Nick Barberis: Why Investors Make Mistakes

By Charlie Clarke

I've been coordinating with Nick Barberis of Yale University about his visit this Friday to the University of Connecticut as part of the PhD Student Speaker Series.  Nick is a leader in Behavioral Finance research, and I plan to be blogging more about his work.  Here is a video of Nick in class explaining common biases in investing.

Working for the Mandarin

By Robert H.

Oh boy, more misuse of historical analogy:

But I think that we are looking at something even deeper than that: the Mandarinization of America.  The Chinese imperial bureaucracy was immensely powerful. Entrance was theoretically open to anyone, from any walk of society—as long as they could pass a very tough examination. The number of passes was tightly restricted to keep the bureaucracy at optimal size.  Passing the tests and becoming a “scholar official” was a ticket to a very good, very secure life. And there is something to like about a system like this ... especially if you happen to be good at exams. Of course, once you gave the imperial bureaucracy a lot of power, and made entrance into said bureaucracy conditional on passing a tough exam, what you have is ... a country run by people who think that being good at exams is the most important thing on earth. Sound familiar?The people who pass these sorts of admissions tests are very clever. But they're also, as time goes on, increasingly narrow. The way to pass a series of highly competitive exams is to focus every fiber of your being on learning what the authorities want, and giving it to them. To the extent that the "Tiger Mom" phenomenon is actually real, it's arguably the cultural legacy of the Mandarin system.

To the state the obvious, there is a big difference between the ancient Chinese system, where the government selects elites by examination, and the American system, where the government and free market actors select elites by examination.  Most journalists are employeed by for profit organizations.  If all those organizations are hiring driven, smart grads from top universities, maybe those people make good employees.

Two caveats:

1.  Yes, via occupational licensing the government often requires that people have certain educational requirements, and that probably leads to over investment in education.  Maybe less than you would think, though: even in states that offer the traditional "go get on the job training" route to becoming a lawyer (California, for example), top law jobs are still staffed by top graduates from top schools.

2.  The basic point of that article is right, it *is* a real concern that low income children have difficulty cultivating the habits and resources needed to excel at these institutions.  But the solution is to subsidize and help them, not rail against institutions that seem to be providing an important market service.    Investing in future generations based on which children rich people love is a market failure, hiring Harvard grads is not.  Articles like this, which pretend that elite education is a scam foisted on America to create a ruling class, are stupid.

P.S.  Hat tip to Arnold Kling for the links.
P.P.S. Note that the second article exists firmly in the "we are obviously right, but we keep losing elections, therefor democracy is flawed" school of libertarian discourse.  It rails against one man one vote and, at the same time claims, our system is too oligarchic.  Awesome!  Fascist libertarians for the win!

A Banner Day

One of our readers (HT: PharaohBender) noticed that the banner to this site is cropped from a Nazi propaganda poster (this one).  I've always liked that poster because it is so hilariously stupid in a way only dictatorship propaganda can be (it simultaneously makes fun of us for being racists (it mocks the Klan) and for tolerating the presence of Jews and African Americans, for example), because I think the Amerikkka monster creature is sort of cool looking and imaginative (if horribly offensive, obviously), and because I think the bottom part of the picture is actually an evocative depiction of what aerial bombardment must feel like.  I wanted the name "bad outcomes" to evoke impending doom despite anyones best efforts to resist it, and to me the bottom of that picture does that.  Also, you know, I'm pretty sure treasonous Propaganda is public domain or fair use or something.

Anyways, that's the explanation for that.  If anyone finds it offensive (including my co-bloggers!) drop me a line and I will (probably) change it.

Who Owns the Air?

By Charlie Clarke

Here is a letter I wrote to Greg Mankiw in March of 2009.  Robert's comment on my last post about giving the poor gobs of free money reminded me of it.  The main idea is that redistributing revenue from the use of a public good is in some sense assigning property rights to that good.

