Coronavirus

I haven't been writing about coronavirus here.  There are plenty of places to get coronavirus news. But, I have been posting daily updates on Facebook, just doing some basic data analysis, and people there seem to appreciate it, so I figured I'd add a post here.

My pathway on this subject has been thus: I basically wasn't paying too much attention, and was roughly in the "it's just a bad flu" camp in January and February.  But, I was increasingly nervous because people like Tyler Cowen and Robin Hanson were especially worried about it, in a conspicuous way that seemed unlike them.  Eventually, I looked closely enough to realize it was a potentially big problem.  By early March, I was wondering what we would need to do.  By mid-March most of the country had come to that realization, so I don't know that my path was much different than most people. By mid-March, I was watching exponential growth of the contagion, and worrying about the considerable damage that each new day's growth would bring.

By late March, though, I saw the first faint signs of a bending curve, and so I started tracking the numbers daily more carefully.  On March 30, I took to Twitter to predict that the high point in the national number of new daily cases would happen that week and that daily new cases would be below 5,000 by April 15.  I just barely made my first prediction.  It appears that Saturday, April 4 might be the high point for new cases.  My second prediction might be a little more difficult, though.

The first graph here is the US daily growth rates in the cumulative number of cases, hospitalizations, and deaths.  A lot is made of problems with the data.  Certainly they aren't perfect, but in terms of trends, I think it's more informative to work with it than it is to act like the data is extremely biased.  There are a lot of reasons to think that, which I'm not going to get into here.  But, one reason is that trends in all three of these measures are running parallel to each other in basically the fashion one would expect.  Also, the variation in outcomes limits the potential for the data to be too far off.  New York shows us what it looks like to have more cases.  Very few places look anything like that.  Also, we know that the death rate for older people is north of 10%.  If cases were much higher than what we think they are, there would be a lot more dying old people.  It is easy to come up with plausible reasons to doubt the data, but I just don't see the doubts standing up to the same level of scrutiny that the doubters are applying to the data.

Anyway, this is a lot like valuing equities.  You just have to be comfortable with quite a bit of unfalsifiable noise.  And, even with that, there are stories to discover.

The interesting thing about these growth rates is that they are declining in a pretty linear way.  The same is true generally of the individual states, too.  But with data this noisy and a time frame this short, it is difficult to see the difference between a linear trend and a convex trend.

Here is the national daily growth rate of cases since March 21, and I have fitted two trends to it, beginning on March 28. One is a linear decrease in the growth rate of 0.93% each day.  The other is a proportional change in the growth rate. Each days growth rate is the previous day x .93.  They both could describe the recent trend, and I would say they might serve as a decent estimate of the range of expectations going forward.

The last graph shows the results of each, in terms of daily new cases.  It makes a big difference. The linear change in the daily growth rate would have to be more or less right in order for my April 15 prediction to come true.  In the next few days, it should become clear what the actual trend is.

Exponential growth can come at you fast.  All in all, I think we did a pretty good job in most places of getting out in front of it.  But, the change in trend in the other direction can be just as surprising.  It could make a big difference for a lot of lives, a lot of jobs, and a lot of investments, if many states around the country can be mostly rid of new cases over the next couple of weeks. Then, the conversation can turn to how quickly we can get back to normal.  We'll see.

PS. The April 9 report shows more new cases than on April 4, so my first prediction failed also.

Housing: Part 305 - If only we could burn all the extra houses down.

From Andrew Ross Sorkin's "Too Big to Fail"(pg. 190), from the summer of 2008 before Fannie and Freddie were taken over by the Treasury.

Paulson and a half dozen staff members huddled over the Polycom on his desk to hear the former Fed chairman's faint voice through the speaker.
Rattling off reams of housing data, Greenspan described how he considered the crisis in the markets to be a once-in-a-hundred-year event and how the government might have to take some extraordinary measures to stabilize it.  The former Fed chairman had long been a critic of Fannie and Freddie but now realized that they needed to be shored up.  He did have one suggestion about the housing crisis, but it was a rhetorical flourish befitting his supply-and-demand mind-set: He suggested that there was too much housing supply and that the only real way to really fix the problem would be for government to buy up vacant homes and burn them.
After the call, Paulson, with a laugh, told his staff: "That's not a bad idea.  But we're not going to buy up all the housing supply and destroy it."

IW readers know there weren't too many homes.  The only things the American housing market and the economy needed were sufficient money and credit.

I have the same feeling reading these retrospectives as I do hearing debates about the market today. It's like we're a tribe that shares a religious origin story in which the spirit of spring floods plays the devil's role. We're in the midst of a terrible drought, but it is simply part of our cultural DNA that water cannot be part of the solution.  So the elders desperately engage in plans and discussions about dealing with the drought in which they cannot reference water as a solution.

Dig a well? Build an irrigation canal? It's not that arguing for these things would be fruitless. It's that it wouldn't occur to a respectable person to mention them.  To mention canals would only serve one purpose - identifying yourself as a heretic.

To suggest that Fannie and Freddie should seek to expand their balance sheets in the summer of 2008 would only serve to besmirch one's own character.  (Look who's the first to pray to the spirits of the flood when things go bad.)

In effect, the entire country became taken with some version of what Robin Hanson would call "far thinking".  Far thinking is where we can impose our ideals on a map of the world that is clean and easy, where our ideals don't have to be moderated by messy reality.  In far mode, the Wall Street Journal can talk about the virtues of a financial panic. FOMC members can talk about letting the market discipline risk takers.  The President can explain that it's not his job to bail out speculators. Elizabeth Warren can ask why aren't more bankers in jail.  In far mode, we can know that they did this to us.  In far mode, just deserts keep us on the straight path.

In effect, Greenspan and Paulson are dealing with the cognitive dissonance of far mode here.  Burning down homes is an obvious solution to the problem in far mode.  Unmoderated by messy reality, far mode can get pretty absurd.  They recognize the absurdity of it. That's why the suggestion is funny.  If only they had taken it seriously enough to force them to confront the "near" - to confront the cognitive dissonance that made it funny - their plans might have been moderated by messy reality.

I wish I could travel back and take them to some townhouse in Brooklyn whose family was moving out of the state because they couldn't afford to spend half their income on rent anymore.  Here's some lighter fluid and a match, Al.  Should we start with this one?

As the crisis wore on, others echoed Greenspan's sentiment.  Frequently the concern was about old working class neighborhoods in rust belt cities, which were devastated by foreclosures.  Now, isn't it strange that in a country that had supposedly just built millions of unneeded homes in Arizona, Forida, etc., that the excess supply was in 80 year old neighborhoods in Cleveland?

Here is an article from Cleveland in 2010 about their program to tear down homes.  Now, in cities that have been depopulating, it may be the case that there are parts of town that call for demolition programs.  But, my point here is that we have conflated this problem with the subprime lending crisis in ways that have led us astray.  From the linked article: "Blame our region's economic stagnation and the nation's recession; blame lenders who bent and broke old rules to make loans to people who couldn't afford them; blame Wall Street speculators who bundled and resold those toxic loans, poisoning the economy. Or blame our drive to expand, leave the old neighborhoods and make new suburbs out of countryside."



Source

For "Wall Street" to be implicated as a source of unneeded homes, those loans would have had to have been associated with a building boom.  Here is the rate of new housing permits (compared to civilian labor force for scale) in the US as a whole and in Cleveland.  I show a long time frame here, just as a reminder that even at the national level, there was nothing unusual about the rate of building in the 2000s.  But, Cleveland didn't have any part of the 2000s housing boom, such that it was.  The rate of building in Cleveland was low and steady, until 2006, when it fell off a cliff along with the rest of the country.

The reason home building fell off a cliff in 2006 in every city across the country is because buyers lacked money and credit.  Cleveland didn't build a bunch of homes and then suddenly discover that they couldn't afford them.  In fact, in Cleveland, as in just about every city in the country, rent inflation rose in 2006 and early 2007 because of the shock to supply created by tight monetary policy.

