O’Rourke on the Millennials and Socialism

As soon as children discover that the world isn’t nice, they want to make it nicer. And wouldn’t a world where everybody shares everything be nice? Aw … kids are so tender-hearted.

But kids are broke — so they want to make the world nicer with your money. And kids don’t have much control over things — so they want to make the world nicer through your effort. And kids are very busy being young — so it’s your time that has to be spent making the world nicer.

This is from P.J. O’Rourke, “This is why millennials adore socialism,” New York Post, September 12, 2020.

Lots of good stuff here. I do want to address one error, an error that P.J. seems to agree with “progressives” about. He writes:

That would have been in the 19th century — during America’s first “Progressive Era” — when mechanization liberated kids from onerous farm chores and child labor laws let them escape from child labor.

Actually, it wasn’t child labor laws that let them escape from child labor: it was economic growth. As people grew wealthier, parents no longer needed their children to be productive. Instead, they could support the family without their children’s income and so instead could send their kids to school. And incidentally, as E.G. West showed in Education and the State, the state in Britain was not a major funder of education and yet schooling was widespread.

It is true that child labor laws reduced child labor around the edges. But they’re an instance of what is almost a general law in economic policy. I’m using “general law” in the sense of regularity. The laws that pick up enough support are usually ones that require people to do what the majority are doing already. I believe for example, although I can’t find the source immediately, that the legislated 40-hour work week came about only after it had become standard practice.

Another good excerpt:

Intellectuals like Marxism because Marx makes economics simple — the rich get their money from the poor. (How the rich manage this, since the poor by definition don’t have any money, is beyond me. But never mind.)

This excerpt reminds me of a great paragraph from Paul Krugman’s 1990 book The Age of Diminished Expectations that I used in the first edition of The Concise Encyclopedia of Economics, in a sidebar on the article “Distribution of Income” by Frank Levy:

One reason that action to limit growing income inequality in the United States is difficult is that the growth in inequality is not a simple picture. Old-line leftists, if there are any left, would like to make it a single story—the rich becoming richer by exploiting the poor. But that’s just not a reasonable picture of America in the 1980s. For one thing, most of our very poor don’t work, which makes it hard to exploit them. For another, the poor had so little to start with that the dollar value of the gains of the rich dwarfs that of the losses of the poor. (In constant dollars, the increase in per family income among the top tenth of the population in the 1980s was about a dozen times as large as the decline among the bottom tenth.)

The O’Rourke piece is excerpted from P.J. O’Rourke, A Cry from the Far Middle, 2020.

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The Future of Space is (or Should Be) Private

NASA recently announced that the Space Launch System (SLS), its next-generation rocket, will cost significantly more than originally anticipated. In a recent announcement, NASA confirmed that the rocket was expected to cost $9.1 billion, and the ground system for mission support $2.4 billion. That’s a 33% increase over estimated costs in 2017!

In contrast, the private sector has performed phenomenally in lowering launch costs. Between 1970 and 2000, the cost of getting to space was about $18,500 per kilogram. When SpaceX came onto the scene, however, things started to improve. The private launch provider has significantly reduced the costs of accessing space: By 2019, using its Falcon 9 rocket, costs had fallen to $2,720 per kilogram. Due to SpaceX’s innovations in reusable rockets, experts say launch costs might fall below $1,000 per kilogram in as little as five to ten years. The opportunity this presents for space exploration and development is exciting.

This is from Alexander W. Salter and David R. Henderson, “For-Profit Companies Must be the Backbone of the New Space Age,” American Institute for Economic Research, September 5, 2020. Alex is turning into an excellent op/ed writer and co-author.

Read the whole thing, which is short.

A personal reminiscence:

In the fall of 2012, I taught, as I did every fall between 2002 and 2015, an economics class in our distance learning Executive MBA course at the Naval Postgraduate School. It’s the only economics course the students got in the curriculum and so my course was approximately 8 3-hour lectures in microeconomics and 3 3-hour lectures in macro. The students were typically at Navy bases around the country. This time, though, I had 5 civilian students at NASA’s Johnson Space Center in Houston.

I could tell from the start that this was a special group. They were involved from the getgo.

Whenever I had 5 or more students at a location, I made a trip sometime during the quarter to that location and broadcast from there to the other locations. So in October I went to Houston.

