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.

This is known as “bad luck”

Sunday, May 14th, 2017

The creative class drives cultural and economic flourishing, Richard Florida argued (in The Rise of the Creative Class), but now the “superstar cities” that attract the creative class have grown increasingly unequal, a problem he dubs The New Urban Crisis:

We find that as a city gets bigger, denser, more productive and more economically successful, inequality rises. In a way, the more successful a city or metro area becomes, the more unequal it becomes, and that is quite challenging.

I’m reminded of what Heinlein had to say about creativity and poverty:

Throughout history, poverty is the normal condition of man. Advances which permit this norm to be exceeded — here and there, now and then — are the work of an extremely small minority, frequently despised, often condemned, and almost always opposed by all right-thinking people. Whenever this tiny minority is kept from creating, or (as sometimes happens) is driven out of a society, the people then slip back into abject poverty.

This is known as “bad luck.”

There is a difficulty with giving The Bell Curve a chance

Friday, May 12th, 2017

Charles Murray explains his controversial book The Bell Curve:

In April, I recorded an interview of almost two and a half hours with Sam Harris for his Waking Up podcast, which, I learned only after I had done it, regularly attracts a few million listeners. We spent more than half of the interview discussing what is actually in “The Bell Curve” as opposed to what people think is in it. Both of us expected our Twitter feeds to light up with nasty reactions after the interview was posted. But the opposite happened. The nasty reactions were far outnumbered by people who said they had always assumed that “The Bell Curve” was the hateful pseudoscientific mess that the critics had claimed, but had now decided they wanted to give the book a chance. It has been a heartening experience.

However, there is a difficulty with giving “The Bell Curve” a chance. The paperback edition has 26 pages of front material, 552 pages of main text, a 23-page response to the critics, 111 pages of appendixes, another 111 pages of endnotes, and a 58-page bibliography. It’s a lot to get through. But there’s a shorter way to get a good idea of what’s in the book: Dick Herrnstein and I began each chapter with a summary that was usually about a page long. With the publisher’s permission, I have stitched all of those summaries together, along with selections from the Introduction and the openings to each of the four parts of the book. If these tidbits arouse enough interest that you buy the book, I will be delighted. But at this point in my life, my main objective is that a labor of love, written with a friend who I still miss twenty-three years after his death, be seen for what it is.

Kevin Kelly’s fundamental technological forces

Thursday, May 11th, 2017

In The Inevitable, Kevin Kelly presents a dozen fundamental technological forces:

Becoming
“In this era of ‘becoming,’ everyone becomes a perpetual newbie.”

Cognifying
“The bigger the network, the more attractive it is to new users, which makes it even bigger and thus more attractive, and so on. A cloud that serves AI will obey the same law.”

Flowing
“We are exploring all the ways to make things out of ceaseless change and shape-shifting processes.”

Screening
“People of the book favor solutions by laws, while People of the Screen favor technology as a solution to all problems.”

Accessing
“As we increase dematerialization, decentralization, simultaneity, platforms, and the cloud — as we increase all those at once, access will continue to displace ownership.”

Sharing
“[I]t is an emerging design space in which decentralized public coordination can solve problems and create things that neither pure communism nor pure capitalism can.”

Filtering
“The filters have been watching us for years; they anticipate what we will ask.”

Remixing
“[The entire global economy] is headed for the inevitability of constant, relentless, and increasing remixing.”

Interacting
“Computers have been on a steady march toward us.”

Tracking
“If today’s social media has taught us anything about ourselves as a species, it is that the human impulse to share overwhelms the human impulse for privacy.”

Questioning
“Our society is moving away from the rigid order of hierarchy toward the fluidity of decentralization.”

Beginning
“A hundred years ago H. G. Wells imagined this large thing as the world brain.”

Crime control is not actually a mystery

Wednesday, May 10th, 2017

Crime control is not actually a mystery, Devin Helton notes:

In the long run, men follow incentives. That is not to say we calculate benefits and potential punishment before every action. But over time we build up intuition and a general sense of what we can get away with, what results in social sanction, what results in criminal sanction, what gets status among friends, and what results in success or failure with women.

When we compare the high crime and low crime poor communities, we see large differences in the incentives:

In low crime areas, disobedience at school results in harsh punishment — often corporal punishment.

In high crime areas, disobedience is either unpunished, or punished by suspension, which is hardly punishment to a kid who does not want to be in school anyways.

In low crime areas, the police are quick to crack down on even petty crime. If a gang is known to be harassing a certain area, they are not afraid to apply the billy clubs as needed until the gang is no longer a problem.

In high crime areas, the police ignore drug dealing for months at a time. Murders go unsolved. Police only enter areas when called in, if even then.

In low crime areas, men who lack motivation to work go hungry or enter a workhouse where they are isolated from their buddies and women.

