Who Profits from the Recession?

Reading Google News this morning, I noticed a headline:

Home Prices Continue to Fall:

D.C. Bucks Trend

I was particularly struck by it because yesterday, driving back to our temporary home in Fairfax from a visit to D.C., my wife commented on the amount of new construction we saw. The economy may not be doing so well, but the government industry is booming

Or, to quote my wife, "People talk about Main Street vs Wall Street. It should be Main Street vs the Beltway."

David Brin and Adam Smith

I've run into yet another case of someone complaining about conservatives falsely claiming Adam Smith in support of their views while doing exactly that himself. The complainer this time is David Brin, who wrote an interesting book on surveillance some years back but has, in my experience, a tendency to pontificate well beyond the limits of his knowledge.

In the relevant passage, he wrote:

But anyone who actually reads Adam Smith also knows that he went on and on about that "fair and open" part! Especially how excessive disparities of wealth and income destroy competition. Unlike today's conservatives, who grew up in a post-WWII flattened social order without major wealth-castes, Smith lived immersed in class-rooted oligarchy, of the kind that ruined markets, freedom and science across nearly 99% of human history. He knew the real enemy, first hand and denounced it in terms that he never used for mere bureaucrats.

In a comment, I asked him to produce a quote from Smith saying that excessive disparities of wealth and income destroy competition. He responded with the following (from The Theory of Moral Sentiments).

"This disposition to admire, and almost to worship, the rich and the powerful, and to despise, or, at least, to neglect, persons of poor and mean condition, though necessary both to establish and to maintain the distinction of ranks and the order of society, is, at the same time, the great and most universal cause of the corruption of our moral sentiments."

Which, as I pointed out in my response, has nothing to do with disparities of wealth and income destroying competition. Apparently Brin couldn't find any examples of Smith saying what he claims Smith went on and on about, so quoted something else instead.

I could have gone on to point out that Smith's attacks are not, for the most part, against the "class-rooted oligarchy," which at his time consisted mostly of the landed gentry. On the contrary, he tried to persuade the landowners that the policies he thought were in the general interest were also in their interest—sometimes stretching his argument pretty far to do so. His attacks were mostly directed at the "merchants and manufacturers."

But it didn't seem worth the trouble.

Those interested in reading Brin's post and our exchange of comments will find them here. 

My earlier post on people misrepresenting Smith while complaining about other people doing so is here.

P.S. Since I put this up, Brin posted another response and I answered it. As I suggest in my answer, my fundamental complaint about Brin is the same as my complaint elsewhere about Rothbard—that as long as he believes he is arguing for the right side, he doesn't really care whether what he says is true.

The Price of Money

I have stayed out of macro-economics in my work as an economist for a number of reasons, but it is a hot political subject at the moment and several times of late I have gotten involved in online macro arguments, so I decided it would be worth learning a little more about it. Someone sent me a copy of a recent book of essays by Tim Congdon, who has the interesting distinction of being both a monetarist and a fan of Keynes, and I have started reading it. 

The central claim of the first essay is that the views of the British Keynesians of the sixties and seventies were strikingly inconsistent with Keynes' own views. They saw inflation as a cost push phenomenon to which the proper solution was wage and price controls. Keynes, like later monetarists, saw it as a result of too much money and the solution as tight monetary policy. He was against wage and price controls, not for them.

One other thing struck me about the first essay: Congdon repeatedly refers to the interest rate as "the price of money." This is a very common error, and one that is not only wrong but dangerously wrong.

If the price of an apple is fifty cents, that means that if I give a seller fifty cents he will give me an apple in exchange. If the interest rate is five percent and that is the price of money, I ought to be able to buy money for five cents on the dollar. I doubt that Congdon, or anyone else, will be willing to sell it to me at that price. 

The price of money is what you have to give up to get it—the inverse of the price level. If the price of an apple is fifty cents, the price of a dollar is two apples. The interest rate is the rent on money, measured in money. A change in the price of money affects both the money you are renting and the money you are paying as rent, leaving the ratio of the two unchanged.

