Arnold:

What's your best guess, Arnold?  Now you barely sound more sanguine than I do.

Robin grants much of my critique of dealism.  Then he offers a bet:

Imagine that economists were surveyed and had to choose how they'd best like to describe economic policy recommendations, as:

1. Morals - Arguing for the morality of actions,
2. Deals - Helping groups find and make deals, or
3. Showing Off - Academics do hard things in order to be certified by other academics as impressive, so that students, patrons, and readers can gain status by affiliation with them. Economic policy analysis is such a hard thing.

I'd bet that at least 25% would choose option #2, and even more among those whose style leans sci/tech.

With those three options, I'd expect the breakdown to be roughly 15% morals, 80% deals, and 5% showing off.  But that's just because Robin omits two popular response options:

4. Social Welfare - Identifying the policies that are best for society as a whole.

5. Smart Partisanship - Identifying the most efficient way to advance the political goals you identify with.

With these extra options on the table, I'd bet on a breakdown of 5% morals (which sounds medieval to most economists), 20% deals, 5% showing off, 50% social welfare, and 20% smart partisanship.  Do you disagree, Robin?

P.S. Maybe we could get this on the next Kauffman bloggers' survey?

Yesterday, co-blogger Arnold Kling referenced my work on the U.S. post-World War II austerity. I had pointed out that Keynesian wunderkind Paul Samuelson had blown it with his prediction of a postwar slump.

In the comments, wd40 writes:

During WW2, there was forced saving (war bonds) and investment went into the war effort. Hence, the robust economy of 1946 when consumers could draw drawn their savings and consume items that were not not available during the war. Naive regressions did not sufficiently account for this pent up demand.

This has become the standard response and, in fact, you can find it in textbooks, to the extent textbooks talk about this event.

The problem is that the part about the drawdown of savings is wrong. Here's what I wrote in my Mercatus study, "The U.S. Postwar Miracle."

Keynesian economists also explained why their glum postwar predictions hadn't come true by arguing that people drew down their savings to finance their "pent-up demand" for the various goods they could not have during the war: cars, tires, refrigerators, stoves, and so on. In 1943, Paul Samuelson, in the article quoted at the beginning of this paper, laid out the idea that pent-up demand for consumer goods would cushion the blow of demobilization. Cited in almost every textbook on U.S. economic history, this explanation has become the orthodox one. There's a problem with this explanation, though: it doesn't fit the evidence.

There are two parts of this explanation. The first, which is plausible, is that there was pent-up demand due to the heavy rationing that the government imposed during the war. People were ready to buy cars, for example, after having not been able to do so for over three years. But Samuelson pointed out that this would be a short-term cushion at best. Of course, one could argue that the two years from 1945 to 1947 were short term. But then, after this pent-up demand was satisfied, there should have been a major drop in economic activity and a major increase in unemployment in the medium term. That didn't happen. The unemployment rate was 3.8 percent in 1948 and kicked up to only 5.9 percent in 1949.

The second part of the explanation is that people drew down their savings that they had accumulated during the war. But the term "savings" is what economists call a stock, whereas "saving" is a flow. If I draw down my savings this year, not only do I not save anything this year, but I also spend some of my stock of savings. So, if people were
drawing down their savings, they would have a negative rate of saving. They didn't. While the personal saving rate did fall substantially from a wartime peak of 25.5 percent in 1944 to 9.5 percent in 1946 and 4.3 percent in 1947, it remained positive.

Robin Hanson often describes his normative view as "dealism."  Forget talking about "right and wrong."  Lets take people as they are, and help them hammer out mutually beneficial deals.  Robin's latest word on this topic:

My closest colleagues seem to mostly take a morals view, but many of my students like a deals view. I think I see a correlation whereby academics who lean toward a sci/tech style tend to favor a deals view, while those who lean toward a humanities style tend to favor a morals view. Sci/tech styles tend more toward math, precision, and local incremental contributions toward specific things and plans, while humanities styles tend more toward bigger pictures, wider-ranging applications, broader interpretations, and joining larger conversations.

In sum, how you think about economic recommendations may depend on whether your thinking leans near or far. It seems deals are near, while morals are far, and sci/tech folks lean near, while humanities folks lean far. Precise formal analysis is more near, while flexible more-metaphorical discussion is more far. Particular suggestions for particular conflicts of particular groups is more near, while general more accessible discussion about what choices tend to be good or bad is more far.