The students were even better than I had expected. I’ve taught well over 2,000 students in my career and probably closer to 3,000 and I don’t remember a lot of names. But I remember all 5 names: George Gafka, Jose Garcia, Lara Kearney, Brad Niese, and Joe Williams.

Typically when I finished a class at a remote location we would quickly go out to a restaurant. This time was different. They wanted to hang around and talk about the material we had just covered plus other things they were wondering about economics. We didn’t leave for a restaurant until half an hour later when an exasperated janitor kicked us out of the room.

At the restaurant, I decided to risk my good will by suggesting that, in light of everything I had taught them about incentives and residual claimants, a better alternative to NASA would be private space exploration. Brad Niese, the most junior of the 5, said immediately, “That makes sense.” We had a good and spirited discussion. I’m not sure I convinced the other 4 but none of them seemed to think it was a crazy idea.

I was one of the two toughest graders, out of about 60 professors and lecturers at the NPS Graduate School of Business and Public Policy. All 5 earned an A, the highest grade one can earn at NPS.

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Armen Alchian and Bill Meckling on Goals and Incentives

And the men of Kharkov and Karachi are not different from the men of Kalamazoo. The specific objects of wealth and power may differ between Kalamazoo and Kharkov. But if Kalamazoo teems with thieves and brigands while Karachi is serenely industrious, the explanation lies not in differences in goals. Differences in goals will not explain differences in the way individuals pursue those goals.

This is from William H. Meckling and Armen A. Alchian, “Incentives in the United States,” American Economic Review 50 (May 1960): 55-61, reprinted in The Collected Works of Armen A. Alchian, Vol. 2, Property Rights and Economic Behavior.

I’ve been working on a chapter on Alchian and property rights in a short book on the UCLA School. (Steve Globerman, a fellow UCLAer, and I are writing it for the Fraser Institute.)

So I’ve been going though the Collected Works volume published by Liberty Fund.

So what does explain differences in the way people pursue their goals. The answer is in the title of their piece: incentives.

 

 

 

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Teaching Responsibility

Someone on Facebook recently asked people to tell the most important thing they learned from their father. Here’s the one I came up with and it was really 2 things I learned.

From an early age, I was told by my father that none of my possessions was as important as my life and so if there were ever a case where I needed to save my life by giving up one or some of my possessions, it was worth it.

I ended up applying that lesson early.

I lived in a small town of 1,200 people in rural Manitoba. One day, when I was about 7, I was walking home with a friend from school. To do so, we had to cross a railroad track. This particular day, for some reason, we were crossing in the middle of the train yard and not where there was a street crossing.

We were involved in our conversation and my friend was slightly ahead of me. I happened to look up and see a box car coming toward me at about 10 mph and it was about 15 feet from me. I was on the track with my bicycle. I didn’t even hesitate; I dropped the bike on the track and ran ahead to where my friend was. The whole back of the bicycle was crushed and I retrieved it and carried it the few remaining blocks home.

When I got home, I told my father what had happened. He congratulated me for using my brain.

Here’s what he didn’t do: offer to pay to get me a new bike. Our family didn’t have a lot of slack in the budget but my sense was that even if we had been substantially wealthier, he wouldn’t have paid. He wanted me to learn responsibility.

I went to a local bike repair place and sold the good front wheel to the guy for $7.50. That would go toward a new bike that was priced at about $40. So I started saving for a new bike.

A few months later, my father came back from the town fair where he had run into the local guy who had been on top of the box car moving it to a different part of the rail yard. The buy had felt bad about what had happened and offered my dad $10 toward a new bike. My dad told me that he had turned him down because it wasn’t the guy’s fault.

When my dad told me this, I was furious and I argued with him. But he made the point that I, not the guy, was responsible for what had happened. I saw his point and became less furious. By the next day, I wasn’t furious at all.

How I got a new bike within a few months is an interesting story in itself, but not closely related to the lessons I learned.

I learned about the value of my life and about the importance of taking responsibility.

 

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Do 10 Economists Constitute a Majority?

 

Given the massive shrinkage in the number of jobs available during the first months of the pandemic, most economists don’t think that the $600 bonus kept many people from returning to work.

So writes Christian Britschgi in “San Francisco Judge Rules Drivers With Ride-Sharing Companies Are Employees. Uber Warns It’ll Have To Raise Prices By as Much as 111 Percent,” Reason Hit and Run, August 11, 2020.