Suppose that at midnight tonight every dollar bill in the world twins, along with a similar change in the accounting entries for bank deposits, other forms of money, and all obligations denominated in money. By morning, there is twice as much money as before—and nothing else has changed.

I would ask Congdon whether, under those circumstances, he would expect the interest rate to drop. If his answer is yes, my next question is whether he would expect a much more extreme drop if we relabeled pennies as dollars and dollars as hundred dollar bills, thus increasing the money supply, measured in "dollars," a hundredfold.

The reason the description of the interest rate as the price of money is not only wrong but dangerously wrong is that it implies a simple relation between money and the interest rate—in the extreme (but not uncommon) version, the belief that interest rates are set by central banks, with high interest rates the result of a tight monetary policy.

A central bank can create money and lend it out, increasing the supply of loans (which reduces the interest rate) and increasing the money supply. That is the one element of truth to the relationship. But what is affecting the interest rate is not the amount of money but the amount of loans; the government could get the same effect by collecting more in taxes than it spends and lending out the difference.

The interest rate is a market price—the price paid for the use of capital—and the central bank controls it only in the same sense in which the government can control the price of wheat by choosing to buy or sell some of it. The central bank does not have an unlimited amount of capital from money creation to lend and so has only a limited ability to shift interest rates from what they would otherwise be. Furthermore, a continued expansion of the money supply creates the expectation of future price rises, which pushes the nominal interest rate up, not down. 

I have been unable to locate an email address for Tim Congdon, so am unable to point out his error to him directly. If any of my readers has one, I would be grateful if you would send it to me.

[Two people have now provided me with his email, I emailed him and received a friendly response.]

How to Destroy the Publishing Industry: Take Three

It is now both easy and inexpensive for an author to self-publish his work, either as a print-on-demand paperback or an ebook; for the former I recommend CreateSpace, Amazon's POD subsidiary, which my wife and I used to self-publish a historical cookbook. Self-published books of either sort can be sold through Amazon, making them easily available to anyone who wants them. Thus two of the functions of a publisher, producing books and distributing them, are no longer necessary.

Publishers also help authors write their books by providing copy editors, locating cover artists, occasionally even providing useful feedback on the contents. But all of these functions can be provided almost equally well in other ways. Copy editors are for the most part self-employed free lancers rather than employees; there is nothing to stop the author from cutting out the middleman, or the author's agent from stepping in to fill that role. The best editorial help I ever got came not from a publisher but from my agent.

There remains one more function—filtering. The fact that a book has been published by a major publisher is no guarantee that it is worth reading but pretty good evidence that it is at least worth looking at. To finish the job of replacing the publishing industry, we need a substitute filter, a way in which readers can find, out of a million self-published books, the top ten thousand or so. My experience so far suggests that Amazon reviews are not adequate for the purpose; the novel that I self-published as a kindle has gotten reviews ranging from four to five stars, but sold few copies. We need something better.

My latest idea is to leverage the Kindle. Have Amazon get permission from Kindle owners to have their machines report, anonymously, on how long the owner spent reading each book on the machine. The longer the time spent, the better evidence that the book was, for that reader, worth reading. The rating algorithm should take account of differing book lengths and ignore books that were never looked at.

To make this work better, make downloading free for the first month, in order to increase the number of people who download each book and take at least a brief look at it. Once the month is up, the book price goes to whatever price the author chooses. A fancier version, probably not beyond the technology, is to make such a free book vanish from the Kindle a month after it is downloaded, leaving behind a link to where it can now be bought. 

An even simpler approach would be to leverage the "sample the beginning of this book for free" option that Amazon already provides, implementing it in some form that lets Amazon find out how many of the readers who started the free sample finished it.

As its title suggests, this is not my first post on the subject. Readers interested in my previous suggestions for eliminating the publishing industry will find them here and here.

Fracking and Earthquakes: Bug or Feature?

According to a recent news story, there is good evidence that forcing water into deep wells, done (among other reasons) in the process of fracturing rock to get at natural gas, causes earthquakes. The story takes it for granted that this is an argument against fracking, but while that might be true, it is by no means obvious.

