Growth, like the future, is not evenly distributed

Larry Summers writes,

whereas my grandmother would have been at sea if returned to her girlhood home, I would miss relatively little if suddenly placed in the home I grew up in. It takes longer and is less comfortable to fly from Boston to Washington or London than it was 40 years ago. There are more highways now but much more traffic congestion as well. Life expectancy has continued to increase, though at about half the pace it did during my grandmother’s day. But the most important transformation—child death being an extraordinary event—had already happened by the time I was born.

Pointers from both Mark Thoma and Tyler Cowen.

If you compare 1900 to 1960, you can point to a few innovations that transformed America. The car, radio and television, and household appliances like refrigerators and vacuum cleaners.

Has there been comparable transformation since 1960? I would say that there has, but the improvements have been distributed differently and are not embedded as much in tangible goods. Continue reading

One Language of Politics?

A piece in the UK Spectator says,


Pointer from Tyler Cowen. The controversial book argues that welfare claimants have personalities that make them difficult to employ. It’s fine if you prefer the oppressor-oppressed narrative to the civilization-barbarism narrative. But instead of shutting the other side down, you should be standing up for their rights to make their case.

Socialism’s Poster Child?

David Deming writes,

You don’t have to be a student of ancient history to know socialism doesn’t work. The collapse of the Soviet Union in 1989 was an unequivocal demonstration of the moral and economic superiority of capitalism. The misery caused by socialism is unfolding today in Venezuela. Since Venezuela embraced socialism in 1999, poverty, crime and corruption have all increased. Grocery shelves are empty and the annual inflation rate is estimated to be as high as 200 percent.

For the left, the poster children for socialism would not be the Soviet Union or Venezuela. Instead, think of Sweden or Denmark. But one can argue that those are welfare states, not socialist states in the sense of government ownership of the means of production. But consider Singapore:

A majority of the top dividend-paying stocks on the Straits Times Index are government-linked

That is according to Andy Mukherjee. Pointer from Tyler Cowen.

I would suggest focusing on the relationship between knowledge and power. In small states, like Singapore, Sweden, and Denmark, there is relatively little discrepancy between knowledge and power. It is possible for government officials to know more of what they need to know to carry out policy effectively.

Large states are harder for a central government to manage. Decentralized institutions, including markets, do a better job of aligning knowledge with decision-making power.

See my essay on the recipe for good government.

Tyler Cowen Juxtaposes

There is this.

whoever you think the four most likely Americans to be the next president of the United States—who are probably Ted Cruz, Donald Trump, Bernie Sanders, and Hillary Clinton—none of them are in favor of TPP.

That is a quote from Larry Summers.

Then there is this:


That is from David H. Autor, David Dorn, and Gordon H. Hanson.

Politicians, unlike tenured academics, have to cater to what the authors call “exposed workers.”

But note that the last sentence in the quote from Autor, et al. Does it not sound like the PSST story for recessions?

Machine Learning and Holdback Samples

Susan Athey writes,

One common feature of many ML methods is that they use cross-validation to select model complexity; that is, they repeatedly estimate a model on part of the data and then test it on another part, and they find the “complexity penalty term” that fits the data best in terms of mean-squared error of the prediction (the squared difference between the model prediction and the actual outcome).

Pointer from Tyler Cowen.

In the early 1980s, Ed Leamer caused quite a ruckus when he pointed out that nearly all econometricians at that time engaged in specification searches. The statistical validity of multiple regression is based on the assumption that you confront the data only once. Instead, economists would try dozens of specifications until they found one that satisfied their desires for high R-squared and support for their prior beliefs. Because the same data has been re-used over and over, there is a good chance that the process of specification searching leads to spurious relationships.

One possible check on the Leamer problem is to use a holdback sample. That is, you take some observations out of your sample while you do your specification searches on the rest of the data. Then when you are done searching and have your preferred specification, you try it out on the holdback sample. If it still works, then you are fine. If the preferred specification falls apart on the holdback sample, then it indicates that your specification searching produced a spurious relationship.

Machine learning sounds a bit like trying this process over and over again until you get a good fit with the holdback sample. If the holdback sample is a fixed set of data, then this would again lead you to find spurious relationships. Instead, if you randomly select a different holdback sample each time you try a new specification, then I think that the process might be more robust.

I don’t know how it is done in practice.

