July 23, 2008

Will I Will My Oil Bet? The Wolfers Factor

Bryan Caplan

Justin Wolfers says that current price of oil is a better predictor of future oil prices than oil futures markets:

And it turns out that they all do worse than one simple forecast: the current oil price. That’s right: the most accurate forecast of oil prices over the next month, year, or quarter is the current oil price. We call this the no-change forecast.

As long as Wolfers is referring to the nominal price, I'm on track to win my bets with Cowen and Balan. If he's referring to the real price, I may be in trouble.

July 23, 2008

Does Parental Divorce Cause Offspring Divorce?

Bryan Caplan

Children of divorce are more likely to eventually get divorced themselves. But why? Earlier behavioral genetic work concluded that, contrary to popular platitudes, the transmission mechanism is heredity, not environment. As Judith Harris put it:

A twin study of 1500 pairs of adult identical and fraternal twins analyzed their and their parent’s marital histories... The analysis churned out that: about ½ of the variation could be attributed to genes shared with twins or parents. The other ½ was due to environmental causes. But none of the variation could be blamed on the home the twins grew up in. Any similarities could be fully accounted by the genes they share.

A new paper by a bunch of researchers (including Eric Turkheimer) challenges this result using a "children of twins" design. Key idea: You gather data on twins and their children. Then you can see, for example, what happens to their offspring if one twin gets divorced and the other doesn't.

The main results from this paper are very different from Harris'. While genetics still matters...

The use of the Children of Twins Design revealed that parental divorce (or risk factors specifically associated with parental marital instability within twin families) accounted for approximately 66% of the initial, unadjusted estimate of the intergenerational transmission. Because our design allowed us to control for genetic and unmeasured environmental selection effects (for the twin parents) as well as measured characteristics of both parents, this is perhaps the strongest evidence to date that parental divorce directly causes an increase in offspring divorce.

Four caveats:

1. The effect size is pretty small. When you look identical twin pairs discordant for divorce (i.e., one divorced, one didn't):

Children of identical cotwins whose parents remained married had a 17.1% risk for divorce, whereas children of identical cotwins whose parents divorced had a 22.0% risk for divorce.

2. The children of twins design can't really distinguish between pure environmental effects and (unmeasured) genetic effects of the non-twin parent:

As discussed above, the Children of Twins Design does not control for genetic risk from the spouse of twins (Eaves et al., 2005).

In other words, if twins are discordant for divorce, the reason could easily be that the divorced twin married someone genetically predisposed to divorce. This in turn would make their children more likely to get divorced as a result of heredity alone.

3. The approach ignores child-to-parent causation. A difficult kid might cause his parents' divorce, then destroy his own marriage when he grows up:

Furthermore, characteristics of the offspring that increase the likelihood of divorce in both generations could also explain the relation (reciprocal influences).

4. Finally, this paper did a standard analysis of variance for the original group of twins, and reached the standard conclusion that shared environment didn't matter. In fact, the point estimate of for shared environmental variance was 0%:

Twin analyses indicated that additive genetic factors accounted for 15% (95% CI [confidence interval] = 5%–19%) of the variation in marital instability... Nonshared environmental factors, environmental influences that make siblings and twins different, accounted for most of the variance (85%, 81%–90%), with a minimal role of environmental factors that equally influenced both twins (0%, 0%–7%).

If you read this paper, you'll probably be astounded by the level of care and craftsmanship. Still, it seems pretty confusing to call something a "genetically informed" study when it can't distinguish between true environmental effects and unmeasured genetic effects of non-twin parents. If anyone's got some additional insight, I'd like to hear it.

July 23, 2008

Imagining Alternative Futures

Arnold Kling

Tyler Cowen offers six, not mutually exclusive. For example,

4. Energy becomes very cheap, destruction is easy, deterrence is difficult, power decentralizes, and we retreat to medieval-style fortresses.

In my view, the two most interesting variables in forecasting the future are (a) the path of biotechnology; and (b) the ability of the center to hold in U.S. politics.

For biotechnology, the question is whether the new pills (or what have you) do nothing at all, primarily help the disadvantaged, or mostly add to the advantages of the elite. For politics, we could have the center hold, we could succumb to a strong demagogue, or the central government could suffer a sudden loss of authority (what if investors lost confidence, so that the Treasury could no longer borrow?), with people (especially those with talent) either leaving the U.S. or setting up alternative government systems on its territory.

The most likely scenario is that the center holds and biotech does not do much. Also, I think that if biotech primarily helps the disadvantaged, then the center will hold.