The energy for an earthquake has to come from somewhere, and I don't think the amount of energy that goes into pumping water underground can be close to enough. What is presumably happening is that pumping in the water causes the release of energy that is already there. Dissipating that energy might mean lots of small earthquakes instead of a small number of big ones, which would probably be a net benefit. 

If so, what has been identified is not a bug but a feature.

Do any of my readers have more information on the subject?

International Healthcare Comparisons

Some years back, I had a post criticizing the widely cited (and often misrepresented) WHO study comparing medical care in a large number of countries. More recently, an online discussion resulted in someone pointing me at a book by Sheila Leatherman and Kim Sutherland, aimed mainly at evaluating the British National Health Service but with a number of international comparisons, in most cases among the U.S., UK, Canada, Australia and New Zealand. Parts of the book are available online at Google Books.

Judging by the information on the pages shown, the widely believed claim that the U.S. not only spends more per capita on health care than other developed countries but also gets worse results for its money is not supported by the evidence. The webbed parts of the book contain the following comparisons (pp. viii-xviii):

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For “mortality from causes considered amenable  to healthcare,” “in 1998 the UK had the highest mortality rates of the five countries compared.”

“England continued to have the highest breast cancer mortality rates among these comparator countries.”

“Of the five countries compared, the US had the highest survival rates from breast cancer, ...”

For colorectal cancer, “New Zealand had the highest mortality rate ... and the US had the lowest.”

“In 2001, England's mortality rate from stroke ... was lower than that in Australia ... but higher than that in the US ...”

“82% of UK respondents indicated that they were treated in [Accident and emergency] in less than four hours, a figure broadly in line with comparator countries (AUS 87%; CAN 74%; NZ 86%; US 87%).

“Patient reports of access to primary care within 48 hours saw the UK … outperform both the US and Canada” (Australia and New Zealand did still better).

“In response to a question regarding whether recent [Accident and emergency] visits would have been necessary if appropriate primary care had been available … the UK had the best result.”

“The UK had the lowest level of health consequences resulting from … errors and mistakes.”

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I think these are all of the pieces of information shown that provide information on the relative performance of either the U.S., the U.K. (or in some cases England), or both, although I might have missed something. I am not including various input measures.

By my count, U.S. medical outcomes (including things such as speed of treatment) are superior to U.K. outcomes (in some case English outcomes) on five different measures, inferior on three. On two measures the U.K. (or England) is the worst of the five countries considered, on two the best; on three the U.S. is the best of the five (counting one tied for best), on none the worst. 

There are four pure outcome measures, mortality and survival rates from various causes. The US was superior to the UK on all of them, best of the five countries on two. The UK was worst of the five countries on two.


The overall conclusion, based on this (very fragmentary) data, is that U.S. healthcare outcomes are on the whole better, not worse, than UK healthcare outcomes.

These results might change if I had a chance to look at the entire book. Unfortunately, neither the library at GMU, where I’m currently visiting, nor the library at SCU, where I teach, appears to have it. If by any chance someone reading this has access to the book, I would be interested in a more complete list of comparisons.

Two other points in the book struck me. Judged by per-capita spending on health the U.S. is  the worst of the five, as I would expect, but North Ireland and Wales are close behind, which surprised me a little.

Also, the text has, under “Waiting for elective surgery,” the information that “The UK in 1998 and 2001 had high numbers of patients waiting: and in 2000 had long waits for elective surgery, relative to comparative countries.”

That’s a charge often made against the English system by its critics and routinely denied by its supporters. In this case it is coming from authors whose speciality seems to be the study of NHS performance.

Reason Magazine, Sarah Palin, and the Huffington Post

In a webbed "candidate profile" of Sarah Palin, Reason.com writes:

Regarding the invasions of Iraq and Aghanistan, she said, "Our national leaders are sending U.S. soldiers on a task that is from God."

