EconLog
EconLog small logo
Bryan Caplan  

Why I Think I Win My Bets

Bryan Caplan
I'm tempted to tell Scott, "You had me at 'Why Bryan Caplan wins almost all of his bets."*  But my story varies from his.  Scott begins:
Bryan almost always takes the consensus view in any bet.
Not really.  In general, I think "consensus views" on interesting questions tend to be innumerate and paranoid. 

Scott immediately adds:
The view a betting market would take, if one existed.
Betting market prices are hardly equivalent to "consensus views," though you could say betting markets reflect the consensus of the small subset of people willing to put their money where their mouths are.  But in any case, this is a circular explanation for why I win, because it doesn't explain how I ballpark a betting market position when there is no betting market.

Introspectively, two key practices account for most of my success.

1. I take the "outside view."  When predicting, I start with long-run averages, and presume the "latest news" is distracting trivia.  For example, when I made my unemployment bet with Tyler, I looked at all the unemployment data for 1948 to the present, and assumed the future would resemble the past.  As usual, it did.

2. I spurn hyperbole.  Human beings adore superlatives, but superlatives rarely apply to the real world.  So when I notice someone treating hyperbolic poetry as literal truth, I rush to wager.  For example, when John Podhoretz asserted that the Iran nuclear deal "effectively ensures that it will be a nuclear state with ballistic missiles in 10 years," I smelled hyperbole, and tried in vain to entice him put some money on it.

In slogan form: I owe my track record to numeracy and normalcy.  Step back, calm down, look at the numbers, and target thinkers who say, "This time it's different." 

* How frequently do I really win?  See my 2016 bet inventory.




[This is aimed at clarifying my previous post, which David commented on.]

Bryan almost always takes the consensus view in any bet. The view a betting market would take, if one existed. When I first hear about a new Caplan bet, I almost always agree with him, and think that he's likely to win the bet. The other side of the bet puts too much weight on their own subjective view. They forget that they are nothing special, and that the smart bet is the consensus view, not the particular hypothesis that they have fallen in love with, because it's theirs.

Most people (perhaps including me) tend to overweight the probability that their views on religion, politics, economics, sports, and art are correct. (On art, by "correct" I mean that the work of art is likely to be perceived that way in the distant future.)

In terms of my area of specialization, monetary policy, I take the following view:

I do not believe that the Fed should set interest rates where Janet Yellen thinks is appropriate, or where John Taylor thinks is appropriate, or where I think is appropriate. Rather interest rates should be set where the market thinks they are most likely to lead to good macroeconomic outcomes. Yellen and Taylor (and me?) do have an important role to play in figuring out what "good macroeconomic outcomes" means.

There is one possible flaw in always marking our beliefs to the market consensus. It's been pointed out that if everyone believed the EMH made it impossible to consistently beat the market, then no one would do the research necessary to make the EMH true. Thus we need lots of individual actors trying to figure out where stocks should be valued, and forming opinions independent of the current market price. Otherwise the EMH does not work. But they should also be wise enough to know that they are nothing special, and hence they should advise their mother to invest in index funds, not their own hedge fund. That's what I mean by realizing that you are nothing special. You are merely a worker ant making the EMH more true.

In macro, it's important for people like me to always search for the truth, and reach conclusions about economic models in a way that is independent of the consensus model. In that way, I play my "worker ant" role of nudging the profession towards a greater truth. But at the same time we need to recognize that there is nothing special about our view. If we are made dictator, we should implement the consensus view of optimal policy, not our own. People have trouble with this, as it implies two levels of belief about what is true. The view from inside our mind, and the view from 20,000 miles out in space, where I see there is no objective reason to favor my view over Krugman's.

In the Middle Ages, people believed their own religion was the one true faith, and used public policy to try to make most of society adhere to this one faith. They could not understand the concept of the view from 20,000 miles out. In the enlightenment (after Copernicus), philosophers realized that we have no privileged position to decide the one true faith, and that public policy should not favor any one religion.

I also believe that public policy should not try to reshape our population more along Republican or Democratic lines, as we don't know which party's views are correct. Thus immigration policy should be neutral, except about characteristics for which there is a broad consensus that they are desirable or undesirable. (Say Nazi views, or totalitarian communist views, which are clearly wrong.)

PS. There was some confusion about my recent denial of personal identity. Most people believe there is a "you" that possesses a brain, and a "you" that possesses a body. I don't, I believe there's merely a brain and a body, no "you". This confusion shows up in discussions of free will. In this recent Atlantic article, the writer discusses the implication of there being no free will for optimal criminal justice policy. I agree with the writer about there being no free will, but he fails to understand that this view has no implications for criminal justice policy. The optimal policy is the one that maximizes aggregate utility. But if you look at any economic model of crime you'll immediately see that the model works exactly the same whether free will exists, or it does not exist. There is no special "FW" variable in the model's equations, which is one if free will exists, and zero if it does not. Since the free will assumption has no practical implications for behavior, it's best to assume that free will does not exist, which also means that there is no personal identity, just a brain spinning out one thought after another, according to the laws of science (plus chance?). I know others won't agree with me, I merely provide this to explain my view.