My claim: Robin's "dealism" is actually an extremely "far" doctrine.  The doctrine is so far, in fact, that Robin keeps missing some basic facts:

Fact #1: Robin has spent decades proposing unconventional policy deals.  His track record is an abysmal failure.  Correct me if I'm wrong, but to the best of my knowledge:

• Zero Hansonian deals have been adopted.
• Zero Hansonian deals have come close to adoption.
• Zero Hansonian deals have been embraced by any normal person.  His proposals appeal almost exclusively to fans of economics, libertarianism, futurism, and science fiction.
  

The reason for Robin's failure is pretty obvious: Most human beings are far too conventional and stubborn to even consider Robin's suggestions.  And instead of trying to overcome this hurdle, Robin habitually raises the hurdle by criticizing conventional attitudes.  (The latest example).  No realtor would do this.

Fact #2: People often have a very good reason to ignore deals: They have better ways to get what they want.  Such as: persuasion, moralizing, trickery, and bullying. 

Fact #3: The effectiveness of deal-making varies widely by person.  Some people aren't very good at making deals, but excel at moralizing.  Consider the Pope.  If he tried bargaining with Catholics to get them to refrain from abortion, they'd be baffled.  But when the Pope tells them that abortion is morally wrong, millions listen.

Fact #4: The effectiveness of deal-making varies widely by situation.  Just one example: Suppose you bump into an angry drunk in a bar.  Yes, you could take out your wallet and try to bargain with him.  But that would probably make him angrier.  You'd better off if you just profusely apologized.

Robin paints dealism as a hard-headed pragmatic doctrine.  But the doctrine is neither hard-headed nor pragmatic.  It ignores basic facts and doesn't work.  The real reason Robin is a dealist, I suspect, is moral.  Dealism reflects Robin's sense of right and wrong.  He thinks that it's morally right to keep your agreements.  He thinks that it's morally wrong to fight someone who offers you a reasonable deal.  And above all else, he thinks that it's morally wrong to be conventional and stubborn. 

An even more serious problem concerns the restructuring of the original Solyndra loan guarantee, a move that placed new, private investors at the front of the line in the event of a default. The result was that the government's (i.e., taxpayers') claims as a creditor were subordinated. Before the restructuring, Assistant Treasury Secretary Mary Miller wrote to Jeffrey D. Zients, deputy OMB director, and warned him that the change might be illegal. She advised the DOE to consult with the Justice Department before continuing with the plan. "To our knowledge that never happened," Miller wrote to the OMB in August 2011.

Making things even worse, a DOE stimulus adviser, Steve Spinner, whose wife's law firm represented Solyndra on the application, repeatedly pushed for the original loan guarantee to be approved. For example, Spinner wrote an email to an OMB staffer in August 28, 2009 (just before the official approval) asking, "How [expletive] hard is this? What is he waiting for? Will we have it by the end of the day?"

This is from the February Econlib Feature Article, "Lessons from Solyndra," by Robert P. Murphy.

Another excerpt:

Despite the efforts to cast Solyndra as a lone bad apple, the Department of Energy has guaranteed other renewable energy projects that later collapsed. However, even if the DOE program had always backed "winners"--meaning that no borrower ever defaulted, and so taxpayers never contributed a dime--it still would have encouraged an inefficient use of resources.

Bryan writes,

when you make signaling cheaper, agents' natural response is to signal more intensely or on another dimension.

My understanding of the signaling model is that it depends crucially on the relative cost of signaling to people with and without the desired trait. You want the cost to be high for someone without the trait and low for someone with the trait.

With that in mind, I do not see how lowering the cost of signaling for people with the trait does anything other than cause people with the trait to choose the low-cost signal. The problem with a low-cost substitute for a diamond is that it lowers the cost of signaling for people without the desired trait (which is a willingness to buy an expensive gift).

If I come up with a low-cost way to earn a badge that signals intelligence, conscientiousness, and conformity, and that badge can only be earned by people with those traits, then my badge should find a market. One challenge is that when few people use the badge, it seems to signal non-conformity. Thus, the early adopters of my cheaper badge do not do as well as they should. But over time, there are two possibilities. One is that the conformity hurdle cannot be overcome, so that the incumbent signaling mechanism remains dominant forever. The other possibility is that eventually a tipping point is reached, and enough people use the new badge so that it no longer signals nonconformity. At that point, the market position of the old badge rapidly deteriorates.

I think that we will arrive at the second equilibrium at some point. However, predicting when it will occur is difficult.

Arnold's post on segregation makes several points on the signaling model of education.  I'm here to rebut them.  Arnold's in blockquotes:

1. Where Bryan sees college as a useful signaling device for those who are cognitively gifted, I see it as a useful segregation device for the Vickies.