By 2010, when neighborhoods were devastated by the blight of foreclosed properties, those neighborhoods suffered from one problem: not enough money.  This was not a supply issue.  Even today, homes in those neighborhoods generally fetch rents of around $1,000 a month.  The collapse was purely a nominal issue.



idiosyncraticwhisk.blogspot.com  2018

Here, I compare home prices in the three most expensive ZIP codes in Cleveland (blue, right scale) with the three least expensive ZIP codes (orange, left scale).  Cleveland is like most other cities.  During the boom, prices across the city increased at similar rates.  Then, after we pulled the rug out from under low tier mortgage markets, prices diverged.  After mid 2008, low tier markets collapsed.

Low tier homes have prices that are similar to prices in 1996.  High tier prices have risen in the range of 50% over that time.  Working class balance sheets have been devastated.  Low tier homes in Cleveland lost half their value after 2008.  This is not because rents have suddenly been cut in half, because this isn't a supply issue.

When Hank Paulson and Alan Greenspan jokingly wished they could burn down some homes, what those homeowners needed was some cash. Cash that the Federal Reserve, Fannie Mae, and Freddie Mac were in prime position to provide.  The thought didn't even occur to them.  It couldn't have.  It would have been heresy.



idiosyncraticwhisk.blogspot.com  2018

Here, I have graphed mortgage affordability for the median home in ZIP code 44137, Maple Heights, OH.  It's the yellow line in the previous graph.  There was no affordability crisis in Cleveland.  The monthly payment required to buy those homes with a conventional loans was similar to what it had been for at least 10 years, after adjusting for inflation. (This graph is in current dollars.)

Foreclosures in Cleveland had been rising throughout the boom, and they spiked from late 2005 to 2007, and then remained high.  Maple Heights continues to have many foreclosed properties.  In the "bubble" cities, foreclosures tended to be a lagging factor - after prices collapsed.  This is the case in Cleveland, too.  Clearly, after 2008, foreclosures were a function of household income shocks in properties that had lost all of their equity, so that the owners couldn't make payments and couldn't tap equity as a rainy day fund.  But, Cleveland did see a rise in foreclosures before the collapse.  This suggests that there was a market in risky mortgages in Cleveland during the boom that called for some moderation.

But, this is the important yet subtle point: The mortgage boom didn't have any significant effect on home prices or supply in Cleveland.  It had little effect on aggregate demand for housing.  The sloppy way in which housing affordability is commonly equated with home prices instead of with rents and the sloppy way that price booms in places like San Francisco or Phoenix have influenced our image of housing markets in places like Cleveland have led to disastrously wrong consensus in policy.  So disastrously wrong that when working class households in Cleveland just needed some cash, the public officials who could have provided that cash were wishing they could destroy real assets.

This over-reaction caused home values to collapse.  By 2010, when the over-reaction was codified in the terms of Dodd-Frank and the Consumer Finance Protection Bureau, the affordability of homes for buyers was unprecedented.  Actual affordability (in terms of rent) was worse than ever, because of the supply shock.  But, in Maple Heights, where the median home required monthly mortgage payments of about $600 for the decade leading up to 2008, it had fallen to less than $400.  And, the further collapse in home values that followed Dodd-Frank eventually pulled the median mortgage payment down to $200.

Excessive lending had little effect on mortgage affordability in 2005.  But, the over-reaction against lending had such a devastating effect on home values, that mortgage expenses declined by 2/3.  While pundits and critics blamed the Fed for saving Wall Street instead of Main Street and while they demanded cram downs, forced refinancing, and subsidies to borrowers, and while Greenspan and Paulson wondered how to get rid of all those houses, what those neighborhoods needed was for someone to just offer them some run-of-the-mill mortgages, of the type that they had successfully been paying for decades.  Not only the existing borrowers, but the potential new borrowers.

We were so upset about mortgages that stretched some borrowers too thin when mortgages in Maple Heights required monthly payments of $700 in 2005 that we were bound and determined to prevent mortgages from being made in 2010 that required payments of $200.  And we did it in the name of affordability.

This is a crazy disconnect.  The idea that homes were too cheap because of oversupply was consensus.  Greenspan and Paulson were hardly staking new ground here.  Consider the scale of the religious zeal against lending that had to be in place for them to think this was a problem.  Even if oversupply had been a problem, sane people would not have wanted to destroy the extra homes.  The obvious solution would be to buy them for pennies and then give them away to working class households.  If there was an oversupply, then working class households could just double the square footage of the homes they were living in at no extra cost.  The reason this wasn't happening in reality was because there was, in fact, a shortage of homes, and rents were rising.  But, if oversupply was the "problem", then the obvious solution at any time from 2009 on would have been for Fannie and Freddie, under federal control, to open the flood gates, and to spread our overabundance of homes to working class borrowers, who could now have twice the house at half the expense by shifting from renters to owners.  This is still, basically, the case today.  And, today, we still maintain a religious zeal against letting that happen.

To get back to normalcy those low tier home prices in Cleveland would need to double from today's price.  This is fabulous news.  For working class homeowners who have managed to keep their properties, simply returning to a normal market would double the value of their homes.  It's amazing how easily one can attain new health simply by refraining from taking poison.

But, the problem with human affairs is that sometimes, when we are wrong enough, being wrong is an impediment to correction.  The disconnect between reality and the consensus view is so great that the truth seems too outrageous to entertain.  So, burning down houses makes more sense than giving them away and to suggest otherwise seems like madness.

In the meantime, working class homeownership is on a 50% off sale in Cleveland while many complain that homebuilders aren't building enough new homes for the entry level market.  And, homebuilders complain that labor, and lumber, and lots are all too expensive.  Everything is too expensive when you're trying to compete against a 50% off sale.  So, because the consensus is so wrong on this issue that it requires a religious conviction to maintain it, this leads many today to complain that those costs are too high because we have too much money.  The solution to homes that are undervalued by half is to raise interest rates and suck cash out of the economy to bring those other costs down.  An awful lot of bad things will happen before those costs are low enough to compete with the 50% off sale.

Wages, profit, overtime pay, and "rights"

Warren Meyer posted a reminder of the Obama administration's proposed overtime rules, that would expand workers who are covered to anyone with income up to about $50,000.  According to Meyer, they are not making him or his employees very happy, despite the hopes of Jared Bernstein and his Washington Post headline writer:

President Obama’s new overtime proposal could make a lot of people happier

I think this is a great example of the "What's the Matter with Kansas?" problem.  Progressives place a bunch of constraints of the lives of the working poor, then they expect to be hoisted triumphantly into office on the shoulders of people they have harmed.  When a worker making $800 on 50 hours of work has to go home and tell her family she is now making $600 on 40 hours of work because new federal rules on overtime pay make the 50 hour arrangement uneconomical, she doesn't need to understand the theoretical subtleties of economics to understand what's happened.  Bernstein and the president's other supporters believe workers will be pleased about this constraint.  They seem to think that someone making $15/hour for 50 hours of work will now have the same schedule, but with an extra $75 for the week.  Or, alternatively, that they will be reduced to 40 hours and $600, and be happy about it, because they were only coerced into those extra hours by their employers.  And, this has the added bonus of creating more jobs, to replace the lost hours.  (I wonder if anyone has ever written on the troubling trend of workers who have to hold multiple jobs to get by.)

Of course, the president and Mr. Bernstein's confidence notwithstanding, it's not really a question of whether all workers are happy about this or not.  Some will be happy and some won't.  There are a lot of activists in the Democratic Party that will not be affected by this policy who will be slightly more motivated to support the party, because they will consider this a victory.  Among those affected, there will surely be a decline in support ("What's the matter with Kansas?" the activists will ask.)  Some portion will be less happy with the new pay and time schedule than they were with the old one.  And, there will be no question where to place the blame for the change, since the supporters of the policy are quite proud of themselves.  The idea that some number of workers will be happy appears to be based on the notion that the base wage will remain unchanged and that the overtime premium will simply add to the worker's compensation.  Nominal rigidities in wage markets may prevent employers from immediately simply docking the base pay to resettle back at the original total cost, but even in the best case scenario, for a worker who might be averaging 50 hours, a few changes to work requirements and some reductions in planned pay increases would re-establish the total compensation cost fairly easily.  For workers who have been salaried, wouldn't we simply expect the new hourly wage level to be set so that the total compensation level remains unchanged, but now the employee and the employer have to deal with a discontinuous 50% cost factor in their weekly production plan?

