Good reading

Reihan Salam praises private equity:

A May 2011 paper by the University of Maryland economist John Haltiwanger illustrates this dynamic. From 1980 to 2009, Haltiwanger observed, 17 percent of jobs in any given year were accounted for by new or expanding firms, while 15 percent of the previous year’s jobs vanished due to the contraction or exit — a nice way to say “going out of business” — of other firms. This process costs a lot and wreaks havoc. But it has two silver linings. The first is that, until recently, gross job creation has outpaced destruction. The second is that the churning process tends to raise economy-wide productivity. Haltiwanger’s exiting firms are generally less productive than surviving ones, and young ones that survive past their first couple of years have higher productivity levels and higher productivity gains than older ones. A growing firm will open new factories or retail outlets; an unsuccessful firm will close them.

….
Also ends up defending Romneys’ record,

These messy facts didn’t make it into When Mitt Romney Came to Town. And Romney has so far proven incapable of defending private equity with stories like this one. If Romney secures the Republican presidential nomination, he’ll have to offer his own narrative about the churn, a narrative that shows how it fosters prosperity rather than destroys it.

Robert Kagan talks about the “myth of American Decline.”

Apparently the President of the United States reads Kagan.

Powerful as this sense of decline may be, however, it deserves a more rigorous examination. Measuring changes in a nation’s relative power is a tricky business, but there are some basic indicators: the size and the influence of its economy relative to that of other powers; the magnitude of military power compared with that of potential adversaries; the degree of political influence it wields in the international system—all of which make up what the Chinese call “comprehensive national power.” And there is the matter of time. Judgments based on only a few years’ evidence are problematic. A great power’s decline is the product of fundamental changes in the international distribution of various forms of power that usually occur over longer stretches of time. Great powers rarely decline suddenly. A war may bring them down, but even that is usually a symptom, and a culmination, of a longer process.

AM: I know the fact that the American decline thesis is as old as America itself isn’t really proof that it’s still wrong, but it is telling that Americans always seem to think they’re in decline, and so far they’ve always been wrong.

Mark Pennington on public choice theory, and its implications for those on the left.

This is a particularly good piece.

Yes, business interests can be powerful – but not because they are businesses or because we live in a ‘capitalist’ society. Instead, they exercise power because in some sectors where there are a relatively small number of big players business interests may find it easier to overcome collective action/free-rider problems than other groups such as taxpayers and consumers-who find it much harder to form a cohesive political force.

Some thoughts on the economy

I generally like Jon Kay’s articles, but this one is pretty bad.

In the National Post, Kay writes:

The big question isn’t whether this is a massive problem. It is. The big question is why so many American conservatives are in denial about it. The Republicans, in particular, are promoting many policies that would actually make the income and wealth gaps worse — such as “flat taxes,” and other schemes that effectively amount to permanent tax cuts for the ultra-wealthy. Mitt Romney’s opponents have made a big deal about his background in “vulture capitalism,” and the 13.9% tax rate he paid on his 2010 income. Yet Newt Gingrich has proposed lowering America’s capital gains tax rate to … zero. Whom, exactly, is that supposed to benefit?

Kay confuses a few issues here, I think.
1. Why some people are getting very rich: it has partially to do with government policy, and not capitalism. Too big to fail and other creditor bail outs allowed people in high finance to take risky bets, acquire massive bonuses for years, and then face no downside loss as a result of their mistakes. This is part of the inequality story.
2. Wage stagnation for some ‘groups’: This is a problem, but what is the cause? Is it really poor K through 12 education? Is it that low skill workers aren’t keeping up with technological change? Is it that burdensome government regulations are stomping out new entrepreneurship and innovation that might put these resources to more productive use?
3. Unemployment: once again, a problem, yes, but what is the cause? Low aggregate demand in the economy, the decline of very specific sectors of the economy including housing? Manufacturing is booming, but not hiring.
4. Kay talks a lot about taxation as a means to redress income inequality. Taxation (redistribution) can have an effect on inequality by definition, but it’s not obvious that it addresses any of the underlying problems that feed inequality in the U.S. I personally find the flat tax argument pretty convincing, and it’s pretty obvious from Kay’s portrayal of it that he’s never really looked into the issue.
Overall, the big mistake in thinking that he (and many people) makes is treating inequality as some aggregate thing, and not the product of disparate factors. A second mistaken conclusion that flows from this is a confusion of cause and effect: there are convincing arguments that some of these underlying issues have more to do with bad government policy than with the operation of free markets.

