Ear Rational Thoughts

Miscellaneous Links

I'm short on time, but I don't want to lose track of some of these interesting points from the past few weeks.

Don Boudreaux on promises:

Pres. Obama is a politician. His promises to voters to pursue science rather than politics are as credible as a prostitute’s promises to a client to pursue love rather than profit.

Arnold Kling does the best job I've seen of explaining the CAPM:

The portfolio separation theorem says that the number of portfolios that are needed to produce an optimum allocation is equal to the number of characteristics that investors care about. In particular, if investors only care about expected return (mean) and safety (minimizing variance), then every investor's portfolio can be computed as a mix of only two dominant portfolios.

David Brooks on the Grinds vs the Princes:

If you go to business conferences, you know that at lunch it is definitely better to be seated next to a prince than a grind.

Robin Hanson on the congestion vs scale:

Products and services (i.e., “goods”) can be divided into two types: those that on net suffer from congestion effects, and those that instead benefit from scale effects. For congestion goods, the more that one person consumes of the good, the harder it gets for others to consume it. For scale goods, in contrast, the more that some consume, the easier it gets for others to consume.

Don Boudreaux on why stimulus need not stimulate.

Arnold Kling on "neo-reactionaries:

The ruling class's appetite for deference, power, and perks grows. The country class disrespects its rulers, wants to curtail their power and reduce their perks. The ruling class wears on its sleeve the view that the rest of Americans are racist, greedy, and above all stupid. The country class is ever more convinced that our rulers are corrupt, malevolent, and inept. The rulers want the ruled to shut up and obey.

...The grandparents of today's Americans (132 million in 1940) had opportunities to serve on 117,000 school boards. To exercise responsibilities comparable to their grandparents', today's 310 million Americans would have radically to decentralize the mere 15,000 districts into which public school children are now concentrated.

Arnold Kling gives reasons for pessimism regarding unemployment:

Robert Fogel tells us that the three long-term superior goods are leisure, health care, and education. Obviously, an increase in leisure does not increase employment, although it certainly creates opportunities in complementary goods and services.

But health care and education in the U.S. are arguably the most cartelized labor markets in the world. How many entrepreneurial ideas in those fields are rendered implausible by credentialing issues? If you want your innovative school to draw customers, you have to get accredited--not to mention dealing with the fact that your competition gets public funds and you do not. Your innovative health care delivery process will run afoul of medical license and practice laws.

Dave Altig finds something curious in the unemployment numbers, with good graphs:

The disconnect between the supply of and demand for workers that is reflected in statistics such as the unemployment rate, the hiring rate, and the layoff rate can be dynamically expressed by the Beveridge curve. Named after British economist William Beveridge, the curve is a graphical representation of the relationship between unemployment (from the BLS's household survey) and job vacancies, reflected here through the JOLTS."

Since the second quarter of last year, the unemployment rate has far exceeded the level that would be predicted by the average correlation between unemployment and job vacancies over the past decade. Tuesday's report indicates that the anomaly only deepened in the first two months of the second quarter.

Arnold Kling makes the claim that individuals in the US have lost their voice over the past several decades. He makes some good points.

David Henderson on power:

... there will be need for actions which are bad in themselves, and which all those still influenced by traditional morals will be reluctant to perform, the readiness to do bad things becomes a path to promotion and power. The positions in a totalitarian society in which it is necessary to practice cruelty and intimidation, deliberate deception and spying, are numerous. ... Yet it is through positions like these that the road to the highest positions in the totalitarian state leads.

Arnold Kling summarizes his "recalculation story" of which I am a big fan.

Megan McArdle makes the case that the 30 yr fixed mortgage is a big reason for the recent financial turmoil

Unemployment Insurance

This post from Freakonomics blog reminds me to post something on unemployment insurance.

First off, the post on Freakonomics is about whether unemployment insurance encourages people to not work. The post - and the comments that follow - frame the question incorrectly. They ask it as if unemployment insurance causes laziness. When in reality, I think it's really more a question of selectiveness.

For example, if an out of work software engineer has an offer to work as a software engineer at his old salary and he declines because he's getting an unemployment check, that is laziness. This seems to be the way it is being framed in the post above as well as in most of the media coverage I've seen. I think the case of laziness is so ludicrous that it is surely almost non-existant.