The oft-heard description of departures from arbitrary wage rules as "wage theft" is a particularly useful rhetorical weapon in the cause of replacing open economic discourse with hatefulness and pop-moralizing.  This issue is a great example of the "curious task of economics".  The combination of an interventionist bias and confidence in a particular world view can be dangerous.  Here we see the sort of Marxian priors that inform so many progressive attempts at helping - the idea that power imbalances are the overwhelming factor in price setting, the idea of just prices and just wages, the idea that employment contracts are generally exploitative, especially for low wage workers, etc.  Supporters imagine that a given set of voluntary labor arrangements must be skewed in favor of the employer.  People don't like to work more, all else equal, so it is not hard to imagine that they are coerced, due to their lack of negotiating power, into working more than they would prefer.  But, it is not difficult to imagine other explanations.  In fact, simply asking workers would provide many reasons - Meyer and his workers, for instance.

One obvious reason workers might prefer a salary arrangement with some uncompensated overtime is management of income risk.  One of the fundamental services employers provide to employees is the assumption of tentative risk - volatility in income from seasonal or cyclical fluctuations in sales.  If one approaches this subject with the bias that employment arrangements are exploitative, these sorts of obvious issues may not be so obvious.  This change in policy will put many workers in the position of meeting regular fixed expenses in their household budgets with earnings that will now come in fits and starts, depending on the work load of their employers.  In fact, I would expect total compensation to rise slightly as a result of this policy change, because this sort of income management is very valuable to workers, and is costly for employers.  The fact that this policy prevents employers from providing this income smoothing service to their employees means that employees will require some compensation, and employers will be willing to pay it.  But, the marginal worker will be worse off for this change, even with the higher compensation level.

Of course, we hear all the time how insecure workers are - how employers are increasingly forcing unpredictable and unsustainable schedules on them.  With a worldview that views labor contracts as exploitative and imbalanced, this can be blamed on employers, almost by definition.  And, even though it seems obvious that imposing hourly pay with overtime rules on salaried workers would exacerbate the problem of weekly wage insecurity, this problem can simply be assumed away through an imagination blinded by its own assumptions.  So, one can believe that, not only does an imposed, arbitrary 50% discontinuity in wage rates for hourly workers have nothing to do with short term wage insecurity, but employers who avoid imposing it are engaged in Wage Theft.


Corporations aren't capturing potential wages.

The idea that workers will get a raise from a policy like this also comes from this sort of worldview.  This chart from Mian and Sufi has become a sort of mascot of the idea that corporations can capture huge gains by underpaying low wage employees - "The Most Important Economic Chart".  The idea is that the median worker has not been granted their portion of productivity growth since 1980. (The trend shift looks like it happens in about 1969, but Mian & Sufi, oddly, set the indexes = 100 in 1980, where the median income series looks like it is already below the productivity series by at least 10 points, relative to 1969.)

According to Mian and Sufi, the two reasons are:

First, owners of capital are getting a bigger share of GDP than before. In other words, the share of profits has risen faster than wages. Second, the highest paid workers are getting a bigger share of the wages that go to labor.

There are some other issues, such as number of earners per household, that have significant effects here.  But, for the purposes of this post, I want to concentrate on the two factors M&S mention.  I have posted a lot about the growing returns to risk and skill, among both capital and labor.  And, in fact, I think M&S's second factor is very important.  After adjusting for other factors they don't mention (like household size), high incomes of digital entrepreneurs and changes in distribution of labor income explain basically all of it.

So, it's a problem that they mention this first factor, that capital is getting a bigger share of GDP.  It's simply not a significant factor.  But, because M&S, Picketty, and other observers keep inserting this notion into the consciousness about this issue, this labor vs. capital mindset creeps into all sorts of issues, like this overtime pay policy issue.  It feeds this idea that corporations, in the aggregate, have immense power to claim producer surplus.  When proponents of these sorts of policies can't imagine that laborers collect any of the producer surplus, they don't have to be concerned about the effect of their policies on producer surplus, because they see the elimination of producer surplus as a virtue.  So, these policies end up destroying producer surplus, and if in reality much of that is going to labor (which I think is true), then these policies end up cutting the incomes of the laborers they are intending to help.  Proponents can't imagine that current labor agreements have developed to meet laborer's intrinsic marginal demands, so they end up making it illegal for labor agreements to meet laborer's intrinsic marginal demands.

Here is a graph of compensation and of capital income as a portion of GDI.  Capital includes all returns to ownership (profit, interest, and proprietor income).  They are very stable over time.  Looking at the M&S graph, median family income looks like it is more than 40% below where it would have been if it tracked their productivity measure.  So, I have included three indicators in this graph:

1) The range of actual capital income since 1980 (Blue).

2) The trajectory capital income would have taken if labor income had declined by 40% since 1980 and this was explained by increased capital income (Red).

3) The range of capital income that would be required to increase compensation by 10% through policies that transfer income from capital to labor (Green).

First, there is a very tight range of relative total capital income over time, even through business cycles.  Overwhelmingly, total compensation correlates with GDP growth.  Real compensation per laborer since 1980 is up around 60%, while incomes as a proportion of GDI move in very tight bands.  The top dark orange line adds homeowner implicit rent to compensation.  Even the small decline in compensation since 1980 has very little to do with wages, but instead is related to housing issues.

The housing supply problem tends to benefit high income households at the expense of low income households, and, as I mentioned, there are plenty of ways we might look at how compensation is distributed among labor.  But, since this idea that corporations are somehow capturing a bunch of surplus from laborers is so enticing, policy fights about ways to help low income households keep being waged about a problem that doesn't exist.

The red lines show how much capital income would have grown if it had been responsible for the missing household income from M&S's graph.  We would have noticed.

If a low-level salaried laborer working 50 hours a week was paid overtime on those 10 hours with no other change in wage level or hours worked, this would represent about a 10% increase in compensation.  The green lines show where income to capital would have to go if this could actually happen - if we could engineer a 10% wage increase through public policy.  Since the BEA began tracking incomes in their current format, going back to 1929, capital income has never fallen in that range.  This simply isn't a potential source of labor income.  Impositions like overtime pay regulations simply force laborers into second-best wage arrangements.


Bernstein's Claims

A portion of the Washington Post article reads:

Especially in weak labor markets, there’s lots of anecdotal evidence of people having to accept work schedules that make it impossible for them to balance work and family, completely vitiating those pristine “equilibration” assumptions.

Hamermesh et al also talk about “rat race” models “in which workers put in sub-optimal excess effort to distinguish themselves from slightly inferior workers.” I myself have worked in offices where if someone sees you leaving at five, they look at their watches and shake their heads. Again, in such cases, the classical assumptions do not hold.

So in the real world, many people don’t choose their hours of work. Moreover, the folks with the most flexible schedules tend to have the highest incomes, which is again upside-down when you think about who has the toughest time balancing work and family

Anecdotes don't prove market failures.

There are lots of stocks that lost more money than the market indexes did last year.  There are lots of stocks that did a lot better than the indexes.  Neither of these outcomes overturns the efficient market hypothesis.  In any market outcome, there will be examples on both sides of a distribution.  A question to ask yourself would be, would an anecdote from the other side of the distribution be a convincing argument for a biased market?  What if Bernstein had said, "Look we all know people who shirk on the job.  We all see workers standing around at work sites or surfing Facebook at work or who go golfing on Friday afternoons.  Clearly workers should be working more.  So much for those pristine 'equilibration' assumptions."  Outcome variance could, in some cases, signal the opportunity to improve efficiency through better information and more precise individual price-setting.  But, it is not evidence of biased outcomes.