Update on Computers Playing Go

From Bloomberg:

Jon Diamond, president of the British Go Association, said machines are five to 10 years ahead of where he expected them to be. “It’s really quite a large, sudden leap in strength,” he said. “This is a significantly better result than any other computer Go program has achieved up to now.”

Technology that improves exponentially will do that to you. Once somebody has a program that is sort of on the right track, you feed it more data and give it more processing power. Once the computer starts to get in the same range as the human, it very quickly races past and leaves the human in the dust.

As Tyler Cowen Alex Tabarrok puts it,

Win or lose, I will bet that Lee Sedol is the last human champion the world will ever know.

Russel Arben Fox on Jacob Levy

He writes,

It introduces, in clear and compelling language, a new way of making sense of the development of liberal ideas, by distinguishing between what he labels “rationalist” (consistent, transparent, state-centric) and “pluralist” (variable, private, culture-dependent) responses to the threats to individual freedom which have arisen throughout the history of liberalism.

Pointer from Tyler Cowen. I also recommend this podcast with Levy, Aaron Ross Powell,, and Trevor Burrus.

Should a restaurant owner be allowed not to serve someone based on race? The “rationalist” theory of liberalism says “no.” The pluralist theory of liberalism says “yes.” An often forgotten aspect of Milton Friedman’s Capitalism and Freedom is that he took the pluralist side on this issue.

Before you jump to the pluralist side of this debate, consider what Fox calls


Think of the Commerce Clause as being on the rationalizing side.

Razib Khan on ISIS

He writes,

Being a good parent, friend, and a consummate professional. But not everyone is a parent, and not everyone has a rich network of friends, or a fulfilling profession. Ideologies like communism, and religious-political movements like Islamism, are egalitarian in offering up the possibilities of heroism for everyone by becoming part of a grand revolutionary story.

There is much more at the link. Pointer from Tyler Cowen.

I am reading Fools, Frauds, and Firebrands, by Roger Scruton, the British conservative philosopher. Most of you will not want to read it, because it mostly discusses European philosophers. But I came away with some interesting ideas to chew on, and I may attempt to write an essay on the book. One of his points is that the left-right lens through which we view politics is designed not to be analytically sound but instead to tilt things in favor of Communists. The idea is to put fascism on the far right and Communism on the far left. Since everybody hates fascism, the implication is that you should like Communism, or at least cut it some slack.

I think that a more useful organizing axis for political movements might be satisfied vs. disaffected. People who support Hillary or Jeb are satisfied. They do not want to rock the boat. People who support Trump or Sanders are somewhat disaffected. Extremist groups, like ISIS, appeal to people who are extremely disaffected.

Where would you put libertarians on this axis? I would put them much closer to the satisfied end. As ticked off as they are about government and politics, they tend to be basically happy with their own lives.

Sharing Home Equity

From an NYT blog post,


Pointer from Tyler Cowen.




Opaque Leverage and Self-Deception

Regarding the movie The Big Short, Tyler Cowen wrote,

There is no central villain, none whatsoever. The filmmakers succeed in showing how the collective actions of many, operating together, can give rise to structural problems and systemic risk. And yet the story remains suspenseful.

People prefer stories with villains.

I think that the story of the financial crisis has to include leverage. Individual home buyers did not put up much of their own capital. The lenders did not put up much of their own capital. The mortgage securities were structured and rated so that banks could hold them with minimal capital.

However, some of this leverage was opaque. People did not understand the way that AIG was contractually obligated to put up billions in collateral if prices moved against them. People did not understand that while Fannie Mae and Freddie Mac were reporting that their sub-prime exposure was less than 2 percent, their exposure to risky loans was closer to 30 percent. People did not understand that mortgage securities rated AAA were not really comparable to AAA-rated bonds. People did not understand that banks had created “structured investment vehicles” and other dodges that made them much more levered than they appeared to be. And by “people,” in all cases I mean regulators and investors.

But finally, the opaque leverage was less intentional bad behavior on the part of financial executives than it was self-deception. Suppose that you had asked executives in 2007 to answer honestly, “Relative to what people outside the firm think, how exposed are you to a decline in house prices and problems in the mortgage market?” My guess is that almost all of them would have said, “We are less exposed than other people think.” And they would have been telling the truth from their point of view.

That is what made the speculators in The Big Short so special. They managed to dig through to reality.

And don’t forget that I coined the term, “Suits vs. Geeks Divide.”