Arnold Kling  

Catching Up

How Lucky Was I?... Cut Their Pay...

Various things that came up while I was traveling are discussed below.

1. William Easterly trashes Matt Ridley. Easterly offers this defense.

It doesn't do the free market side any favors if all of its advocates are willing to overlook sloppy logic and evidence and just follow clan-like loyalties based on the final conclusions. We will only move beyond the "religious war" if both the anti-market and pro-market sides are rigorously honest about the strengths and weaknesses of their own arguments.

I think that is a fine sentiment, and I think it would be appropriate for Easterly to make his complaints about Ridley on his blog or in some libertarian publication. However, the way Easterly chose to attack the book in the New York Times will do nothing but give Times readers an excuse not to read the book and to stay within their ideological cocoons. Easterly could have focused his review on the strengths of the book, while adding a paragraph on what he saw as the weaknesses. Instead, he portrays a book that is almost all weaknesses and no strengths. If Easterly really believes that, then I disagree with him. If he does not believe that, then I think he went overboard.

Sweeping historical books are bound to be controversial. Look at Power and Plenty, by Findlay and O'Rourke, which claims, quite contra to Ridley, that empires promote trade. Or look at A Farewell to Alms by Gregory Clark. For that matter, look at Easterly's own books on the history of international aid. I have lots of doubts about all such books, but they still offer some very powerful arguments and evidence. In my opinion, the right way to review such a book, in any publication, is to focus on its strengths, while also mentioning a few caveats.

Anyway, Ridley talks here, including some good Q&A.

2. an abstract of a paper by Nicola Gennaioli, Andrei Shleifer, and Robert W. Vishny:

We present a standard model of financial innovation, in which intermediaries engineer securities with cash flows that investors seek, but modify two assumptions. First, investors (and possibly intermediaries) neglect certain unlikely risks. Second, investors demand securities with safe cash flows. Financial intermediaries cater to these preferences and beliefs by engineering securities perceived to be safe but exposed to neglected risks. Because the risks are neglected, security issuance is excessive. As investors eventually recognize these risks, they fly back to safety of traditional securities and markets become fragile, even without leverage, precisely because the volume of new claims is excessive.

I have not read the paper, but my reaction is to want to replace the word "model" with the phrase "just-so story." Look, I too have written about financial intermediaries:

The nonfinancial sector wants to hold risk-free short-term assets and issue risky long-term liabilities. To accommodate this, the financial sector does the opposite.

My own just-so story of manias and crashes is not one of neglected risks. Instead, it is one in which signaling and reputation are major determinants of the size of financial intermediaries. A mania is when intermediaries are overly successful in signaling their soundness, and a crash comes when people find that they have to correct their previous overconfidence.

3. The Los Angeles Times claims,

government surveys indicate that the vast majority of job gains this year have gone to workers with only a high school education or less

Is that true? I have seen stories that the majority of job losses during the downturn were for workers with no college education. If there have been gains this year, my guess is that they are small relative to the previous losses. A dead-cat bounce, so to speak.

The point of the whole story is to question the value of college degrees nowadays, and I share that skepticism. But I did not find the story itself persuasive.

The Wall Street Journal finds a study that takes a different view.

By 2018, the United States will see 46.8 million job openings, 63% -- 29.5 million -- of which will require some college education. One-third, or 16 million positions, will require a bachelor's degree or higher, according to a report by the Georgetown University Center on Education and the Workforce.

Any time you see a report like this, which projects an excess of demand over supply or vice-versa, you know that it is flawed. In a market economy, you do not get excesses of supply or demand. Instead, you get price adjustments.

It is true that in the short run, wages seem to be sticky and we get results that are inconsistent with market clearing, notably bouts of high unemployment. But to predict a long-run shortage or surplus of some type of worker is to defy the laws of supply and demand.

If the underlying analysis of the report about labor demand is correct, then the wage differential for college-educated workers will rise. As a result, some of the jobs predicated for college workers will not materialize, and more jobs for non-college workers will materialize (but at low wages).