The fact that Bernstein chose to work in an office where part of the complex set of communications and expectations included an expectation of working past five may tell us something about Bernstein's personal choices, but it doesn't tell us anything about biases in work schedules.  In fact, most workplaces are divided between salaried and hourly jobs, where everyone knows the tradeoffs between those career tracks.  And, between workplaces or job types, even within salaried career tracks, there are myriad different tracks with different work expectations.  The existence of some tracks which call for more hours than some others says nothing about a bias in any direction.  The existence of so many different careers with different characteristics suggests otherwise, unless we just consider any constraint that employers carry with them into the complex set of ongoing negotiations about typical labor contracts to be a bias.  Is our baseline for a balanced life painting landscapes for 3 hours a day, and then meeting friends for tea, and any deviation from this is a bias imposed by corporations on our ideal work-life balance?  Surely Mr. Bernstein had options for hourly work that he could have taken in lieu of having those co-workers glaring at him at 5pm.  Have we come to a place where the existence of tradeoffs is considered a market failure?

At the base of all of this is the reality that if workers would work less if they could, in the aggregate, then they would also earn less.  There is no way around it.  And, there are significant life cycle issues with career tracks.  Even if the workers who are putting in the longest hours are the ones who report the least satisfaction with their work-life balance, this is not a sign of bias in workplace trends any more than the high satisfaction of the 60 year old playing golf and going on cruises is a sign that we don't work enough.  We make tradeoffs with ourselves, our employers, and our families.  We are rarely at the margin.  Bernstein says that many people don't choose their hours of work.  They don't personally negotiate the price of paper towels or the size of roasted chickens, either.  What does that have to do with market failures?


Work weeks have long been declining.


Source

Bernstein refers to a study in Korea and Japan that finds a correlation between happiness and reduced hours.  To his credit, he notes that there may be cultural differences.  Korea and Japan have a cultural history of longer work weeks, and Korea especially has very long work weeks which are declining rapidly as their economy grows.  As a comparison, the US has an average work week of about 34 hours, which is similar to Japan and to the OECD average.  Korea has an average work week of about 42 hours, down from 48 hours as recently as 2000.  The US hourly work week has also declined over time.  As early as 1965, it was about 39 hours per week - still far below the current Korean level.  There is very little about Korean workweeks that would apply to American worker preferences.
And, since workweeks have been declining without tweaks in overtime labor rules, doesn't this suggest that labor trends incorporate worker demands without political coercion?  But, low income workers work the most, right?

The red line above is for all workers.  The lower blue line is for production and non-supervisory workers.  Here is Gallup data about workweeks.  Workweeks increase with income, education, and and age (until retirement).  This graph suggests that a large majority of the workers that would be covered by the new rule change don't work overtime, even without these rules.  And the trend is for more leisure time among low income and low education workers.

And, self-employed people work longer hours than employees.  All of these data suggest that there is significant value in long workweeks and that less productive workers are already engaged in an emergent set of negotiations setting norms for work-weeks which lead to shorter workweeks for employees, especially less productive employees.

I just find this to be astonishing.  There is a strong and clear correlation between people having more choices and control over their lives and people choosing to work longer.  And, the Obama administration and its supporters are specifically targeting the categories here that have the shortest workweeks, and they are making it illegal for them to choose the work-life balance that everyone else is choosing.  For those who earn below average wages, the Obama administration wants to put a 50% surcharge on their choice to work harder, even temporarily, to earn more money or to prepare for a potentially more rewarding career path.

I suppose those unbalanced, problem workers who are drawn to long work schedules (I mean, not as long as, say, your typical Washington Post columnist or White House staff, but still, I'm sure, too long for a healthy life balance.) could just become self employed.....well, if they don't need a license for their occupation.


One More Question About Market Failure

Why is this a presumed market failure to begin with?  If workers really don't want to work more than 40 hours, and if this overtime surcharge would cause employers to limit their hours and hire more workers, why wouldn't employers already be doing this?  What kinds of Dickensian hellscape do we work in that employers are widely forcing workers into job descriptions with more hours and more income those workers want, when they could hire more workers, and have a more healthy and happy labor force?

Here's another Bernstein piece for the Economic Policy Institute:

These provisions are important for covered workers, including 75 million hourly-wage workers, who value having a 40-hour workweek and earning extra pay when they work overtime. The right to a limited workweek provides time for leisure, civic participation, commuting, self-improvement, and tending to family and friends.

You have "the right to a limited workweek".  Put that in your pipe, huh?  There are debates about positive rights and negative rights.  I'm not sure what category this fits in.  How about imaginary rights?  The square root of a negative number.  Seems about right.

As Meyer points out, the junior management positions that might be moved from salary to hourly because of these rules are a typical stepping stone for low income, less educated workers to move into managerial career tracks.  All of the subtle signals involved in the difference between hourly workers and salary workers are an important, emergent part of the ongoing discovery process between workers and employers.  Overtime policy supporters can't imagine that low income workers want these choices, so those workers are stuck with these imaginary rights - the right not to do what most high income workers did do, but that some have decided low income workers shouldn't do.

This is the subtle problem that comes from the oppressed-oppressor paradigm that Arnold Kling associates with the progressive point of view.  Bernstein, for instance, has been confronted with many choices and tradeoffs in his life - some more difficult than others - some difficult enough to induce guilt or doubt.  One of the trickiest tradeoffs is work-life balance.  The life cycle of a modern American spouse/parent/worker has a peak in time demands in the 25 to 45 age range.  All of these factors are pulling at us.  We have a natural inclination to feel and show support for our families, so the work portion of these demands does not enjoy a rhetorical bias.  So, when we settle on our priorities, we naturally have a rhetorical bias against our work demands, and we sincerely have misgivings about choices we make that favor work.  These are difficult choices, not least of which because sometimes choosing work is in the best interest of our families, even when that means we sacrifice some of the other demands our families have on our time.  But, this is "near" stuff, as Robin Hanson would describe it.  This is the context of reality and tradeoffs.  So we make our decisions, and we carry the consequences in our consciences, never knowing if we chose correctly.

Where the oppressed-oppressor paradigm comes in is that this allows us to look at other people and remove those tradeoffs from the picture.  Jared Bernstein worked long hours because that was the difficult tradeoff required to be a sought after voice in the halls of power.  But, we can imagine low income workers as oppressed, so that their decisions are not based on tradeoffs, they are based on demands which we can presume those workers had no means to negotiate.  Removing tradeoffs from the picture pulls us away from the insights of economics, which deal with the difficulty of accounting for, or even knowing, tradeoffs.  And, it pulls us from the "near" to the "far", where we can imagine that reality is shaped by our ideals, instead of the other way around.  So, this paradigm, which begins with a sincere desire to empathize and help marginalized people, ends up creating a sort of elitism.  They are different than us, so we need to impose our ideals on them.

And, our ideals are imposed in a way that we would have never stood for in our own lives, lived in the "near".  A 50% jump in cost is huge.  There are arguments on the margin about 5% or 10% increases in the minimum wage.  But 50% is clearly not a cost factor that firms can simply swallow.  So, it is very common to see workers who have employers that are obsessive about keeping their hours under 40.  In the "far", 50% increases in cost don't have tradeoffs.  They are just a means to capture income from employers.  For many workers, who must live in the "near", this is effectively a ban on overtime, and to the extent that it extends the barrier between hourly and salary positions, it is a glass ceiling for workers who don't carry a set of credentials that pushes them over the threshold.

Supporters tell themselves it's for the best.  We had to live our lives in the "near".  It's refreshing to manage the lives of others in the "far".  The President's most recent announcement of the new rules contains no hint of the "near".  His world is the world that lies above accountability.  There are no tradeoffs - it is only greed and moral weakness that prevents us from creating the ideal world he imagines that we should.  The difference between high wage jobs and low wage jobs simply reflects the moral standing of the employer.  Employees are innocents, helpless but for the "hard work" of the social justice brigade.  And they will right this moral wrong by...instituting a 50% surcharge on employers of low wage workers who work a minute over 40 hours a week and putting obstacles between low status workers and salaried career paths.

