Politics

The Midas Paradox

Posted by Peter on May 6, 2016
Posted in: Book Reviews, Economics, U.S. Politics. Tagged: , , , .

Book review: The Midas Paradox: Financial Markets, Government Policy Shocks, and the Great Depression, by Scott B Sumner.

This is mostly a history of the two depressions that hit the U.S. in the 1930s: one international depression lasting from late 1929 to early 1933, due almost entirely to problems with an unstable gold exchange standard; quickly followed by a more U.S.-centered depression that was mainly caused by bad labor market policies.

It also contains some valuable history of macroeconomic thought, doing a fairly good job of explaining the popularity of theories that are designed for special cases (such as monetarism and Keynes’ “general” theory).

I was surprised at how much Sumner makes the other books on this subject that I’ve read seem inadequate.
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Fed Policy and Inflation Forecasts

Posted by Peter on February 25, 2016
Posted in: Economics, Investing, U.S. Politics. Tagged: , , , .

NGDP targeting has been gaining popularity recently. But targeting market-based inflation forecasts will be about as good under most conditions [1], and we have good markets that forecast the U.S. inflation rate [2].

Those forecasts have a track record that starts in 2003. The track record seems quite consistent with my impressions about when the Fed should have adopted a more inflationary policy (to promote growth and to get inflation expectations up to 2% [3]) and when it should have adopted a less inflationary policy (to avoid fueling the housing bubble). It’s probably a bit controversial to say that the Fed should have had a less inflationary policy from February through July or August of 2008. But my impression (from reading the stock market) is that NGDP futures would have said roughly the same thing. The inflation forecasts sent a clear signal starting in very early September 2008 that Fed policy was too tight, and that’s about when other forms of hindsight switch from muddled to saying clearly that Fed policy was dangerously tight.

Why do I mention this now? The inflation forecast dropped below 1 percent two weeks ago for the first time since May 2008. So the Fed’s stated policies conflict with what a more reputable source of information says the Fed will accomplish. This looks like what we’d see if the Fed was in the process of causing a mild recession to prevent an imaginary increase in inflation.

What does the Fed think it’s doing?

  • It might be relying on interest rates to estimate what it’s policies will produce. Interest rates this low after 6.5 years of economic expansion resemble historical examples of loose monetary policy more than they resemble the stereotype of tight monetary policy [4].
  • The Fed could be following a version of the Taylor Rule. Given standard guesses about the output gap and equilibrium real interest rate [5], the Taylor Rule says interest rates ought to be rising now. The Taylor Rule has usually been at least as good as actual Fed policy at targeting inflation indirectly through targeting interest rates. But that doesn’t explain why the Fed targets interest rates when that conflicts with targeting market forecasts of inflation.
  • The Fed could be influenced by status quo bias: interest rates and unemployment are familiar types of evidence to use, whereas unbiased inflation forecasts are slightly novel.
  • Could the Fed be reacting to money supply growth? Not in any obvious way: the monetary base stopped growing about two years ago, M1 and MZM growth are slowing slightly, and M2 accelerated recently (but only after much of the Fed’s tightening).

Scott Sumner’s rants against reasoning from interest rates explain why the Fed ought to be embarrassed to use interest rates to figure out whether Fed policy is loose or tight.

Yet some institutional incentives encourage the Fed to target interest rates rather than predicted inflation. It feels like an appropriate use of high-status labor to set interest rates once every few weeks based on new discussion of expert wisdom. Switching to more or less mechanical responses to routine bond price changes would undercut much of the reason for believing that the Fed’s leaders are doing high-status work.

The news media storytellers would have trouble finding entertaining ways of reporting adjustments that consisted of small hourly responses to bond market changes. Whereas decisions made a few times per year are uncommon enough to be genuinely newsworthy. And meetings where hawks struggle against doves fit our instinctive stereotype for important news better than following a rule does. So I see little hope that storytellers will want to abandon their focus on interest rates. Do the Fed governors follow the storytellers closely enough that the storytellers’ attention strongly affects the Fed’s attention? Would we be better off if we could ban the Fed from seeing any source of daily stories?