When I read Britschgi’s statement, I was shocked. Normally, when the government pays millions of people more to stay unemployed than to return to work, most economists would expect a large percentage of those workers not to return to work.

So what is Britschgi’s basis for concluding that most economists don’t think that’s true? It turns out, as the link in the quote above shows, that the reference is to a study done by 10 scholars at Yale. It’s not clear that all of them are economists, because their titles are not given. But let’s assume they are. When there are well over 10,000 economists in the United States, 10 is not a majority.

I’m not commenting on the study itself. I still haven’t read it. I’m simply criticizing Britschgi’s statement, based on the views of 9 economists, about what most economists believe.

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George Will’s Public Choice Contradiction

I recently listened to Juliette Sellgren’s 36-minute interview of Washington Post columnist George Will. Juliette does an excellent job of briefly stating Will’s argument about the growth of presidential power at the expense of Congress. Her statement starts at 5:15 and ends at 5:52. Will says that she has “efficiently and accurately” distilled his argument about the presidency. I agree.

From about 5:52 on to about 8:15, Will lays out his argument in more detail.

In doing so, though, he presents a puzzle and it’s not clear that Will sees it as a puzzle.

Here’s what he says, starting at about 7:45:

Congress, out of careerist interests, job security interests, and the sheer press of time has hollowed itself out. We constantly hear people complaining that presidents are usurping powers. Well of course they do. The Founders understand that all people in power try to usurp more power. But, to say that Congress’s powers have been usurped is too kind to Congress. Congress has all too willingly given them up.

I agree with Will about the factual issue: Congress has all too willingly given up its power.

But notice the contradiction in the last three sentences. All people in power try to usurp more power. Surely that would include members of Congress. Yet Congress has willingly given up power.

So it’s not true that all people in power, or, at least in the case of Congress, even most people in power, try to usurp more power.

So Will has contradicted himself. But possibly more important, he’s presented a puzzle. Why does Congress give up power? Is it just that they want the job and the perks that go with it–the first 2 of the 3 reasons Will gives in the quote above?

I don’t know.

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Could it have been much worse?

Toward the end of a recent podcast, Tyler Cowen remarked that the pandemic could have been much worse, and because we’ve been through this we’ll be much better prepared next time.

At first I agreed with both observations. But while I still believe that we’ll be much better prepared next time, I have doubts as to whether it could have been much worse. This might have been the worst possible epidemic that could possibly have hit the world in 2020. It all depends on what economists call “elasticity”, which means responsiveness of behavior to changes in incentives.

I don’t doubt for a moment that one can imagine viruses that are much more deadly than Covid-19, including SARS, AIDS and Ebola. But just because a virus has a higher case fatality rate (CFR) doesn’t necessarily mean it leads to a higher total death toll, or a longer economic depression. The damage depends on both the CFR and the number of cases. And in general, the number of cases will be inversely related to the CFR, other things equal.

The best way to see my argument is to look at some data. When looking at incentive effects, I am going to use the term “response” rather than “policy”, because I’m interested in the response of both governments and private individuals, not just governments.

Germany has a fatality rate per million that is between 1/4th and 1/6th the rate of other populous countries such as Italy, France Spain and the UK. It seems plausible that the difference in death rates is due to a difference in response (although of course other factors such as genetics and luck may play a role.) If the disease had been 5 times more deadly, then it seems quite possible that the other big European countries would have responded as effectively as did Germany.   They’d still do more poorly than Germany (which would also respond more strongly to a deadlier epidemic), but not more poorly than they actually did with Covid-19.  In a deadlier epidemic, the Italians would respond more like the Germans did in this case, and the Germans would respond more like the Chinese did in this case.

[If you are thinking that Italy had the disadvantage of being hit first, then compare Germany to the UK in this thought experiment.]

Some readers may be thinking, ‘You can’t compare Germany to the other four countries, as Germans are more disciplined in following rules and their government has more state capacity.” If that’s what you are thinking, then you’ve completely missed the point. Those cultural differences are likely real, but they merely explain why Germany did better than the other four when faced with this particular epidemic. It tells us nothing about counterfactuals of how Germany and the other four would have reacted to a much more serious epidemic.

Italy responded to the epidemic in March and April far more effectively than in February. Basic Italian culture did not change in one month—they simply became more aware of the need to try to control the epidemic. Chinese provinces outside of Hubei had death rates that were only a tiny fraction of the death rates in Hubei province. That’s not because the non-Hubei provinces of China had a different culture, rather they responded differently to the epidemic because they knew more about the risks by the time it got there.  The response of the population is hugely important.