If we were the Soviet Union, the central planners might need to use a report about trends in educational needs. in a market economy, decentralized decisions will do a much better job than central planners at resolving the tensions implied by trends in education and technology.

4. Another abstract, of a paper by Jacob L. Vigdor and Helen F. Ladd, says,

we also demonstrate that the introduction of home computer technology is associated with modest but statistically significant and persistent negative impacts on student math and reading test scores. Further evidence suggests that providing universal access to home computers and high-speed internet access would broaden, rather than narrow, math and reading achievement gaps.

The Obama Administration is hell-bent on a national broad-band strategy. Taxpayers and/or telecommunications consumers are going to subsidize getting broadband to everyone, regardless of whether they want it. And, if we believe this paper, regardless of whether getting broadband would help or hurt the recipients.

5. Yet another abstract, from a paper by James J. Heckman, John Eric Humphries, and Nicholas S. Mader.

Although the GED establishes cognitive equivalence on one measure of scholastic aptitude, recipients still face limited opportunity due to deficits in noncognitive skills such as persistence, motivation and reliability. The literature finds that the GED testing program distorts social statistics on high school completion rates, minority graduation gaps, and sources of wage growth. Recent work demonstrates that, through its availability and low cost, the GED also induces some students to drop out of school.

This seems to be consistent with Robin Hanson's view that education is not mostly about gaining knowledge.

6. Scott Sumner writes,

We could pump up the economy through monetary policy, or we can have Fannie and Freddie continue to throw $100s of billions down the drain, socialize the auto industry, extend unemployment benefits to 99 weeks, etc. And if that isn't enough there are also calls to move away from free trade policies. And then there's the higher taxes we'll pay in the future to cover the costs of debts run up in a futile attempt to stimulate the economy.

Read the whole thing. Count me as a monetary expansionist. I am far less optimistic than Sumner that monetary expansion would work. However, I am if anything even more pessimistic than Sumner about the policy alternatives that are likely to be tried instead. I am just starting to read David Kennedy's history of the Great Depression, Freedom from Fear, and it is painful to see all of the regulatory interventions tried by the Hoover-Roosevelt Administration (the similarities between the two stand out in my mind). I think that for the United States, combining hard money with socialist policies in the short run will lead to very soft money in the long run.

7. John Taylor talks about restructuring Greek debt. He argues that it can be "orderly." However, he does not address what would happen to French and German banks if they had to mark down the value of their assets.

9. Patrick Lawler, a colleague of mine about thirty years ago, dares to make a case against the 30-year fixed-rate mortgage. It is not exactly the same case that I make. However, the issue is quite important, because a lot of the rationale for keeping Freddie Mac and Fannie Mae in business is to maintain the 30-year fixed-rate without prepayment penalty. I have no problem if borrowers want to pick that type of mortgage in a free market, but I contend that in a free market the most attractive mortgage would be something closer to the Canadian rollover, where the rate is fixed for only five years. Canada has a high rate of home ownership and also (this is not necessarily a good thing) a high average ratio of debt to equity in houses.

10. Robin Hanson keeps writing fascinating posts. It seems to me that the best of these should be edited and combined into a book.

COMMENTS (4 to date)
Andy writes:
It is true that in the short run, wages seem to be sticky and we get results that are inconsistent with market clearing, notably bouts of high unemployment. But to predict a long-run shortage or surplus of some type of worker is to defy the laws of supply and demand.

In a perfect world, yes. Consider, however, doctors and other medical professionals. This country has a shortage of doctors in this country (especially in primary care) and we are barely keeping pace by importing doctors from the third world. Market force aren't correcting that because market forces can't. You have a system where the creation of doctors is regulated and doctors themselves have an interest in influencing that regulation to limit the number of doctors that can be created. Doctors are the most obvious example, but there are many others.

John Alcorn writes:

Arnold, I'm glad that you tackled Easterly's somewhat puzzling review of Ridley. The Mercatus lecture by Ridley is a gem - and the answers in the lecture's Q&A are a cornucopia.

N. writes:

What about 8.?!

Philo writes:

If you have an 8., please share it. The rest of this post made for very good reading.

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