Must-Reads: November 28, 2016


Interesting Reads:

Must-Read: Pseudoerasmus: To Explain Myself on Twitter: My View of Chile

Must-Read: Pseudoerasmus: To Explain Myself on Twitter: My View of Chile: “Chile before Allende had already been a middle-income country… since the 19th century….

But… much like Argentina, Chile had been in relative decline since the early 20th century. Allende was a complete disaster https://pseudoerasmus.com/2015/05/21/the-invisible-blockade-against-allendes-chile/… both a ‘short-term’ disaster of fiscal and monetary management; and a long-term structural disaster of increasingly ‘socialising’ the economy. Allende to some extent was unlucky… but his mismanagement was extreme, Venezuela-like, in the face of the external shock.

Pinochet’s first austerity programme (1973–5) was absolutely necessary in the sense that Chile’s 30% of GDP budget deficit and hyperinflation had to be reversed…. Pinochet was indeed lucky to see rising copper prices during his part of the 1970s…. However, Pinochet also liberalised the capital account, letting in ‘hot money’ capital flows, much of which went into a real estate bubble in the late 1970s. Because of this, Chile faced the debt crisis in the early 1980s just as much as any other Latin American country…. The financial austerity in the face of the debt crisis erased the economic recovery of 1973–82. This was purely Pinochet’s mismanagement and incompetence. He was no better than Mexican presidents, in this regard.

But that’s different from his structural reforms. Those largely survived him, albeit with more redistribution under democratic governments, more ‘light’ industrial policy, as well as capital account controls, which were actually implemented by Pinochet after 1982. Clearly, Chile is much closer to the neoliberal paradigm, albeit with anomalies, than Chile was in 1969 or 1973. Denying that is tantamount to denying that the rest of Latin America is also closer to the neoliberal paradigm today than it was in 1975 or 1980. But there is nothing special about Chile today….

Had an Allende-like regime persisted, Chile would probably be much poorer today. But the actually existing Chile is no closer to convergence with the rich countries than it was in 1930. Moreover, Chile’s GDP/capita is about the same as Argentina’s, but Chile’s median household income is lower, and Chileans work longer hours per year than Argentinians.

Must-Read: Noah Smith (2013): “Just Deserts”

Must-Read: Noah Smith (2013): “Just Deserts”: “‘I get what you get in ten years, in two days.’–Chris Brown…

…Mankiw wants… a value system based on “just deserts”… “people should receive compensation congruent with their contributions”…. I think it’s worthwhile to think through the implications….

Brad CEO… makes $30 million a year…. Mike Clerk, who works at Wal-Mart… $25,000 a year…. So Mike works and works and works, for three years…. Suppose Brad randomly sees Mike’s new Civic in a parking lot and decides that he wants the same car…. Brad will have to work a little less than 5 hours…. Go to a couple meetings, send some emails, and the Civic is his.

Now suppose Mike goes to Greg Mankiw and asks: “Dr. Mankiw, why is it right and just that it took me 4% of my entire lifespan to buy this car, with all my heroic efforts and harsh self-denial, when it took that Brad CEO guy less than a day? I put in every bit as much effort as he does, day after day. Why does he deserve to get things with so much less effort than I put in?” Dr. Mankiw responds:

I am more persuaded by the thesis advanced by Claudia Goldin and Lawrence Katz (2008) in their book The Race between Education and Technology. Goldin and Katz argue that skillbiased technological change continually increases the demand for skilled labor. By itself, this force tends to increase the earnings gap between skilled and unskilled workers, thereby increasing inequality….
“OK,” Mike says. “But why, then, is Brad CEO so much more productive than I am? Where does his $30 million productivity come from?”

Dr. Mankiw responds:

[T]he intergenerational transmission of income has many causes beyond unequal opportunity. In particular, parents and children share genes…. IQ… has a large degree of heritability… IQ is only one dimension of talent, but it is easy to believe that other dimensions, such as self-control, ability to focus, and interpersonal skills, have a degree of genetic heritability as well.

“So let me get this straight,” Mike says. “Brad deserves to be so much richer than me because of ability he was born with?…”

Mike falls off of a ladder…. In the old days, before Mankiw’s “just deserts” theory gained widespread acceptance, Mike would have been able to collect Social Security disability; now, however, the government tells him that he does not deserve disability payments–they constitute an unfair transfer of income from the productive to the unproductive…. Mike cannot go to physical therapy because he cannot afford health insurance, and Medicaid was canceled because Medicaid payments do not constitute… “just deserts”….

Hopefully by now I’ve made my point. It’s easy to say that people deserve to get whatever they can manage to get in a “free” market. But when you start to actually think… you realize that it probably doesn’t fit very closely with most people’s concept of… “just deserts”…. Moral values are just statements of opinion, and Greg Mankiw is certainly entitled to his own. But I somehow doubt that his opinion of “just deserts” will be able to win over a majority of Americans, even among the intellectual classes.

Must-Read: James J. Feigenbaum and Christopher Muller: Lead exposure and violent crime in the early twentieth century

Must-Read: James J. Feigenbaum and Christopher Muller: Lead exposure and violent crime in the early twentieth century: “In the second half of the nineteenth century, many American cities built water systems using lead or iron service pipes…

…Municipal water systems generated significant public health improvements, but these improvements may have been partially offset by the damaging effects of lead exposure through lead water pipes. We study the effect of cities’ use of lead pipes on homicide between 1921 and 1936. Lead water pipes exposed entire city populations to much higher doses of lead than have previously been studied in relation to crime. Our estimates suggest that cities’ use of lead service pipes considerably increased city-level homicide rates [by 24%].

Good Riddance to Fidel Castro…

Good Riddance to Fidel Castro!: Fidel Castro has retired. Good riddance!!