David R. Henderson  

My Response to Scott Sumner

David Henderson

I'm still scratching my head at co-blogger Scott Sumner's recent post titled "You're not special." It seems like a combination of extreme subjectivism, denial of subjectivism, putting his thumb on the obvious, and argument from authority.

Extreme Subjectivism

Scott writes, "There's no objective reason to view your or my political views as being superior to those of any other person."

"Any other person" includes a lot of people. I assume he would apply it to those who are dead also. So Scott is saying that there is no objective reason to prefer the views of someone who believes in liberty to those of Stalin, Hitler, Mao, or Mussolini. He would also have to say that there is no objective reason to prefer his views or my views to those of people who defended slavery.

Maybe it's all in the word "objective." Maybe Scott would say that murder isn't objectively wrong.

I'm flabbergasted.

Denial of Subjectivism

But Scott doesn't stick with subjectivism. He writes:

The hope is that if all economists research their issues, and report their conclusions, then society will consider all of these arguments and enact good public policies. Not all the time, but at least more often than not. And when you look at North Korea or Afghanistan, there's reason to believe the developed countries have done many things right.

But if our views are not superior to anyone else's, then we can't know what "good public policies" are. And what would we learn by looking at North Korea or Afghanistan that would tell us that we've done many things right? Now I happen to believe that Scott's making a good argument here. But the person who shouldn't believe he's making a good argument is --Scott. If no one's views are superior to anyone else's views, then he can't make a judgment that what's happening here is superior to what's happening in North Korea of Afghanistan.

Thumb on the Obvious

Scott writes, "there is no objective reason for me to assume that just because I inhabit Scott Sumner's body, my ideas are somehow special." I agree with him here. Who wouldn't? That's obvious. Ideas don't get special because of the particular body with the head on top from which they come.

Argument from Authority

Scott writes:

When I debate issues like immigration, I find that some commenters want to argue that admitting lots of this or that sort of immigrant will lead to bigger government. The implicit assumption is that since the commenter and I both think big government is bad, then admitting those immigrants is a bad idea. I wonder if they realize how arrogant they are being? Their view of the optimal cultural make up of America in 2116 is a country with the same economic views as they have. Not the economic views of Paul Krugman. Not the economic views of Joe Stiglitz. (Both Nobel Prize winners). Rather the views of the commenter.

The only reason I can think of for his mentioning Krugman and Stiglitz is that he is arguing from authority. They won Nobel prizes and, therefore, their views on issues that have little or nothing to do with the research that won them the Nobel prizes are to be taken more seriously than those of others.

But go back to the "Extreme Subjectivism" heading and you'll see that Scott thinks that there is no reason to prefer their views to anyone else's.

I don't know what category to put this last under, but I do disagree with Scott about leaders. He writes, "When the aliens say take me to your leader, they don't mean you." Maybe they don't mean me, but I mean me. I don't see anyone but me as being my leader. And I don't see me as being Scott's or your leader.

CATEGORIES: Economic Philosophy



cultural2.jpg

The welfare state is an appealing rationale for migration restrictions.  Normally, of course, it's a rationale for international migration restrictions.  In Maoist China, however, the urban welfare state swiftly became a rationale for restricting domestic migration from the countryside, enforced by mass deportation.  As Frank Dikötter explains in his excellent new The Cultural Revolution: A People's History 1962-1976:
As soon as the bamboo curtain came down in 1949, the new regime had started emptying the cities of entire categories of people described as a threat to social order and a drain on public resources.  Prostitutes, paupers and pickpockets, as well as millions of refugees and disbanded soldiers, were sent to the countryside, which became the great dumping ground for undesirable elements.  In the intervening years, as the household registration system imposed strict controls on the movement of people, a sometimes deadly game of cat and mouse developed... Migrant workers had no secure status, and risked expulsion back to the countryside at any time.  Once in a while, a purge would cleanse the cities of people without proper documentation.  Those who were caught were sent back to their villages, while hardened recidivists were dispatched to the gulag.

In 1958, at the height of the Great Leap Forward, as targets for industrial output were ceaselessly revised upwards, more than 15 million villagers moved to the city.  But three years later, with the country bankrupt, 20 million people were deported back to the countryside.
The welfare state connection:
Class background mattered a great deal in the socialist state, but ultimately the inability to earn a living was a far greater stigma.  Destitute members of society, in other words, were treated like pariahs.  The economy was in the doldrums, and the state wanted to reduce the number of people who represented a drain on its resources.  In many parts of the country the most vulnerable categories of people were sent into exile...

In Shanghai the authorities even envisaged reducing the population by one-third.  As early as April 1968, all retired workers and those on sick leave were ordered back to the countryside without pension or medical support if they lacked the proper class credentials.  A year and a half later, after more than 600,000 people had been deported, including students and other undesirable elements, a new plan proposed to increase the number of people earmarked for removal to a total of 3.5 million.  Half of all medical workers were to be sent off, as well as all unemployed and retired people.  Those suffering from chronic illness were added to the list.  Even prisons were to be relocated outside the city limits.  The plan was never fully implemented, but for years the population of Shangai stagnated around the 10 million  mark.
When people claim that deporting millions of illegal immigrants from the United States is "impossible," I always furrow my brow.  With totalitarian brutality, it's totally possible. 




