mother breastfeeds her child for a year, national statistics report that only 27% of mothers fulfil this American Academy of Pediatrics goal (in Alabama, that figure hovers at 11%).

[...]

Perhaps most importantly, the new investment in inconspicuous consumption reproduces privilege in a way that previous conspicuous consumption could not. Knowing which New Yorker articles to reference or what small talk to engage in at the local farmers’ market enables and displays the acquisition of cultural capital, thereby providing entry into social networks that, in turn, help to pave the way to elite jobs, key social and professional contacts, and private schools. In short, inconspicuous consumption confers social mobility.

The null hypothesis is not an iron law

Friday, June 23rd, 2017

Statistically, educational interventions tend to affect resource allocation much more than outcomes, Arnold Kling reminds us, so, for educational interventions within roughly the current institutional setting, the null hypothesis is not an iron law, but it is an empirical regularity. This led me to add:

What stands out to me is just how little variation we see between schooling options. Public schools are all run on the same basic plan. Catholic schools are too, but with stricter discipline. Private schools aren’t much different, but with a wealthier clientele.

Only a few niche alternatives, such as Montessori and Waldorf, offer something truly different, and they obviously attract unusual families.

At the beginning of the dynasty, taxation yields a large revenue from small assessments

Sunday, June 18th, 2017

Dániel Oláh looks back at the economic ideas of Ibn Khaldun — who is better known to most of us for his notion of assabiya, or social cohesion:

He states that the division of labor serves as the basis for any civilized society and identifies division of labor not only on the factory level but also in a social and international context as well. Khaldun highlights on the example of obtaining grain that division of labor creates surplus value: “Thus, he cannot do without a combination of many powers from among his fellow beings, if he is to obtain food for himself and for them. Through cooperation, the needs of a number of persons, many times greater than their own (number), can be satisfied” (Khaldun p. 87).

His example of the division of production process is completely forgotten by economists and it’s not less expressive than the pin factory of Smith: “such include, for instance, the use of carvings for doors and chairs. Or one skillfully turns and shapes pieces of wood in a lathe, and then one puts these pieces together, so that they appear to the eye to be of one piece” (Khaldun p. 519). What is more: opposed to Smith, Khaldun doesn’t make any distinction between productive and unproductive work.

Based on this it’s easy to understand that Ibn Khaldun presented very similar ideas as Adam Smith, but hundreds of years before the Western philosopher. But Khaldun said even more about the economy.

He analyzed markets which arise based on the division of labor and examined market forces in a simple didactic way which is very similar to the attitude of Alfred Marshall. The invention of supply and demand analysis wasn’t invented in the 19th century: the islamic scholar also described the relationship of demand and supply, and also took the role of inventories and merchandise trade into account. He divided the economy into three parts (production, trade and public sector) since the market prices in his theory include wages, profits and taxes (Boulakia 1971). At the same time he analyzed market for goods, labor and land as well. This structured approach led Khaldun to invent the labor theory of value, which makes the islamic scholar a pre-marxian (or classical) thinker in this sense (Oweiss, 1988).

His idea, that the produced value is zero if the labor input is zero seems surprisingly classical, far ahead of his time.

In the dynamic Khaldunian model of economic development, the government plays a crucial role. Its policies, primarily taxation has a great effect on the development of a civilization. After the nomadic way of life tribes change to sedentary lifestyle, giving birth to urban civilization. The sedentary lifestyle demolishes the original group solidarity and creates a need for a new clientele. Creating a new group identity is costly and needs a new army as well.

So with the deepening of urban civilization, and thanks to the increasing luxurious needs of the dynasty, the ruler has to increase taxes. In the end, tax rates become so high that the economy collapses. “It should be known that at the beginning of the dynasty, taxation yields a large revenue from small assessments. At the end of the dynasty, taxation yields a small revenue from large assessments” (Khaldun p. 352) — writes Khaldun, describing the micro incentives behind taxation as well. On the other hand, he rejects customs and government involvement in trade since the economic-political power of government is disproportionately large.

These ideas are so unique in the Middle Ages, that even Ronald Reagan quoted Khaldun’s work stating that they had some friends in common, referring to Arthur Laffer. The reason for this was that even Laffer himself regarded Khaldun as a forerunner of supply-side economics and the Laffer-curve, although Khaldunian ideas have not much in common with the Laffer-curve. The reason is that these should be interpreted in time dimension rather than as a policy rule of thumb.