As I've said several times, I see college as a useful signaling device not just for intelligence, but for two "Vicky" traits: conscientiousness and conformity.  Which makes me wonder: If college is where the Vickies go, won't college be a strong signal that you're a Vicky?  If so, Arnold's model morphs into mine.

2. The segregation model predicts that as the society gets wealthier, the dollar cost of college will get higher. The signaling model would not necessarily predict that. In fact, it would predict that the market would try to find less expensive signals.

Au contraire.  Not only does the the signaling model predict that a higher payoff for college will increase demand for signals; it predicts that if the price of signaling falls, people need to increase their quantity of signaling to remain separate from the pack.  As I've explained before:

Many economists assume that market forces will somehow figure out a way to make signaling costs disappear.  But as far as I can tell, they never explain why signaling costs would be easier to eliminate than any other costs.  And on reflection, the truth is precisely the reverse: Signaling costs are especially hard to eliminate.  Why?  Because when you make signaling cheaper, agents' natural response is to signal more intensely or on another dimension.

Let me illustrate my claim with a prediction: The typical engagement ring will always cost several weeks' income.  If industry figures out how to cheaply synthesize gold and diamonds, we'll start making engagement rings out of something else - platinum and rubies, or ivory and T-rex teeth.  Why?  Because one major function of engagement rings is to signal commitment with an expensive gift!  To separate the sheep from the goats, the signal has to be expensive enough to convince the goats to give up.

Arnold again:

3. The segregation model predicts the emergence of institutions like Boston University and George Washington University, which require much more money than brains to attend, and yet which have fairly high prestige, considering.

I'm happy to admit that, in addition to their other functions, colleges are social clubs.   I suspect that this social club function is especially important for religious colleges (think Brigham Young) and less-selective private colleges.  But even if students in "clubby" colleges are implausibly apathetic about impressing future employers, belonging to any selective club almost automatically sends a signal.  As long as (a) the average graduate of BU or GWU possesses special traits that employers value; and (b) employers can't costlessly measure these traits, a BU or GWU degree will pay off in the labor market.

4. I think that if either the utilitarian model or the signaling model of higher education were correct, I would be sure to collect on any bet I make with Bryan about the demise of colleges. If college as we know it manages to persist for another two decades, it will be thanks to the segregation model.

Arnold's right about what he calls the "utilitarian model," better known as the human capital model.  But contrary to Arnold, signaling models readily predict the persistence of costly, inefficient customs.  Indeed, it's the persistence of costly, inefficient customs that inspire much of the signaling literature.

Given Arnold's faith in educational innovation, I have to ask: If entrepreneurs can figure out cheaper ways to teach students, why can't they figure out cheaper ways to segregate students?  Suppose Harvard is just a Vicky Club.  On Arnold's account, there's no reason why an upstart Vicky Club couldn't come along and offer Harvard students Harvard-level segregation for a fraction of the cost.  In the signaling model, of course, this wouldn't work: Quitting Harvard to join an "upstart Vicky Club" sends a godawful signal to employers and the world.

Reihan Salam has had a number of interesting posts recently. Here, he discusses Kevin Carey's analysis of how subsidies to college education ultimately benefit not the consumers but the suppliers.

Suppose that you want people to have more high-quality education and health care. You regulate the supply to ensure quality, and you subsidize demand to ensure that people can buy it. What happens?

If you make the supply inelastic and you increase demand, then the quantity stays the same and the price goes up. When this predictable result occurs, the politicians then complain about greed or some other flaw in the market.

John Cochrane writes,

I ran across a fascinating article, "A Post-Mortem on Transition Predictions of National Product," in the 1946 Journal of Political Economy, by Lawrence Klein. Klein, who would go on to create the main macroeconomic forecasting models and a Nobel Prize, was confronting one of the first great failures of Keynesian economics:

We all recall clearly the headlines in last Autumn's press, declaring that "Government economists predict 8 million unemployed by 1946." ...We now find ourselves in the first half of 1946 with about three million unemployed and facing one of the greatest inflationary pressures that we have ever experienced. The economists who were warning us of a deflationary danger during the early months of the postwar transition period should have been stressing precisely opposite economic policy

As I have pointed out, 1946 is a striking instance of the predictions of Keynesian economics being way off. Recall David Henderson on what Paul Samuelson predicted.

[UPDATE: Russ Roberts unearths an even more damning article, from the 1947 JPE, by W.S. Woytinksy.]

From FastCompany Magazine.

"Uncertainty is when you've defined the variable but don't know its value. Like when you roll a die and you don't know if it will be a 1, 2, 3, 4, 5, or 6. But ambiguity is when you're not even sure what the variables are. You don't know how many dice are even being rolled or how many sides they have or which dice actually count for anything." Businesses that focus on uncertainty, says Patnaik, "actually delude themselves into thinking that they have a handle on things.

