Category: Equitablog

Should-Read: Adam Smith (1776): Publicly Funded Education: “In the progress of the division of labour, the employment of the far greater part of those who live by labour…

…that is, of the great body of the people, comes to be confined to a few very simple operations, frequently to one or two. But the understandings of the greater part of men are necessarily formed by their ordinary employments. The man whose whole life is spent in performing a few simple operations, of which the effects are perhaps always the same, or very nearly the same, has no occasion to exert his understanding or to exercise his invention in finding out expedients for removing difficulties which never occur. He naturally loses, therefore, the habit of such exertion, and generally becomes as stupid and ignorant as it is possible for a human creature to become.

The torpor of his mind renders him not only incapable of relishing or bearing a part in any rational conversation, but of conceiving any generous, noble, or tender sentiment, and consequently of forming any just judgment concerning many even of the ordinary duties of private life. Of the great and extensive interests of his country he is altogether incapable of judging, and unless very particular pains have been taken to render him otherwise, he is equally incapable of defending his country in war. The uniformity of his stationary life naturally corrupts the courage of his mind, and makes him regard with abhorrence the irregular, uncertain, and adventurous life of a soldier.

It corrupts even the activity of his body, and renders him incapable of exerting his strength with vigour and perseverance in any other employment than that to which he has been bred. His dexterity at his own particular trade seems, in this manner, to be acquired at the expence of his intellectual, social, and martial virtues. But in every improved and civilized society this is the state into which the labouring poor, that is, the great body of the people, must necessarily fall, unless government takes some pains to prevent it….

In a civilized state… though there is little variety in the occupations of the greater part of individuals, there is an almost infinite variety in those of the whole society. These varied occupations present an almost infinite variety of objects to the contemplation of those few, who, being attached to no particular occupation themselves, have leisure and inclination to examine the occupations of other people. The contemplation of so great a variety of objects necessarily exercises their minds in endless comparisons and combinations, and renders their understandings, in an extraordinary degree, both acute and comprehensive.

Unless those few, however, happen to be placed in some very particular situations, their great abilities, though honourable to themselves, may contribute very little to the good government or happiness of their society. Notwithstanding the great abilities of those few, all the nobler parts of the human character may be, in a great measure, obliterated and extinguished in the great body of the people.

The education of the common people requires, perhaps, in a civilized and commercial society the attention of the public more than that of people of some rank and fortune. People of some rank and fortune are generally eighteen or nineteen years of age before they enter upon that particular business, profession, or trade, by which they propose to distinguish themselves in the world. They have before that full time to acquire, or at least to fit themselves for afterwards acquiring, every accomplishment which can recommend them to the public esteem, or render them worthy of it. Their parents or guardians are generally sufficiently anxious that they should be so accomplished, and are, in most cases, willing enough to lay out the expence which is necessary for that purpose.

If they are not always properly educated, it is seldom from the want of expence laid out upon their education, but from the improper application of that expence. It is seldom from the want of masters, but from the negligence and incapacity of the masters who are to be had, and from the difficulty, or rather from the impossibility, which there is in the present state of things of finding any better. The employments, too, in which people of some rank or fortune spend the greater part of their lives are not, like those of the common people, simple and uniform. They are almost all of them extremely complicated, and such as exercise the head more than the hands. The understandings of those who are engaged in such employments can seldom grow torpid for want of exercise. The employments of people of some rank and fortune, besides, are seldom such as harass them from morning to night. They generally have a good deal of leisure, during which they may perfect themselves in every branch either of useful or ornamental knowledge of which they may have laid the foundation, or for which they may have acquired some taste in the earlier part of life.

It is otherwise with the common people. They have little time to spare for education. Their parents can scarce afford to maintain them even in infancy. As soon as they are able to work they must apply to some trade by which they can earn their subsistence. That trade, too, is generally so simple and uniform as to give little exercise to the understanding, while, at the same time, their labour is both so constant and so severe, that it leaves them little leisure and less inclination to apply to, or even to think of, anything else.

But though the common people cannot, in any civilized society, be so well instructed as people of some rank and fortune, the most essential parts of education, however, to read, write, and account, can be acquired at so early a period of life that the greater part even of those who are to be bred to the lowest occupations have time to acquire them before they can be employed in those occupations. For a very small expence the public can facilitate, can encourage, and can even impose upon almost the whole body of the people the necessity of acquiring those most essential parts of education.

The public can facilitate this acquisition by establishing in every parish or district a little school, where children may be taught for a reward so moderate that even a common labourer may afford it; the master being partly, but not wholly, paid by the public, because, if he was wholly, or even principally, paid by it, he would soon learn to neglect his business. In Scotland the establishment of such parish schools has taught almost the whole common people to read, and a very great proportion of them to write and account. In England the establishment of charity schools has had an effect of the same kind, though not so universally, because the establishment is not so universal.