Dear Greg,

    I admire your professional work and your blog, and as you have spoken out frequently on pigou taxes I would love to understand our differences on a subject.  I find that the Obama administration would like to follow something close to my ideal pigouvian tax scheme.  Given that the tax will be collected as cap-and-trade (rather than carbon tax), it appeals to my intuitive sense of fairness that the revenue from such a tax be distributed lump-sum to each citizen (total revenue / citizen = payment to each).  My reasoning is that everyone has an equal right to public goods like air (or the right to pollute air), if this were a more perfect world, I would be able to sell my air rights to the highest bidder as would everyone else.  It seems my system closely mimics that outcome with heavy polluters compensating light polluters.

   I understand that your position is that revenue from pigouvian taxation should be used to offset income taxes.  I understand that my plan creates more deadweight loss than your plan, but to me, your plan asserts that productive people should have more property rights to pollute air than less productive people.  So my question is, why should this be so?  How do you view the world differently than me that leads you to believe that your ideal is more correct than my ideal?

   I would like to close by saying I'm not sure that my intuition is correct.  In all my economics classes, I have received no training on how to think about distributional issues.  My goal is to open a real dialog, not because I think I have found some sort of trump card.  I read your paper about the optimal taxation of height, and it makes me think that you too might like to see economics open a dialog about philosophical issues of fairness.

 Humbly,
 Charlie Clarke

Why I Think About Libertarianism So Much

By Robert H.

I am not a Libertarian, but I devote a lot of time to thinking about libertarianism and reading libertarians.  Why?  Well, the answer to that question depends a lot on the libertarians I am thinking or reading about.  I divide libertarians into three sorts:

1. Marginal Libertarians: For most policies, these people think the next policy step should be in a libertarian direction, but they don't necessarily want a libertarian state.  So of all the realistic policies we might adopt towards health care, the marginal libertarian wants the one that has less government intervention in the  marketplace, less government subsidies, etc.  Maybe he likes Paul Ryan's plan.  But, unlike a traditional libertarian, he doesn't necessarily want government OUT of healthcare.  At the margin he prefers libertarian policies, but going all the way to a minimalist state scares him.

Obviously more people are *mostly* marginal libertarians, than are *completely* marginal libertarians, since it is more a coincidental or attitudinal thing ("hey, look at that!  Most of the policies I like involve less government!") than a real ideology.  Greg Mankiw is an example of a marginal libertarian.  Or Tyler Cowen.

2. Consequentialist Libertarians: Consequentialist libertarians think the marginal policy move should be in a more libertarian direction, but they also think that those policy moves should go all the way, and we should have a night-watchman state, or anarcho-syndicalism, or whatever.  They want this because they think those kind of states are simply the best way to arrange public affairs, IE that adopting a minarchy has better consequences than adopting other forms of government.  They aren't much interested in libertarianism as a philosphy, they see it as a practical and superior form of government.

I tend to think of Scott Sumner as a consequentialist Libertarian, though he may be more of a marginal libertarian. In general I think very few people fall into this category, and I don't spend much time thinking about it.

3. Philosophical Libertarians: Philosophical libertarians think a libertarian state would have good consequences, but they also think it is philosophically mandatory.  They think government simply has no right to engage in redistribution, for example, and that this is as much a moral evil as theft.  Or maybe they don't go that far, but on some level they think there is a *moral*, as well as a practical case to be made for minimal government.

I am just going to pick the obvious example and say Robert Nozick was this kind of libertarian.  Or at least, was when he wrote Anarchy, State, and Utopia.  But this category obviously includes people with muddier thinking. Ron Paul, say.

***

So why do I care about libertarianism?  Because I am close to 1 and detest 3.  In terms of category 1, I've been convinced on the merits that a lot of policy should move in a more libertarian direction.  I am for free trade, open borders, less local regulation of property (IE, "zoning," height restrictions, etc), less incarceration  etc.  I still have big soft fuzzy liberal notions that keep me from identifying as a libertarian (hooray obamacare!), but I can read Tyler Cowen's blog and "right on" more than I "tsk tsk."  So I tend to enjoy reading and thinking about consequentialist libertarians, even when they disagree with me.