This is why it is strange to associate progressivism with liberalism.  This is more akin to the worst sins of conservatism - the tendency to ascribe moral import to those things we most strongly choose not to understand.  Someone might take issue with some of the inputs that inform my pushback on this policy.  The President's rhetoric doesn't rise to that level.  It couldn't.  It lives in the "far".  To acknowledge debate - to enter the "near" - would undermine the position itself.  This is a cue to listen for when supporters of this rule speak, to separate the serious from the sectarian.  Bernstein's position might be wrong, but the President's rhetoric is simply banal.

So, by assuming income mobility away, we ignore the cost of  policies that destroy the seeds of that mobility.  Why can't the working poor accept that they have no ability to manage their own moral agency and that there are certain arrangements we can't let them accept?  Is being kept in your place with misplaced pity any better than being kept in your place with misplaced disdain?  Maybe that's the question Kansas was answering when we wondered what was the matter.

Institutions, individuals, and American Politics (aka: Progressivism becomes Conservatism)

Recently, Chris Rock said:

I stopped playing colleges, and the reason is because they’re way too conservative.

How can this statement make sense?  Here is a simple way of imagining US politics.  I included a version of this, in my post on jubilee.

This could use less loaded language.  High respect here  means being careful
about changing or controlling something.  Low respect means being more
willing to change or control something.

Let's begin with conservatism.  It is kind of the core of the natural state of human community, which was surely made possible by our biological tendency to strongly favor our tribe, our tribe's leaders, and our tribe's idiosyncrasies.  Loyalty to our received institutions is the core value here.  There's a place for that value.  There is real value in the Burkean sense of trepidation about changing institutions.  Capitalism creates a constant stream of challenges to status quo arrangements.  But, the American Constitution, one of our received institutional foundations, is the cornerstone of American liberalism and capitalism, so American conservatives are in the awkward position of defending the very system that inevitably speeds adaptive changes in status quo moral norms.  This is probably one of the lucky accidents of the modern West.

Libertarians tend to have some affiliation with conservatives in the U.S.  I think that this is because libertarians share a respect for our liberal Constitution.  But, where conservatives emphasize the duty of individuals to serve institutions, libertarians see the value of institutions as a product of how they serve individuals.  Libertarians can be protective of the Constitution or religious institutions, but are more likely to view them from a Hayekian perspective - that these institutions are emergent human creations.  Whether it is the law, the market, or religion, we may see imperfections and sources of unfairness, but with emergent systems, we must be wary of the uncountable number of interactions and relationships that escape our limited observations.  Just as we wouldn't want to roll through the rainforest, say, killing all the large predators, libertarians are wary of popular proposals aimed at broadly manipulating public behaviors and outcomes, because of possible unintended and unseen consequences.  Libertarians are Burkean liberals, and they defend emergent order, in the form of markets and free society, and core institutions that promote their peaceful incubation.

Moving around the circle, liberals are much like libertarians, but with less trepidation about changing institutions.  From conservatives' point of view, liberals frequently seem anti-American, or anti-religious.  That is because it is important to liberals that their institutions - institutions that they have control over and that have control over them - are just, and they are not hesitant about calling out their own institutions when they disagree with them.  This is also a product of the modern West - a sense that we aren't just custodians of received institutions, but that we are responsible for correcting our institutions when they are in error.  Libertarians and liberals each generally value both limited government and democracy, but liberals tend to favor democracy where libertarians favor limited government.  For liberals, democracy represents the power to perfect our institutions.  The Bill of Rights might be the best American example of liberalism, with the 1960's Civil Rights battle as its most recent apex.  And, when liberalism triumphs, in hindsight, it is usually a universal triumph.  The Renaissance, the Reformation, the Enlightenment, and the Industrial Revolution describe a multi-century process of the triumph of individuals over institutions.- the triumph of broad progress over imposed status hierarchies.

Moving from liberal to progressive, we move from a sense of perfecting institutions to serve individuals toward a sense of perfecting institutions to perfect individuals.  Where conservatives would press others into a world that once was, progressives would press others into a world that never was.  Where liberals would mold existing institutions to make people free, progressives would mold existing institutions to make people behave.  Here, we have another accident of history.  The Civil Rights advancements of the 1960's were a great liberal victory.  But, we can divide those advancements into two categories.  The more libertarian victories were changes that reduced governmentally imposed discrimination.  These were changes that allowed institutions to better serve individuals.  The more progressive victories were changes that imposed rules on private citizens.  Even though the core victories were libertarian victories, the progressive changes became a part of the package of changes we identify with the Civil Rights era, and libertarian opposition to those elements meant that progressives took the mantle as heirs to Civil Rights liberalism.

I say this is an accident of history, because progressivism is decidedly illiberal.  As with all of these political conceptions, there is a core of virtue here.  The progressive core is a sense of justice - of righting past wrongs.  We need this, just as we need the sensibilities held dear by the other wings of political ideology.  This sense of justice - of fighting oppressors - leads to categorizations.  Rich vs. poor.  Majority vs. minority.  Men vs. women.  Employer vs. employee.  These categories can become the core principle itself.  Progressive policy positions are usually a reflection of the need to rebalance power among these groups.  Where liberalism demanded individualist equality under the law, progressivism applies the law based on group identity.  Progressive policies are usually associated with positive liberties.  In commercial contexts, this usually means that employers and capitalists are coerced for the presumed benefit of employees and consumers, through redistribution, progressive taxation, and a host of norms imposed selectively on private for-profit firms, such as workplace and wage restrictions and anti-discrimination rules.  Positive liberties generally, in practice, equate to the selective denial of negative liberties.

So, while this is rooted in a quest for justice, in practice it is essentially ad hominem.  This article is a case in point:  "Wal-Mart’s new scheme to prey on America’s poor".  Note that the article makes no attempt to even create a poorly constructed straw man set of expectations.  Wal-Mart is creating valuable banking services for poor people, which is bad...because it's Wal-Mart.  There is a movement to create low income banking services through the Post Office.  The movement must insist on preventing Wal-Mart from establishing banking services and must implement them politically through the Post Office, because the Post Office represents control.  Imagine if both the Post Office and Wal-Mart start offering banking services.  Where do you imagine most poor people will choose to bank?

The attempt at egalitarianism and at leveling social injustices arises from a virtuous sense of justice.  But, in practice these ideas serve as a sort of original sin - a problem that can never be rectified - and thus morph into a permanent lineup of favored and disfavored groups.  The writings of Robert Reich, Paul Krugman, etc. are infused with these explicit appeals to ad hominem. They talk about "The rich" or "corporations" or "Wall Street" as a monolith, with rhetorical tactics that would be clearly offensive if directed at an ethnic group or race.  The message is "They're different than you and me".  Progressives become modern Pharisees.  Advocacy, OWS marches, and Facebook status updates are like loud public prayers at the temple.  Corporations and investors are perpetually unclean in the eyes of the unbending law of egalitarianism.

Progressives oppose Citizens United*, for instance, in spite of liberal principles regarding political speech, explicitly because some of the plaintiffs are associations formed to facilitate shared ownership of productive capital.  Corporations own capital - a progressive original sin.  If your core principle is that rights should be enforced selectively to counter power, and capital represents power, then "getting money out of politics" seems principled.  But, really, there are any number of sources of political power - all of them distributed unequally.  Progressives are simply singling out the one source of power that is associated with their chosen out-group and selectively attempting to remove it from the realm of protected rights.  There is no principled difference between this position and, say, preventing gay couples from marrying or keeping minorities out of good schools or limiting property rights for women.  Progressives will argue that selective treatment is warranted here, as a way to correct for power imbalances.  But all sectarians think they have their own good reasons for selective treatment.  Progressives are applying conservative (or, more precisely, sectarian) principles.  They have simply changed who's in and who's out.**

Thus, progressivism in power is crude conservatism.  There doesn't seem to be an ideological mechanism for progressivism to transmute into conservatism, as there was from conservatism through libertarianism and liberalism.  The mechanism is power.  In power, progressivism becomes conservatism, but not the conservatism that we are accustomed to, which at least defends our received liberal foundations.  It is a pre-liberal conservatism, explicit in its insider-outsider identity-based favoritism, and decidedly anti-bourgeois.