But if the software engineer has an offer to work, e.g. at Walmart for much less money and he declines because he's getting an unemployment check, that is selectiveness. It's worth noting that either way - laziness or selectiveness - the amount of unemployment is higher than it would otherwise be.

I think the case of selectiveness is quite prevalent, and it can even be seen from reading the comments in the post above. People who respond and are unemployed are indignant at the accusation of laziness. And yet they describe their situation in exactly the way I've described selectiveness - applying only for jobs in their "old" field; not taking jobs making less money, etc.

The second thing about this is that I think there's a much better way to handle unemployment insurance that would render the whole question moot. The key is to give people ownership of their unemployment insurance.

For example, let's say the government takes 5% of your salary every month and puts it into a special (personal) account. Your contributions accrue - possibly with some interest, as if you had purchased gov't bonds with them - as long as you are employed. When you are unemployed, you are then allowed to take any amount out per month of the account up to 50% of your previous salary (which is similar to today's terms). When the account reaches 0, your unemployment checks stop. If you get a job before then, the accrual resumes.

The key thing is that any money left in at the time you retire is transferred to you. So that staying on unemployment is draining down potential future money. In contrast with today where staying on unemployment is only draining down gov't money that would otherwise not come to you anyway.

I think another key feature should be to allow you to continue to draw down the account even when you find a job. For example, you could allow people to draw from the account any amount (up to a max of 50% of their previous salary) as long as the sum of (unemployment check + new salary) does not exceed their previous salary. For example, if someone earned $50K before being laid off and finds a new job for $35k, they could continue to draw up to $15k from their account if they want. This way, finding a job at a substantially lower salary still allows you to take home more pay (which is the opposite of today's system where additional salary does not lead to more take home pay).

In addition, this doesn't preclude any progressiveness. For example, the gov't could "top-up" the accounts of people with very low incomes by, e.g. making their 5% contribution for them, or matching their 5% contribution, or anything in between.

It also does not preclude tinkering during very deep recessions. For example, if this was in place for this recession, the gov't could decide to take everyone who was unemployed during 2008-2011 and add some amount to their accounts. This would have the effect of extending their unemployment checks, but it would not provide any incentive to stay out of work. It would effectively penalize those who are working, but in a lot of ways that speaks to most people's sense of fairness.

Money's influence on politics

Required reading: OpenSecrets.org:

OpenSecrets.org is your nonpartisan guide to money’s influence on U.S. elections and public policy. Whether you’re a voter, journalist, activist, student or interested citizen, use our free site to shine light on your government. Count cash and make change.

It lists every politician and who their biggest donors are.

What's good for the students...

What's good for the students is bad for the teachers. And what's bad for the teachers is bad for the Democrats. Which is where we get this from:

Established in 2004 as a five-year pilot program, OSP is among the most heavily researched federal education programs in history.

OSP targeted about 2,000 of the poorest kids in DC who were stuck in some of the worst schools in the country. It gave their parents a $7,500 scholarship to attend a private school of their choice.

... Everyone knew OSP would be a bargain. DC has among the highest spending per pupil in the nation. At a conservative estimate of $17,542, the public schools spend over $10,000 more per child than the $7,500 spent through the scholarship program.

Not just the cost savings, but the program improved graduation rates significantly, as well as other measures of students' knowledge.

Simply put, OSP has a profoundly positive effect not just on students, but on the city and the country as a whole.

So when it came time for Congress to reauthorize OSP, it would seem to be a no-brainer: Expand the program.

Instead, they killed it.

But we can't complain. As Obama said, "in our democracy, government is us." So everything the government does is by definition approved by the people. Which means we must want this. We just didn't know it.

Cash Reserves

Bryan Caplan reminds us of something worth keeping in mind:

Suppose you see an individual, a bank, or a corporation sitting on a big pile of money. What should you conclude?

Theory #1: The actor has nothing good to spend it on. ...

Theory #2: The actor wants a buffer. ...

Theory #1 is often popular, but all the evidence I've heard of supports Theory #2.

His point is that if people have cash because they have nothing to spend it on, giving them more money or taking it from them doesn't change things. However, if they have cash as a buffer, then giving them money will cause them to spend and taking it from them will cause them to save more.

It's important to understand what situation we're in (and it's likely different for different people/groups/companies, etc.) because what you're trying to do could backfire if you don't.

Why would you do this to yourself?