Do any other interest groups prefer stable interest rates over stable inflation rates? I expect a wide range of preferences among Wall Street firms, but I’m unaware which preferences are dominant there.

Consumers presumably prefer that their banks, credit cards, etc have predictable interest rates. But I’m skeptical that the Fed feels much pressure to satisfy those preferences.

We need to fight those pressures by laughing at people who claim that the Fed is easing when markets predict below-target inflation (as in the fall of 2008) or that the Fed is tightening when markets predict above-target inflation (e.g. much of 2004).

P.S. – The risk-reward ratio for the stock market today is much worse than normal. I’m not as bearish as I was in October 2008, but I’ve positioned myself much more cautiously than normal.

Notes:

[1] – They appear to produce nearly identical advice under most conditions that the U.S. has experienced recently.

I expect inflation targeting to be modestly safer than NGDP targeting. I may get around to explaining my reasons for that in a separate post.

[2] – The link above gives daily forecasts of the 5 year CPI inflation rate. See here for some longer time periods.

The markets used to calculate these forecasts have enough liquidity that it would be hard for critics to claim that they could be manipulated by entities less powerful than the Fed. I expect some critics to claim that anyway.

[3] – I’m accepting the standard assumption that 2% inflation is desirable, in order to keep this post simple. Figuring out the optimal inflation rate is too hard for me to tackle any time soon. A predictable inflation rate is clearly desirable, which creates some benefits to following a standard that many experts agree on.

[4] – providing that you don’t pay much attention to Japan since 1990.

[5] – guesses which are error-prone and, if a more direct way of targeting inflation is feasible, unnecessary. The conflict between the markets’ inflation forecast and the Taylor Rule’s implication that near-zero interest rates would cause inflation to rise suggests that we should doubt those guesses. I’m pretty sure that equilibrium interest rates are lower than the standard assumptions. I don’t know what to believe about the output gap.

War! What Is It Good For?

Posted by Peter on September 12, 2015
Posted in: Book Reviews, Politics. Tagged: , .

Book review: War! What Is It Good For?: Conflict and the Progress of Civilization from Primates to Robots, by Ian Morris.

This book’s main argument can be broken down into two ideas:

  1. War creates powerful leviathans and occasionally globocops.
  2. The resulting monopoly on the use of violence is important for (or necessary to) creating low-violence societies.

(2) overlaps a lot with Pinker’s The Better Angels of Our Nature. Pinker’s version is sufficiently better that reading Morris’ version adds little value.

(1) is an old idea (“war is the health of the state”) that seems mildly controversial in its stronger versions. But Morris is relatively cautious here, admitting that many wars were destructive.

He goes around labeling many wars as productive or not, in a way that had me wondering whether he thought that was observable while the wars were in progress. When he got to World War II, it became clear that he considered that at least sometimes impossible: World War I initially looked harmful (ruining Britain’s globocop status), but when seen in combination with World War II he is able to classify it as productive (enabling the US to become a globocop).

Morris sometimes hints at a stronger version of (1) that would say leviathans or equivalent civilizing institutions couldn’t have been created without war. Morris never attempts to make much of an argument for such a strong claim. He does provide some arguments for the hypothesis that wars sped up the creation of peace-keeping leviathans. Whether that makes some wars good depends heavily on what would have happened without those wars, and Morris provides little insight about that.

If Morris were interested in testing his claims, wouldn’t he have discussed Switzerland? Swiss involvement in war over the past 200 years seems to consist of just a civil war in November 1847 with fewer than 100 deaths. Morris’ beliefs seem to imply Switzerland has lots of violence, yet Swiss homicide rates are unusually low (lower than the rest of western Europe). Maybe responding sensibly to the threat of war provides the benefits that Morris talks about, with few of the costs?

Much the book’s claims seem reasonable: wars did have some tendency to create stronger leviathans, and those leviathans did have some peace-keeping benefits. Yet those claims don’t come close to demonstrating the existence of “productive war”.

Masters of the Word

Posted by Peter on April 14, 2015
Posted in: Book Reviews, Economics, Politics. Tagged: , , .

Book review: Masters of the Word: How Media Shaped History, by William J. Bernstein.