* I am endlessly amused by the fact that opponents to Citizens United, who generally use slogans, such as, "Money is not speech, and human beings, not corporations, are persons entitled to constitutional rights." fight this ruling by forming corporations, associations, and affiliations, and with a united voice making public statements of conscience.  Here is a petition that implores boards of trustees, congregations, and committees to demand that "corporations aren't persons and money is not speech" and ends with "This work is made possible by the generosity of individual donors and congregations."  Clearly, these groups are engaged in reducing the rights and status of commercial producers.  I am curious about the motivations that cause them to avoid language that would make this more clear in their petitions.  This disconnection does not come from a shallow or conscious place.

**  Of course, I'm being unfair to conservatism here.  Prejudice is sometimes a kind of a side effect of conservative biases.  Progressivism has made a prejudicial viewpoint a core principle.  Think of how frequently the progressive media will simply note that something good happened to the rich, or whites, or corporations, or men, and this is understood to be bad news.  If we think in progressive terms, we can see how there is some base virtue at work here - a desire to pull outcomes toward a mean.  But, if we think about this in terms of avoiding a corrosive mindset, it's really quite nasty.  With any prejudiced point of view, our biases start to inform our interpretation of the world and our acceptance of perceived facts.  If prejudice is a central virtue, how in the world can you expect to interpret facts with a remotely objective perspective, especially if you are surrounded by like minded ideological partners.  Think of how biased and ill-informed people generally are who openly espouse white supremacy, misogyny, and nativism.  Accepting that progressive prejudices are ground in a sense of justice, still, why would we expect them to be any more reasonable or informed than unjust prejudices?  Even the wise Benjamin Franklin famously wrote a friend about German immigrants, "…Not being used to Liberty, they know not how to make a modest use of it; and as Kolbern says of the young Hotttentots, that they are not esteemed men till they have shewn their manhood by beating their mothers, so they seem to think themselves not free, till they feel their liberty in abusing and insulting their Teachers…."  And, he didn't consider it a virtue to dislike Germans.  This mistake was by accident because he was kind of put off by them.  Imagine how ignorant he would have been if he considered being anti-German to be a morally uplifting core principle.

Being a financial nerd around progressives is, I suspect, like being an evolutionary biologist around creationists.  Creationists would constantly be talking about your favorite subject.  You might at first think, "Oh! Yeah!  Seemingly irreducible complexity!  What a fascinating topic.  How could these mechanisms evolve?"  But, you would soon find that their interest in the topic is to specifically not learn those things.  Such is the case with progressives and inequality, or the balance between wages, interest, and profits, or markets in general.  Progressive approaches to economic and social matters are informed by the goal of pulling down the status of commercial associations.  This does not lend itself to objective review of stochastic statistical information that moves around a tentatively stationary mean.

Take an issue like income inequality - a favorite issue today.  To the extent that it is an interesting subject - which it seems to be to many people - it is the product of a complex web of causes, such as the revolutionary global explosion of the internet and digital technology, the empowerment and education of women, the extension of education and retirement in our lifecycles, changing household composition and size, the new trend of lower income being associated with more leisure, etc.  Yet almost all of the discussion revolves around factional political issues like tax rates, which probably are a small part of the story, or growing corporate profits, which is empirically incorrect.

The reaction to much economic progress makes me think of this scene from Seinfeld.  (George is basically demanding that any change in his dating life is a Pareto improvement.) Whenever I hear something about foreigners or robots or some other source of new productivity taking everyone's jobs, (or some new technological or cultural advancement that might temporarily change income distributions or might lower and raise the social or economic status of various groups in complex ways) I want to ask, "Do you want to be able to get your hand out of her hair, or do you not want to be able to get it out?":


  I think you'll get it out.

Odds & Ends and IMH

This Wall Street Journal article (HT: Benjamin Cole at Historinhas) is like a chapter out of Gulliver's Travels.  I mean, literally, you could stick this scene on a floating island, and paste it into the book, word for word.  It's full of stuff like this:

The Treasury Department’s report to Congress on the exchange-rate policies of major trading partners called on policy makers “to use the full set of policy tools at their disposal.”
“Not only has global growth failed to accelerate, but there is worry that the composition of global output is increasingly unbalanced,” it said. “The global economy should not again rely on the U.S. to be the only engine of demand.”

Not since the last semi-annual currency report has so much "reasoning from a price change" been used to say so little with such authority.  Some observers believe that central banks don't have that much influence over inflation.  I disagree with that.  But, I can see how it could seem true, or be true.  We could give Treasury officials and central bank officials around the world big computer terminals with a lot of buttons and levers, but not connect them to anything, just have random colors and numbers flash on the screen as they pull and push on them.  Then we could occasionally tell them what a great job they are doing, or chastise them for pulling too many levers.  It wouldn't look much different than the world we have today.  What's the difference between trying to describe a web of exchanges we can't begin to understand and just making stuff up?

The first line of the article:

The Obama administration chastised Europe and Japan for excessive reliance on monetary policy to revive stagnant growth....

This seems like strong form IMH.

Maybe Office Space is a better place for this scene than Gulliver's Travels.

"Um...Yeah...So, Germany, we're going to need you to work over the weekend to get those TPS reports in.  M'kay?"

---------------------------------
On the topic of EMH and IMH, here is a Harvard Business Review article that discusses recent research that shows inside information can lead to worse decisions.  This doesn't surprise me.  I have always thought that the difference between weak form efficient markets and strong form efficient markets was less stark than it is generally perceived.

We tend to think in terms of clear episodes, like a bio-tech firm getting FDA approval for a new drug, or something like that.  But, the vast, vast majority of investment information and decisions are bathed in a complex set of factors that make simple information very difficult to value in isolation.  Insiders are frequently very poor traders.

Financial speculation depends greatly on discipline and perspective.  And the denominator in the valuation of perpetual streams of cash flows is very important, even while it is wholly unknowable.  If you haven't honed those things carefully, gaining new information can very easily lead you to give more weight to incorrect perceptions.

I used to think this was limited to the nooks and crannies of the investment space - little microcaps that just didn't get enough attention for markets to work out efficient expectations.  But, even in something as big as the money supply and the housing market, it is interesting how if one begins in 2006 with two very different ideas about what is happening (a "bubble" where prices are unrelated to underlying value vs. a rise in nominal intrinsic values coming from high demand for low risk savings vehicles as a hedge against a quickly evolving global economy), then practically all of the new information one would have seen since then (assisted by ever-present confirmation bias) would seem to serve to confirm your narrative.  You would become more confident in either narrative as time passes.

One of Robin Hanson's general themes is that we have a biological predisposition to be sincerely the most confident about things that are the most incorrect, if we are socially primed to believe them.  So, the good news is that it isn't such a disadvantage to lack inside information.  The bad news is that we are all equipped with our own very powerful miscalculator.

Keystone Pipeline: Politics is not about policy

(I had written this out, but I was sitting on it, debating whether to soften it up, and I saw that Menzie Chinn made a post this morning that is, unfortunately, a perfect example of the problem.  Our central bank treats success as failure, and our academic economists treat costs as benefits.  So, I decided to post this.  I promise I will get back to my housing series.)