Can you pass an ideological Turing test?

I try to avoid partsian political debates. This is partially because I don't really support any particularly political party, but mostly because I find that people who live in that world sound like idiots when they brainlessly mount arguments in support of their own side, and burn in effagy the strawmen that represent their ideological opponents. The truth rarely emerges in the context of such language. If this is you, you probably don't realize it. Of course, you think, the supporters of "insert political affiliation here" are idiots, liars, corrupt, and your side is honest, generally smart, and well meaning.

So here's a test: what blogger Brian Caplan calls an "ideological Turing test" A turing test is basically when a computer tries to pass for a human. A human has a conversation with both another human, the computer, and if he can't tell the difference, the computer passes. The ideological turing test is this:

Can you explain the views of the other side in a manner that those on the other side would both recognize and agree with? If you're a liberal, can you explain the views of the conservatives in such a way that you might be able to convince a conservative that you are in fact one of them? If you are a conservative, can you do the same?

If not, you're probably a partsian hack.

I don't think a lot of liberals or conservatives would pass this test. It's hard to imagine how you can really have a discussion with someone whose views you don't understand. Of course, it is my experience that most ideologues don't care to make the effort.

Does Inequality Matter?

Why is inequality a problem?

It’s not if (a) there is mobility; (b) everybody is getting better; (c) the gains at the top are “fair”

On the first, there is mobility. There is some debate, of course. Most recently: Winship vs. Krueger. Winship delivers a fairly decisive smackdown to Krueger, in my opinion (of course, i'm confirming my bias).

But it was a specific claim about declining upward mobility that set off my bad-numbers detector. As detailed in another essay I wrote for National Review Online, the president’s assertion that upward mobility from poverty to the middle class has fallen markedly was based on a model built on a foundation of untenable assumptions. He claimed that upward mobility fell from 50 percent to 40 percent between midcentury and 1980. When I subjected the claim to real-world data, I found no change in mobility over the period, consistent with the consensus from previous academic research.

On the second, everyone is getting better? This is less certain. It depends whether you buy the income stagnation hypothesis: sceptics note statistical artefacts caused by high immigration, break up of households, technological change, and overestimations of inflation may distort the picture. But even if you accept this, the problem is not inequality but stagnation at a certain level of income, and that is a very specific problem.

On the third, people getting better at the top unduly: lots of people have. They work in finance and banking, and they benefited from a cozy relationship with the U.S. federal government and bad public policy. Once again, this is a particular problem that exists aside from inequality.

So why is ‘inequality’ in the aggregate, a problem: I can see why facets of it are problems on their own, but that is somewhat different from saying ‘inequality’ is a problem.

Republican Strategy

Charles Krauthammer on the GOP race:

This is no mainstream media conspiracy. This is the GOP maneuvering itself right onto Obama terrain.

The president is a very smart man. But if he wins in November, that won’t be the reason. It will be luck. He could not have chosen more self-destructive adversaries.

AM: Very smart observation. Obama will not be campaigining this year on his domestic policy record. He will go for a new issue, inequality, and present himself as the champion of the middle class. Mitt Romney is the perfect rival: a ranking member of the 1 percent. The other GOP candidates seem intent on attacking Romney's wealth also. Obama, I bet, could not be happier.

Tim Thomas speaks out against big government

Wow. From Bruins Goaltender Tim Thomas on his decision to decline an invite to the White House:

I believe the federal government has grown out of control, threatening the rights, liberties, and property of the people.

Not bad.