This is a history of the world which sometimes focuses on how technology changed communication, and how those changes affected society.

Instead of carefully documenting a few good ideas, he wanders over a wide variety of topics (including too many descriptions of battles and of individual people).

His claims seem mostly correct, but he often failed to convince me that he has good reason for believing them. E.g. when trying to explain why the Soviet economy was inefficient (haven’t enough books explained that already?) he says the “absence of a meaningful price signal proved especially damaging in the labor market”, but supports that by mentioning peculiarities which aren’t clear signs of damage, then describing some blatant waste that wasn’t clearly connected to labor market problems (and without numbers, doesn’t tell us the magnitude of the problems).

I would have preferred that he devote more effort to evaluating the importance of changes in communication to the downfall of the Soviet Union. He documents increased ability of Soviet citizens to get news from sources that their government didn’t control at roughly the time Soviet power weakened. But it’s not obvious how that drove political change. It seems to me that there was an important decrease in the ruthlessness of Soviet rulers that isn’t well explained by communication changes.

I liked his description of affordable printing presses depended on a number of technological advance, suggesting that printing could not easily have arisen at other times or places.

The claim I found most interesting was that the switch from reading aloud to reading silently and the related ability to write alone (as opposed to needed a speaker and a scribe) made it easier to spread seditious and sexual writings due to increased privacy.

Bernstein is optimistic that improved communication technology will have good political effects in the future. I partly agree, but I see more risks than he does (e.g. his like of the democratic features of the Arab Spring aren’t balanced by much concern over the risks of revolutionary violence).

Ethical diets

Posted by Peter on January 8, 2015
Posted in: Health, Politics. Tagged: , .

I’ve seen some discussion of whether effective altruists have an obligation to be vegan or vegetarian.

The carnivores appear to underestimate the long-term effects of their actions. I see a nontrivial chance that we’re headed toward a society in which humans are less powerful than some other group of agents. This could result from slow AGI takeoff producing a heterogeneous society of superhuman agents. Or there could be a long period in which the world is dominated by ems before de novo AGI becomes possible. Establishing ethical (and maybe legal) rules that protect less powerful agents may influence how AGIs treat humans or how high-speed ems treat low-speed ems and biological humans [0]. A one in a billion chance that I can alter this would be worth some of my attention. There are probably other similar ways that an expanding circle of ethical concern can benefit future people.

I see very real costs to adopting an ethical diet, but it seems implausible that EAs are merely choosing alternate ways of being altruistic. How much does it cost MealSquares customers to occasionally bemoan MealSquares use of products from apparently factory-farmed animals? Instead, it seems like EAs have some tendency to actively raise the status of MealSquares [1].

I don’t find it useful to compare a more ethical diet to GiveWell donations for my personal choices, because I expect my costs to be mostly inconveniences, and the marginal value of my time seems small [2], with little fungibility between them.

I’m reluctant to adopt a vegan diet due to the difficulty of evaluating the health effects and due to the difficulty of evaluating whether it would mean fewer animals living lives that they’d prefer to nonexistence.

But there’s little dispute that most factory-farmed animals are much less happy than pasture-raised animals. And everything I know about the nutritional differences suggests that avoiding factory-farmed animals improves my health [3].

I plan not to worry about factory-farmed invertebrates for now (shrimp, oysters, insects), partly because some of the harmful factory-farm practices such as confining animals to cages not much bigger than the animals in question aren’t likely with animals that small.

So my diet will consist of vegan food plus shellfish, insects, wild-caught fish, pasture-raised birds/mammals (and their eggs/whey/butter). I will assume vertebrate animals are raised in cruel conditions unless they’re clearly marked as wild-caught, grass-fed, or pasture-raised [4].

I’ve made enough changes to my diet for health reasons that this won’t require large changes. I already eat at home mostly, and the biggest change to that part of my diet will involve replacing QuestBars with a home-made version using whey protein from grass-fed cows (my experiments so far indicate it’s inconvenient and hard to get a decent texture). I also have some uncertainty about pork belly [5] – the pasture-raised version I’ve tried didn’t seem as good, but that might be because I didn’t know it needed to be sliced very thin.