I was listening to NPR this morning, and they were talking about the Keystone Pipeline.  Politics is about imposing our factional collective will on others.  So, the point of engaging in politics is to stubbornly refuse to acquiesce to reasonable opposition.  That being the case, the way to win in politics isn't to engage in thoughtful dialog.  If anyone disagrees with you to begin with, in the political realm, they will be engaging with you specifically to avoid that.  So, you win by appealing to whatever misconceptions or biases they have already committed to, which happen to support your policy preference.

So, when I happen upon political dialog, what is striking to me is how often basic truths are avoided by everyone involved in the discussion.

And so it is with the Keystone XL Pipeline.  Regarding the economics of it, there is really only one significant measure of value, and that is the consumer and producer surplus it will provide.  On the margin, the consumer surplus will only come about indirectly and will be difficult to measure.  But, by the conventions of modern finance and accounting, we tend to keep a precise record of producer surplus - profit.  The economic profit the owner expects to reap from it is really the only measurable point of clarity here.  This point appears to be stridently ignored by all involved.  In a sane public debate, instead of arguing how many jobs it would create, we would ask the intended owner how much they were going to make on the pipeline, and the higher the number, the more support we should give it.

The jobs created by building and maintaining it and the materials and capital used will presumably be slightly more valuable as a result of this additional opportunity for their application.  But mostly, on the whole, it will simply divert labor and capital from some similarly valued activities that are competing for our limited resources.

So, here's a test.  Tell someone that you like the pipeline, but you would really love it if instead of creating all these jobs, the owner simply had a state of the art machine that would quickly lay down the pipeline with little cost, and could reap millions in profits without hiring more than a handful of workers or spending more than a small amount of capital.  That would really be great.

If the person looks at you like you have cottage cheese coming out of your ears, then they are operating with a morally perverse frame of reference.  They are making an ascetic imposition on the rest of us based on a preset determination of who they morally favor.  It is the moral equivalent of a segregationist or a tyrannical monarch who forces women out of school.  They are explicitly willing to harm the whole society if it seems to harm a particular group proportionately more.  If cash is transferred to the group they favor (labor), they go so far as to treat costs as benefits.  If cash is transferred to the group they disfavor (capital), they will treat benefits as costs.

It's disappointing to me how foundational this sectarian status battle has become in American politics.  I see so many otherwise good, intelligent people proudly calling for the rights of other Americans to be curtailed - people who are keenly aware of these human tendencies when it comes to race, gender, and sexual orientation, and who actively fight for a better society in those realms, yet they engage so explicitly in motivated reasoning and ad hominem regarding economic matters.  Get-out-the-vote rhetoric like, "Help make sure the voice of the 1% isn't heard this Tuesday."  Profit as a reason to oppose something.  Explicit calls to roll back Bill of Rights protections for commercial associations.  I trust that the pendulum will swing back at some point.  But it is a little frightening and disappointing to see how easily people can believe harm is a virtue.

This bias against capital is so built into our public consensus that introducing the idea in a conversation like this is generally met with bewilderment.  It should be patently obvious that we are better off if some new service can be provided with less effort and material.  Sadly, for most people, it is not.  This is one of those cases - much like with, say, someone in a creationist community who is confronted with the evidence of evolution - where, on the facts, it seems like it should be very easy for people to see something.  But, we are human.  Community matters a lot to us.  Affiliations give our lives meaning.  Having villains, and sharing those villains with a group of like-believers, is powerful.  If acceptance of a simple fact challenges that, it is most definitely not an easy thing to do.  It could, in fact, be rational for that person to concoct a story that ignores the fact, but saves their personal identity.  That doesn't mean it's good.  Local optimums are not global optimums.

There is much moral similarity between strident moralists - think of angry marchers with anti-gay signs or anti-Wal-Mart signs.  These are both working from sectarian impulses, yet thoroughly convinced that they are morally compelled.  They are both working from a pre-determined set of good vs. bad, with a determined refusal to consider any of the constraints or needs of the chosen villain, a demand that you, nonetheless, bend your lives to their moral code, and a complete ignorance about what that would realistically entail created by a refusal to engage you with even the slightest empathy or understanding.  And both insist on acting as if there is some damage being done to hetero families or workers, with reasoning that is highly motivated.  I think that, even though there is a lot of discomfort still in our society regarding sexual identities, there is generally a consensus about the shamefulness of those protesters.  Economics is a complex subject, so there will always be ignorance about it, but I would like to think that we will someday have the same consensus about both sets of protesters.

Human nature wants to make everything moral.  We used to think that droughts and famines were the gods' punishment for our moral failings.  We have shed those tendencies in so many ways, but we retain them in the realm of finance and economics.  In the Wal-Mart or Keystone examples above, people are still imposing moral biases, consciously or unconsciously.  Or, think of the Great Depression and the Great Recession.  How many people believe that these events were payback for the "excesses" of the preceding decades?  The inevitable falls from grace resulting from our greed.  We make this error, and we end up destroying ourselves, as humans always have.  We've come a long way, but we have a hell of a long way to go.


PS.  I don't want to debate the pipeline itself.  There may be other reasons to oppose it.  I am speaking only about how the distribution of its economic effects would affect someone's support.

PPS. (added)  One character of prejudice is that we impose a moral framework on our targets where we would allow ourselves to operate more pragmatically, and we ignore the constraints that our targets have in  meeting our moral demands.  The striking thing about this regarding anti-capital prejudice is that we have this remarkable, real-time measurement of the constraints on capital - the stock market.  A butterfly flaps its wings in Bangkok, and the next day GE stock is down three ticks.  Literally by the second, we can measure the constraints on capital.  So I am blown away by the level of self-imposed obtuseness that leads to those back-of-the-envelope geniuses who figure out that Wal-Mart could raise wages or improve working conditions without losing profits, or better yet, gaining profits.  Can you believe the $280 billion worth of capital trading up and down every second because of those wing-flapping butterflies missed this one?  Stop watching those butterflies, people!  That guy with the dreadlocks, the venti fair trade latte, and the necklace with the artisanal aboriginal pendant that's been out yelling at passersby in front of your store just made you a ton of money.  He's got the basic idea scribbled out on a napkin in his back pocket.  Do this before the guys on Shark Tank find out and steal the idea first!

Updating the map to the territory

Well, I said I'd look into it.  But, actually, I don't think I have a reliable way to avoid adopting a vulgar pretense of principles.

Keynes famously said, "Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist."   This really doesn't only apply to economists.  I was reminded of this when I recently read this article about how John Muir's dismissive attitude toward Native Americans led to a lack of appreciation about how much some of the landscape he treasured had been managed by the indigenous people.  From this false premise, an entire paradigm toward ecology was built.  This article is what originally enticed me to write on this topic.  But, then, after finishing the first post, I have to admit that the analogy I sometimes use to compare economic policy to environmental policy utilizes this very premise.  Few people advocate meddling in the rainforest.  Yet, the forests we know have been deeply altered by human management for centuries.  So, I couldn't even complete the prequel to the post about intellectual honesty without accidentally promoting a point of view by using the misconceptions of its detractors.

What I was going to say, before I discredited myself, was that we all work out of some paradigm that consists of a set of interlocking presumptions.  Each of those presumptions, we hold with some confidence.  And, usually, if one presumption changes, it necessitates a change in the other presumptions.  The problem is that if you have a set of, say, 12 independent beliefs, and you have 80% confidence in each of them, you are 93% likely to be wrong about your broad worldview.  I am being wildly optimistic in saying that any of us holds less than 12 important beliefs that deserve an 80% confidence level.  If you think that you have a better set of priors than that, I can promise that, at least for a topic as complex as finance, we could easily find many smart people that would concede to you less than 50% on that many of your beliefs.

Most of the time, we operate in the least useful context for improving this situation.  We identify with groups of ideas or people that share a common set of beliefs.  When one belief is tested, which would create dissonance among other related beliefs, we pull back to more generalism.  We gather those other beliefs in defense of the belief that is being most directly tested.  One easy way to do this is through ad hominem.  We note that the source of the test has other beliefs that seem wrong, so that we can suspect that she has been misinformed in some way on the belief in question.  Or, with a little extra work, the same sort of discounting can be applied to the idea itself.  The fact that it contradicts several other beliefs creates doubt about the fact itself.