Quote of the Day: The antilibrary

Nassim Taleb (Black Swan pg. 1):

Read books are far less valuable than unread ones. The library should contain as much of what you do not know as your financial means, mortgage rates, and the currently tight real-estate market allow you to put there. You will accumulate more knowledge and more books as you grow older, and the growing number of unread books on the shelves will look at you menacingly. Indeed, the more you know, the larger the rows of unread books. Let us call this collection of unread books an antilibrary.

For an hour or so of really interesting listening: Russ Roberts interviews Taleb about his upcoming book on the subject of "Antifragility".

War and the State: my weird libertarian view

If you’ve ever taken a political philosophy course, you know that the basis for all of government is (supposedly) something called the “social contract.” The details of the theory change depending on which philosopher you happen to be reading (Mill, Hobbes, Rousseau, Locke etc…) but the basic concept is as follows: a stateless world is no fun at all. Life in ‘nature’ is “nasty brutish and short”. War is perpetual, and constant insecurity makes economic, scientific and cultural progress impossible. The way out of this is to surrender a portion of ones freedom to a common power that maintains law and order. The association is voluntary, rational, and for both the common and individual good. The social contract is an implicit pledge to obey the laws of the state.

This is a nice story. It makes us feel good about government. It contains some elements of truth, the most important of which is that the state of nature is far more violent than life within a state. But the notion of a contract, which implies voluntary, intentional action by people with a specific goal in mind, is historical fiction.

As the pioneering work of the late Charles Tilly shows: The forerunners of the first “nation-states” in Europe were warlords. They were power seeking, money seeking rules that sought only to expand their own power and control. To that end, and partially because Europe is a pretty tight space with a lot of people, competition for territory was intense and war common. Everyday people, businesses, merchants etc.. were caught in the middle. Warlords are predators, pirates. In early modern Europe, they sought territorial control in order to extract revenue from populations: to loot the earnings of private citizens for the purpose of war. Many of the institutions of modern government emerged from war making and the needs of taxation: policing (the first of which were tax collectors), public infrastructure, public education, indeed the entire concept of the ‘nation’. These things were not intentionally designed, but were unintentional outcomes of bargains between rulers, people, and merchants in the context of the demands of war, and the efficiencies of tax collection. We see it now as the dominant mode of political organization because there was a powerful mechanism of selection: war. Non-state units were slowly conquered, annexed, or otherwise absorbed into the state which eventually become the main way in which violence was organized (a state is, according to the famous sociologist, Max Weber, an organization with a ‘monopoly on violence.’).

Thus, we take the state for granted as the final form of political association. But let us keep in mind that it arose only through strength of arm over the less-efficient war-making institutions. Viewed in this way, the state is a basically a protection racket that grows through the exercise of coercion. There are many good reasons to oppose war, but another one, from a libertarian point of view is that: War makes governments grow. Not to say that there is are no good wars, but only to recognize that war usually limits the liberties of people in aggressor countries as well as those that actually suffer directly from the activities of war. As a result of war we have: the income tax; the U.S. healthcare system; the department of homeland security etc.. As Tilly pointed out, war has a ratchet effect on government size. Government rarely shrinks: new revenue usually produces new functions, which in turn breed their own clients, and become self-perpetuating entities. And though inertia is the force, war is the engine.

Classical liberalism long holds that decentralizing political and economic power within states is the most effective way in which to limit the power of governments to wage war. While democracies never war with one another, a plethora of new research shows that states that protect private property, and promote competitive markets both internationally and domestically are at far reduced risk of war with each other, and even with “big-government” states. The reason is simple: governments that own vast public resources, and that are supported by protectionist and mercantilist coalitions can more easily survive the costs of war than can governments that do not have their hands in the private sector.

The social contract theory of the state promotes the nation-state as an agent of peace. But it is more properly seen as an organization of war. The idea that we need to the state in its current form for progress is absolute nonsense. Protection of property, yes, but trade and commerce predate the state, and continue despite its encroachments. In a stunning article to this effect, GMU’s Peter Lessen shows that Somalia’s stateless, wartorn anarchy actually preforms better, economically, than did its dictatorship.

