Intergenerational Transfer of Wealth

If you are old, particularly if you are a homeowner, then you likely saw a good chunk of your wealth deteriorate due to the collapse of housing prices directly or due to the MBS fiasco indirectly. Regardless, you now have less wealth. It's kind of like an accounting error...you wake up one morning and realize you had been consuming and planning as if that 2 was really a 5. Opps.

If you are young, particularly if you do not own a home, then your consumption is derived from income and you aren't much impacted by the current crisis. Moreover the housing bubble just made a very important source of investment and forced savings much more affordable for you. This is windfall. It's like walking into the grocery store and discovering everything is now 1/2 price...time to stock up. True, we now know that real estate is not a risk free investment and prices can fall and fall big. But that certainly doesn't mean housing is a bad opportunity for a patient investor. Nor does is it a especially risky investment with the right collateral. People with 20% down are not (yet) sitting on negative equity.

So we are experiencing a transfer of wealth across generations. Lets look at how this could play out for three specific groups:

(1) Many homeowners have children and many homeowners plan to bequest some wealth to their children. But now their kids can benefit from the housing slump. So if you own a home and are planning to leave something for your kids, then fret not. You can reduce the amount you were planning to pass down without guilt. Your balance of wealth is basically a wash.

(2) On the other hand, if you are young and are planning to get a shout out from the old folks, then situation will be a wash for you too. Better start looking for a house to buy if you don't want to take a hit on the inheritance.

(3) Now, if you are like me, then you are in the best position to take advantage of the opportunity the housing slump presents. I can benefit from the affordability of housing AND I don't lose anything because my parents weren't going to give me anything in their will anyway! Woohoo.

A Quick Reminder of a Real Crisis

Creating a World that can Feed Itself

Bill "gets it"

Clinton on Palin.

"I get this," Clinton said. "My view is ... Why don't we like them and celebrate them and be happy for her elevation to the ticket? And just say that she was a good choice for him and we disagree with them?"

My Simple Model for Dependence on Foreign Oil

Suppose you’re stranded on an island with two other people; call these people Crusoe and Friday. The island is nicely divided such that you control the only fishing spot, Crusoe has exclusive property rights to coconuts, and Friday has private access to firewood. Consumption of fish, coconuts and firewood are all essential for survival on the island. Fortunately, the three of you have an arrangement to trade with each other under mutually agreeable terms. All is well.

Now suppose as winter approaches (assume your island is sufficiently far from the equator to experience seasons) colder weather requires that you consume more firewood to stay warm. Growing demand for firewood increases scarcity and raises the price Friday charges in terms of fish and coconuts. Under these new conditions, Friday starts to accumulate excess quantities of coconuts and smoked (otherwise it would spoil) fish. For reasons of personal safety you become seriously concerned about Friday’s growing stores. For example, what if: (1) natives attack and demand coconuts or fish to spare your life, (2) sources of coconut and fish become depleted and Friday uses his supplies to extort your services, or (3) other individuals wash ashore and fish and coconuts become extremely valuable.

This “transfer of wealth” becomes very worrying, so you consider your options:

(a) After researching potential technologies for generating heat you discover that it is possible to burn coconut husks. Currently generating the equivalent heat directly from coconuts requires 2x the cost of firewood in terms of coconuts. If you fully adopt this method there is an unknown probability that you could improve your coconut burning technology. However, it is unlikely that you would achieve parity or greater fuel efficiency relative to firewood before the end of winter.

(b) You could spend time searching the island for alternative ways to generate heat. Currently you are unaware of any feasible alternative fuel sources on the island. And searching requires forgoing time spent fishing, which currently is your only source of income.

(c) It is possible to be marginally more conservative with your consumption of firewood. However, doing so reduces your energy such that you are less productive when fishing.

(d) Maintaining the current arrangement is always a possibility.

What is your optimal strategy for long term security and comfort?

I know next to nothing about finance...but what the hell.