The article is about rapid change and adaptation, but honestly, it sounds like FastCompany has not changed a bit in 15 years. Still breathless. Still Chicken Soup for the middle manager's soul, much as I described it in 1998.

One of the issues that I have been thinking about since reading Coming Apart is segregation.

1. Where Bryan sees college as a useful signaling device for those who are cognitively gifted, I see it as a useful segregation device for the Vickies.

2. The segregation model predicts that as the society gets wealthier, the dollar cost of college will get higher. The signaling model would not necessarily predict that. In fact, it would predict that the market would try to find less expensive signals.

3. The segregation model predicts the emergence of institutions like Boston University and George Washington University, which require much more money than brains to attend, and yet which have fairly high prestige, considering.

4. I think that if either the utilitarian model or the signaling model of higher education were correct, I would be sure to collect on any bet I make with Bryan about the demise of colleges. If college as we know it manages to persist for another two decades, it will be thanks to the segregation model.

5. Vickies historically have needed thetes in order to have military power. Drone warfare might change that, which could make segregation even more viable.

6. Segregation sounds bad, but both Vickies and thetes may find it preferable. Maybe instead of "the American project" we will have the Vicky project and the thete project and, contra Murray, we will be none the worse for it. Integration would be more stressful.

7. In the world as a whole (but not necessarily in America), there will be plenty of upward mobility. There will be plenty of global Vickies with whom America's Vickies can affiliate.

8. Perhaps Mitt Romney's gaffe is actually an omen for the future.

The talk I gave at Hoover on Wednesday, "Five Myths About Free Markets," is on YouTube.

Here it is.

Relax.

That's my summary of an article by Pamela Druckerman in today's Wall Street Journal by an American woman who noticed that French kids tend not to be brats to the same degree that American kids are. It's more grist for Bryan Caplan's mill.

One excerpt:

After a few more harrowing restaurant visits, I started noticing that the French families around us didn't look like they were sharing our mealtime agony. Weirdly, they looked like they were on vacation. French toddlers were sitting contentedly in their high chairs, waiting for their food, or eating fish and even vegetables. There was no shrieking or whining. And there was no debris around their tables.

Though by that time I'd lived in France for a few years, I couldn't explain this. And once I started thinking about French parenting, I realized it wasn't just mealtime that was different. I suddenly had lots of questions. Why was it, for example, that in the hundreds of hours I'd clocked at French playgrounds, I'd never seen a child (except my own) throw a temper tantrum? Why didn't my French friends ever need to rush off the phone because their kids were demanding something? Why hadn't their living rooms been taken over by teepees and toy kitchens, the way ours had?

In fiction (and "reality" television), firing workers almost seems fun.  How many times has Mr. Burns gleefully hissed, "Fire than man, Smithers!"?  In the real world, though, bosses dislike being the bearer of bad news.  They feel guilty when they let someone go.  So guilty, in fact, that some hire consultants to help them fire people.  To coin a behavioral econ phrase, most employers feel "firing aversion."

How does firing aversion play out in the real world?  For starters:

1. Firms often fail to hire workers who would be profitable in the short-run.  Why?  Because in the medium- or long-run, conditions might change.  Robots would respond by coldly discarding superfluous workers.  But many human bosses won't.  A human boss might feel guilty enough to continue paying the worker more than he's worth.  Or he might fire the worker and feel like a jerk.  Either way, it's not like returning a pair of pants to CostCo.  Upshot: If a job candidate is a close call, a boss who foresees his own psychological reaction will say, "No thanks."

2. Signaling matters more.  Suppose bosses can learn workers' abilities in one of two ways: (a) Examine their educational credentials, or (b) give them a chance to prove themselves on the job.  For robots, (b) might be an attractive option.  For human bosses, however, (a) has more appeal.  If you hire based on credentials, you never even have to meet most of the subpar candidates.  If you hire based on trial-and-error, in contrast, you get to know a lot of people, then dash their dreams.  Once again, a boss who foresees his own psychological reaction tailors his strategy accordingly.

3. Outsourcing looks better.  For most people, firing a visible human being hurts a lot more than firing a company.  Firing a gardening firm doesn't feel so bad.  Firing a gardener does.  As a result, firms will outsource more than narrow profit-maximization recommends.