Scott Sumner  

You're not special

Scott Sumner

You may like your outgoing and family oriented culture, or your introspective and individualistic culture. But that fact, by itself, doesn't make your culture better than another. (Put aside the question of whether it is better, a much more difficult and controversial proposition.) You may be a Muslim because you were born in Tehran, or a Catholic because you were born in Naples, but that fact doesn't make your religion special. Similarly, you may have distinctive, well thought out political views, but so do lots of other people, who are just as smart as you and I. There's no objective reason to view your or my political views as being superior to those of any other person.

Update: David Henderson points out that, as written, my post makes no sense. In the previous sentence I meant "any other similar person". Mea culpa.

Then why do I aggressively promote my views in the blogosphere? Because that's my job. I am a small worker ant in a vast intellectual edifice called "economics." It's my job to study the issues and report what I believe to be true. I know that other worker ants will do the same. One named Paul Krugman will reach different conclusions, advocating a larger role for government than I think is wise. The hope is that if all economists research their issues, and report their conclusions, then society will consider all of these arguments and enact good public policies. Not all the time, but at least more often than not. And when you look at North Korea or Afghanistan, there's reason to believe the developed countries have done many things right.

Nonetheless, there is no objective reason for me to assume that just because I inhabit Scott Sumner's body, my ideas are somehow special. I just do my job.

When I debate issues like immigration, I find that some commenters want to argue that admitting lots of this or that sort of immigrant will lead to bigger government. The implicit assumption is that since the commenter and I both think big government is bad, then admitting those immigrants is a bad idea. I wonder if they realize how arrogant they are being? Their view of the optimal cultural make up of America in 2116 is a country with the same economic views as they have. Not the economic views of Paul Krugman. Not the economic views of Joe Stiglitz. (Both Nobel Prize winners). Rather the views of the commenter.

While I tend to agree that small government is best, I also know that there is nothing special about my opinion. I'm not smarter than lots of economists with different views. It's not my job to decide whether future Americans should be predisposed to prefer my views on economics or Krugman's. Thus I should not take political inclinations into account when deciding on which groups should be allowed to immigrate to the US. And I apply this rule to lots of other issues as well. When deciding whether the Electoral College or the popular vote is the best way to pick a president, I pay no attention to which party is helped (it's not clear in any case, and FWIW I favor the popular vote). Ditto for the parliamentary political system (which I prefer). I don't care which party it helps. And referendums, another idea I support.

To be fair to the other side, I think there are some cultural attributes that are almost universally viewed as bad, such as high levels of corruption. So if someone wants to argue that admitting a certain type of immigrant will lead to more corruption, that's a fair argument. But it's not kosher to advocate an immigration policy expressly for the purpose of favoring your particular political party, or your view on the size of government, when other people who are just as bright hold differing views. Sorry, but you're nothing special.

I do understand that the illusion of personal identity creates the related illusion that we ourselves are special, and that our precious views of things are special. But we aren't, and they aren't.

When the aliens say "take me to your leader", they don't mean you. Just do your job.

Screen Shot 2016-05-25 at 3.16.54 PM.png

CATEGORIES: Economic Philosophy



Attention undergraduates and undergraduate educators - one week remains to submit papers for the 5th annual Carl Menger Essay Contest!

The purpose of the contest is to recognize and encourage undergraduate scholarship in the Austrian tradition and the broadly catallactic approach to social science which it represents. By this we mean an approach common to the Scottish Enlightenment of Adam Smith and David Hume, the French Liberal School of Say and Bastiat, the Virginia School of Buchanan and Tullock, the UCLA price theory of Alchian and Demsetz, and the Bloomington School of Vincent and Elinor Ostrom, among others. We invite essays that explore, advance, challenge, or apply the ideas of these and related schools of thought.

Three winners will each receive $500 conditional on attending and presenting at the Society for the Development of Austrian Economics annual meetings at the Southern Economic Association conference. The conference is November 19-21, 2016 at the JW Marriott in Washington, DC. Accommodations will be provided at the conference hotel and the cost of the SDAE dinner will be covered. Winners are responsible for registration. Travel scholarships may be available.

Carl Menger 2013 Resized.jpg

Past winners have gone on to do PhDs in economics and publish their papers in academic journals such as Rationality and Society and Studies in Emergent Order. More information on the contest and how to submit your essay is available here.

CATEGORIES: Austrian Economics



David R. Henderson  

To Vote or Not to Vote?

David Henderson

One of my favorite writers and thinkers on the Cato blog, Cato at Liberty, is Jim Harper. He posted yesterday on voting, titling his piece "Don't Not Vote." He makes some good points but goes too far. The issue for me, by the way, is not that I disagree with his bottom line: I vote pretty regularly. But reasons matter.

First, I like how he starts, writing:

A fair number of libertarians pride themselves on not voting. Among their reasons: One person's vote is so unlikely to influence the outcome of an election that almost any alternative action is a better use of time. That reasoning has appealing simplicity. For consistency's sake, our hyper-rational non-voting friends should refrain from applauding at performances or cheering at games.

Where I thought he was going to go is to say that voting is a means of expression, so why cut yourself off from that means.

