Monday, April 7, 2014

Constitutions are Laws, Not Alternatives to Laws

By Robert H.

Here is a mistake lots of libertarians make.  "Democracy sucks; it must be bound by strict, constitutional limits on government; so let's have more constitutional limits on government."

The problem is that Constitutions are laws.  That means that if you have a fundamental problem with the way laws are made, "rely more on constitutions" can't be the answer.  I mean, how do you select the constitutional constraints and principles of a limited government?  The current answer in America is "with a supermajority," but super majoritarian voting is even more susceptible to most criticisms of majoritarian voting than majoritarian voting itself.  Take the two criticisms kling cites in my link: 1. supermajorities don't solve the problem of voter ignorance.  Now, instead of a majority of informed people, we have to scare up a SUPERMAJORITY to create good policy. 2. Supermajorities don't solve the problem of forcing voters to join a coalition to effect change.  Now they have to join an even bigger coalition!  

Things aren't better on the enforcement side.  How do you enforce constitutional principles of limited government?  The current answer is "with elected politicians or those they appoint."  But those are the same guys who make laws!  If they can't be trusted to do the latter, why the former?

It's laws all the way down, and the fact that one set of constitutional law makers made one constitution in 1789 which libertarians like one interpretation of is not a reason to think "constitutionalism" will solve libertarian problems with democracy.  So, just for a practical example, the most popular model constitution for new nations to adopt has been, since the wall fell, the German basic law.  Germany also attracts lots of migrants, and would attract more if immigration restrictions were lifted.  But the German constitution would make a libertarian's heart seize up: it's littered with second generation rights (ie, mushy socialist stuff like rights to a clean environment or to healthcare) and isn't particularly federalist.  If both super majoritarianism and migration have created and fortified a popular constitutional model libertarians hate, what's the alternative libertarian method for creating and preserving "good" constitutions?  Military coups?

So here's the math: to make a constitutional regime libertarians like, they would have to convince a supermajority.  To just pass good laws they approve of, they would have to convince a majority.  Instead of writing off democracy and embracing the first model, libertarians who go the second route will have a far easier time.  Scoreboard time: In the last 50 years American democracy killed segregation, slashed tariffs, ended the draft, embraced LGBT rights, lowered top marginal tax rates, had an amnesty for migrants, embraced Friedman's monetary ideas, etc. etc.  Libertarian ideas can and have won at the polls. In that same amount of time, more or less no libertarian constitutional amendments were passed*.   Learn your lesson, people.

*Maybe the 24th?  

Sunday, April 6, 2014

Mind the fiscal gap?

By Robert H.

Is fiscal gap accounting something I shouldn't think is stupid?

Basically the idea behind fiscal gap accounting is that you get the best estimate of our fiscal situation not by looking at US debt held by the public and maybe projecting it out over x years, but rather by adding up all our future obligations and subtracting all our future income, holding policy constant.

I've always thought it's dumb for three reasons:

1. It operates on an infinite timeline.  Assuming we are going to, to pick random examples, keep paying out SSI obligations and keep taking in gas taxes at current rates forever strikes me as an ahistorical and useless way of thinking.

That said, this may be stupid on my part.  The social discount rate means that a dollar spent on SSI 700 years from now doesn't count very much in assessing the current fiscal gap.  But that means fiscal gapers have to estimate the social discount rate for America over a decades long timeframe, and that also strikes me as crazy and impossible.

2. Related to 1, the fiscal gap gyrates from year to year in ways that don't seem helpful for policy makers.  I can't find a chart of the fiscal gap that goes back to the war (a bad sign in and of itself), but here's a chart showing the projected fiscal gap rise by 300 percent over the last ten years.  Should I be 4 times more concerned about the deficit than in 2003?  Really?  How many fiscal gapers were only 25 percent as concerned about the deficit ten years ago?

3. The market for US debt appears to be totally unrelated to the fiscal gap.  Again, the fiscal gap says our fiscal situation is four times worse off than 2003, but treasuries have significantly lower yields than ten years ago.  Fiscal gapers  seem to fail the market test.

I could use more info, though.  Has anyone correlated fiscal gaps and debt yields over time across countries?

***

So all that said, accounting is related to math and I am about as numerate as a puffin.  Is the fiscal gap more useful than I give it credit for?