In terms of category 3, I pay attention because a lot of philosophical libertarians are, to me, terrifyingly counter-majoritarian , rejecting the basic

Democratic Focused, Rights Focused, Rule of Law Focused Cultural Norms + Democracy + Rights as Side Constraints = Sound Government 

formula that worked increasingly well over the 20th century.  So, for example, here's a law profesor, Glenn Reynolds, who came on Russ Robert's show to talk about all the ways he would like to change the constitution in order to ensure that his policies always win.  His proposals run the gamut of ways you can fail to respect modern democracy,  from changing long established process rules to make the outcomes you want more likely (IE, fiddling with term limits, which he wants to do), to constitutionally forbidding democratic outcomes simply because you don't like them on policy grounds (IE, instituting a balanced budget amendment, which he does not oppose and only does not support because he thinks it won't be stringent enough), to undermining human rights when you find them inconvenient (IE, he wants a constitutionally mandatory poll tax, currently forbidden by the 24th amendment and probably by Article 25 of the ICCPR, an international human rights treaty we have ratified).

That's modern philosophical libertarianism: "We are clearly right as a philosophical and policy matter, but modern democratic government keeps not doing what we want.  Therefor, democracy is flawed and the government is only failing to recognize our obvious rightness because it is in thrall to special interests.  Therefor, we should limit democracy not just when it steps on human rights, but more generally whenever it fails to enact the policies we want.  Convincing people to vote libertarian is all well and good, but most important is to take away or limit their ability to vote for non-libertarian outcomes."  The US constitution's model, limited powers for federal government to guard against tyranny, but broad powers for state government to empower the people, has been turned into a radical new model: limited power for all government, not for the purpose of preserving democracy, but in order to make sure all our preferred policies win.  It's a sickening rejection of majoritarian rule.

Add the distrust of democracy in with the utopianism, the blind conviction in an over-simplified philosophical position, the bad economics, the confident predictions of imminent doom for western democracies (doom that will conveniently reveal the status quo to have been flawed and libertarians right all along), the revolutionary rhetoric, and the on-campus appeal and you get a movement that reminds me uncomfortably of American communism in the 20th century.  I'm not sure if movement libertarianism has the potential to actually be as dangerous or global as communism was, but I don't think it's worth finding out.  Philosophical libertarians, from Ron Paul to law professors on Econtalk, have terrible ideas.  Those ideas have to be engaged.  Doubly so since so many of their policy positions coincide with my own, and since it worries me when my beliefs about, say, ending the drug war get lumped in with the beliefs of someone who wants a constitutionally mandated gold standard, or something.

So, that's why I spend a lot of time thinking about philosophical libertarianism.

Obviously, not all philosophical libertarians fit the description I just painted (most don't, probably.  The most wrong voices are probably the ones I am most likely to remember), and I try to be charitable to the best arguments philosophical libertarianism can present (which are pretty good!).  Just as obviously, plenty of people who hold a few views I find objectionable are probably smart people with lots of other good views (I am sure Reynolds, the law professor I talked about above, is smarter than me and has better ideas than me about most things, he just has really bad ideas about whether the constitution should be amended).  I am trying to demonize ideas, not people.

Econ 101 and the Minimum Wage

By

Charlie Clarke

    Lots of work done on the minimum wage over the last 20 years, since this paper by Card and Krueger have argued that at low levels the minimum wage doesn't lead to increased unemployment.  I thought a lot of this work was based on publication bias -- the desire of the profession to publish interesting and counter-intuitive results--until I geeked out on it a little last year and the results are much more robust than I thought.  This guest post on Mike Konczal's blog provides a nice review (and much more info than anything I've seen in the recent blogosphere debates).

     Interestingly, this view has become so mainstream that it is Econ 101.  In fact, the event leading me down a nerd hole of research was over hearing Jonathon Gruber's Principles of Micro MIT opencourseware course.  He taught a Monopsony version of the minimum wage market, where low income employers (McDonald's, Wal-Mart...) have some market power and thus a minimum wage may increase employment.  Then at the end, summarized the balance of the evidence as pointing to the monopsony model.  I couldn't believe it, but he was right.  So, at least at MIT, possibly the best place to get an undergraduate education in economics, the mainstream view has shifted quite a bit.