Jewelry is money

Sunday, June 11th, 2017

Nick Szabo describes the astronomical origins of precious metals and then explains how they became money and treasure:

Billions of years later, naked apes evolved with hypertrophied brains and clever hands, living on a planet in this gold-dusted solar system. They dug out the gold and silver they could find and separated it from the more common earth.  Other more common metals were more useful for concretely usable tools; instead they fashioned the precious metals into what looks to our eyes like jewelry. They formed these precious metals into shapes both repetitive and unique, bragged about them, displayed them, stored them as “treasure”, “wealth”, and “money”. They fashioned gold and silver into wearable objects, transferred them to each other or stole them, even injuring or killing each other in pursuit of them. They used the gold and silver to pay each other compensation for those and many other injuries. People transferred gold and silver to each other in order to satisfy important obligations as well as to obtain items of more direct and obvious use.  Since the most important such obligations happened at many of the most fitness-critical junctures of life — marriage, death, injury, war — gold and silver, as treasure and as money, came to be greatly desired.

Some metal collectibles came in a wide variety of artistically skilled forms. Others came in the form of coins: labeled, mass-produced pieces of metal stamped by the blow of a hammer or cast in molds, whereby a mostly-trusted brand named their alleged value. Still others came in forms that look odd to us, resembling neither coins nor fancy jewelry, but rather utilitarian-looking pieces that manage to make precious metals ugly, and that might have been worn but that look, long before the era of factories, like they were mass produced.  People around the world wore gold jewelry proudly, and globe-straddling monetary systems, on which economies were said to be based, were defined around gold and silver objects and debts denominated in weights of those metals.

We can think of collectibles as coming at us at two levels, like railroads and trains, or like pipelines and the oil they carry. At the most basic or “inner layer” is the metal itself that constitutes the substance of the collectible: occasionally iron, more typically copper or bronze for the less valuable collectibles, and the precious metals, especially gold and silver, for the more valuable money and treasure.

So important is the “lower layer” of the traditional cultural understanding of gold and silver, the natural substance itself, evaluated by its weight rather than by any value added via the craftsmanship or its form, that Europeans of earlier generations evolved a word for it: bullion. Bullion is the metal itself, considered and valued only for its substance. Jewelry, coins, and other ways of shaping precious metals are just various forms of the underlying bullion.

[...]

In 1959 Paul Bohannan coined the phrase “spheres of exchange” to refer to moral or legal distinctions made between different types of exchange. Often one set of collectibles was expected to be used in one kind of exchange, and another distinct set in another. Since there are several important kinds of wealth transfer besides exchange, we can generalize Bohannan’s idea to the concept of spheres of transfer. In Western cultures (and many other modern cultures under their influence), for example, we make a strong distinction between money, meant for the rapid turnover of earning and spending, and heirlooms that are expected to stay in the family for generations, with feelings of guilt or shame occurring if we have to sell a family heirloom. But it’s fine to use an heirloom ring for a marriage. Similarly, we make a strong distinction between stocks and bonds on the one hand and decorative wealth objects such as jewelry and artwork on the other. So strong is our taboo that if a Western archaeologist finds a wearable (as in forager days they mostly were) collectible, it is automatically and dogmatically labeled “ornamental” or “symbolic”, with wealth-related uses seldom considered. (It also doesn’t help that shells, often scarce and precious treasures in indigenous environments, look like cheap tourist knick-knacks to modern eyes).

Legal or moral sanctions discourage transfer of objects from one sphere to another. In feudal European societies it was shameful and often even illegal to sell or mortgage land: a lord’s duty was to preserve his land and devise it intact to his eldest son. In modern Western society, weddings are one sphere of transfer (where a gift of a finger-ring is expected, as well as some household items from the guests and a feast or party thrown by the parents), whereas commerce and legal remedy in civil law is another (where payment of money is expected). Some aspects of our bodies (such as ownership of humans or payment for sex or body organs) are off limits to monetary compensation — one is expected to donate an organ, not to sell it — while many others are not (most health care, for example). All of these spheres can involve transfers of objects of substantial value, but it is disgraceful and/or illegal if they are the too obviously the wrong ones for the given sphere.