The actual quote is available in a variety of places. The following is from the Huffington Post; the accompanying video of the speech is no longer up:

"Pray for our military men and women who are striving to do what is right. Also, for this country, that our leaders, our national leaders, are sending [U.S. soldiers] out on a task that is from God," she exhorted the congregants. "That's what we have to make sure that we're praying for, that there is a plan and that that plan is God's plan."

What she is saying is not that the war is a task that is from God but that her listeners should pray that it is. She even says it twice over. Asking people to pray that something is true implies, not that you know it is true, but that you are afraid it might not be.

Reason converted "Pray that X is true" into "X is true." That is either incompetent journalism or a deliberate lie.

During the 2010 elections, I found I had a new hobby—defending Tea Party candidates from claims that they were nuttier than they actually were. One pleasant surprise was the discovery that the Huffington Post, at least in the cases I looked at (example), was a reliable source of information, even when reporting on people whose views they obviously disagreed with. 

One unpleasant surprise was discovering, on Reason.com, words attributed to a candidate, given in quotation marks, which the candidate had not said. The author of the piece had altered both words and meaning. When I pointed that out to him by email he defended what he had written. The misquote was only corrected after I pointed it out to someone else at Reason.

I find it unfortunate that the leading libertarian magazine is a less reliable source of information than a leading publication on the other side.

The Evolution of the Camera

Long ago when the world was young and cameras used film, there were two kinds. With a viewfinder camera, the human looked through the viewfinder, the camera looked through the lens, and the two views were different—significantly different for close-up shots. A single lens reflex camera (SLR), typically larger and more expensive, contained an elaborate internal mechanism to permit the human to view the scene through the same lens that the camera saw it through. To  take a picture, the mirror that was directing the image up to the prism that bent it to reach the human's eye swung up and out of the way, in order that the light could get to the film instead. (There is also evidence in the fossil record of a still earlier design known as a twin lens reflex).

After digital cameras came along and I started using them, it occurred to me that the image I was seeing on the view screen was the same image that would be recorded on the camera's memory—one of the advantages of using electronics instead of optics for the purpose. I was already looking through the camera's lens, so no need for a mirror and prism. Oddly enough, however, SLR's (called dSLR's since they were now digital) were still being made, were still large and expensive, still had an elaborate apparatus of moving mirror and prism, and were still regarded as what serious photographers used. 

They had two significant advantages over the less expensive sorts of digital cameras—interchangeable lenses and much larger imaging sensors, permitting them to take better pictures. They also had optical viewfinders that let you look through the camera's lens. The resolution perceivable by the human eye is higher than the resolution of a camera's viewscreen, so getting the image directly to the human was worth something—but, given the quality of the available screens, not very much. That, at least, was how I saw it—making the internal mirror and related apparatus the photographic equivalent of the human appendix.

It couldn't last—and, fortunately, didn't. It eventually occurred to someone in the industry that a camera with interchangeable lenses and a large sensor but without mirror, prism, and optical viewfinder could be very nearly as useful as a dSLR but considerably smaller and less expensive. 

My Sony NEX-3 arrived yesterday. It cost about half as much as a comparable dSLR—and has the same sized sensor. With the smaller of its two lenses it is not very much larger than the pocket camera it replaces.

Celtic Wanderings?

My current writing project is a book on legal systems very different from ours, based on a seminar I have taught for some years at SCU; my current chapter drafts are webbed for a workshop I am doing at George Mason this fall.

The legal systems I have done chapters on so far include ancient Irish law (c. 6th century) and traditional Somali law. Surprisingly enough, they have several features in common. In both, one consequence of injuring someone is the legal obligation to provide your victim with sick-maintainance—hospitality and medical services until he recovers. 

In the Irish system the kin-group called the fine, consisting of all descendants in the paternal line of a common great-grandfather,  is responsible for seeing that its members pay any fines or damage payments they owe or, if they don't, paying for them. In the Somali system the kin-group called the juffo, consisting of all descendants in the paternal line of a common great-grandfather,  is responsible for some but not all fines owed by its members, the rest being the responsibility of the jilib, a group of several related juffos.

All very suspicious. The Celts wandered pretty far but, so far as I know, they never made it to the horn of Africa. Looking at it from the other side there are people referred to as "black Irish," but I don't believe ...   .