My main concern is large social gatherings. It has taken me a good deal of willpower to stick to a healthy diet under those conditions, and I expect it to take more willpower to observe ethical constraints.

A 100% pure diet would be much harder for me to achieve than an almost pure diet, and it takes some time for me to shift my habits. So for this year I plan to estimate how many calories I eat that don’t fit this diet, and aim to keep that less than 120 calories per month (about 0.2%) [6]. I’ll re-examine the specifics of this plan next Jan 1.

Does anyone know a convenient name for my planned diet?

footnotes

0. With no one agent able to conquer the world, it’s costly for a single agent to repudiate an existing rule. A homogeneous group of superhuman agents might coordinate to overcome this, but with heterogeneous agents the coordination costs may matter.

1. I bought 3 orders of MealSquares, but have stopped buying for now. If they sell a version whose animal products are ethically produced (which I’m guessing would cost $50/order more), I’ll resume buying them occasionally.

2. The average financial value of my time is unusually high, but I often have trouble estimating whether spending more time earning money has positive or negative financial results. I expect financial concerns will be more important to many people.

3 With the probable exception of factory-farmed insects, oysters, and maybe other shellfish.

4. In most restaurants, this will limit me to vegan food and shellfish.

5. Pork belly is unsliced bacon without the harm caused by smoking.

6. Yes, I’ll have some incentive to fudge those estimates. My experience from tracking food for health reasons suggests possible errors of 25%. That’s not too bad compared to other risks such as lack of willpower.

Fragile by Design

Posted by Peter on December 20, 2014
Posted in: Book Reviews, Economics, U.S. Politics. Tagged: , , , .

Book review: Fragile by Design: The Political Origins of Banking Crises and Scarce Credit, by Charles W. Calomiris, and Stephen H. Haber.

This book start out with some fairly dull theory, then switches to specific histories of banking in several countries with moderately interesting claims about how differences in which interest groups acquired power influenced the stability of banks.

For much of U.S. history, banks were mostly constrained to a single location, due to farmers who feared banks with many branches would shift their lending elsewhere when local crop failures made local farms risky to loan to. Yet comparing to Canada, where seemingly small political differences led to banks with many branches, it seems clear that U.S. banks were more fragile because of those restrictions, and less competition in the U.S. left consumers with less desirable interest rates.

By the 1980s, improved communications eroded farmers’ ability to tie banks to one locale, so political opposition to multi-branch banks vanished, resulting in a big merger spree. The biggest problem with this merger spree was that the regulators who approved the mergers asked for more loans to risky low-income borrowers. As a result, banks (plus Fannie Mae and Freddie Mac) felt compelled to lower their standards for all borrowers (the book doesn’t explain what problems they would have faced if they had used different standards for loans the regulators pressured them to make).

These stories provide a clear and plausible explanation of why the U.S. has a pattern of banking crises that Canada and a few other well-run countries have almost entirely avoided over the past two centuries. But they suggest the U.S. banking crises should have been more unique among mature democracies than was actually the case.

The authors are overly dismissive of problems that don’t fit their narrative. Commenting on the failure of Citibank, Lehman, AIG, etc to sell more equity in early 2008, they say “Why go to the markets to raise new capital when you are confident that the government is going to bail you out?”. It seems likely bankers would have gotten better terms from the market as long as they didn’t wait until the worst part of the crisis. I’m pretty sure they gave little thought to bailouts, and relied instead on overly complacent expectations for housing prices.

The book has a number of asides that seem as important as their main points, such as claims that Britain’s greater ability to borrow money led to its military power, and its increased need for military manpower drove its expansion of the franchise.

How China Became Capitalist

Posted by Peter on November 29, 2014
Posted in: Book Reviews, China, Economics. Tagged: .

Book review: How China Became Capitalist, by Ronald Coase and Ning Wang.

This is my favorite book about China so far, due to a combination of insights and readability.

They emphasize that growth happened rather differently from how China’s leaders planned, and that their encouragement of trial and error was more important than their ability to recognize good plans.

The most surprising features of China’s government after 1978 were a lack of powerful special interests and freedom from ideological rigidity. Mancur Olson’s book The Rise and Decline of Nations suggests how a revolution such as Mao’s might free a nation from special interest power for a good while.