If in those little schools the books, by which the children are taught to read, were a little more instructive than they commonly are, and if, instead of a little smattering of Latin, which the children of the common people are sometimes taught there, and which can scarce ever be of any use to them, they were instructed in the elementary parts of geometry and mechanics, the literary education of this rank of people would perhaps be as complete as it can be.*137 There is scarce a common trade which does not afford some opportunities of applying to it the principles of geometry and mechanics, and which would not therefore gradually exercise and improve the common people in those principles, the necessary introduction to the most sublime as well as to the most useful sciences.

The public can encourage the acquisition of those most essential parts of education by giving small premiums, and little badges of distinction, to the children of the common people who excel in them. The public can impose upon almost the whole body of the people the necessity of acquiring those most essential parts of education, by obliging every man to undergo an examination or probation in them before he can obtain the freedom in any corporation, or be allowed to set up any trade either in a village or town corporate.

It was in this manner, by facilitating the acquisition of their military and gymnastic exercises, by encouraging it, and even by imposing upon the whole body of the people the necessity of learning those exercises, that the Greek and Roman republics maintained the martial spirit of their respective citizens…

Should-Read: Bernanke and Yellen’s failure to push the envelope further to attain an inflation rate higher than 2% has created enormous risks, given our dysfunctional government’s right-wing ideologically-driven inability to get its fiscal act together. I note that a little opposition to tax cuts that consumed our fiscal space without credible prospects of boosting growth would have been welcome and constructive from Marty Feldstein. But that ship has sailed. And here he is talking sense: Martin Feldstein: The Heightened Risks of a US Downturn: “The Fed traditionally responds to a downturn by sharply reducing the short-term federal funds rate…

…At only 1.4% now, the Fed has little scope for a significant rate reduction…. The responsibility for stimulating the economy in the next downturn will therefore fall to fiscal policy–changes in taxes and government spending. A new temporary tax cut would not work…. An economic downturn in the next few years would be a good time to enact make the cuts permanent. The other way to reverse an economic downturn would be to increase government spending. There is now widespread bipartisan support for increased spending on infrastructure…. The US Congress and the White House should begin now to develop an inventory of infrastructure projects…. If there is no downturn during the next several years, it would still be desirable to start some of those projects….

The high level of the national debt–about 77% of GDP now and heading to 97% at the end of the next ten years–would create strong resistance to either tax cuts or increased spending. But a significant economic downturn with limited scope for Fed action would leave Congress with little choice…

Should-Read: As Alfred says: “Some men just want to watch the world burn”. It is not as though any conservative technocratic ideas about how to make health financing fairer and more efficient are being deployed—that is not the object of this political game being played by the Republicans in Washington: Zac Auter: U.S. Uninsured Rate Rises to 12.3% in Third Quarter:

Should-Read: Definitely an ongoing debate to follow: Brink Lindsey and Steven M. Teles: The Regulatory Subsidy for Extreme Leverage: A Reply to Mike Konczal: “We do not argue—although Konczal suggests we do—that the problem with financial regulation is a dearth of ‘economic liberty’…

…that can be remedied by “getting government out of the way.” The modern state and modern finance have been inextricably connected since the origins of both. Accordingly, our analytical starting point is to take as given an active government role in overseeing the financial sector. The question, therefore, is entirely one of choosing which institutional arrangements the state uses to facilitate and structure financial markets, with a view to the different effects of various possible arrangements on stability, growth, and inequality. Our contention is that the United States has adopted—typically at the behest of the financial industry— institutional arrangements that generate high system instability while redistributing income and wealth upwards. Nothing in our argument should be understood to suggest that the problem is “too much regulation” and the answer is “deregulation,” for the simple reason that, at the margin where policy change occurs, those terms are basically meaningless. Reducing regulation on the one hand (say, by reducing limits on leverage) may just increase the role of the state (through bailouts) on the other…

Should-Read: A remarkable fact—especially since a number of companies end their listing periods on CRSP when they are acquired. That you are more likely to not to have better performance over the lifetime of a company by simply putting your money in Treasury bills is striking evidence of skewness—and the extraordinary benefits to diversification. It also means that, in a world with lots of undiversified portfolios, successful wealth is unlikely to be significant evidence of portfolio-choosing skill: those who were lucky enough to get in on the ground floor of Xerox or Apple will turn out to have outperformed and to be richer than those who knew what they were doing: Hendrik Bessembinder: Do Stocks Outperform Treasury Bills?: “Most common stocks do not outperform Treasury Bills…