In the modern West, we consider the realm of jewelry and the realm of money to be very separate spheres of transfer. It is considered either a shameful betrayal or a grim necessity if the winner of an Olympic or Nobel Prize medal or a Super Bowl ring sells it to raise money. The finger-ring is a central feature of modern weddings, but few things would offend a typical modern bride more than being paid a bride price, she or her kin being indemnified by money as if she, as we would see it, were a prostitute on long-term contract. Meanwhile, our economists obsess over money while touching on the subject of jewelry hardly at all, and certainly not as any sort of form or variant of money. We moderns can hardly imagine confusing such seemingly very different things, and indeed the very idea offends our sensibilities. But in many non-Western and earlier Western cultures this was far from the case. For them the fundamental protocol layer, the substance itself, is cherished for its own sake, and forms the great majority of the value of the item, while its protocol layer two, the “outer layer”, the particular form it has been fashioned into, while often of considerable interest, is usually quite secondary in determining its value for purposes of the display and transfer of wealth.

This modern Western restriction involves the more culturally local aspect of gold and silver, namely the particular form it takes (jewelry vs. coin), even though these objects are made out of the same underlying substance, and traditionally were mainly prized for the content by weight of that substance. Even in our own culture we have businesses that serve to transfer gold and silver from one sphere to another. Nevertheless, economists and other academicians often act as if money and jewelry are scientifically and objectively very distinct objects, when in fact this is a cultural convention that is largely confined to the modern West.

Globe-trotting gold dealer Roy Sebag has described the differences between Asian and Western views of jewelry. As he describes it, over $2 trillion worth of jewelry is owned by about 2 billion people in India and China alone, constituting a much larger fraction of their wealth on average than in the West. The metal content of the gold jewelry constitutes the vast majority of its sales price and its assessed value as collateral, as it also does in Brazil, Russia, and most other countries outside of Western Europe, the British Commonwealth, and the United States. In the latter countries, precious metal content constitutes only a small fraction of the sales price or pawning value of jewelry. “Jewelry is money” is how Sebag summarizes his observations of the modern Asian jewelry market.

This last point that jewelry is money also comes up in Barton Biggs’ Wealth, War and Wisdom, which discusses preserving wealth through bad times, with examples of what worked or didn’t work during World War 2.

Few left Alsace-Lorraine

Saturday, June 10th, 2017

Bryan Caplan thinks that expressive voting explains the lack of emigration from Alsace-Lorraine after it became Elsass-Lothringen:

In 1871, the German Empire annexed the French territory of Alsace-Lorraine, known to the Germans as Elsass-Lothringen.  The inhabitants were overwhelmingly German-speaking, but most clearly resented absorption into the new German Empire.  What is striking, however, is how differently this resentment expressed itself in voting versus actual behavior.

For their first five elections, over 90% of the new citizens of the Second Reich voted for “autonomists” — anti-Prussian regional parties.  Their ultimate goal, pretty clearly, was to rejoin France.  Beginning in 1890, autonomists rapidly lost support to the Social Democrats (and, to a lesser extent, the Conservatives).  But even in 1912, autonomists remained the plurality party of Alsace-Lorraine.

Given this near-unanimous political resentment against German annexation, you might think that the people of Alsace-Lorraine would be leaving in droves — or at least struggling mightily to do so.  The reality was quite different.  While they were free to escape German rule by selling out and moving a few miles over the border, few chose to do so:

The Treaty of Frankfurt gave the residents of the region until October 1, 1872 to choose between emigrating to France or remaining in the region and having their nationality legally changed to German. By 1876, about 100,000 or 5% of the residents of Alsace-Lorraine had emigrated to France.

[...]

To rationalize the divergence between voting and emigration, you need something like Brennan and Lomasky’s expressive voting theory. The essence of the theory: When people decide how to vote, their main goal is to express their support for what sounds good. When people decide where to live, however, they focus on practicalities, not symbolism.

He misses the point that ordinary folks aren’t atomistic cosmopolitans, as commenter Fazal Majid points out:

I’m sorry, but this article is spectacularly callous. Most people feel a visceral attachment to their homeland. Involuntary exile, even self-exile, is incredibly painful for those concerned, and leaves lasting scars.