I’m still somewhat puzzled by the rapid and nearly complete switch from a country blinded by ideology to a country pragmatically searching for a good economy. Coase and Wang attribute it to awareness of the harm Maoism caused, but I can easily imagine that such awareness could mainly cause a switch to a new ideology.

It ends with a cautiously optimistic outlook on China’s future, with some doubts about freedom of expression, and some hope that China will contribute to diversity of capitalist cultures.

How the West Won

Posted by Peter on September 8, 2014
Posted in: Book Reviews, Politics. Tagged: , , .

Book review: How the West Won: The Neglected Story of the Triumph of Modernity, by Rodney Stark.

This book is a mostly entertaining defense of Christian and libertarian cultures’ contribution to Western civilization’s dominance.

He wants us to believe that the industrial revolution resulted from mostly steady progress starting with Greek city-states, interrupted only by the Roman empire.

He defends the Catholic church’s record of helping scientific progress and denies that the Reformation was needed, although he suggests the Catholic church’s reaction to the Reformation created harmful anti-capitalist sentiments.

His ideas resemble those in Fukuyama’s The Origins of Political Order, yet there’s little overlap between the content of the two books.

The early parts of the book have too many descriptions of battles and other killings whose relevance is unclear.

I was annoyed at how much space he devoted to attacking political correctness toward the end of the book.

In spite of those problems, he presents many interesting ideas. Some are fairly minor, such as changes in privacy due to the Little Ice Age triggering the invention of chimneys. Others provide potentially important insights into differences between religions, e.g. “many influential Muslim scholars have held that efforts to formulate natural laws are blasphemy because they would seem to deny Allah’s freedom to act.”

Alas, I can only give the book a half-hearted endorsement because I suspect many of his claims are poorly supported. E.g. he thinks increased visibility of child labor in the 1800s caused child labor laws via shocked sensibilities. Two alternatives that seem much more plausible to me are that the increased visibility made the laws feasible to enforce, and the increased concentration of employers into a separate class made them easier scapegoats.

Rule of the Clan

Posted by Peter on June 16, 2014
Posted in: Book Reviews, Politics. Tagged: , .

Book review: The Rule of the Clan: What an Ancient Form of Social Organization Reveals About the Future of Individual Freedom by Mark S. Weiner.

This book does a good job of explaining how barbaric practices such as feuds and honor killings are integral parts of clan-based systems of dispute resolution, and can’t safely be suppressed without first developing something like the modern rule of law to remove the motives that perpetuate them.

He has a coherent theory of why societies with no effective courts and police need to have kin-based groups be accountable for the actions of their members, which precludes some of the individual rights that we take for granted.

He does a poor job of explaining how this is relevant to modern government. He writes as if anyone who wants governments to exert less power wants to weaken the rule of law and the ability of governments to stop violent disputes. (His comments about modern government are separate enough to not detract much from the rest of the book).

He implies that modern rule of law and rule by clans are the only stable possibilities. He convinced me that it would be hard to create good alternatives to those two options, but not that alternatives are impossible.

To better understand how modern individualism replaced clan-based society, read Fukuyama’s The Origins of Political Order together with this book.

Drugs without Patents

Posted by Peter on May 15, 2014
Posted in: Politics. Tagged: .

When considering proposals to weaken patent monopolies, drug development seems like the main type of innovation that would be hurt.

Most of drug development cost seems to be verification of safety and effectiveness, which doesn’t look like the kind of novelty-creation patents are designed to help, but that doesn’t mean it’s easy to implement an alternative.

It turns out we have an example of a company making monopoly-style profits from an unpatented drug (Questcor Pharmaceuticals, Acthar).

Questcor bought Acthar for $100,000, suggesting the seller expected it would hardly make any money. Sometime later Acthar was designated an orphan drug, and Questcor raised the price from $1,650 to 28,000 per vial, without causing competitors to sell it. It now gets profits of roughly $300 million per year off of it.

So something must be restraining competition, probably something connected to the orphan drug laws, suggesting that if protections for patents in general were weakened, it would only take small changes in existing rules to maintain existing incentives for drug development.