…Fifty-eight percent of common stocks have holding period returns less than those on one-month Treasuries over their full lifetimes on CRSP. When stated in terms of lifetime dollar wealth creation, the entire gain in the U.S. stock market since 1926 is attributable to the best-performing four percent of listed stocks. These results highlight the important role of positive skewness in the cross-sectional distribution of stock returns. The skewness in long-horizon returns reflects both that monthly returns are positively skewed and the fact that compounding returns itself induces positive skewness. The results also help to explain why active strategies, which tend to be poorly diversified, most often underperform…

Should-Read: Actually, I do not believe that the work of wizards like Norman Borlaug “encouraged [the] complacency about environmental problems that threaten us today”. That is a fake rap, Bill—the complacency has other, much more self-interested and selfish roots than the writings or deeds of those working to raise productivity: William Easterly: Review: Going Beyond the Limits of the Earth With ‘The Wizard and the Prophet’: “Even though the explosion of population and living standards that Vogt feared did occur, the famines he expected never did…

…Global population is three times higher than when Vogt was writing, while global living standards (per capita GDP) are about four times higher…. What happened? Part of the answer is that Norman Borlaug happened….Like many breakthrough innovations, those of the Green Revolution were in part the result of serendipity. The Rockefeller project in Mexico sought to boost maize production—and failed…. But one small and obscure part of the project worked: a program to control a destructive fungus on wheat called stem rust… develop[ment of] wheat varieties that were not only resistant to stem rust but could (along with fertilizer, pesticides and irrigation) dramatically raise yields. Borlaug’s initial success in Mexico led to later triumphs in India and Pakistan, where there were some similarities in climate….

The author’s portrayals of Vogt and Borlaug make the former much harder to love. Vogt sometimes seemed to care more about cormorant babies than human ones. He criticized “unchecked spawning” and “untrammeled copulation” of “backward populations.” He wrote that people in India breed with “the irresponsibility of codfish.” He suggested in 1952 that “industrial development should be withheld” from poor countries as a form of birth control. Population scares led to programs in which, Mr. Mann says, “millions of women were sterilized, often coercively, sometimes illegally, frequently in unsafe conditions, in Mexico, Bolivia, Peru, Indonesia, Bangladesh, and, especially India.” India sterilized 8 million men and women in 1975 alone….

To Mr. Mann, Vogt’s major contribution was to sound the needed warning about environmental problems that today include “over-fishing, deforestation, soil degradation, contaminated groundwater, declining populations of mammals and birds, and, most alarming, the possibility of very rapid climate change.” But the author notes Vogt’s big mistake: He blamed all this on growth. In fact, Mr. Mann writes, “the contribution of population growth to [these environmental problems] is secondary, and the relationship to economic growth is equivocal.” The author notes that Vogt “denounced social scientists as fools,” but Mr. Mann concludes “he should have listened to them.”… You can… simply tax polluters or regulate the pollution…. As finite resources get scarcer… their price will increase… people will economize…. It is not that hard, in the arid American Southwest, to replace water-thirsty grass lawns with dryland plantings….

The author [also] suggests that Borlaug and the Wizards should also have listened to social scientists more. A political system that has been captured by the elites may let those elites get away with land and sea degradation… as happened in India and Pakistan after the Green Revolution….The excessive alarmism of Prophets helped inspire the modern environmental movement, but implicitly opposed the rise in living standards of billions of poor people. Wizards, by contrast, helped defy the limits to growth to make the escape from poverty possible, but they may have encouraged complacency about environmental problems that threaten us today…

Must-Read: Marvin Goodfriend could have given any one of three answers to account for his rather strident opposition to Ben Bernanke’s monetary policy at the start of the 2010s: (a) that he was right, and that Ben Bernanke was lucky things turned out well and did not go south; (b) that he was wrong, and has rethought his views in such and such a way; or (c) that he was giving his political patrons what they wanted to hear. Any one of the three would have been better than filibustering: Binyamin Appelbaum: Senate Confirms Jerome H. Powell as Fed Chairman: “Brown and other Democrats questioned the qualifications of Marvin Goodfriend… [who] repeatedly predicted after the 2008 financial crisis that the Fed’s actions were about to unleash higher inflation…

…That did not happen…. Goodfriend was flustered by questions about his predictions. He conceded that some had been wrong, but defended others and declined to explain his thinking…. After the crisis, Mr. Goodfriend repeatedly criticized the Fed’s stimulus campaign as likely to generate inflation rather than economic revival. He told Bloomberg in 2012 it was “really doubtful” the Fed could reduce unemployment, which was then hovering above 8 percent, to 7 percent. Furthermore, he said, even if the Fed succeeded in doing so, “it would give rise to rising inflation in the next few years, which would be disastrous for the economy.”…