Drones, Geneva Convention, and Other Ambiguous Goods

"Any development that makes war appear to be easier or cheaper is dangerous and morally troubling. It lowers the political threshold of war. It threatens to weaken the moral presumption against the use of armed force." David Cortwright, writing at CNN.com on drones.

It is a legitimate argument, but its application is wider than may be obvious. The Geneva Conventions, for instance, are designed to make war cheaper—not in dollars but in human costs. The pre-Napoleonic rules of parole, under which a prisoner of war could give his word not to try to escape and then spend his imprisonment in the town inn instead of the much less comfortable prison, or even give his word not to fight until exchanged and then be sent home, were designed to make war less costly. 

Any such change has two effects. One is to reduce the cost, the amount of damage to things that matter to human beings, including human beings themselves, of warfare, which is good. The other is to increase the amount of warfare, which is bad. There is no theoretical basis to say, in general, which effect is larger—it depends on  the elasticity of supply of war.

In my Law's Order, I discuss [search for the word "duress" in the chapter] the same issue in a different context—whether contracts made under duress ought to be enforceable. When the mugger threatens to kill you if you don't pay him a hundred dollars and you pay with a check,  should you be free to call up your bank and cancel payment once he is out of sight? Being able to pay  him means that when mugged you don't get killed for failure to offer your mugger enough to let you go. But it also means that mugging is more profitable, so more of it happens.

In that particular case, I am pretty sure that making the contract enforceable has, on net, negative consequences. But there is no good reason to suppose that the same is true for innovations, technological or otherwise, that make war less costly.

How to Lie With Statistics: Tax Rates

A good deal of the recent rhetoric in support of Democratic proposals for raising taxes is designed to make it sound as though rich people pay federal taxes at a lower rate than everyone else. That, as one can easily check by looking at the published figures from the Congressional Budget Office, is not only false but wildly false. Most people in the bottom half of the income distribution pay no federal income tax at all, although they do pay payroll taxes and, arguably, some of the cost of corporate income tax passed on in higher prices or lower wages. On the CBO calculations, the ratio of total federal tax paid to income rises pretty much monotonically with income.

The less extreme claim, which has been getting a good deal of press of late, is that a quarter of the households with an income of at least a million dollar a year pay taxes at a lower rate than the ten percent of those with incomes of under $100,000 who pay at the highest rate. 

I have not seen any detailed explanation of how those numbers are calculated, but presumably they are based on income and tax for a single year. If so, although the claim may be literally true, it is also highly misleading—an elegant example of how to lie while telling the truth.

Income and tax liability vary for each individual from year to year. If you take a large capital loss one year, part of it carries over to reduce your taxes, but not your income, in the next year. If you have a large capital gain in one year, your taxes go up for that year but your average tax rate goes down, since capital gains are taxed at a lower rate than ordinary income. 

Some of the 25% of high income taxpayers paying at the lowest rate are people who regularly pay less taxes than most, some are taxpayers who happen to be paying a lower rate than average this year. Some of the 10% of middle income taxpayers paying at the highest rate are people who regularly pay more taxes than most, some are people who happen to be paying a higher rate this year than most years. So the widely reported calculation overstates, by how much I have no way of knowing, the spread of both distributions, both the number of middle income taxpayers who on average, year after year, are taxed at a higher rate than the bottom 25% of high income taxpayers and the number of high income taxpayers who on average are taxed at a lower rate than the top 10% of middle income taxpayers.

If the logic is not clear, consider betting on the races. Each day, a significant fraction of the bettors—say a quarter—make money. A few of them make money because they really are much better than most at guessing which horse will win. Most of them make money because that was the day that they happened to be lucky. If you looked only at the day's results, you would conclude that the top quarter make money at the races. If you looked at the year's results, you would come up with a much smaller number.

Just as, if you looked at the tax rates paid by any group of taxpayers over a period of years, you would get fewer paying a rate that was unusually high or unusually low than if you look at them for a single year.

And for readers interested in a more general account of how to lie with statistics, I have a book to recommend.