This is a very good reason to discount a new fact.  It is also a guaranteed method for avoiding any movement toward accurate beliefs.

Avoiding this is very difficult, because engaging in it is part of the essence of being social and being human.  I am frequently impressed by how Tyler Cowen can look at a source that might even treat him with contempt, and look for positive things to learn from it.  It's something I try to mimic, but ranting about others from within our own paradigms is so much more viscerally fun, our motivation is always biased toward self-satisfaction.

The first step to combating this is to insist that instead of pulling out to more generalized levels, we push to more detail.  We should look for ideas that test us and try to test the ideas on their own terms.  This is difficult to do in broad conversation with those who are vastly different than us, because most of our detailed experience will be informed by vastly different priors, so the details will generally seem preposterous to us.  For instance, in my previous post, Simon Wren-Lewis' statement that "the idea that private sector activity is always welfare enhancing and is best left alone was blown out of the water by the financial crisis" seemed like a ludicrous thing to say to me.  It would be like describing "Dirty Dancing" as a morality tale.  (Just goes to show you've got to clamp down on those teenage girls.)  But, in most audiences, I'm sure Wren-Lewis' statement is wholly uncontroversial.  Come to think of it, "Dirty Dancing" is a pretty effective morality tale.  There's some dark stuff going on down at the servant's quarters, and Baby is getting pulled in over her head.  But we all came in with the prior that you just don't put Baby in the corner, and priors rule our reaction to the movie.  We might hope that we wouldn't be a jerk-wad about it, but of course we would stop our daughter from sleeping with Patrick Swayze at summer camp if we could.  I mean, come on!

We take our reactions of outrage or incredulity as evidence of our own certitude, but frequently when we have extreme reactions, we are at our most unreliable.  Extreme reactions may even be biology's tool for giving us a way to fool ourselves.  My umbrage at Wren-Lewis' comment is a terrible reason to reject it, even if my umbrage is very convincing to me.

So, this should be our practice, considering ideas where there is some disconnect between our beliefs, or between theory and practice, or between our beliefs and other beliefs, and then dig down.  This is usually easier on the margins than with someone coming from an entirely different direction.  Usually, on my blog, I start with some sort of idea where a way of looking at something leads to a conclusion that is somehow counterintuitive to common treatment, and I'll follow it to where it goes.  I usually start writing before I have looked at the data, to help organize my thoughts.  Sometimes, like in this post on asset allocation, the data surprises me.  The way the post is written probably gives the impression that I knew what I was doing.  But, I had written the first half of the post, and was basically finished with a fairly standard description of the stock/bond relationship, when I thought, "Hmm, it wouldn't be that hard to check my data and see how close historical returns are to a normal distribution, just to double check this."  And, I saw that bonds have a terrible distribution of long term returns, so I wrote the second half of the post and went on to do a series where I decided that there was a relationship between stocks, real estate, debt, and bonds that I hadn't fully appreciated before.  I had noticed that the equity premium had not been historically consistent, but I hadn't considered the full ramifications.

But, surprisingly often, the data (or my interpretation of it) surprises me by agreeing with my hypothesis.  On the 11 part series of posts about leverage and risk trading, I had an idea about how leverage would effect profit margins in a counterintuitive way.  In thinking about it, it occurred to me that even though public discourse usually connects low interest rates to increased borrowing, the high margins I was trying to explain were coming from deleveraging in a low interest rate environment, and that even though this ran counter to common parlance, it was actually a corroboration of the Modigliani-Miller theory of taxed capital allocation.  Anyway, I wrote the first post before I looked at any data, because it was just a hypothetical. It took me a long time to pull all the models together after that first post, and I was shocked at how much the historical data seemed to confirm the theory, because it just doesn't seem like it should work that way.  (If true, it sure undermines any theory of the business cycle that assumes low bond rates are related to misallocated leveraged corporate investment.)

I also wasn't a housing bubble denier until I looked at the data.  I saw a provocative post suggesting that there wasn't an excess construction of homes in the 2000s, and as I thought about it, I started thinking of homes as securities.  (A friend tells me I turn everything into a bond.)  As I ran the numbers, and thought about oddities that don't fit into the common narrative of the housing market, I concluded that home prices, given the low real long term interest rates we have seen, were not significantly out of line.

But, these descriptions of my work are still just narratives I tell myself.  I've been rolling my eyes at Jonathon Gruber's transparent narratives, but in the end I don't know if his excuses are that different than my personal narratives.  When I look back at how striking the data was on corporate leverage, my memory is just as clouded and self-serving as Gruber's is when he tells Congress that he can't remember what he was thinking, but it must have been XYZ.  (XYZ happening to support a description of the law that would argue for Supreme Court support).  Maybe the raw data doesn't support Modigliani-Miller at all, but I'm as good at making narratives from the data as I am at making narratives about how objectively I interpreted it.

I would like to say that finance makes us much more honest than, say, politics, because our mistakes lead directly to personal costs.  But, a lot of financial analysis seems pretty flaky to me.  Of course there are still agency issues in many cases.  But, few things motivate us to backfill a narrative more than knowing we blew money on an investment or lost hard earned cash because of poor trading.  This is why I generally assume relative efficiency in arbitrageable markets, but in many cases I could (must) believe in Semi-Strong IMH (Inefficient Market Hypothesis).  That's where I trade.

Slate Star Codex had a great post on this problem, and how it complicates all contentious scientific endeavors.  In the end, it comes down to personal judgment.  Of course, as Feynman says,
"The first principle is that you must not fool yourself and you are the easiest person to fool."

The producers of "Dirty Dancing" could count on audiences universally leaving the theater saying, "Can you believe that mean dad tried to keep the street-wise itinerant dance instructor from sleeping with his naïve school-girl daughter?"  That's pretty strong evidence of semi-strong IMH (we are predictably, universally crazy in ways that we feel strongly about).  But, then, if my reaction to Wren-Lewis is "Can you believe that mean economist tried to keep Wall Street banks from betting your savings on risky securities?" the only reason I can claim that my reaction is reasonable is because I'm backing up to generalities and then populating the narrative with a bunch of my personal judgment calls that are a product of my paradigm itself.  Simply following different sets of seemingly reasonable priors very easily puts us in a position where even when we dig into the details and find something that clearly must be wrong, it will still be a product of the general.

But, it's the best we can do, and it has to be our goal.  Dig into those beliefs, and where we have 80% confidence, break down that confidence and test it, make that leg of our belief system fit a little awkwardly for a little bit.  And, when new information comes in regarding the other legs, we might see that a little change over there helps the new leg fit a little better.  Allowing a little dissonance to linger can lead to imperceptible paradigm shifts, until those shifts turn into a groundswell without us even noticing.  (And, before you know it, you're sitting before Congress wondering what you possibly could have meant when you said the things you said.  Which leads to another famous Keynes line: "If the facts change I change my mind, what do you do sir?" Even when looking back and seeing change in ourselves, can we tell the difference between growth and fecklessness, or between self-serving in-filling and brave readjustments?)

Where finance is helpful is that it relieves the pressure of trying to convince others or win arguments.  I really appreciate my readers who share their insights and reactions.  I started blogging partly to have those conversations.  But, if I'm working on a semi-strong IMH trade, I need the marginal investor to be on the other side. If semi-strong IMH is accurate, then the most persistently tradable incongruities arise from the truths that are right there to see, which we all disregard.  I can only really blog about my work as long as it mostly leaves other investors unmoved.  So, I'm trading notes with the world, but I don't necessarily want to convince you.  I want you to convince me that I'm wrong before I go putting money on the line.  Thinking that way really helps me to be more objective.  Not that I can say that I am objectively more objective than anyone else, just more objective than what I would have been if I was desperate to convince.

PS.  I apologize if these last two posts seem self-indulgent.  I promise posts will follow with charts and graphs.