Shane L. said something similar:

I tend to agree with Fazal here: leaving home means abandoning family, friends, community, and also livelihood. Surely many inhabitants of 19th century Alsace-Lorraine were farmers? If so, their incomes were probably reliant on their lands too.

Finally there could be a sense of bitter nationalist defiance. Inhabitants might have deliberately wanted to remain on land they considered their own, to spite the invaders, and hoping (correctly, as it turned out) that it would be returned to France in due course.

Hansjörg Walther shared some German insights:

Alsace-Lorraine was the only “Reichsland” which meant it was directly subordinate to the Emperor and not a real state of the German federation with a government. Only in 1911 did it get a parliament of its own and also representatives in the “Bundesrat” (representation of the states).

The elections are for the German parliament. So the most you could hope for was that a block of Alsatian deputies could under certain circumstances obtain some concessions. And then you could also signal to the French that you were still waiting to be redeemed.

The good point of not being a state was that you also did not have to pay state taxes, which usually were higher than taxes on the Reich level. That made it also attractive for “Altdeutsche” (Germans from the old parts of Germany) to move to the region, which may also explain part of the shift to “reichsfreundlich” (friendly to the Reich) parties later on.

They wanted their land back the way it was. No individual could recreate home somewhere else.

Nick Szabo’s security through obscurity takes a hit

Wednesday, June 7th, 2017

Tim Ferriss calls Nick Szabo the quiet master of cryptocurrency.

Hipster libertarian-neoreactionaries may be tempted to say, “I only like old Unenumerated, before Szabo sold out.”

A cruise ship is not a democracy

Monday, June 5th, 2017

While cruising to Bermuda, Bryan Caplan concludes that cruise ships show the logic of open borders:

On a cruise ship, people of all nations — and all skill levels — work together. Top-notch pilots and mechanics from Scandinavia ply their craft alongside cabin stewards and janitors from the Third World. Via comparative advantage, their cooperation allows them to provide an affordable, high-quality vacation to eager consumers.

A Bastiat fan notes that a cruise ship is not a democracy.

Could a minister of bread do even half as well?

Sunday, June 4th, 2017

I just got around to watching It’s a wonderful loaf:

If you look down upon a city with the widest bird’s eye view
You might wonder how it functions, who takes care of me and you?
Who makes sure there’s food for vegans, and for carnivores as well?
It seems like there’s a wizard who has cast a magic spell

Just think of one small part — who makes sure there’s so much bread?
You want rye, she wants ciabatta, or make it sourdough instead
A baguette or a croissant, it doesn’t matter, don’t you see
You get yours and she gets hers, and I get mine, how can that be?

One’s buying a dozen bagels to grace an impromptu brunch
One’s using food stamps for a simple loaf to make her children lunch
No matter the amount we require, no matter the choices we make
An army of workers has mobilized to fashion the bread we partake

The farmer who grows the wheat, the miller that grinds the flour
The baker and all the others who work hour after hour
They’re all on their own, each one making independent decisions
But somehow their plans fit together with the greatest degree of precision

So there must be a czar of wheat and flour, of trucks and of bread and yeast
To allocate and oversee and plan at the very least
For the unexpected change. What if today’s not like yesterday?
It never is, though, is it? So who keeps chaos away?

Because there’s order all around us — things look as if they’re planned
Like the supply of bread in a city — enough to match up with demand
And though flour is used for more than just bread, we never have to fight
Over where it goes and who gets what. So why do we sleep so well at night

Knowing nobody’s in charge, it looks like all is left to chance
Yet in New York, or London as well as Paris, France
No one’s worried the shelves will be empty, we take supply for granted
But it’s a marvel, it’s a miracle, the world’s somehow enchanted

Of course the result’s never perfect, but the system’s organic, alive
Over time fewer people go hungry and more and more bread-lovers thrive
And if you’re allergic to gluten, there are sellers who work for you, too
Your choices expand and what you demand is created and waiting for you

I have my tastes and you have yours, we each have our own urges
Yet somehow there’s no conflict, a harmony emerges
Our dreams can fit together like a quilt that someone weaves us
But there isn’t a weaver of dreams, reality deceives us

And here’s the crazy thing, if someone really were in charge
To make sure that bread was plentiful, with the power to enlarge
The supply of flour, yeast and of bakers and ovens, too
Would that person with that power have any idea of what to do?