Big picture: When you hire someone, you "name the puppy."  You accept them into your tribe.  Yes, their initial status is relatively low.  But if you're psychologically normal, the lowest member of your tribe still counts in your eyes.  You'll exile a person from your tribe if they're a massive burden or a traitor.  But if they're merely a moderate disappointment, you'll probably show mercy and lend them a hand. 

This may sound good.  But it's a mixed bag at best.  Yes, firing aversion makes life more secure for the employed.  But it also makes it harder to find a job in the first place.  From a social point of view, the labor market would work better if employers were as free of firing aversion as robots.

P.S. Two requests for the comments:

1. Can you name additional plausible real-world effects of firing aversion?

2. Do you have any real-world examples to share (with names changed to protect the guilty)?
 

Edmund S. Phelps and Saifedean Ammous write,

This shift of power from owners and innovators to state officials is the antithesis of capitalism. Yet this system's apologists and beneficiaries have the temerity to blame all these failures on "reckless capitalism" and "lack of regulation," which they argue necessitates more oversight and regulation, which in reality means more corporatism and state favoritism.

Pointer from Mark Thoma. Reminded me of The Idea Trap.

Scott Sumner writes,

In my view, Japan is the future of the global economy. Not the deflation (I think the Fed will be able to keep inflation close to 2%) but the low real interest rates. In retrospect the 2001 recession (when rates fell to 1%) was the canary in the coal mine. Nominal rates will probably be unusually low from this point forward. Global saving will increase dramatically as Asian countries get richer (remember that most people are Asians) and slowing population growth outside of Africa will dramatically reduce the demand for investment funds.

It is not S=I. It is S = I + (G-T), and the equilibrium interest rate is rather high. Just wait.

From Ross Douthat, writing an introduction to a new edition of Robert Nisbet's The Quest for Community.

Man is a social being, and his desire for community will not be denied. ... And if he can't find that community on a human scale, then he'll look for it on an inhuman scale--in the total community of the totalizing state.

Read the whole thing. It made me want to read the book.

On Thursday evening, Feb. 9, I'll be giving a public talk at the University of Rochester in Rochester, New York. It will go from 7:30 to 9:00, with ample time during that time period for Q&A. The talk is titled: "Do We Need to Go to War for Oil?"

Here are the details.

For those who won't be able to attend, which is most of these readers, you can read this piece I wrote on the issue a few years ago for the Independent Institute. Shortly after it was published, I briefed it to Congressman Ron Paul's Freedom Caucus in his office. Eight Congressmen, all Republicans, attended. I think I persuaded 7 of them although some of the 7 might have already believed it. Certainly Ron Paul already agreed with my bottom line.

I will also talk a bit about why I think the Iranian government, though it is a threat to Iranians, is not a threat to the United States.

I'm looking forward to going back to Rochester. I left there in 1979 after 4 years as an assistant professor at the Business School (now the Simon School) and returned once to visit in 1980. I haven't been back sense. At age 28 in 1979, I was kind of the Pied Piper on my street, Rockingham Street. I played with a bunch of the kids on that street. One of the parents was recently--I don't know if he still is--the mayor of Monterey.

He writes,

My guess is that most intellectuals underestimate just how dysfunctional most firms are.

This is part of a discussion of why businesses pay consultants. I think a pretty standard view is that CEOs bring in consultants to help overcome resistance in the internal bureaucracy. Intellectuals do not get that concept, because they assume that the CEO is a dictator with complete autonomy in the firm. As I have said before, that model is incorrect.

At Freddie Mac, I would have told you that they brought in McKinsey when it would have been easier if senior management had just listened to me in the first place (I was sort of full of myself in those days). I really resented the consultants, because I was jealous of all the power they could wield based on relatively little knowledge. But they probably helped me on net, because I tended to be pushing for things that a lot of executives did not want.

One of my fantasies is to have Cabinet Secretaries hire McKinsey to go through their agencies and whip them into shape. The problem is that a Cabinet Secretary has even less power than a CEO in dealing with the internal bureaucracy. And, unlike a CEO, a Cabinet Secretary has nothing to gain by making his organization more effective.

The Adam Smith Institute has just released a paper of mine on patterns of sustainable specialization and trade. An excerpt:

The PSST approach drops the assumption that production technology is known. Instead, the Smithian division of labour and Ricardian comparative advantage are constantly being developed and improved. Entrepreneurs, through a process of trial and error, figure out how best to configure production. In this process of ongoing discovery, there can be periods in which workers are unemployed, while the market mechanism tries to figure out how to utilize them.

For your convenience, I have put on my web site three academic papers, all pdfs:

1. My paper in Capitalism and Society
2. Peter Howitt's comment on my paper
3. The Adam Smith Institute paper (quoted above). The same paper is on their web site here.