In high crime areas, men who lack a commitment to work earn a living from side hustles, welfare, and living off of mom’s and girlfriends. They still get access to their friends and to sex.

In low crime areas, women are kept under the care of their parents until they are married off to a stable man. If a woman gets pregant out of wedlock and needs aid, she too would have to go the work house where she would be under curfew and discipline.

In high crime areas, women get pregant before locking in a husband, and have to raise their child alone. A rotating array of boyfriends often abuse the children, setting off a cycle of violence. (Non-father males in all human societies, and indeed, all primate societies, are often the most dangerous child abusers, as they have no genetic investment to the children).

In low crime areas, anti-social people are ostracised from the community. They lose access to friends, credit, and are shamed. Without a job, they must enter the workhouse, or they are in jail for their crimes.

In high crime areas, predators live in public housing for years, committing all sorts of crime, with no repurcussion.

(Note: I’m not advocating a return to Victorian era workhouses. I’m simply noting the obvious that if you want people to work a market job, then the “not-working” option has to be worse than the market job option. In the modern era, when we are much wealthier, there are many ways of doing this that wouldn’t entail the horrors of Dickensian workhouses.)

The Bob Rubin trade

Monday, May 8th, 2017

Nassim Nicholas Taleb describes the Bob Rubin trade:

[A] system that doesn’t have a mechanism of skin in the game will eventually blow up and fix itself that way. We will see numerous such examples.

For instance, bank blowups came in 2008 because of the hidden risks in the system: bankers could make steady bonuses from a certain class of concealed explosive risks, use academic risk models that don’t work (because academics know practically nothing about risk), then invoke uncertainty after a blowup, some unseen and unforecastable Black Swan, and keep past bonuses, what I have called the Bob Rubin trade. Robert Rubin collected one hundred million dollar in bonuses from Citibank, but when the latter was rescued by the taxpayer, he didn’t write any check. The good news is that in spite of the efforts of a complicit Obama administration that wanted to protect the game and the rent-seeking of bankers, the risk-taking business moved away to hedge funds. The move took place because of the over-bureaucratization of the system. In the hedge fund space, owners have at least half of their net worth in the funds, making them more exposed than any of their customers, and they personally go down with the ship.

People don’t learn when they they are not the victims to their own mistakes:

Skin in the Game reduces, sometimes even eradicates, the following differences that arose as a side effect of civilization: action and cheap talk (tawk), consequence and intention, the practical and the theoretical, expert and pseudoexpert, entrepreneur and bureaucrat, Coventry and Brussels, the concrete and the abstract, the ethical and the legal, the genuine and the cosmetic, scholarship and academia, democracy and governance, science and scientism, politics and politicians, love and money, the spirit and the letter, Cato the Elder and Barack Obama, quality and marketing, commitment and signaling, and, centrally, the collective and the individual.

But, to this author, is mostly about justice, honor, and sacrifice as the core of human existence.

Does inequality cause crime?

Thursday, May 4th, 2017

It is often argued that inequality or poverty causes crime, Devin Helton notes, and that only by addressing these “root causes” can we reduce crime:

But as we know from Statistics 101, correlation does not prove causation. There are numerous variables that differ between countries or states that can have a correlated impact on inequality and crime: governance, ethnicity, culture, institutions, traditions, etc.

To avoid these confounders, another way to test the link between inequality and crime is to examine the treatment effect. If public policy choices increase inequality, does crime go up? If public policy choices decrease inequality, does crime go down?

From 1910 until the late 1970s, both England and America undertook concerted programs to reduce inequality. Both introduced progressive income taxes. Both changed laws to support unionization. And then in the 1980s both countries reversed course. Britain elected Thatcher, the U.S. elected Reagan. They lowered tax rates, made life more difficult for unions, and promoted business. Inequality rose in both countries for the next few decades.

I hope you see where this is going:

Turns out that inequality reduces crime, and equality increases crime. For every 10% decline in inequality according GINI coefficient, homicide nearly doubles! That is a very strong correlation. (You can download my spreadsheet here).

Does he actually believe this?

No. My results above are due to tricks and confounding factors.

[...]

In total, the statisical analysis above does not prove causation. But — all those studies using correlations to show the opposite, that inequality causes crime, are also bogus. They are also cherry-picked, confounded, and intellectually dishonest. With so many interlocking causal factors, anyone who calculates a correlation with regards to inequality and crime and tells you this proves X causes Y is either appallingly stupid or utterly mendacious.

Read the whole thing.

It conquered the office

Friday, April 21st, 2017

Adam Smith famously used a pin factory to illustrate the advantages of specialization, Virginia Postrel reminds us — just before the Industrial Revolution really kicked off:

By improving workers’ skills and encouraging purpose-built machinery, the division of labor leads to miraculous productivity gains. Even a small and ill-equipped manufacturer, Smith wrote in The Wealth of Nations, could boost each worker’s output from a handful of pins a day to nearly 5,000.