But the ending sentence in that paragraph is this:

People who want to see liberty advance, and not just bask in the superiority of libertarian ideas, should probably vote--and vote loudly.

That's what doesn't follow. It still is the case that your vote has an almost infinitesimal chance of influencing the outcome.

Ah, says Harper, but so what if your vote doesn't determine the winner? It influences the margin of victory. He writes:

Here's one use of vote information that I'm familiar with as a former Hill staffer: Folks in Congress assess each other's strength and weakness according to electoral margin of victory. When a one- or two-term member of Congress is re-elected by a wide margin, it's a signal that he or she is there to stay. That member is going to have a vote for a long time and will acquire more power with increasing seniority. The stock of that person and his or her staff rises, and they immediately have more capacity to move their agenda.

OK, but let's not lose our numeracy.

A personal story. Because I left Canada in 1972 just before an election, I never voted in Canada. And I couldn't vote in the United States until June 1986, after I had just become an American citizen. I voted the first chance I got. What a disappointment! Everything I told my students in class about the economics of voting was true. It's not just that I didn't influence the outcome. It's also that I didn't noticeably influence the margin of victory either.

If you find yourself persuaded by Jim's point about margin of victory, ask yourself this: Think of a candidate, candidate A, whose views you liked a lot more than those of his opponent, candidate B. To make it real think about an actual candidate A whom you voted for. Now ask yourself, without checking data, by what number of votes did he/she win?

I bet the best you can do is guess to the nearest hundred and, for most people, it's the nearest thousand.

QED.

CATEGORIES: Public Choice Theory



My sense is that most of the coverage of Brexit in the US comes down in favour of remaining in the EU. That is the case put forward in Dalibor Rohac's new book. And for onlookers, I think it is easy to dismiss the exit position when it brings out anti-immigration and nationalistic arguments (of which I have zero sympathy).

Brexit resized.png

In the spirit of considered opinion, I thought I would draw reader's attention to three other pieces on the exit arguments that may be of interest. First, Brexit the Movie hit London's red carpet last week (you can watch it free on Youtube). Second, Tyrone's argument based on a zero social rate of discount. Third, a FT piece on a new book by Daniel Hannan - Britain's representative in Brussels for 17 years - Why Vote Leave.

What all three of these have in common are arguments regarding Britain's sovereignty, evolved political institutions, decentralization, and hope for the case for free trade to win out in the medium to long-run. Interestingly, these arguments side with Scott that now is the time to stand up for globalization, liberalization and openness, but view an exit vote as the best means for achieving roughly the same ends.

(An anecdotal side note, German friends at the pub this weekend echoed Scott's concern for what exit would mean for fiscal pressures and liberal principles within the EU.)

CATEGORIES: Political Economy



When I posted about a talk I was about to give a week or so ago, a number of readers asked if I could post the talk. There was no video, but I used my iPhone and the recording came out crystal clear. The talk went 50 minutes and Q&A went 25 minutes. Even the questions asked from the back of the room can be heard clearly.

Here's the link.




One of the most basic ideas in economics is that the vast majority of regulations are harmful. Here's a simple example. Suppose banks charged $2 to use ATMs. Then suppose the government passed a "pro-consumer' law banning those sorts of fees. What would happen? Economic theory suggests the law would hurt consumers, and yet I'd guess that 97.34% of consumers do not know this fact. Here's why a ban on fees hurts consumers:

Banks will see this as a cost increase, and pass the cost on to consumers in other ways. Can I be sure this will occur? No, but it's very likely. Suppose I told you that Congress passed a 10-cent increase in the gas tax. What would you expect to happen to gas prices at the pump? Most people would expect a 10-cent increase. In fact, the oil industry is perhaps the industry where taxes are least likely to be passed on to consumers. That's because the supply of oil is less elastic that the supply of almost any other good, including banking services. So if you think gas taxes are passed on to consumers, then you should be even more certain that I'm right about the elimination of bank fees being passed on to consumers in other ways, such as fees on deposits, or lower interest rates on deposits.

OK, but so far this is a wash. If consumers pay less in one place and more in others, does the regulation actually hurt consumers? Yes it does, because it also hurts bank efficiency. Eliminating ATM fees will reduce the profit maximizing number of ATMs, which will make banks less efficient. Since tellers cost more than ATMs, the cost increase passed on to consumers will be larger than the saving from ATMs.

This logic applies to most other regulations, except those aimed at special market failures, such as monopoly power, externalities, and information asymmetry. None of those market failures apply in the ATM case.

Nor do they apply to the new regulations on overtime, discussed recently by David Henderson. Nor do they apply to the vast majority of regulations aimed at health, safety, worker benefits and 1000 other aspects of our daily lives. I won't say they never apply, there are probably a few areas where OSHA understands health risks better than workers and companies, but there is no statistical evidence that OSHA has actually improved worker safety. Nor do externality or information asymmetry arguments justify banning smoking in restaurants.

