Some problems are so complex that you have to be highly intelligent and well informed just to be undecided about them. - Laurence J. Peter

Friday, January 30, 2009

Destroying wealth to improve the economy

In the past, people sometimes tried to improve the economy by destroying wealth:
President Roosevelt came into office proposing a New Deal for Americans, but his advisers believed, mistakenly, that excessive competition had led to overproduction, causing the depression. The centerpieces of the New Deal were the Agricultural Adjustment Act (AAA) and the National Recovery Administration (NRA), both of which were aimed at reducing production and raising wages and prices. Reduced production, of course, is what happens in depressions, and it never made sense to try to get the country out of depression by reducing production further. In its zeal, the administration apparently did not consider the elementary impossibility of raising all real wage rates and all real prices.

The AAA immediately set out to slaughter six million baby pigs and reduce breeding sows to reduce pork production and raise prices. Since cotton plantings were thought to be excessive, cotton farmers were paid to plow under one-quarter of the forty million acres of cotton to reduce marketed production to boost prices.

History repeats:
The second plan is more politely known as "fleet modernization." It combines economic as well as environmental goals in one package.

Under a bill introduced by Sen. Dianne Feinstein, D.-Calif., owners of older cars would get vouchers worth thousands of dollars toward the purchase of newer, more fuel-efficient vehicle. For the customer to get that cash, the car dealer would have to certify that the trade-in was getting scrapped and not resold. The car's vehicle identification number (VIN) would be tracked to make sure it never shows up on a vehicle registration again.

Added: from the Wall Street Journal on January 28:
[In discussions of the stimulus bill,] dairy and beef cattle producers butted heads over talk that the government might buy up dairy cattle for slaughter to drive up depressed milk prices.

Thursday, January 29, 2009

Home ownership and labor mobility: a trade-off

Governments tend to promote/subsidize home ownership. Why? Rourke O'Brien and David Newville write in the Washington Post (January 11, 2009):
Studies have shown that families who own their own homes are more likely to be involved in their communities, to report higher satisfaction with their lives, and to vote. Homeownership also has positive impacts on children, such as increased high school graduation rates, fewer behavioral problems and better job outcomes after school, and these effects have been found to be strongest among low-income homeowners.
Citation needed, but ok...
What's more, homeownership has been and will continue to be the single biggest source of wealth for low- and moderate-income families. Even if housing prices don't rise much, the forced saving that comes from paying down a mortgage can help families build equity that can then be leveraged to finance a child's education, provide financial security in retirement or pass wealth on to the next generation.
"Even if housing prices don't rise much"? What if they fall by 40%?

We should consider the costs of promoting home ownership too. Arguably, it contributed to an enormous financial crisis. (Note: don't believe that explanation - or any other explanation of the financial crisis - unless you have a good reason to think you're better at economics than Nobel Prize-winning economists, because Nobel Prize-winning economists disagree on this.)

Also, home ownership reduces labor mobility, as Will Wilkinson points out. And with a labor force more heterogenous than ever before*, America needs labor mobility more than ever.

Maybe governments should pursue policies that promote labor mobility. (Or maybe governments should leave people the hell alone.) One downside to that might be that labor might mobilize itself to some other country (say, to Taiwan - it's a great place to do business), or even to some still further frontier.

*That is, the skills of the labor force are more specialized than before. Fifty years ago America had more factory jobs than it does now. My understanding is that one high school dropout could work in one factory about as capably as another factory. But you can't easily switch from being a website developer to a biotech engineer, or whatever it is people are doing in America these days.

Sunday, January 18, 2009

How do you distinguish good experts from bad experts?

How do you distinguish good experts from bad experts? It would be an extraordinarily useful skill - a meta-skill that gives you access to so many others.

Priests and biologists both claim to know the origin of human life. How do you choose between the two? It seems obvious to me, but people disagree on this so there's something non-obvious about it.

How do you distinguish between a good mutual fund manager and a bad one? It's really hard. So you might choose to get an index fund instead, which is probably not a bad idea. In one sense, that would be judging the market to be your good expert. Patri Friedman didn't do that in 2008; he chose a bear strategy instead. This is evidence that Patri Friedman is good at choosing good investing experts or is a good investing expert himself (but not sufficient evidence - watch him for another ten years).

How do you distinguish between bad science and good science? Patri Friedman thinks he can. squid314 challenged him:
You need to prove that you can "beat the house"; that your own judgment is likely to be less fallible than the nutritional scientists' for some reason. Top nutritional scientists should know everything you do about the problems with certain kinds of studies and take that into account. So all of the pitfalls that apply to nutritional scientists equally apply to you, unless you have some specific reason to think they don't. And then the experts have the extra advantage of much greater familiarity with the subject matter.

Patri claims "that by using [rigorous scientific procedures], digging into a few papers, correcting for funding biases, one can occasionally decide to take a contrarian view, and be correct."

I suspect that that approach would yield a strong conclusion on the priest/biologist question.

How do you distinguish between good economics and bad economics? Nobel Prize-winning economists Paul Krugman and Paul Samuelson have a different view of macro-economics than Nobel Prize-winning economists Milton Friedman and Friedrich Hayek (of course, all four of them disagree, but if you're going to divide them into two groups, that's a sensible categorization). Who are the better economists? How do you know whether you are a good enough economist, or a good enough judge of economists, to decide?