Could a minister of bread do even half as well?
Would there be enough of every kind of bread upon the shelves?
How could he know how much to make of each kind every day?
There’d be shortages and surpluses and waste and much dismay

You might think the job is easy — if the top seller’s rye
Then for every variety push production up that high
Then no one’s disappointed, bread eaters will rejoice
When they see that every bakery is filled with so much choice

Bread eaters, yes, but “Help!” the forgotten pizza lover cries
All the flour’s gone to baking bread there’s none left for the pies
Of pepperoni, deep dish, thin-crust and Sicilian
You’ve solved the bread challenge, yes, but created another million

Problems. No problem! We’ll just grow lots more wheat
But that means less of something else that people like to eat

Which only makes the puzzle of the harmony around us
Much more puzzling — this order, this peace has to astound us
So many things we count on, yet no one’s behind the curtain
No wizard, no controls, yet the supply of stuff — near certain

Every morning the bakers rise early to make sure your bread is fresh
And the world gets more complicated but the plans just continue to mesh
Every morning the bakers rise early, though not under anyone’s command
Where in the anatomy textbooks can I view an invisible hand?

The key to the process is prices and the freedom to shop where you want
Competition among all the bakers, makes sure that they rise before dawn
To make sure the bread’s near perfection, to make sure that the buyer’s content
You don’t have to know economics to know when your money’s well-spent

We know there’s order built into the fabric of the world
Of nature. Flocks of geese! Schools of fish! And every boy and girl
Delights in how the stars shine down in all their constellations
And the planets stay on track and keep the most sublime relations

With each other. Order’s everywhere. Yet we humans too create it
It emerges. No one intends it. No one has to orchestrate it.
It’s the product of our actions but no single mind’s designed it
There’s magic without wizards if you just know how to find it

Cyclical theories of history return

Friday, June 2nd, 2017

Mark Koyama opens his discussion of the return of cyclical theories of history with this passage from Jean D’Ormesson’s “excellent 1971 fictional history” The Glory of the Empire:

People and states oscillate between peace and war, freedom and slavery, order and disorder. They tire easily. Even happiness soon grows wearisome. No sooner do they begin to enjoy the benefits of wise and just government than they demand more wisdom and a different kind of justice. Factions spring up. Everyone is on the lookout for new privileges. The equilibrium that was so hard to strike crumbles. Wild hopes are embraced. The system collapses. Everything has to be built up anew on the ruins of the past.

The leading modern-day cyclical theorist is “undoubtedly” Peter Turchin, who co-wrote Secular Cycles with Sergey A. Nefedov:

Their innovation (building on an argument made by my GMU colleague Jack Goldstone in his 1991 book Revolution and Rebellion in the Early Modern World) is to take the Malthusian model of economic cycles and add to it a model of elite competition.

Tuchin and Nefedov show that periods of demographic expansion are often associated with the growth of elite incomes and inequality (as population growth causes rents to rise and wages to fall). More elites competing over the surplus, however, puts fiscal pressure on the surplus-extraction machine that we call the state. Elite overproduction thus brings about a political crisis. Secular Cycles applied this model to medieval and early modern England and France, Russia and ancient Rome. Turchin’s most recent book applies it to the United States.

Bas van Bavel’s The Invisible Hand? presents another cyclical account of things. Koyama cites Branko Milanovic’s review:

Van Bavel’s key idea is as follows. In societies where non-market constraints are dominant (say, in feudal societies), liberating factor markets is a truly revolutionary change. Ability of peasants to own some land or to lease it, of workers to work for wages rather than to be subjected to various types of corvées, or of the merchants to borrow at a more or less competitive market rather than to depend on usurious rates, is liberating at an individual level (gives person much greater freedom), secures property, and unleashes the forces of economic growth. The pace of activity quickens, growth accelerates (true, historically, from close to zero to some small number like 1% per year) and even inequality, economic and above all social, decreases . . .