This used to be a basic idea that was known to all good economists, like the idea that fiscal stimulus is not needed when the central bank is targeting inflation, or that minimum wages are a bad idea, or that free trade with China helps America, or that trade deficits are not bad things, or that fiscal stimulus doesn't reduce budget deficits by triggering faster growth. Unfortunately, much of the core of economic theory is rapidly being forgotten. Here is Paul Krugman:

The Obama administration issued new guidelines on overtime pay, which will benefit an estimated 12.5 million workers.
This is a real head-scratcher. Basic economic theory predicts that this rule will hurt workers, for exactly the same reason that a ban on fees at ATMs would hurt bank consumers. And that's probably true even if higher minimum wage rates help workers. Overtime rules don't cap total worker compensation, which is set by the market. Reduce worker efficiency (as this regulation does) and you will reduce total compensation.

I didn't write this post to bash the overtime rules; others like Don Boudreaux have done that far more effectively. I'm writing this post to remind people that economic theory suggests that the vast majority of regulations are counterproductive, and many actually hurt the people they are intended to help. I'd guess that over 90% are not justified, including almost all occupational barriers to entry, trade restrictions, health and safety regulations, tax rules, employer mandates, landlord mandates, etc., etc.

What regulations are justified? Primarily environmental mandates (or taxes), and perhaps a few anti-trust rules. One can also justify some regulations, like minimum capital requirements for banks, on "second best grounds", due to deposit insurance.

We'd be better off passing a law sun-setting all regs, and the entire Federal tax code, in 2025. Then give Congress the next 9 years to set about re-passing all the regs and taxes that actually make sense.

CATEGORIES: Labor Market , Regulation



Former New Mexico governor Gary Johnson, running for the Presidential nomination of the Libertarian Party, wrote on Facebook:

In a nationally-televised debate among three of the Libertarian candidates for President (A debate that should, by the way, have been more inclusive of all the candidates.), a highly unlikely hypothetical question was raised about whether a Jewish baker has the right to refuse to serve a Nazi sympathizer asking for a "Nazi cake". I responded to that question in the legal context of whether a public business has the right to refuse to serve a member of the public, as distasteful as it might be.

The simple answer to that question is, whether all like it or not, U.S. law has recognized the principle of public accommodation for more than 100 years: The principle that, when a business opens its doors to the public, that business enters into an implied contract to serve ALL of the public. Further, when that business voluntarily opens its doors, the owners voluntarily agree to adhere to applicable laws and regulations -- whether they like those laws or not.


I have dealt with this issue on this blog before, but perhaps it's worth restating.

First, where does Johnson come up with the implied contract? I don't see it. Couldn't it just as easily be that there's no implied contract.

Second, and more important, let's say there is an implied contract. It is implied only if the business does not address the issue. That is, the only way to conclude that there is an implied contract is if the business does not specifically say that it will refuse to serve certain people. If the business makes that statement, one can hardly imply a contract that contradicts that statement.

As I wrote when I challenged economist Michael Munger's similar claim about public accommodation:

On the other hand, there is a way out of the apparent "implied contract." That way is to make the implied contract the default. That is, unless the business states differently, there is an implied contract. I don't think that's as good as my solution of complete freedom of association, but it's not terrible. Then a business can say, "We reserve the right not to deal with heterosexuals" or "we reserve the right not to deal with homosexuals" or "we reserve the right not to deal with black people" or "we reserve the right not to deal with people who hate black people." That business would then take the risk of losing customers who disagree. And so be it.

By the way, a lively debate, and one of the better ones on this blog, ensued.

So my question to Gary Johnson is this:
My solution seems to accommodate your idea of an implied contract while still protecting the rights of people who feel strongly about whom they want to do business with. What do you think of it?

Johnson also raises a new issue at the end of the quoted comment, one that is much broader than the issue of freedom of association. Recall that he writes:

Further, when that business voluntarily opens its doors, the owners voluntarily agree to adhere to applicable laws and regulations -- whether they like those laws or not.

I don't get the "voluntarily agree" part. When a business opens its doors, it has to adhere to applicable laws and regulations. I get that. But "voluntarily agree?" Where does that come from?

Notice also what his reasoning would imply about a different era. In many parts of the South, before the Civil Rights Act, businesses were forced to discriminate on racial grounds. Streetcar companies were a famous example. In South Africa during Apartheid, the government made it difficult for mining companies to hire black people. Were Johnson to follow his own reasoning, he would need to claim that businesses in the South and mining companies in South Africa "voluntarily agreed" to discriminate. Would Johnson follow his own reasoning?

CATEGORIES: Regulation



Bryan Caplan  

Euroteach

Bryan Caplan
This summer, I'll be in Europe for a month, from June 16-July 16.  My activities:

1. Teaching Advanced Public Choice at the University of Münster. Classes are on Monday afternoons and Tuesday mornings.  If you wish to audit, please email me.  The class will be taught in English, with my minimal German mixed in for comic relief.

2. Speaking at the IEA's THINK conference in London on July 2.

3. Speaking in Heidelberg on the evening of July 12.

If you want to meet up in Münster or London, email me and perhaps we can work something out.  In Heidelberg, I'll only be available to hang out for an our or two after the talk.

CATEGORIES: Economic Education



The other story was about a policy change achieved through executive action: The Obama administration issued new guidelines on overtime pay, which will benefit an estimated 12.5 million workers.

What both stories tell us is that the Obama administration has done much more than most people realize to fight extreme economic inequality. That fight will continue if Hillary Clinton wins the election; it will go into sharp reverse if Mr. Trump wins.