    That said, I'm quite skeptical at the current liberal enthusiasm for the President's plan to raise the minimum wage.  None of this research focused on minimum wages when the economy was suffering from a shortfall of aggregate demand.  Just as, fiscal multiplier research may have little bearing on fiscal multipliers during a liquidity trap (self-imposed or otherwise), the distortion of a minimum wage may be quite a bit more severe under current circumstances.  

PopeHat Turns Crazy

--By Robert H.

So this is offensive.  Basically it's a Popehat author pointing out meaningless comparisons between Obama and the crazy LAPD dude running around killing people.  They are both for gun control!  They both like his wife!  The worst kind of association fallacy.  The point (?) is that Obama's targeted killings of US citizens is just as bad as anything crazy cop man is doing.

Drone Strikes

So all those other comparisons (they both think Obama did OK in his first term!) could be ignored as stupid window dressing, but in the comments the author takes things a step further, arguing that it's all a fair comparison   He thinks being for gun control, liking the welfare state, and being a murderer is all sort of part in parcel, implying a fundamental disrespect for law or a desire for unbounded government control of our lives or something.  His co-bloggers also basically support the post in the comments.  So, yeah, offensive.  Which leaves me having to debate whether Pope Hat's authors are so crazy (IE, "liking welfare state = fascist = murderer" crazy) that I have to invoke my "it's not worth reading crazy people" rule and take them off my RSS feed.  Not something I expected from a usually excellent blog.

But that's not why I'm writing this!  I'm writing this post to point out that the basic underlying comparison is stupid too, not just the "they both like gun control democrats are killers" stuff.  And it is a stupid mistake I see a lot of liberals AND conservatives make, namely the idea that drone-strikes are basically murder, impeach obama, freedom FTW.

Here's why that doesn't work: LAPD dude has no colorable legal theory for why he should get to murder the people he murders.  Whatever moral theory he has is strained.  But the president, while his drone strikes may be unlawful,  does at lest have a real theory for why he has the authority kill a minority ("US citizen" works better than "minority," but isn't an NWA lyric):

1. In congressionally authorized military actions the soldiers we are fighting don't get due process.  We kill them.  We assassinate them.  That's that.  The executive branch handles all of this.  This makes sense: we wouldn't be able to defend ourselves if, say, we couldn't launch an attack in WWII save with a judicially authorized warrant.  The way war works (should work) is: congress gives the broad go ahead, President goes kill people.
2. Historically, sensibly, and constitutionally, this also applies to US citizens fighting the US.  Or see here.
3. Use of force against al quaeda and it's affiliates is congressionally authorized.
4. Between the authorization for the use of military force, the fact that this sort of thing (flying around the world blowing up terrorists in a protracted fight with Al Qaeda)  is probably exactly what congress envisioned when it passed the AUMF, Al Quaeda's proven ability to attack the American homeland, the time-sensitive nature of a lot of our decisions to assassinate Al Quaeda operatives, and Al Quaeda engaging us militarily in Afganistan and Iraq, it is fitting and proper to analogize our fight with Al Quaeda to a military, not a law enforcement action.
5. Therefor, prez can assassinate members of Al Quaeda.

Not a fully convincing argument!  People who oppose drone strikes would be quick to point out that a lot of them are deliberative, slow decisions, with plenty of time for judicial oversight.  They'll point out that military killings are traditionally limited to the battlefield, and it isn't satisfying to say "in the modern world, the battlefield is everywhere."  They'll point out that an open-ended AUMF, already 11 years old, is a weak perch to hang your hat on.  They'll point out how easily this system could be abused.  The bolder ones argue that the founders misinterpreted the founders when the founders launched the quasi war, and that foundational intent was, unbeknownst to the founders, for congress to only be able to launch military action with a formal deceleration of war.

And good for them!  Most of those arguments aren't stupid!  But if people who oppose drone strikes are honest, they will admit that the President's position is not lawless vigilantism.  At the margin, the line between law enforcement and war is not a clear one -- both can consist of congress authorizing the use of force against bad actors who seek to harm Americans.  But the line between murdering people with no colorable legal justification and not doing that is crystal clear.  People who cross that line are psychopaths.  Presidents, on the other hand, are mostly just a**holes.