But the process, Bavel argues, contains the seeds of its destruction. Gradually factor markets cover more and more of the population: Bavel is excellent in providing numerical estimates on, for example, the percentage of wage-earners in Lombardy in the 14th century or showing that in Low Countries wage labor was, because of guilds, less prevalent in urban than in rural areas. One factor market, though, that of capital and finance, gradually begins to dominate. Private and public debt become most attractive investments, big fortunes are made in finance, and those who originally asked for the level playing field and removal of feudal-like constraints, now use their wealth to conquer the political power and impose a serrata, thus making the rules destined to keep them forever on the top. What started as an exercise in political and economic freedom begins to look like an exercise in cementing the acquired power, politically and economically. The economic essor is gone, the economy begins to stagnate and, as happened to Iraq, Northern Italy and Low Countries, is overtaken by the competitors.

China and Namibia are all-weather friends

Thursday, June 1st, 2017

Is China the world’s new colonial power?

China’s gravitational pull can be felt today in every nook of the globe. Few countries feel the tug more strongly than Namibia, a wind-swept nation with a population of 2.4 million — barely a tenth the size of Beijing’s — some 8,000 miles away from the Chinese capital. The desert where the Husab mine has materialized in recent years used to be known only for the presence of Welwitschia mirabilis, the short, droopy national plant that grows just two leaves — and can live for more than 1,000 years. Now, in little more than 1,000 days, China’s reach has spread far beyond the uranium mine.

Just north of Swakopmund, a Chinese telemetry station sprouts from the desert floor, its radar dishes pointing skyward to track satellites and space missions. Twenty-five miles south, in Walvis Bay, a state-owned Chinese company is building an artificial peninsula the size of 40 baseball fields as part of a vast port expansion. Other Chinese projects nearby include new highways, a shopping mall, a granite factory and a $400 million fuel depot. Chinese trade flows through the port: shipping containers filled with cement, clothing and machinery coming in; tiles, minerals and — in some cases — illegal timber and endangered wildlife heading out to China. The activity is so frenzied that rumors of a proposed naval base in Walvis Bay, though vehemently denied by Chinese officials, do not strike locals as implausible.

This small outpost offers a glimpse of what may be the largest global trade-and-investment spree in history. Driven by economics (a hunger for resources and new markets) and politics (a longing for strategic allies), Chinese companies and workers have rushed into all parts of the world. In 2000, only five countries counted China as their largest trading partner; today, more than 100 countries do, from Australia to the United States. The drumbeat of proposed projects never stops: a military operating base, China’s first overseas, in Djibouti; an $8 billion high-speed railway through Nigeria; an almost-fantastical canal across Nicaragua expected to cost $50 billion. Even as China’s boom slows down, its most ambitious scheme is still ramping up: With the “One Belt, One Road” initiative — its name a reference to trade routes — President Xi Jinping has spoken of putting $1.6 trillion over the next decade into infrastructure and development throughout Asia, Africa and the Middle East. The scheme would dwarf the United States’ post-World War II Marshall Plan for Europe.

China’s relationship with Africa goes back to the 1960s, when Chairman Mao Zedong promoted solidarity with the developing world — “Ya Fei La,” as he called it, using the first syllables for Asia, Africa and Latin America. Though it was poor and mired in the chaos of the Cultural Revolution, China won new allies in Africa by finishing, in 1976, a 1,156-mile railroad through the bush from Tanzania to Zambia. Aid continued to trickle in, but there were no other big projects for nearly 30 years, as China focused on building up its domestic economy, following its leader Deng Xiaoping’s prescription to “hide your strength and bide your time.” That ended in the 2000s, when Beijing, recognizing the need for foreign resources and allies to fuel its economic growth, exhorted the nation’s companies to “go out” into the world.

Today, if you take the red-eye flight from Shanghai to Addis Ababa, the Ethiopian capital, chances are you’ll be seated among Chinese workers heading to a construction site in oil-rich Equatorial Guinea, a cotton-processing plant in Mozambique, a telecom project in Nigeria. China’s trade with African nations has increased fortyfold in the past 20 years. The workers and migrants carrying out China’s global vision are now so ubiquitous in Africa — as many as a million of them, according to one estimate — that when my wife and I wandered into a Hunanese restaurant in Addis, the red-faced workers devouring twice-cooked pork blurted out: “Ah, laowai laile!” “Foreigners have come!” It seemed rude to point out that they were foreigners, too.