So don’t confuse cross sectional comparisons of response for a given epidemic, with counterfactual responses in the same country for a wide range of hypothetical epidemics. Young people would not be having Covid-19 parties if the death rate were 50%, and almost everyone would be wearing masks.  There’d be a sort of WWII mobilization push for test/trace/isolate (which helped keep the German epidemic under control.)

We know that lots of countries controlled the epidemic more effectively than the US or Western Europe. And there are wide variations even within areas like Western Europe. Had the epidemic been far worse, then many more countries would have responded much more strongly. Taiwan had a death rate of 0.3 per million from Covid-19 (so far). Assume their case fatality rate were 100 times worse, making the disease close to 100% fatal. Even in that case, and even in the worst case with no behavior response, the fatality rate in Taiwan would have been only about 30 per million. That’s less than 1/20th the UK rate. So even a highly deadly epidemic doesn’t kill that many people if controlled effectively.  And the UK actually had more time to prepare than Taiwan. My claim is that if Covid-19 had been as deadly as AIDS, then the UK (both public and government) would have taken steps so that the total number of British deaths was no higher than the actual number—roughly 45,000.

So maybe it could not have been much worse; maybe this was the perfect storm. Just deadly enough to shut down the global economy, but not deadly enough to make most countries take Taiwanese-style precautions.

PS.  Australia was recently hit by a second wave.  We know the specific mistakes that led to this happening, and it seems very unlikely these mistakes would have happened if the CFR had been 50%.  (Guards were partying with quarantined airline passengers.)

PPS.  You can think of this in economic terms, where the societal demand for safety is roughly unit elastic.  This is different from individual demand elasticity, as there is a public good aspect to public health.

PPPS.  I have doubts as to whether my argument applies to poor, densely populated countries with low state capacity.  Perhaps in some places there was no feasible level of response that could have prevented disaster if the CFR had been high. (Recall the Black Death.) But we know that’s not true of developed countries, or even many developing countries such as Vietnam.

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In an Epidemic, Individuals are not Plants

An econometric study by Austan Goolsbee and Chad Syverson of the University of Chicago estimates that the lockdowns imposed by state and local governments may have been responsible for only 7% of the drop in economic activity. Most of the impact came from individuals who decided to avoid crowded places, as can be seen by comparing traffic in shops that were not under lockdown orders and those that were.

This is consistent with a basic economic idea: individuals respond to incentives (here, the fear of being infected), even in the absence of coercion. People are not just plants.

The authors used a database of cellphone data on foot traffic spanning contiguous counties subjected to different or differently-timed legal restrictions from March 1 to May 16. The data comprise more than 2.25 million business locations. (Note that the study tracks only foot traffic for consumption purchase, not traffic for work purposes.)

The main results of this working paper:

The results indicate that legal shutdown orders account for a modest share of the massive overall changes in consumer behavior. Total foot traffic fell by more than 60 percentage points, but legal restrictions explain only around 7 percentage points of that. … The vast majority of the decline was due to consumers choosing of their own volition to avoid commercial activity.

The authors conclude:

The COVID-19 crisis led to an enormous reduction in economic activity. We estimate that the vast majority of this drop is due to individuals’ voluntary decisions to disengage from commerce rather than government-imposed restrictions on activity.

It is not clear how these conclusions fit into the current neglect of social distanciation rules and the resurgence of infections in many states where the lockdowns were ended, but they still suggest that an epidemic will, to a certain degree, be attenuated by the private means used by individuals to protect themselves.

In an older paper, Tomas Philippon, also of the University of Chicago, reached a similar conclusion (“Economic Epidemiology and Infectious Diseases,” in A.J. Culyer and J.P. Newhouse, Editors, Handbook of Health Economics, Vol. 1 [Elsevier Science B.V., 2000]):

Incentives for prevention make epidemics self-limiting, because the prevalence of a disease raises the incentives for preventive behavior. … The economic approach yields the insight that public intervention often provides less benefit than predicted by epidemiology, because private incentives counteract its effects.

We may add that, in the case of Covid-19, government intervention often generated perverse incentives. For example, public health agencies long claimed that wearing masks was useless for the general public. We may hypothesize that this detrimental advice was motivated by the shortage of masks (and other personal protective equipment) created by governments’ own price-controls and their efforts to commandeer the consequently insufficient quantity supplied. (On these shortages, I have written a number of posts starting with one on March 6, “Don’t Confuse Shortage and Smurfage.”)