Ultimately, the only hope for liberty is to reign in the power of the state, reign in the power of state leaders, politicians. While some libertarians are at work upon radical alternatives: sea steading, charter cities, competitive government, we should not give up on the idea of a minimal state that has as its goal the protection of human freedom. There is no social contract. The state is not a voluntary association but a historical reality. The pragmatic must accept this, and do our best to encourage reform.

Quote of the Day

From Friedman and Kraus' excellent book, Engineering the Financial Crisis,

It is not because regulators should be blamed for the crisis: nobody should be blamed for honest mistakes or even for ideological thinking both of which, we maintain, are inherent to the human conditions and are, moreover, involuntary. Rather, it is important because once one recognizes that 'deregulated' capitalist finance did not cause the crisis, but rather that regulatory ignorance and ideology, apparently, transmitted to the regulators by modern democracy's most trusted academic experts, may have caused it, one has to wonder whether modern democracy has a potentially fatal flaw: the mistakes that may flow from the cognitive limitations of modern democracy's all-too-human decision makers.

The authors nicely state the basic problem with central planning and top down regulation: knowledge.

Quote of the Day: The Concentration of Power

Lawson and Alm:

In 2010, a tiny cabal of 535 individuals — just 0.00017% of the population — spent $3.5 trillion, or about 23% of the $14.5 trillion U.S. economy. That leaves 77% for the other 99.99983% of us. The group is the U.S. Congress — whose members have enormous powers to tax and spend. And they've used them to grab economic power well beyond anything found in the private sector.

Something that both libertarians and OWS protesters can agree on: a concentration of power is bad. THe difference, is that libertarians recognize that big government and big business are two sides of the same coin. Lefties want more government: read, a higher concentration of power.

Random Thoughts on the 1 percent

In the Huffpo, the Real Johnson has a well written article from the 1 percent to the 99 percent decrying the failure of the OWS people to spur any real political action on wealth inequality through their recent protests. All PP readers are encouraged to check it out.

Anyway, the article repeats a statistic that I’ve read a lot recently: Do the top one percent of wealth owners hold 40 percent of all the world's wealth? And if so, what does that mean? First, wealth inequality looks at the total value and distribution of financial assets. It’s a hard statistic. First, unlike income data, it’s not reported to tax authorities. The main research on this data, Ed Wolffe notes that it’s collected via household surveys. It is not as reliable as a general metric as income data. Second, I don’t like it as an indicator of standard of living: better to look at (a) income; (b) consumption. Why? You don’t actually consume or “earn” the financial assets until they are translated into ‘income’. So that’s what matters. At that point, asset earnings are declared and we can see the real picture from tax reports.

According to income: at its peak in 2007, the top 1 percent of income earners in the U.S. had an income equal to 23 percent of total wealth. Second, it’s fallen a bit during the recession: the 1 percent now has an income equal to about 17-18 percent of total income. The Great Recession actually hurt the 1 percent the most if you consider percentage declines. Third, to get into this one percent income bracket, you don’t need to be a gabillionaire: an annual household income of 400 k should probably do it, according to University of Chicago economist Steven Kaplan. Finally, it’s not a homogenous category: people come and go from this category and they have very different jobs: some are evil/corrupt wall street execs, others are sports and movie stars, others are entrepreneurs and business owners, hedge-fund managers, venture capitalists, some lawyers etc… Kaplan breaks it down here.
Overall, I don’t think the narrative of the 99 percent is very helpful. It’s meant to convey a specific political message, but on balance, it serves more to oversimplify and obscure than to provide us with any meaningful insight into the state of the economy.

Quote of the Day

From Wired

And yet, we must never forget that our causal beliefs are defined by their limitations. For too long, we’ve pretended that the old problem of causality can be cured by our shiny new knowledge. If only we devote more resources to research or dissect the system at a more fundamental level or search for ever more subtle correlations, we can discover how it all works. But a cause is not a fact, and it never will be; the things we can see will always be bracketed by what we cannot. And this is why, even when we know everything about everything, we’ll still be telling stories about why it happened. It’s mystery all the way down.

An excellent essay on causality and the limits of knowledge.