Step back for a minute and ask, what can policy do to limit inequality? The answer is, it can operate on two fronts. It can engage in redistribution, taxing high incomes and aiding families with lower incomes. It can also engage in what is sometimes called "predistribution," strengthening the bargaining power of lower-paid workers and limiting the opportunities for a handful of people to make giant sums. In practice, governments that succeed in limiting inequality generally do both.


This is from Paul Krugman, "Obama's War on Inequality," New York Times, May 20.

It is clear from the context that Krugman is claiming that the new Obama regulation on overtime pay is an example of "strengthening the bargaining power of lower-paid workers."

He's wrong. It does just the opposite.

Probably the best way to help him see the point, if, as I doubt, he wants to see the point, is to consider his situation with his employer, the City University of New York. Krugman is a salaried rather than an hourly worker. So he doesn't have to punch a clock and no one is keeping track of his hours. He can work on his lunch break if he wants, he can work on an airplane, he can work any time and anywhere.

I don't know the specifics of his deal with his employer, but of my above claims I am virtually certain.

Imagine that you are making between $40K and $45K, much less than Krugman's $225K. You are salaried. You don't want or need as much flexibility as Paul Krugman has, but you do want some flex. You want to be able to have an occasional long lunch hour some days and a short lunch hour other days. But this won't always works out to 40 hours a week. Some weeks you will work 38 hours, some 42 hours, some 45 hours, some 34 hours. You ask your employer for that flexibility and your employer answers, "Fine, as long as the work gets done. And, in return, there might be times, not often, but some times, when you need to come in on a Saturday morning."

You think about that. You respond, "OK, as long as I can take a few hours off in a day, when there's a lull, but I guarantee that the work will get done." Your employer and you agree.

Is there anything in this story that sounds implausible?

What just happened?

You exercised your bargaining power.

Now someone who doesn't know you from Adam comes along and says, "Your agreement with your employer means that some weeks you will work 45 hours. In the weeks that you earn 45 hours, the employer must pay you for 47.5 hours. (Overtime rules require that the employee be paid time and a half for any hours over 40 in a week.) You may think that those cancel out so that your average is 40 hours a week. Tough. We don't think the same way. Your deal is illegal. The employer must pay you overtime any week that you work more than 40 hours no matter what happens in the other weeks."

Now the employer has to rethink his earlier agreement. Paying overtime wasn't part of the plan. He can adjust by lowering your base pay so that some weeks you earn less than before and some weeks (the weeks with overtime) you earn more than before. And he must keep track of all these hours, whereas he didn't before. He reluctantly goes along and cuts your base pay.

The arrangement has been altered. You might not like that. You have rent to pay in the 4-bedroom house you share with 3 other single people and you like the certainty of that weekly income. But now the employer, in response to that regulation, has removed that certainty.

Your bargaining power is now less. QED.

Update: Question for extra credit.
Why do you think the Obama administration chose December 1 as the date for implementation?




Scott Sumner  

The rich heart of Europe

Scott Sumner

Razib Khan recently linked to a map of Europe, showing average incomes by region. The richest areas were colored dark green, and the poorest are colored dark red/brown:

Screen Shot 2016-05-19 at 2.11.01 PM.png
Notice that major capital cities such as London, Paris, Madrid, Stockholm, etc., are much richer than the surrounding regions. There's also a rich area centered on Europe's two biggest ports (Antwerp and Rotterdam). Again, no big surprise. Nor is the wealth of coastal Norway, which is rich in oil. But I am sort of surprised by the richest area of all, right in the center of Western Europe.

This area includes Switzerland, western Austria, northern Italy and southern Germany. What's going on there? It doesn't seem to be cultural in any obvious way, as it includes both Nordic and Mediterranean elements. It also includes both Catholic and Protestant cultures. It includes successful countries and dysfunctional countries. So the quality of governance doesn't seem like a complete explanation either. Indeed northern Italy is rich despite bad governance.

I recall that economic geographers used to argue that places like Bolivia and Afghanistan were poor because they were landlocked and mountainous. Well the rich heart of Europe is landlocked and mountainous. Yes, it has rivers, but that doesn't explain why it's richer than those regions that are closer to the coast, or which have lots of flat, fertile farmland. Nor has this region always been rich. Southern Germany only became unusually rich after WWII. I seem to recall reading that when British tourists took a Grand Tour through the Alps 200 years ago, the region was relatively backwards.

There's only one thing that I can see that these regions have in common, they are all close to the Alps. Before seeing this map, if you had asked me which part of Austria I thought was richest, I would have guessed the eastern part, which is less mountainous. I knew that Lombardy was rich, due to companies that cluster around Milan, but didn't know about the three other smaller Italian Alpine provinces.

So I offer this as a mystery to be explained. Why are areas close to the Alps richer than elsewhere? In earlier centuries, did the rugged mountains somehow prevent the development of the sort of feudal systems seen in farming regions, and instead instill rugged independence in their populations?

In the next map, the regions are broken down with finer detail. It seems to me that lots of the richer regions are right up against various mountain ranges. The far west of Italy, right up against the Alps, and also the northern Apennines in Italy. The Pyrenees region of northern Spain.