China’s advances have come as the West seems to be retreating. United States engagement in Asia, Africa and Latin America declined after the Cold War, when the regions served as proxies for superpower rivalries. China’s rise and the wars in the Middle East also pulled away resources and attention. And now, with Washington raising doubts about global agreements on issues like free trade and climate change, Beijing has more leverage to push its own initiatives and show its capacity for global leadership. President Trump’s disdain for the Trans-Pacific Partnership has already made Beijing’s trade proposals, which exclude the United States, more appealing. “In certain parts of the world, the relative inattention of the Trump administration is definitely creating an opening for China to fill,” says David Shambaugh, director of the China Policy Program at George Washington University and author of the 2013 book “China Goes Global.” But “China remains very much a partial power — and only offers other countries an economic relationship.”

Still, for a nation like Namibia, China’s pitches can be irresistible partly because they’re rooted in historical solidarity. Beijing backed the black nationalist movement’s liberation struggle against apartheid and its white South African overlords. Sam Nujoma, the leader of the South West Africa People’s Organization (Swapo), visited Beijing in search of guns and funds in the early 1960s. When Namibia finally claimed independence in early 1990, with Nujoma as president, China became one of its first diplomatic allies, pronouncing the two countries “all-weather friends.” (Beijing was also desperate for allies to break its diplomatic isolation after its violent crackdown on the 1989 democracy movement.)

I can’t help but think of Amy Chua’s World on Fire and its market-dominant minorities:

James and Rose are part of the early wave of Chinese immigrants who landed in Africa 20 years ago and never left. The Chinese diaspora has a long history of finding a foothold, and then thriving, in some of the world’s most remote places: I’ve bumped into Chinese merchants everywhere from the Arctic tundra of Siberia to mining towns in the Andes. In Africa, entrepreneurs like James and Rose found a new frontier with the space, freedom and opportunities that many early settlers saw in the American West. “My husband came to look at business here, and he fell in love with the wide-open spaces,” Rose told me. “But we’re still Chinese first and foremost.” Like many Chinese immigrants around the world, the couple began by opening a small mom-and-pop shop, filling the shelves with cheap clothes, shoes and bags shipped by container from China. Their store, James and Rose, still stands at a central intersection of Walvis Bay, even as their ventures have expanded to include a hotel, a restaurant, a karaoke bar, a massage parlor and a trading company. Today there are such Chinese-run stores in nearly every town in Namibia — and thousands more across Africa. On a recent Sunday in Windhoek’s Chinatown, where dozens of shops occupy a series of long warehouses in the city’s industrial district, Namibian families strolled the lanes, haggling over everything from knockoff Nikes and plastic children’s toys to solar panels and secondhand mobile phones. One man told me he liked the low prices, even as he complained about the goods’ poor quality — and the harm they did to the local garment industry. Wu Qiaoxia, a Chinese entrepreneur whose real estate business began with a simple store in the northern town of Oshakati, waves off such criticism. “Many Namibian children didn’t even have shoes before we got here,” Wu says. “The people here needed everything, and we sold it to them, cheaply.”

Reading Technology Review is a wonderful antidote to reading Regulation Magazine

Friday, May 26th, 2017

Arnold Kling has grown more pessimistic about American political culture:

I think that I would have preferred that the elite stay “on top” as long as they acquired a higher regard for markets and lower regard for technocratic policies. What has been transpired is closer to the opposite. There was a seemingly successful revolt against the elite (although the elite is fighting back pretty hard), and meanwhile the elite has doubled down on its contempt for markets and its faith in technocracy.

I am disturbed about the news from college campuses. A view that capitalism is better than socialism, which I think belongs in the mainstream, seems to be on the fringe. Meanwhile, the intense, deranged focus on race and gender, which I think belongs on the fringe, seems to be mainstream.

The media environment is awful. Outrage is what sells. Moderation has fallen by the wayside.

It seems increasingly clear that no matter who wins elections, my preferences for economic policy get thrown under the bus. The Overton Window on health policy has moved to where health insurance is a government responsibility. The Overton Window on deficit spending and unfunded liabilities has moved to where there is no political price to be paid for running up either current debts or future obligations. The Overton Window on financial policy has moved to where nobody minds that the Fed and other agencies are allocating credit, primarily toward government bonds and housing finance. The Overton Window on the Administrative State has moved to where it is easier to mount a Constitutional challenge against an order to remove regulations than against regulatory agency over-reach.