 

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Cooking Official Statistics Is Not Easy, for Now

After the Bureau of Labor Statistics announced a drop in the unemployment rate—from 14.7% in April to “only” 13.3% in May—a friend emailed me to share his suspicion that the unexpectedly low figure was a propagandist lie. The probability of that is not zero, I explained to him, but it is extremely low.

These data are gathered (through a monthly survey of 70,000 households), assembled, analyzed, and summarized by bureaucrats from the Census Bureau and the BLS, many of whom are professional statisticians. Bureaucrats could of course be co-opted or corrupted by political leaders, as they were in Argentina and Greece not so long ago. But there are reasons why this is less likely to happen in America.

Any attempt at political interference in official statistical data (which would probably be a crime under federal law) could be resisted or blocked at many points in the process. Successful conspiracies involving a large number of people are rare because, like in the Prisoner Dilemma game, anyone has an incentive to defect before anyone else does. A political manipulation at the last stage would be visible to many who have participated in the process. (The BLS Commissioner apparently only sees the report once it is completed.) Any success at political manipulation would quite certainly be followed by some resignations. High-level bureaucrats have an incentive to preserve the value of their personal brands. A professional statistician suspected of having acquiesced to data fraud may be unable to find another job in his field. Moreover, a political manipulation would be interpreted as meaning that US statistical agencies having become of the Greek or Argentine sort. The credibility of all federal statistical agencies would suffer—and may take decades to recover. Treasury yields would probably increase as creditors would suspect that the federal deficit and debt numbers, for example, are cooked too.

Another part of the difficulty would be to reconcile false unemployment statistics with other numbers calculated by other federal statistical agencies, like the Bureau of Economic Analysis (at the Commerce Department), which will, at the end of July, provide a first estimate of second-quarter GDP. And note that cooking a number one month may require cooking it again the following month and so forth, increasing the probability of the fraud being discovered.

Think also of the Department of Labor’s Inspector General, who may investigate any suspicion of statistical manipulation. It is true that federal Inspectors General may now be scared of investigating political malversations after President Trump removed five of them in different agencies over the past few months. But who knows, the Department of Labor Inspector General may still investigate out of personal integrity or because his legal responsibilities require it.

Fortunately, then, lying is not always easy in a government limited by the rule of law and constrained by numerous centers of power. We could say that, like in Rudyard’s delicious novel The Man Who Would Be King (1888), even the king cannot do everything he wants.

The intriguing error in employment data made by the BLS over the past three months does not change my opinion. As my co-blogger David Henderson explained, an error by interviewers led to misclassify the workers furloughed due to the coronavirus as employed instead of “unemployed on temporary layoff” as they should have been. Without this error, the correct unemployment rate would have been closer to 20% in April and to 16% in May, as opposed to the published figures of 14.7 and 13.3%. This big error blunts the impact of the pandemic and especially of government measures to combat it.

The notification of this error in the BLS’s June 5 report covering May (available at https://www.bls.gov/bls/news-release/empsit.htm#2020) reads as follows:

However, there was also a large number of workers who were classified as employed but absent from work. As was the case in March and April, household survey interviewers were instructed to classify employed persons absent from work due to coronavirus related business closures as unemployed on temporary layoff. However, it is apparent that not all such workers were so classified. BLS and the Census Bureau are investigating why this misclassification error continues to occur and are taking additional steps to address the issue.

If the workers who were recorded as employed but absent from work due to “other reasons” (over and above the number absent for other reasons in a typical May) had been classified as unemployed on temporary layoff, the overall unemployment rate would have been about 3 percentage points higher than reported (on a not seasonally adjusted basis). However, according to usual practice, the data from the household survey are accepted as recorded. To maintain data integrity, no ad hoc actions are taken to reclassify survey responses.

(The constraint of maintaining data integrity exists to prevent intentional manipulation.)

A notice similar to the one above appeared in the report for April (published May 8) as well as in the report for March (published April 3); see also https://www.bls.gov/bls/news-release/empsit.htm#2020 for these reports. The same data collection error was committed three months in a row.

Let’s hope the BLS and the Census Bureau continue investigating until they find how the error happened. And let’s hope that their Inspectors General are (still) ready to do their own investigations if necessary.

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