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P.S.

Here are two summaries of federal tax incidence, one from the Tax Policy Center of Brookings and the Urban Institute, one showing the figures from the Congressional Research Service. The former shows figures for the top one percent and top tenth of a percent. At least by its calculation, the effective rate rises monatonically with income.

P.P.S.

I linked to the figure showing the Congressional Research Service numbers, which I found on Google+. That apparently didn't, or at least doesn't, work. Here is the figure:

Are the Amish Anarchists?

I have been reading up on the Amish for one chapter of the book on legal systems very different from ours that I'm currently working on. They provide an example of what I think of as an embedded legal system—a group that is under the authority of an external legal system, but also has its own legal system which it succeeds in enforcing on its members. Other examples are modern gypsies and Jewish communities during the diaspora, which were often given the right to impose Jewish law on their members by their gentile rulers.

It occurred to me that one could view the Amish as a working example of a form of anarchy. It is a very strange form, since the rules that the Amish are under are considerably more constraining—including rules on what styles of clothing they can wear, rules against owning automobiles or flying on airplanes, and much else—than the rules the rest of us are under. But those rules are all voluntarily accepted, and the system that generates them may reasonably be viewed as a competitive system of private law.

To expand on that, for readers not familiar with the Amish... . The only level of Amish "government" with any authority is the congregation, typically made up of about thirty to forty households. Its authority is over individuals who, as adults, have chosen to swear to accept its rules. The only punishment it can impose is shunning—the refusal of members of the congregation to associate in various ways with a member who has been excommunicated. Members, including excommunicated members, are free to resign from their congregation and join any other congregation that will accept them, or drop out of the Amish sect entirely.

The rules—the ordnung—vary from one congregation to another and change over time. In some settlements the congregations are, in effect, miniature territorial sovereigns, so if a member of one congregation wants to shift to another, perhaps because its rules are less (or more) strict than the rules of his current congregation, he has to physically move, although often not very far. In other settlements, especially ones where there are congregations with a considerable range of different versions of the Ordnung, congregations overlap, so you can switch congregations while remaining in the same location.

It's true, of course, that the Amish are under the rule of the U.S. (or, for a smaller number, Canadian) government. But they receive very few services from government, since they are unwilling to accept most of the conventional forms of government aid and, as pacifists, are unwilling to report crimes against themselves to the police or sue in the government courts to collect debts. Off hand, the only significant benefit I can think of that they get is protection against foreign invasion. And, on the other hand, governments at various levels imposes sizable costs on them, in the form of taxes that (with the exception of Social Security) they have to pay and regulations.

So I think they provide pretty good evidence of at least one form of (very structured) anarchy that works.

Mormons, Fundamentalists, and Critics

Various people of late have been going back and forth over claims that Mormons are a cult and are not Christians. What strikes me is how much better press Mormons get, in the political context, than evangelical fundamentalists. If you look at the actual beliefs of the two groups, the official doctrines of the Church of Latter Day Saints are at least as nutty as those of fundamentalist groups that deny evolution, believe humans and dinosaurs coexisted ten thousand years or so back, and get routinely mocked for those beliefs. 

The LDS claims that if you live a good life you will eventually become a god with a universe of your own to run, or that your ancestors can be converted post-mortem and so saved, are a bit odd, but there is no way of proving they are false, any more than one can prove false the beliefs of those who expect the second coming of Christ real soon now. But the belief that there was a lively civilization in the New World long before Columbus, and one that fits the description in LDS scripture, is inconsistent with what archaeology tells us about the relevant history. That surely ranks with the more direct versions of creationism as a denial of accepted scientific views.

The odd beliefs of fundamentalist Christians are an issue at the moment for Republican political candidates, many of whom sound as though they agree with them, raising the question of whether they actually believe or only pretend to. But I have not noticed any of the people who pick on candidates such as Palin or Bachmann for their religious views asking whether Romney and Huntsman really believe in the pre-Columbian "history" that their church proclaims or are being prudently silent on the subject.

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P.S. some days later. A British newspaper asks the same question.