To be clear, my current strategy is to figure that the markets especially and democracy less so are better than me at figuring out how worried to be about the debt, and using them to guide my thinking.  People who buy treasuries and elected politicians don't seem very worried.  As a check, I note that fiscal crises have been extremely rare over a century plus of modern welfare states.  So I'm pretty confident we will eventually get around to dealing with the deficit before it is a big deal.

Then the fiscal gapers start screaming no, every second of delay costs us 400 billion dollars, or whatever, and my equanimity gets perturbed.  Should I listen to them?

Friday, April 4, 2014

Learning Investments

By Charlie Clarke

As student studying abroad asks me how to learn the course I'm teaching next fall "Investments" independently.  Someone told him it was "near impossible."  I know that's not true, because I did it!  Here's my advice:  

I don't agree that Investments is a difficult subject to learn independently.  You must remember that wall street is filled with Mathematicians, Statisticians, Physicists and Engineers that have no formal Finance training.  That said, it requires some hard work, and more than that, a passion for the material, which makes it not feel like work at all.  Additionally, it's never been easier in the history of the world to learn something on your own as there is a tremendous amount of material available from top institutions.  

The textbook we use is Bodie, Kane and Marcus.  Here is an MIT course syllabus with lecture notes.

Coursera offers free online classes with videos, practice problems as well as certificates of completion if you end up taking it for credit.  I would probably start there.  None of the courses really replicate 3302, as they are probably more quantitative, but if you want to do investments as a career, that is not a bad thing.

Bob Shiller's Financial Markets course at Yale is online and has a lot of overlap with the Investments course.  This course is not that quantitative and pretty interested.

Here are some more quantitative courses.  I don't know your level of commitment and math background, but there is a lot of info about professional investing in these courses:

Computational Investing, Part I 
Financial Engineering and Risk Management (this is the most mathematical/advanced)

For outside reading, I'd start with "Random Walk Down Wall Street" by Burton Malkiel.  That's the book that got me interested in Investments.  Check out what's available and follow your interests.  You don't have to follow any particular order.  You can learn a lot.

Which Hunt?

By Robert H.

Just a friendly reminder that there were not many actual witches in Salem.  Just so, in the most famous post war witch hunt a lot of the people caught up by McCarthyism were never or had long since stopped being movement communists, and very few were spies (which is impressively bad work, since the state department actually was riddled with soviet spies).

So people, stop referring to the targeting of someone for beliefs they actually hold and things they actually do as a witch hunt!  A witch hunt is when we go after people so zealously and with so few safeguards for the innocent that we burn people at the stake who aren't even witches.  It's a useful concept, word, and premise for a Star Trek: The Next Generation episode (see The Drumhead).  Don't dilute it.

Not that it's justified to burn actual witches at the stake.  But the term for that is a human rights violation.

Tuesday, April 1, 2014

Delong and Krugman on Cochrane

By Charlie Clarke

Brad Delong and Paul Krugman are not happy with John Cochrane.  Brad Delong says John Cochrane is wrong, and Paul Krugman says he thought of it first.

Here is the original from 2009 (except everything in bold was cut):
If we just had a credit crunch, we would expect to see stagflation – lower quantities sold, but upward pressure on prices. A credit crunch, like a broken refinery is a “supply shock.” Since we are seeing lower quantities sold and easing inflation, we must also be seeing a “demand shock,” and we need to understand its source.
The bottom line, then, is that people want to hold more of both money and government debt – and don’t particularly care which.  Trying to get it, we are trying to buy less of both consumption and investment goods. Again, this is a deflationary pressure. If the government does nothing, deflationary pressure will remain until goods are so cheap that we have the desired real value of nominal government debt.  Until deflation happens, output falls.
What do to? In this analysis, monetary policy is impotent, but not for the usual reason that interest rates are nearly zero. The Fed can arbitrarily exchange Treasury debt for money, and increase the money supply as much as we like. But nobody cares if it does so, since the “flight to liquidity” is equally towards all forms of Government debt.  If we want more fruit and less cheese, putting more apples and less oranges in the fruit basket won’t help.
Looking at it this way gives us a logical reason that fiscal stimulus might work. It leaves the private sector with a trillion more dollars of government debt in their pockets. But the Fed’s many facilities also issue government debt and money, which helps to satisfy the demand for government debt.  Which is the better path?

I think the bolded sections make clear that Paul Krugman has the right response.  Cochrane is in all senses agreeing with Brad and Paul's analysis.