The other possible cases are:

1. Biotech does nothing, and a strong demagogue takes over.
2. Biotech does nothing, and the U.S. central government loses a lot of its authority.
3. Biotech helps the elite, and a strong demagogue takes over.
4. Biotech helps the elite, and the center holds.
5. Biotech helps the elite, and the U.S. central government loses a lot of its authority.

I think that (5) is the second most likely scenario. I think that (1) is the third most likely scenario.

July 23, 2008

Education: Is There a Massive Market Failure?

Arnold Kling

Goldin and Katz get more press.

"There has been much more growth of inequality among college graduates than among noncollege workers," Katz says. Only some people, he says, are coming out of college with the high-level abstract-reasoning skills that fully complement the new information technologies and command high salaries...Does that mean, then, that too many people are going to college, and that the rewards of a B.A. are overrated, as some commentators have recently suggested?

"That's absolutely wrong," Katz says. "...The market is very bad for people with only a high-school diploma — they're not doing much better than people who dropped out in the eighth grade. So the return [on investment] to college is still very high. Even if you wind up in the bottom half of the college group, you're still much better off than in the top half of the high-school group."

The Goldin-Katz thesis, at least as it is filtering into the media, is that there is a massive market failure taking place. Young people are passing up the high returns of going to college. Are they myopic? Are they liquidity constrained?

I wish someone would test the market failure hypothesis directly. Offer a college scholarship program to students who otherwise would not attend college, and select the winners by lottery. Then compare the winners with the losers in terms of subsequent education and earnings.

July 22, 2008

Public Choice Outreach Seminar 2008

Bryan Caplan

If you want to learn more about public choice, why not fill out an application for the 2008 Public Choice Outreach Seminar? It's normally in the summer, but this year it's October 9-11. It's a great chance to sample the GMU experience. And if you want to see me beat the dead horse of "The Myth of the Rational Voter," you're in luck - I'm on the faculty.

July 22, 2008

A "Why Not?" Moment

Bryan Caplan

David Friedman's recent post on airplane boarding gave me a "Why Not?" idea: Wouldn't it be simpler if last row on the airplane was called #1? Then even the innumerate could understand that the first row boards first.

It's not as clever as changing the shape and flipping the label on ketchup, but why not?

July 22, 2008

Why Read The Watchmen?

Bryan Caplan

Probably thanks to the new movie trailer, the classic graphic novel The Watchmen is now #2 on Amazon. It's well-deserved. I can't say enough good things about this book - I've read it at least ten times. But for skeptical EconLog readers, this one should be enough: The Watchmen is the Best... Utilitarian Parable... Ever.

HT: Steve Blatt, who gave me The Watchmen as a birthday present back in 1992 or so.

July 22, 2008

How Many Americans Could Pass the Citizenship Test?

Bryan Caplan

Should you have to pass a test to be allowed to vote? People tend to freak out when I sympathetically consider this possibility. It not fair! Who would write the test? Wouldn't it be discriminatory?!

The funny thing is that we already have such a test - for immigrants. You don't need to pass the citizenship test to get a green card; but if you want the right to vote, you need to answer 60% of the questions correctly. And unlike this sample test, the actal test is not multiple choice. (For more questions, go to page 60 of this Guide to Naturalization).

I bet that at least half of Americans would fail this test if you gave it to them today. I'd further bet that if you had to pass the test to vote, most of the people who initially failed wouldn't be willing to hit the books to get a second chance. Our civic religion may say that the "right to vote is our most precious right," but few people literally believe it. And it's a good thing, too.

July 22, 2008

Business Books

Arnold Kling

Joe Nocera picks the best business narratives. I assume this means a book that describes an individual, a company, an event, or an era. I agree with him that Barbarians at the Gate (about the RJR-Nabisco takeover) and Liar's Poker (Michael Lewis writing about Wall Street mortgage-backed securities traders) are must-reads. They are well written, and they emphasize the role of ego on Wall Street in a way that reinforces my priors.

I would not include Roger Lowenstein's book on When Genius Failed. In my view, he does not really get at where Long Term Capital Management, the star-studded hedge fund, went wrong.

The other books on his list I have not read. I am most intrigued by The Go-go Years and least likely to approve of The Smartest Guys in the Room (the latter, about Enron, I saw as a movie, and that had some really asinine perspectives, particularly in its conspiratorial take on market value accounting).

Books I would add:

'Adam Smith' (George Goodman), both The Money Game and Supermoney, about Wall Street in the late 60's and early 70's (in the latter book, the Penn Central railroad bankruptcy is not unlike recent financial events).