Suing over protectionism

From the CBC:

Brian Topp, who is seeking to lead the federal New Democratic Party, says if he became prime minister he would reverse the decision to end the monopoly of the Canadian Wheat Board.

I wonder if any member of the NDP would advocate an ad valorem tax on wheat, dairy, and poultry? Of course not. That type of tax would be highly regressive. While Canadians as a whole don't spend that much on food, poorer Canadians spend a higher percentage of their income on foodstuffs. Levying a tax on these items would harm them disproportionately.

Supply management is protectionism, plain and simple. It amounts to a tax/transfer from Canadians to farmers. Using 'world prices' as a basis, Canadians pay more for supply managed goods. Smart Canadian economists have figured out that it's about $72 per person per year. The profits to go the farmers. The arguments in favor of supply management are weak: price stability, and food security. Neither argument has ever held water. The main reason that supply management persists is the strengthen for the farmer lobby, and the general weakness of the consumer lobby.

Thankfully, the current government is taking action against the Canadian wheat racket. Farmers apparently want compensation for this... ha ha ha.

A class action lawsuit was launched in Saskatoon Monday seeking $15.4 billion in damages resulting from changes made by the Harper government to the Canadian Wheat Board.

The legal details are beyond me, but in principle, this is just idiotic. It as if they are entitled to sell their wares at high prices.

Part of the claim includes damages for lost price premiums previously obtained with the selling power of the board's monopoly.

Sorry, no. Consumers are actually entitled to pay world market prices. Lets hope the "Dairy Commission" is next.

Should the U.S. attack Iran?

Matthew Kroenig argues that it is time for the United States to use military force to disable Iran's nuclear capability.

But skeptics of military action fail to appreciate the true danger that a nuclear-armed Iran would pose to U.S. interests in the Middle East and beyond. And their grim forecasts assume that the cure would be worse than the disease--that is, that the consequences of a U.S. assault on Iran would be as bad as or worse than those of Iran achieving its nuclear ambitions. But that is a faulty assumption. The truth is that a military strike intended to destroy Iran's nuclear program, if managed carefully, could spare the region and the world a very real threat and dramatically improve the long-term national security of the United States.

Kroenig argues that if Iran were to become nuclear, it would impose many costs upon the U.S., and weaken its strategic position in the Middle East. He argues further that a preemptive attack could be effective, minimal, and that the fall out could be managed.

I'm not at all convinced. It seems to me that Kroenig vastely underestimates the risks and challenges of attacking Iran, and overstates the dangers of doing nothing at all. Stephen Walt makes this point also in a penetrating critique. Indeed, this type of miscalculation or "false optimism" is a fairly major cause of war, historically.

Kroenig assumes that Iranian leaders are committed to obtaining nuclear weapons, are close to obtaining nukes (with no actual discussion of its capabilities) and that negotiations have no chance of succeeding. Indeed, it is plausible that the threat of U.S. attack, as well as regime security, is a major driver of Iran's nuclear ambitions in the first place.

The essay is well argued but flawed. Let us hope it fails to convince.

We don't need no regulation

In the NYTimes, an argument for tighter bank regulation

Governments should fully guarantee all bank deposits — and impose much tighter restrictions on risk-taking by banks. Banks should be forced to shed activities like derivatives trading that regulators cannot easily examine.

Right now in the U.S. FDIC insurance only covers $250,000. The author argues that if all deposits were 100% guarenteed, there would be fewer bank runs and financial crises would not be so bad. To mitigate risky lending, the government should act as a tight regulator, and ban trading in financial instruments like derivatives.

AM: Unfortunately, the author does not address some of the counterarguments. Fully insured deposits would create a major moral hazard problem as the rich depositers would not care at all what banks did with their money. This problem already exists to some degree, I would imagine, with insured deposits. The author would likely counter that "this is the point of regulation." I would respond: "you have a lot of faith in regulators."

There is no resolving this one, but the contours are familar: which way should we choose, more bottom up or more top down? I have more faith in bottom up. Banks don't 'self regulate' but they do act in their own self-interest and respond to incentives. Risk taking has been fed by a culture of bail outs, which created a massive moral hazard problem. FDIC insurance (and bail outs in general) perverts incentives, and so you need top down oversight, sure. But that creates its own problems: regulators don't have perfect information; they are subject to capture by private and political interests; they create new burdens of compliance and new inefficiencies.