Cochrane goes on to disagree with fiscal policy for much more banal reasons.  He worries the money would not be spent well.  He prefers "fiscal policy" by which he means that the Fed could buy up lots of almost safe debt, "I would be happiest if the Fed and Treasury satisfied the large demand for government debt and money by transparently buying or lending against high quality corporate and securitized debt, at market prices."

Tuesday, March 18, 2014

I'm Saying We Wouldn't Get Our Hair Mussed

By Robert H.

Are we allowed to start worrying about nuclear war without seeming weird?  Is the Cold War on again enough for that?  'Cause I was googling around a little, and America has a surprisingly good shot at succeeding totally in a first strike against Russia, which is obviously bad.

I say "surprisingly" not because I think the chances are high, but because I would have thought our chances of surviving a full scale nuclear war without the Russians hitting a single target would be zero.  More than that, I would have thought the odds of just losing three or four cities would be zero.  I would have thought the odds of only losing a third of our population were zero.  Basically I thought MAD was still a thing, and both Russia and America could destroy each other under any conceivable nuclear scenario.  The only way to win is not to play, how about a nice game of chess?

But that author wants to play up how risky a first strike would be, and yet he still leaves me with the impression that we have an outside chance of pulling it off totally.  

Worrying.  It makes me wonder how much further we would have to develop our ABM capability before we could shoot down any Russian nukes likely to survive a first strike, which makes me wonder if that possibility fuels erratic behavior on Russia's part.  The knowledge that an age of American nuclear primacy might be right around the corner would scare me shitless if I were Russian, and obviously the worse your future position the more aggressively you play your current advantages.  What's worse, the less likely you are to survive a first strike, the more likely you are to launch one, which means we are more likely to launch one, which means etc.  The balance of terror doesn't work without the balance.

On the bright side, nuclear war could solve the Fermi paradox.

Thursday, March 6, 2014

Uncertain

By Robert H.

Andrew Cohen says some weird things about uncertainty:

We are, indeed, fallible. I don’t think anything follows from this with regard to toleration (see Chapter 7, section E). It is perfectly reasonable to think toleration is a value while recognizing one’s own fallibility. One may be wrong, but to say one thinks X is to say, “given all else I know, I think X and I will maintain X until shown that X is false.” As Joseph Schumpeter said “To realise the relative validity of one’s convictions and yet stand for them unflinchingly, is what distinguishes a civilized man from a barbarian.” Indeed, it seems entirely natural to be willing to stand for one’s beliefs unflinchingly, recognizing one’s judgments may nonetheless be wrong.

To maybe state the obvious, it is perfectly possible to hold a belief you think is the belief most likely to be correct without thinking it is likely to be correct. For example, say a delicious torta could be behind one of three doors, and you happen to think there is a 49 percent chance it is behind door one, a 20 percent chance door 2, and a 21 percent chance door three.  In that situation you might believe that you should open door one, but you would also think that the torta is probably not behind door one.  This is one way to hold a belief without being confident you are correct.

But we could have even more options: maybe not opening any doors is a possibility, and if you wait two days ta torta will simply be given to you.  Now we have to weigh our preferences: the chance of a torta now, or a certain torta later.  Here we may say, "I prefer to wait," and firmly believe that, but acknowledge that it's all a matter of taste.  This is another way to hold a belief without being confident you are correct: acknowledging that you are judging by subjective criteria that vary from person to person.

Lastly,  you could simply not know what other people know.  You've conducted some sort of investigation and come up with some sort of probability, but are you confident telling someone else to pick your door if they've conducted a separate investigation?  Maybe they've peaked behind door 3!  Maybe they have a better sense of smell!  This is another reason to be hold a belief but not be confident in it: it may be the best belief based on what you know, but you may not know enough.

Cohen seems to say, if I am reading him right, that knowledge that your beliefs could be wrong shouldn't encourage you to be more tolerant of other beliefs.  I'm not so sure.  Imagine 100 doors, and you think door number 2 is most likely to hold the prize at a 2 percent chance.  Is your tolerance of people advocating for door number 1 as low as if there are only 2 doors, and door number 2 has a 99 percent chance of being correct?

Of course, it's possible that there are a lot more "2 doors with an obvious answer" problems than "100 doors with a tricky answer" problems in the world.  I wouldn't bet on life being simple, though.