Michael S. Malone, Infinite Loop, about Apple Computer.

David Halberstam, The Fifties. Not strictly a business book, but his descriptions of the great mass-market phenomena of the period, from McDonalds' to Holiday Inn to Levittown, are superb.

George Gilder, Microcosm. He caught very early the spirit of the personal computer revolution. This book influenced me a great deal, both in my career moves (a few years after reading it, I became an early Internet entrepreneur) and in my economic views (he leads you to think about the long-term evolution of the economy).

July 22, 2008

The Nanny State

Arnold Kling

Marc Fisher writes,

Montgomery County, the government that brought you bans on trans fats, smoking and any sales of liquor except by the county's own stores, last week added a new kind of regulation, becoming probably the first place in the country to require residents who hire nannies to do so via a written contract.

This is a classic MoCo decision to make law as a political statement rather than as a remedy to a burning social need.

Pointer from streiff, who remarks,

I'm guessing that if Fisher was a business owners he'd find a lot more to object to in Montgomery County that the regulating of nannies.

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July 22, 2008

Morning Reading on Political Economy

Arnold Kling

First, Jesse Larner on Hayek.

So to Hayek, the common law is a spontaneous phenomenon, without obvious human direction. In a sense law is related to custom in this manner, but there is no guarantee that honoring this concept of the nomos leads to an enlightened condition of liberty. Isn’t the barbaric (I use the word with no relativistic embarrassment) practice of female genital mutilation derived from this sort of nomos? Hayek is susceptible to this mistake precisely because he is distrustful of all human attempts to define authority and so prefers a mystical, holistic origin for it.

Next, The Washington Post,

Mortgage programs that helped nearly 79,000 people buy homes using government-insured loans last year would be eliminated as part of a broader housing package...Under these programs, nonprofit groups provide buyers with money for down payments. Home sellers then reimburse the organizations and pay an administrative fee...using loans insured by the Federal Housing Administration...Borrowers who take part in these arrangements go to foreclosure at nearly three times the rate of borrowers who put their own money down, according to the agency.

It sounds to me as though the nonprofits were guilty of predatory lending. But don't worry, the nonprofits aren't losers in the housing bill. An op-ed notes,

One proposal is to have government buy distressed properties, then turn them over to private, nonprofit groups for use as low- and moderate-income housing. Some such programs have worked well, and the Senate housing bill includes $3.9 billion to expand them dramatically, with the money to be distributed via state and local governments.

Finally, Mark Thoma links to an article by Stefan Tangermann, who writes,

The use of agricultural products, in particular maize, wheat, and vegetable oil, as feedstock for biofuel production has expanded dramatically in recent years. Between 2005 and 2007, i.e. in the period when food prices began to explode, nearly 60% of the growth in global consumption of cereals and vegetable oils was due to biofuels...In a situation of depleted stocks and very low demand and supply elasticities, this gap between use and output growth has pushed prices up very strongly.

July 21, 2008

The Social Costs of Getting Out the Vote

Bryan Caplan

John Stossel interviewed me today. (Here's his review of my book). If everything goes as planned, I'll play the foil to some get-out-the-vote activists on a forthcoming 20/20 segment.

I'll keep you posted on the airdate. But whatever happens, meeting Stossel and his team was great experience. I've long suspected that the best way to make libertarian ideas popular is to create several hundred clones of Mr. "Give Me a Break." Now I'm convinced.

The main focus of the interview: Should we encourage everyone to vote? My answer, of course, is no. The average voter's understanding of politics and policy is disappointing at best. But hard as it is to believe, the average voter is an above-average citizen. Voters are more educated and know more about economics, politics, science, and statistics than non-voters. So if you think that politicians are pandering to the lowest common denominator, think again. With 100% turnout, the denominator could and would get lower still.

One thing I forgot to mention to Stossel: Most of the fear of low turnout probably rests on the empirically discredited Self-Interested Voter Hypothesis. If voters were selfish, then groups with unusually low turnout would become the punching bags of democratic politics. Fortunately, for all their flaws, voters have a strong sense of fair play. They may have crazy beliefs about the consequences of their favorite policies, but they are usually trying to promote the general interest. The main route to better policies isn't equalizing (or maximizing!) turnount; it's raising the average competence of the people who show up.

If you're a normal American, you're likely to conclude that we just need more (or better) education. But if you're an economist, it's hard to ignore a much cheaper alternative: Encourage people who don't understand the issues to stay home. At minimum, we should stop trying to raise turnout, and stop trying to make the politically apathetic feel guilty about non-participation. Apathy may not be a virtue, but it's a lot better than the activism of the irrational.