That the Lenin-Trotsky-Stalin Authoritarian Project of which Fidel Castro was the next-to-last exemplar was not an advance toward but a retreat from a better world was obvious long, long ago. Quite early–Kronstadt?–it was clear to all save the dead-enders that the project was a mistake.

As Rosa Luxemburg wrote in “The Russian Revolution”:

Freedom only for the supporters of the government, only for the members of one party — however numerous they may be — is no freedom at all. Freedom is always and exclusively freedom for the one who thinks differently… because all that is instructive, wholesome and purifying in political freedom depends on this essential characteristic….

The tacit assumption underlying the Lenin-Trotsky theory of dictatorship is this: that the socialist transformation is something for which a ready-made formula lies completed in the pocket of the revolutionary party, which needs only to be carried out energetically in practice. This is, unfortunately — or perhaps fortunately — not the case…. What we possess in our program is nothing but a few main signposts which indicate the general direction in which to look….

The socialist system of society should only be, and can only be, an historical product, born out of the school of its own experiences, born in the course of its realization, as a result of the developments of living history… socialism by its very nature cannot be decreed or introduced by ukase. It has as its prerequisite a number of measures of force — against property, etc. The negative, the tearing down, can be decreed; the building up, the positive, cannot. New Territory. A thousand problems.

Only experience is capable of correcting and opening new ways. Only unobstructed, effervescing life falls into a thousand new forms and improvisations, brings to light creative new force, itself corrects all mistaken attempts. The public life of countries with limited freedom is so poverty-stricken, so miserable, so rigid, so unfruitful, precisely because, through the exclusion of democracy, it cuts off the living sources of all spiritual riches and progress….

The whole mass of the people must take part in it. Otherwise, socialism will be decreed from behind a few official desks by a dozen intellectuals…. [Lenin] is completely mistaken in the means he employs. Decree, dictatorial force of the factory overseer, draconian penalties, rule by terror…. It is rule by terror which demoralizes.

When all this is eliminated, what really remains?… Without general elections, without unrestricted freedom of press and assembly, without a free struggle of opinion, life dies out in every public institution, becomes a mere semblance of life, in which only the bureaucracy remains as the active element. Public life gradually falls asleep, a few dozen party leaders of inexhaustible energy and boundless experience direct and rule. Among them, in reality only a dozen outstanding heads do the leading and an elite of the working class is invited from time to time to meetings where they are to applaud the speeches of the leaders, and to approve proposed resolutions unanimously — at bottom, then, a clique affair — a dictatorship, to be sure, not the dictatorship of the proletariat but only the dictatorship of a handful of politicians, that is a dictatorship in the bourgeois sense….

Yes, we can go even further: such conditions must inevitably cause a brutalization of public life: attempted assassinations, shooting of hostages, etc….

That–written some ninety years ago–strikes me as a good epitaph for Castro’s rule.

Must-Reads: November 25, 2016


Interesting Reads:

Should-Read: David Jacks et al.: Infant Mortality and the Repeal of Federal Prohibition

Should-Read: David Jacks et al.: Infant Mortality and the Repeal of Federal Prohibition: “Exploiting county-level variation in prohibition status…

…this paper asks…. What were the effects of the repeal of federal prohibition on infant mortality? And… were there any significant externalities from the individual policy choices of counties and states on their neighbors? We find that dry counties with at least one wet neighbor saw baseline infant mortality increase by roughly 3%. Cumulating across the six years from 1934 to 1939, this would suggest a substantial number of excess infant deaths which can be attributed to the policy externalities alone arising from the repeal of federal prohibition in 1933. We argue that such policy externalities should be a key consideration in the contemporary policy debate on the prohibition of illicit substances.

Should-Read: David Weil and Heidi Sherholz: CBO Report Confirms What We Already Knew

Should-Read: David Weil and Heidi Sherholz: CBO Report Confirms What We Already Knew: “The Congressional Budget Office released a study of the economic impact of reversing these updates to the overtime regulations…

…The CBO report confirms what we already knew – that the rule will increase earnings for middle-income Americans. Here are our takeaways…. Reversing the rule would strip nearly 4 million workers of overtime protections… reduc[ing] workers’ earnings while increasing the hours they work… the total annual earnings of all affected workers would decrease by more than $500 million in 2017…. CBO finds that reversing the rule would primarily benefit people with high incomes… 85 percent… would accrue to people in the top income quintile. CBO finds that reversing the rule would not create or save jobs…

Central Banks, Neutral Policy, and Economic Structure

Since 2009 the Federal Reserve and other global north central banks have, first hesitantly and enthusiastically, been trying to sacrifice the health of the commercial banking sector in order to keep the life support machines that are keeping the rest of the economy alive going.

Your average commercial bank needs a 2.5% margin on its liabilities in order to cover the cost of its branches and its ATM network. Commercial banks are used to taking their deposits, sticking them in long term Treasuries and similar assets, and relying on time, diversification, the slope of the yield curve ,and the normal level of interest rates to generate the revenue so that they can earn profits if they manage their branches and ATM networks efficiently. Since 2008 that has not been a profitable strategy for commercial banks. Thus commercial banks have been under enormous pressure for a near-decade now.

It is there, I think, that central banks have been inflicting significant pain. It is not the case that extremely low interest rates on extremely safe assets has been keeping alive businesses that ought to shut down. For small businesses, credit is tight. Equity earnings yields are about normal–a company that is trying to think about whether to expand or payout its earnings is not facing any sort of environment in which there is a cost of capital that is in any sense “artificially low”.

So I do not see the Fed as having given any sort of pass to industry as a whole at all. It has kept the rest of the economy functioning while imposing very heavy pressures on the commercial banking sector. This is not normal. But it is not a bubble…