Mr. Goodfriend has continued to criticize the Fed in recent years. In March, he told a House committee that the Fed’s benchmark interest rate was “too low,” and he endorsed the adoption of a monetary policy rule that would limit the role of human judgment in raising and reducing interest rates. On Tuesday, Mr. Goodfriend said he remained in favor of a policy rule, but he was less critical of current Fed policy, which he described as being “more or less on the right path going forward.”…

Should-Read: Marvin Goodfriend must have been much less impressive in his confirmation hearing than I would have imagined possible. I need to try to figure out why: Paul Krugman: The Durability of Inflation Derp: “What’s striking about the economists who predicted runaway inflation in 2009-2011 is that as far as I can tell none of them has even gotten to step (a), acknowledging their mistake…

…They kept saying the same wrong thing year after year (which is what makes it derp), and even those who eventually stopped saying the same thing never admitted past mistakes. Thus when Bloomberg tried, four years later, to track down economists who signed the infamous open letter to Ben Bernanke insisting that quantitative easing would “debase the dollar,” it couldn’t find a single person to admit that the original warning was wrong.

Why this durability of unrepentant, unprofessional derp? Surely at least part of it is political: predicting doom from money-printing appeals to powerful forces on the right, is indeed a sort of credential that guarantees favor, no matter how wrong the prediction. And let’s face it: the economics profession is essentially craven…. There are no costs to unprofessional behavior that serves right-wing ideology; you’ll still get invited to all the meetings, get treated with respect, even get letters from liberal and moderate colleagues supporting your nomination to high office…. And so today we have Marvin Goodfriend…. Inflation derp endures. In fact, it’s good for your career…

Should-Read: Donald Trump really is not doing the job of president. It is not clear who is: Matthew Yglesias:Trump’s CNBC interview from the Davos World Economic Forum: “President Donald Trump’s first non-Fox television interview in a long time, conducted with CNBC’s Joe Kernen from Davos, Switzerland, is in many respects weirdly devoid of substance…

…And much of the substance that’s there consists of misstatements of fact. But lurking in that is an important insight: Trump is holding the office of president, but he’s not doing the job of president. He seems to have no real idea what’s going on, even with his own signature policy moves. Some of his misstatements have the color of propaganda, but often he seems to be caught up in other people’s propaganda or even to have misunderstood his own talking points…. He can’t even describe his own negotiating positions in the immigration standoff…. Listening to him talk is interesting from an entertainment perspective… but it conveys no information about the world, the American government, or the Trump administration’s policies. If Kernen wanted to help his viewers understand what’s going on, he’d have been better off interviewing someone else…

Should-Read: It looks as though Marvin Goodfriend is a very bad choice for Fed governor—that he will behave like one of those Bush-era regional bank presidents who was a stopped clock, impervious to the news and to argument: Matt O’Brien: Why can’t conservatives just admit they were wrong about inflation?: “Marvin Goodfriend, one of President Trump’s picks for the Federal Reserve, would have been terrible at the job over the past 10 years…

We don’t know is whether he’ll be any better at it now. The early signs, though, are not encouraging…. When a once-in-three-generations financial crisis sends unemployment into the double digits and inflation well below the central bank’s 2 percent target… everybody can agree that the Fed should be doing everything it can to help the economy. Well, everybody but people like Goodfriend…. For years… Goodfriend has insisted that hypothetical inflation is a bigger concern than actual unemployment and that the best thing the Fed can do to promote job growth in the long run is to keep inflation in check…. It’s an ideology of inaction in the face of mass unemployment. And in this, Goodfriend has never wavered….

To be fair, though, to err is to be an economic forecaster. The real question is whether you learn from your mistakes. Goodfriend, unfortunately, hasn’t. Indeed, when Sen. Sherrod Brown (D-Ohio) asked him during his confirmation hearing this week why he had been so “wrong so many times,” Goodfriend said only that low inflation is important. This isn’t exactly the level of self-reflection we would hope for after empirical reality had spent the last 10 years refuting his ideas….

The first mistake Goodfriend made was… he didn’t realize the 1970s were over…. The second mistake… was… he didn’t think the Fed should try to make things better because he didn’t think it could… a faux world-weary philosophy in which not doing enough to stimulate the economy becomes an excuse to do even less of it. That they haven’t been able to get things back to normal so far means that it might simply be impossible to do. Something big must have transformed the economy, right? Because it can’t be their fault….

We were lucky the Fed didn’t believe this during the last economic crisis. Now we’ll just have to hope there isn’t another one…