In the early 19th century, that number jumped an order of magnitude with the introduction of American inventor John Howe’s pin-making machine. It was “one of the marvels of the age, reported on in every major journal and encyclopedia of the time,” writes historian of technology Steven Lubar. In 1839, the Howe factory had three machines making 24,000 pins a day — and the inventor was clamoring for pin tariffs to offset the nearly 25 percent tax that pin makers had to pay on imported brass wire, a reminder that punitive tariffs hurt domestic manufacturers as well as consumers.

[...]

Nowadays, we think of straight pins as sewing supplies. But they weren’t always a specialty product. In Smith’s time and for a century after, pins were a multipurpose fastening technology. Straight pins functioned as buttons, snaps, hooks and eyes, safety pins, zippers, and Velcro. They closed ladies’ bodices, secured men’s neckerchiefs, and held on babies’ diapers. A prudent 19th century woman always kept a supply at hand, leading a Chicago Tribune writer to opine that the practice encouraged poor workmanship in women’s clothes: “The greatest scorner of woman is the maker of the readymade, who would not dare to sew on masculine buttons with but a single thread, yet will be content to give the feminine hook and eye but a promise of fixedness, trusting to the pin to do the rest.”

Most significantly, pins fastened paper. Before Scotch tape or command-v, authors including Jane Austen used them to cut and paste manuscript revisions. The Bodleian Library in Oxford maintains an inventory of “dated and datable pins” removed from manuscripts going as far back as 1617.

[...]

But a better solution was on its way. In 1899, an inventor in the pin-making capital of Waterbury, Connecticut, patented a “machine for making paper clips.” William Middlebrook’s patent application, observed Henry Petroski in The Evolution of Useful Things, “showed a perfectly proportioned Gem.”

It was that paper clip design that conquered the office and consigned pins to their current home in the sewing basket.

US healthcare is famous for three things

Wednesday, April 12th, 2017

US healthcare is famous for three things, Ben Southwood notes:

It’s expensive, it’s not universal, and it has poor outcomes. The US spends around $7,000 per person on healthcare every year, or roughly 18% of GDP; the next highest spender is Switzerland, which spends about $4,500. Before Obamacare, approx 15% of the US population were persistently uninsured (8.6% still are). And as this chart neatly shows, their overall outcome on the most important variable — overall life expectancy — is fairly poor.

But some of this criticism is wrongheaded and simplistic: when you slice the data up more reasonably, US outcomes look impressive, but being the world’s outrider is much more expensive than following behind. What’s more, most of the solutions people offer just don’t get to the heart of the issue: if you give people freedom they’ll spend a lot on healthcare.

The US undoubtedly spends a huge amount on healthcare. One popular narrative is that because of market failures and/or extreme overregulation in healthcare, prices are excessively high. So Americans with insurance (or covered by Medicare, the universal system for the elderly, or Medicaid, the government system for the poor) get the same as other developed world citizens, but those without get very poor care and die younger. A system like the NHS solves the problem, according to this view, with bulk buying of land, labour, and inputs, better incentives, and universal coverage.

But there are some serious flaws in this theory. Firstly, extending insurance to the previously-uninsured doesn’t, in America, seem to have large benefits. For example, a recent NBER paper found no overall health gains from the massive insurance expansion under Obamacare.* A famous RAND study found minuscule benefits over decades from giving out free insurance to previously uninsured in the 1970s. In fact, over and above the basics, insuring those who choose not to get insurance doesn’t ever seem to have large gains. Indeed, there is wide geographic variation in the life expectancy among the low income in the US, but this doesn’t even correlate with access to medical care! This makes it unlikely that the gap between the US and the rest is explained by universality.

To find the answer, consider the main two ingredients that go into health outcomes. One is health, and the other is treatment. If latent health is the same across the Western world, we can presume that any differences come from differences in treatment. But this is simply not the case. Obesity is far higher in the USA than in any other major developed country. Obviously it is a public health problem, but it’s unrealistic to blame it on the US system of paying for doctors, administrators, hospitals, equipment and drugs.

In fact in the US case it’s not even obesity, or indeed their greater pre-existing disease burden, that is doing most of the work in dragging their life expectancy down; it’s accidental and violent deaths. It is tragic that the US is so dangerous, but it’s not the fault of the healthcare system; indeed, it’s an extra burden that US healthcare spending must bear. Just simply normalising for violent and accidental death puts the USA right to the top of the life expectancy rankings.

One of our cultural problems, Arnold Kling adds, is that we spend too much on health care and not enough on public health.

Above-median income and close to zero saving

Tuesday, March 28th, 2017

There is a significant portion of the population with above-median income and close to zero saving, Arnold Kling notes:

I think it is hard to tell a story that explains that in terms of rational behavior. Remember, we are talking about a lot of people, not just a few random exceptions.