July 21, 2008

Too Virtual to be True

Arnold Kling

Glenn Reynolds pointed to this blog post, which says that

an inflatable electric car could be only $2500 in price and available starting in 2010-2011.

The link takes you to a site for something called XP Vehicles. It lists no street address, no corporate executives or board members, no tangible presence whatsoever.

If you search for them on the Web, you get several blog mentions. I'm surprised that they have gotten anyone to take them seriously. The probability that it is a hoax is greater than .99, if you ask me.

July 20, 2008

Do HSAs Work? Singapore, Singapore, Singapore

Bryan Caplan

In an otherwise wise addendum to his latest NYT column, Tyler takes a swipe at Health Savings Accounts:

By the way, I think that HSAs are ineffective as health care reform and that the so-called "right" is floundering on this issue, just to get in my equal opportunity smack on the blog.

While I'd prefer laissez-faire, HSAs are a vital component of Singapore's amazing health care system. Singaporeans get great health care for a quarter of the U.S. cost, largely with market and market-like incentives. But almost no one pays attetion to this policy miracle. So as much as I dislike the rhetorical technique of repeating oneself thrice, I don't know what more I can say to Tyler's dismissal of HSAs than "Singapore, Singapore, Singapore."

July 20, 2008

A Hobbesian Thought Experiment

Bryan Caplan

Suppose a random person is living on a desert island without hope of rescue. Call him the Initial Inhabitant, or I.I. Another random person unexpectedly washes up on shore, coughing up water. Call him the New Arrival, or N.A. While N.A. is helplessly gasping for air, what does I.I. do? Just to make the story interesting, let's suppose that N.A. is much bigger than I.I.

Thomas Hobbes' prediction, on my reading, is that I.I. will immediately pick up a rock and murder N.A.:

And therefore if any two men desire the same thing, which nevertheless they cannot both enjoy, they become enemies; and in the way to their end (which is principally their own conservation, and sometimes their delectation only) endeavour to destroy or subdue one another. And from hence it comes to pass that where an invader hath no more to fear than another man's single power, if one plant, sow, build, or possess a convenient seat, others may probably be expected to come prepared with forces united to dispossess and deprive him, not only of the fruit of his labour, but also of his life or liberty. And the invader again is in the like danger of another.

And from this diffidence of one another, there is no way for any man to secure himself so reasonable as anticipation; that is, by force, or wiles, to master the persons of all men he can so long till he see no other power great enough to endanger him: and this is no more than his own conservation requireth, and is generally allowed. (emphasis mine)

Preemptive murder may seem paranoid. But here's the Hobbesian logic: If I.I. waits for N.A. to catch his breath, N.A. will be strong enough to overpower him if he so desires. It's therefore in I.I.'s interest to kill N.A. before N.A. becomes a threat.

In my view, the Hobbesian prediction is crazy. Virtually no one alone on a desert island would choose the route of preemptive murder. Yes, it's possible that N.A. will catch his breath and then attack. But it's far more likely that N.A. will catch his breath and say, "Boy, am I glad to see you. At least I'm not alone." And I.I. will say the same thing back. Two normal humans in a Hobbesian scenario become fast friends, not mortal enemies.

Dogmatic Hobbesians won't accept my prediction, but I think reasonable people will. But here's a bigger challenge: What is the minimum revision you would have to make to my thought experiment to get a Hobbesian outcome?

July 18, 2008

Inconvenient Arithmetic and Engineering

Arnold Kling

Kevin Bullis writes, Over the past couple of weeks, T. Boone Pickens, an oil tycoon, has been using some of......MORE

July 18, 2008

More on U.S. Education

Arnold Kling

Two links from Mark Thoma. First, Clive Crook. For decades the educational quality of the US labour force surged. In......MORE

July 18, 2008

Goldin-Katz Filters into the Mainstream

Arnold Kling

David Brooks writes, During the 20th century, Americans were better educated than the citizens of any other power. Since 1970,......MORE

July 18, 2008

Real Health Care Reform

Arnold Kling

Two relatively new books that I have not read. One is by Roger Feldman. Should Medicare pay for patient expenses......MORE

July 18, 2008

Are Central Banks the Most Efficient State Enterprise?

Bryan Caplan

Yesterday at the FEE seminar, I got to hear the excellent Jeff Hummel thoroughly debunk the crazy Rothbardian view that......MORE