From a rant by Arnold Kling (which is unsettling throughout):

If my state, Maryland, needs a bailout, it is because it is a wholly-owned subsidiary of the teacher's union. As the Washington Post editorializes,

a new law took effect in Maryland that undercuts local control in collective bargaining by giving a significant new advantage to teachers unions, one they had been seeking for decades.

...it creates a Public School Labor Relations Board, which will consist of two members nominated by unions, two members recommended by school boards and superintendents and a fifth to be independent but with experience in labor relations. ..

This new board's decisions on wages, benefits and even what matters can be collectively bargained will be binding. That is a power that the state education board never had in resolving disputes. Local school boards and counties, which opposed the bill, are right to worry that binding awards could force counties to accept contracts they can't afford.

So, just at the point where voters are starting to wake up to the need to curb teacher compensation, we are going to have a state-level unelected board that can overrule the decisions of elected officials on teacher pay.

For some tasks, we have the choice between letting the government do them or letting the private sector do them. When we let the government do them, we are forced to pay, we pay before seeing the product, and we pay regardless of whether we like the product or not. When we let the private sector do them, we have the choice to pay or refuse, and we get to see the product before we decide. Given that, why would anyone choose to let the government do anything?

It's a question the people of Maryland may be asking themselves shortly.

Arnold Kling's Hypothetical Book on Macroeconomics

Arnold Kling has been posting sample chapters from a hypothetical book on macro. There's too much for me to comment on now, but I feel the need to bookmark his chapters for the futre:

• Intro

• Chapter on what causes recessions (various stories about employment, money, etc):

suppose that unemployment did not exist, but that instead there was a very low-value job (say, dishwashing) that is always available, at whatever wage will clear the market. In that case, we would always have full employment. However, I would argue that we could still observe recessions in such an economy. During good times, the only dishwashers would be people who have no other skills. During a recession, many skilled people would be working as dishwashers, and they would drive down the wages of dishwashers. Income would be much lower in a recession, even though there is full employment.

• Chapter on labor markets

Similarly, I would suggest that a recession creates a flood of refugees in the job market. In ordinary times, the job transitions that people undertake are ones for which they have done some preparation and planning. The market is able to absorb job losers and new labor force entrants fairly routinely, just as a region can absorb fairly routinely the normal ebb and flow of population. However, just as a community cannot quickly absorb a sudden flood of refugees, labor markets cannot absorb a large influx of unemployed workers.

Massachusetts Health Care (again)

Arnold Kling reports some unfortunate news from MA:

The number of people who appear to be gaming the state's health insurance system by purchasing coverage only when they are sick quadrupled from 2006 to 2008, according to a long-awaited report released yesterday from the Massachusetts Division of Insurance.

He offers some thoughts:

Health insurance reform means that the government destroys the freedom of insurance companies to design their own contracts. Instead, health insurance companies simply administer programs designed by the government.

Awesome.

All change is bad

The always lucid Don Boudreaux:

A prominent group of 18th century economic thinkers – the Physiocrats – argued that the ultimate source of all wealth is agriculture. They regarded the then-just-emerging industrial sector to be sterile.

Harold Meyerson is a member of a group that we might call the “Factoryocrats.” Just as the Physiocrats misread the once-dominant role of agriculture as proof that the only truly productive activity is farming, Mr. Meyerson’s histrionic fear about the decline of manufacturing employment in America suggests that he misreads the once-dominant role of factory work as proof that the only truly productive activity is manufacturing.

I call this phenomenon "all change is bad" thinking. It happens a lot in global warming discussions, but it also happens in economics. You can tell when you're dealing with "all change is bad" thinking when the world as we currently know it is at the pinacle and any deviation from what we have today represents a step backwards.

Of course that is rarely the case - almost all change is positive. Towards this end, Don points out:

The Physiocrats would be astonished to learn that Americans today are very well fed (and otherwise provided for) even though a mere 2 percent of the work force is in agriculture. Similarly, if Mr. Meyerson weren’t blinded by Factoryocratic myths, he’d see that Americans today are very well supplied with manufactured goods (and food and services) even though a mere 10 percent of the work force is in manufacturing.

Regulatory quote of the day

Megan McArdle gives the regulatory quote of the day:

"In every state, people are free to feed others in their filthy, unregulated homes, it's only when money changes hands that home cooks transform into a public health hazard."

Katherine Mangu-Ward