Walls and Growth

Alex Tabarrok talks about ideas, innovation, and progress. The biggest barrier to progress: walls that keep people from voluntary interaction.

Quote of the Day: Stupidity in Canadian Politics

Some truths are timeless. In 2007 Andrew Coyne wrote:

Why is Canadian politics so moronic? It isn’t that our politicians are especially stupid, as people: Stephen Harper, Stephane Dion, and Michael Ignatieff are all intelligent men. They just behave like idiots. It’s institutional, a culture of vapidity that drags even the best down to its level.

The Ivory Tower Survey

Survey of the IR discipline:

Interesting highlights include Top problems for American Foreign Policy: #1 the rise of China.

AM: I doubt that all the respondents see this as a bad thing, likely, the term "important development" is more accurate.

Most respondents answered that the Arab Spring will be good for the United States. Most approved of the military intervention in Libya, but oppose further interventions in other countries. Almost no one thinks that war with China is likely.

The survey also looks at the political leanings of IR theorists and practicioners. They are overwhelmingly "liberal" on both social and economic issues. This comes through in their judgemnts about presidental candidates: GW Bush gets a bad rating, Obama a pretty good one. Of ocouse, that really depends if you're a lib or conservative.


PP readers? What is the most important issue facing American foreign policy in the future? Is war with China likely?

Government in the Financial Crisis

Great line/comment from Russ Roberts (Cafe Hayek) on the Financial Crisis:

"....they were all GSE’s, all government sponsored enterprises: Fannie and Freddie and Bear and Citi and Goldman and Lehman and on and on. They all had an implicit guarantee from the government that allowed them to borrow at low rates (often from each other), rates that were well below market because of the implicit guarantee. And they were able to borrow at low rates even though they were highly leveraged which made them vulnerable to defaulting on their debt. Despite that vulnerability, they were still able to borrow at low rates. When things fell apart, almost all the creditors, lenders, and bondholders got all their money back, 100 cents on the dollar. The only exception was Lehman. The rest were all taken care of despite funding really bad bets."

AM:

It still baffles me how these two aspects of the financial crisis, which were basically failed government policies, are consistently ignored in many analyses of the crisis. I recently rewatched the Oscar winning documentary Inside Job. Although I enjoyed it, it doesn't even mention this part of the story. Of course, these type of Hollywood documentaries are usually better as entertainment than analysis.

Future Wars

Political scientists and international affairs wonks are notoriously unskilled at prognostication. Did anyone predict that, last year, we’d be at war with Libya? Of course not. That being said, it’s still fun to try and predict the next big hotspot.
This Foreign Policy article has a list of possibilities for full blown war:
1. Iran/Israel
2. Syria
3. Pakistan
4. Burma
5. Burundi
6. Democratic Republic of Congo
7. Venezuela
8. Afghanistan
9. Yemen
10. Central Asia
11. Kenya/Somalia
12. Tunisia

AM: Of these, I’d bet on DRC, Afghanistan, Yemen, Burundi, mostly because the either are currently experiencing some level of civil war, or have very recently.

I’d bet against Iran/Israel, Syria, Pakistan, and Venezuela.

In the case of Iran, lots of international actors will be trying to avoid war. I think it would be politically difficult for Israel to do this. My guess is that there is no political will or capacity in the U.S. for this type of conflict, either.

Syria: will the Assad regime fall of its own accord? If this happens, will the transition be peaceful? It seems that if there was going to be any international intervention like Libya, it would have happened by now.

Venezuela: this one would really surprise me although criminal violence is pretty bad, the most likely type of war would be a Mexico-type situation. For all Chavez’ attempts to help out the poor , he’s done little in terms of improving the security situation.

Pakistan: more of the same. Nukes; big army; lots of foreign aid, and the centre of the war on terror. Hard to imagine a full blown collapse, but easy to imagine more of what we’ve seen.