Outside of the realm of politics, things are not nearly so bleak. Many American businesses and industries are better than ever, and they keep improving. Scientists and engineers come up with promising ideas. Reading Technology Review is a wonderful antidote to reading, say Regulation Magazine. The latter is the most depressing thing I do all month.

There’s a lot to like about cutting corporate taxes

Monday, May 15th, 2017

There’s a lot to like about cutting corporate taxes:

One reason is that corporate taxation isn’t the greatest way of raising revenue. When you tax a corporation, it’s not just the shareholders who pay. Prices for customers go up to some degree, and take-home wages for employees — both at the top and the bottom of the pay scale — go down. It’s difficult to tell who pays what — some economists estimate that shareholders pay essentially all of the tax, while others conclude that workers pay the lion’s share.  There’s also a chance that some piece of the corporate tax might fall on those who can least afford to pay, specifically low-wage workers and poor people. That uncertainty implies that society should shift the tax burden from corporations to wealthy individuals. That will ensure that less of the cost of government falls on the poor. Since corporate tax represents only 11 percent of U.S. revenue, replacing some of that with higher top-end income taxes shouldn’t be too difficult.

There’s also the question of whether corporate taxes reduce investment. In the 1980s, some economists concluded that taxes on capital — of which corporate taxes are one variety — should be zero. Since capital — the physical kind, buildings and machines and so on — allows greater production in the future, taxing it today just means a smaller economy, and therefore a smaller tax base, down the road. That result came from a highly unrealistic model, and later economists showed that when you tweak the model a bit, the optimal corporate tax is no longer zero. Still, the U.S. should be focusing on ways to boost business investment, which has fallen as a share of output in recent years:

There is plenty of evidence that corporate tax cuts can raise investment levels. A 2009 paper by economists Simeon Djankov, Tim Ganser, Caralee McLiesh, Rita Ramalho, and Andrei Shleifer found that lower corporate taxes are correlated with more investment. And when Canada cut taxes for some kinds of companies but not for others in the early 2000s, the companies that got tax cuts invested more. A number of other studies find similar results. So in this climate of low investment, the U.S. should try corporate tax cuts as one method of getting businesses to spend more.

But perhaps the clearest reason to cut corporate taxes is the waste they generate through avoidance. A key, often overlooked fact about the U.S. corporate tax is that many businesses manage to pay little or nothing. One of the most common ways to do this is to shift profits overseas, through transfer pricing, inversions, or other perfectly legal methods, to a tax haven country like the Cayman Islands. There, a company can avoid taxes indefinitely, reinvesting the profits in its business and letting them compound. If the company wants to cash out, it has to repatriate its cash and pay taxes to the U.S., but the returns from delaying the date of payment can be substantial. And often, a corporation can avoid taxes altogether by waiting for the U.S. to enact a repatriation holiday. In addition to tax havens, there are many other legal loopholes businesses can exploit to avoid taxes.

As a result of avoidance, the U.S. doesn’t collect much more of corporations’ profits than other countries do, despite having a much higher official tax rate. A number of recent studies find that on average, U.S. companies pay about 27 percent to 30 percent of their profits in taxes, compared with 24 percent to 26 percent average for other nations.

Meanwhile, because of tax avoidance, the true rate isn’t closely tied to the headline rate. The official U.S. rate has remained at 35 percent since 1993, with only minor changes. But the percent of corporate profits collected through the tax system has fallen quite a bit.

All that avoidance costs real resources — hours of labor by tax accountants and financial professionals, buildings for them to work in, and computers to keep everything in order. By cutting the corporate tax rate, the U.S. would reduce the incentive for companies to waste all that money avoiding taxes.

Reducing the reward from tax avoidance might also lower an important barrier to entry in U.S. industries. Tax avoidance probably has big fixed costs — you have to hire teams of lawyers and set up foreign subsidiaries. Those fixed costs make it difficult from small startups to compete on a level playing field with big, established companies, worsening the problem of monopoly power in the economy. Cutting the corporate tax rate would make the system fairer.