Screen Shot 2016-05-19 at 4.41.29 PM.png




David R. Henderson  

My Daughter the Juror

David Henderson

My daughter, Karen Henderson, a resident of San Francisco, recently served on a California jury for almost two weeks for $15 a day. She is self-employed and her opportunity cost, therefore, was quite high.

But as she said in a text to my wife and me, when the jury pool was being narrowed down, "Part of me wanted to lie to get out of it but I'm just such an honest person I can't lie." Sure enough, the pool fell from about 100 to 24, and then down to 12, and she was juror #6.

I'm not going to write about the economics of involuntary servitude and the associated huge waste of people's time compared to paying closer to market wages and getting people to volunteer. That's an interesting topic, but I'll leave that for another day.

Instead, this is proud papa complimenting my daughter's insights about the housing market in San Francisco and about revealed preference.

First, the housing market in San Fran. Karen pointed out that in the pool of 24 people, 23 had a Bachelor's degree, and the 24th had an Associate's degree. One third of the people had at least a Master's degree or a professional degree (doctor or lawyer.) What does this tell you about incomes in San Francisco, she asked me, and then answered: there are few low-income people in San Francisco because they are priced out by the high rents and high housing prices.

Second, revealed preference. The case was about a young man who was clocked speeding at 77 mph in a 35 mph zone. The SFPD chased him and he led them on a wild chase indeed. The serious charge against him was evading the police officer in his vehicle.

Most of the case involved the prosecutor trying to prove that he was willfully evading and the defending lawyer arguing that the driver's car went out of control. Given the way the chase occurred, e.g., the car suddenly turning from the furthest left lane of three to make a right turn, the defendant had a tough road ahead (pun intended.) Also, it came out that the defendant was a race car driver, making his argument that the car got out of control suspect.

As the evidence mounted, my daughter found the defendant's case less and less credible. Jurors were allowed to write out questions. The bailiff would then come and pick up the question and take it to the judge. The judge, consulting with the attorneys on both sides, would then decide whether the question was legitimate. All of Karen's questions, she said proudly, passed muster.

And here's the question that pushed her beyond reasonable doubt. It had come out in the testimony that the defendant's friend had picked up his car for him the next day after it had been impounded. Karen's question: "If the car had gone out of control, weren't you worried that your friend would be at risk if he drove it?" The defendant answered that he wasn't.

The initial vote among the jurors was 12-0 in favor of Guilty. And here's where the stereotype I held about jurors, based on stories I've heard from others who have served, broke down in a positive way. Even though that was their initial vote, they knew that the charge was serious but, of course, they weren't allowed to know or research the range of penalties. They knew that he was a race car driver, which means that maybe at 3 a.m. he wasn't putting people at much risk with his evasive maneuvers. So they spent a whole extra day sifting the evidence. They asked to see the transcripts or view videos of the trial (I wasn't clear which) before voting 12-0 in favor of Guilty.




President Obama and Governor Brown believe the science is settled and carbon emissions lead to droughts. Before we test the veracity of their beliefs, consider that many of the warmest places on Earth, such as rainforests, are both warm and wet. Further, some of the driest places on Earth, such as Antarctica and Siberia, are also the coldest. The coldest city in the world, Oymyakon, Russia, has a mean annual temperature of -15.5 °C and gets only 8.3 inches of precipitation per year. Antarctica's McMurdo Dry Valleys, obviously cold, are the world's driest locations. So we can't just assume that warmer equals drier.

Droughts are defined by reduced precipitation and increased evaporation, and California's 2011-2015 drought had both. What happened over the last three winters was a major reduction in precipitation (a reduction of 0.9 mm per day) with only a minor increase in evaporation (less than 0.1 mm per day). In short, the reduction in precipitation was an order of magnitude more than the increase in evaporation. "California lost essentially one full year of precipitation," according to Richard Seager, a climate model specialist at Columbia University's Lamont-Doherty Earth Observatory. "The [reduced] precipitation was the essence of this drought," added Marty Hoerling, a meteorologist at the NOAA Earth System Research Lab: "Farmers were praying for rain, not cooler temperatures."


This is from David R. Henderson and Charles L. Hooper, "Did Global Warming Cause California's Drought?" Defining Ideas, May 19, 2016.

Charley deserves more of the credit for this piece than I do. He tracked down virtually all the evidence. My main role was rewriting.




Imagine an article on the "carried interest" tax loophole, entitled as follows:

"Carried Interest tax treatment should not be changed, experts agree"
And suppose that all of the experts were hedge fund billionaires.

CNBC has a new article discussing "expert" opinion on Chinese steel exports. Here's the headline:

China has conducted a 'war' - not trade - with steel, experts say.

The article cites two experts:

China's low-cost metal producers have been widely cited as the main culprit for the glut. In particular, the world's second largest economy has been accused of "dumping" cheap steel on to global markets, due to a slowdown in domestic demand, in a bid to gain market share. However Beijing has denied any wrongdoing and has said that its costs are lower than other producers.

Lourenço Gonçalves, chairman, president and chief executive of mining and natural resources company Cliffs Natural Resources, told CNBC on Thursday that China had been acting unfairly. . . .

"Just based on the numbers, China is by far the largest problem," Gonçalves said, accusing China of not abiding by the rules of international trade. "You can't call yourself competitive if your competitiveness is based on cheating the international rules of trade. Trade without fairness is not trade, it's war."


And here's the other expert:

James Bouchard, founder, chairman and chief executive of steel services group Esmark, agreed that there was "no doubt about it" that China was dumping steel and said that the impact had been "devastating" for businesses.
We now live in a world where actual experts are ignored, and the press merely repeats the claims of special interest groups on one side of the issue. Trump would be proud.
CATEGORIES: International Trade



One picture is worth a thousand words, courtesy of Bloom and Van Reenen's "Why Do Management Practices Differ Across Firms and Countries?" (Journal of Economic Perspectives, 2010)

reenen.jpg

My earlier comments on this still-underrated piece here.




David R. Henderson  

Morley Safer, RIP

David Henderson

CBS Sixty Minutes reporter Morley Safer died today. He was one of my favorites. He had that smile of doubt when he was hearing someone he interviewed tell him what he thought was a spin. He was also a fellow Canadian who became an American, while retaining Canadian citizenship.

Indeed the Canadian part relates to one of my favorite stories about him, assuming, as I think is justified in this case, that Wikipedia tells it right.

Safer had reported on, and shown, U.S. soldiers in Vietnam lighting people's huts on fire during the Vietnam war. He was justifiably shocked by this. President Lyndon Johnson was shocked too, apparently not because the soldiers were lighting the huts on fire but because Safer reported it.

Here's the relevant segment from Wikipedia:

Safer's report on this event was broadcast on CBS News on August 5, 1965, and was among the first reports to paint a bleak picture of the Vietnam War. President Lyndon Baines Johnson reacted to this report angrily, calling CBS's president and accusing Safer and his colleagues of having "shat [DRH comment: LBJ was good on the past tense] on the American flag." Certain that Safer was a communist, Johnson also ordered a security check; upon being told that Safer "wasn't a communist, just a Canadian", he responded: "Well, I knew he wasn't an American."

My wife and I had just watched, and enjoyed, the special one-hour Sixty Minutes segment on him last Sunday.

Here's an excerpt from the CNN obit:

"He was an extraordinary writer and reporter, and a true gentleman," said CNN anchor and "60 Minutes" contributor Anderson Cooper. "From his work during the War in Vietnam to his completely unique and evocative pieces for 60 Minutes, he set the standard for what we all want to be as journalists. His kind shall not pass this way again."

I think Cooper's last statement is probably right. It's worth thinking about why. Is it the incentives? If so, what incentives have changed. I'm not sure about the answer.

CATEGORIES: Obituaries



Jesse Walker, over at Reason's Hit and Run, just posted an excellent piece making an obvious point. I'm not undercutting him here: part of why it's obvious is that he says it so well.

Here's the key part:

Sometimes they get more explicit, as when Sen. Dianne Feinstein said last week that Sanders' presence in the race has become "actually harmful," since it means Clinton "can't make that general-election pivot the way she should."

The "pivot," of course, is the moment a candidate stops pursuing her party's base and starts chasing the mushy moderates. The pivot is precisely what Sanders wants to block.


Summary of Feinstein's message to Bernie: You want outcome A. I don't. What you're doing will maximize your chance of achieving outcome A. So just stop it.

If Sanders quits, Clinton will be able to move closer to the median voter in the general election. That's Public Choice 101.

By the way, I have my own reason for wanting Bernie to quit. It's also Public Choice 101. If Sanders quits, Clinton pivots toward the median voter and then the Republican nominee, presumably Trump, doesn't have the incentive he otherwise has to go further left. Remember that in 1972, Nixon went left to compete with McGovern and Nixon proceed to "McGovern" from the left.

You might wonder why I wouldn't want Bernie in so that he can push his much-better, less-interventionist views on foreign policy. Simple. Because he doesn't. He mainly talks about the domestic economy and he's almost completely awful. The only candidate who's saying much non-interventionist in foreign policy is Trump.

CATEGORIES: Public Choice Theory



Return to top
Blogroll
OUR REGULAR READING:
Tyler Cowen and Alex Tabarrok
Russell Roberts and Don Boudreaux
Greg Mankiw
Scott Sumner
Robin Hanson
David Friedman
Mark Thoma
Megan McArdle
Matt Zwolinski, et al
Jason Kuznicki, Gene Healy
Daniel J. Mitchell, Ilya Shapiro, et al
Reason Online
Nathan Smith, et al
John Cochrane
James Hamilton
Bob Murphy
Karl Smith
WE TRY TO KEEP UP WITH:
Stephen Bainbridge
Stan Collender, Pete Davis, Andrew Samwick
Brad DeLong
Evan Goldstein
The Economist
Nicolai Foss, Peter Klein
Lynne Kiesling
Steven Levitt and Stephen Dubner
Mike Rappaport and Michael S. Greve
Wall Street Journal
John Taylor
David Tufte
A FEW MORE:
Chris Dillow
Peter Gordon
Heritage Foundation
Stephen Karlson
Stephen Kirchner
Michael Munger
Craig Newmark
William Parke
Virginia Postrel
(was Prestopundit) Greg Ransom
David Warsh
Return to top