My opinion is that the current financial crisis is NOT bad. Admittedly, I would be less nonchalant if I were more exposed. But I think the net long-term effect of a crisis like this on the economy is positive. Our historic prosperity is a function of innovation and efficiency. Failure, uncertainty and fear are necessary inputs in the production of innovation and efficiency learning.

The question is not "will we have economic setbacks?" but rather "how frequent and deep will the impacts be?" Our present situation is serious, yes. But were it not for the current crisis, the next pothole would likely be an even bigger chasm. Ideally, we want frequent, small bumps in the road; the resulting long term trend will be upward sloping and smooth from a distance. Banks fail almost every other week, but we don't hear about them because our economic system depends upon and absorbs these occasional house cleanings in the long run.

I think the "bailouts" (they can hardly be characterized as bailouts) were probably preferrable to not getting involved, however, I'm sure there were better alternatives now that we have the benefit of hindsight. The important question looking forward is whether or not the federal government will allow the current supply of fear to self-regulate the market or if they will impose inevitably imperfect regulations which foster the type of false security that generated the current high-risk situation.

No matter how much you idiot-proof capitalism, a bigger idiot will always emerge. The two alternatives are (1) reject capitalism, or (2) punish the idiots. There really is no middle ground. You cannot design a better variety of capitalism than the one produced by the free market. So, we would do well to take advantage of what educators refer to as a "teaching moment".

And as for those non-idiots who are nevertheless suffering from the crisis: well, that is the fee we pay to live as the most prosperous generation in the most prosperous nation in history.

"My 10+ Axioms of Arguing" or "How to Enjoy a Good Argument & Why"

1. Intelligent people with whom I disagree tend to make the most interesting and enjoyable friends.

2. When a comparably intelligent person has access to the same information and arrives at a different conclusion, it is realistic to acknowledge the probability that your own particular belief is true to be only marginally higher than the opposing belief; roughly 0.50 assuming one view is, in fact, correct. By comparison, people typically irrationally assign something approaching 1 to the probability that their belief is true. Accepting this observation as empirically and epistemically correct is an excellent foundation for sane debate and helps to limit general bias. This perspective also helps to distinguish those beliefs with justifiably high probability. [Note, I credit this concept to Tyler Cowen and I, like him, give it a high P(true)].

3. Accepting (2) does not erode confidence in your beliefs. Advocating for a belief despite awareness that you do not hold an informational advantage and that opposing views have probabilistic merit is a far more realistic and genuine flavor of confidence. Blind confidence is not confidence; it is faith. There is nothing wrong with faith, per se, but it is not compelling.

4. Engaging in a debate with someone can indicate that (a) you think they are wrong and want to make them feel like a fool, (b) you think they are wrong and want to correct the error in their thinking, or (c) you respect their intelligence enough to give them a chance to challenge your view. Most people immediately assume the motive for an argument is (a) and attempt to reciprocate or become defensive. This can be very frustrating when your motive is not (a), particularly when it is (c).

5. Not engaging in a debate with someone when the opportunity is presented usually indicates you think that person is not worth your time.

6. Very few beliefs worth discussing are accepted by a majority. By holding non-universal beliefs, a person is implicitly arrogant. That is, the person starts under the assumption that large groups of people are either smart and ignorant or informed and stupid. Arrogance is perfectly healthy and does not necessarily contradict (2). In fact, accepting (2) and (6) suggests that you are both occasionally arrogant AND willing to admit that there is a non-trivial probability that you are occasionally the one who is stupid or ignorant.

7. People who are not occasionally arrogant have often not critically examined their own views. They are also often less interesting.

8. Intellectual debate can be incredibly fulfilling for those of us who are so inclined. Not everyone is so inclined.

9. The confirmation bias is the largest hurdle to thoughtful debate. Resisting the confirmation bias, and bias generally, can be incredibly liberating.

10. People have an *extremely* strong interest in maintaining their beliefs. That is, once a belief is formed, the social and psychological cost of rejecting the belief is very high. This has two implications. See 11 and 12.

11. Convincing someone with strong priors to change their beliefs is largely futile. Even when your argument is perfectly lucid, they will likely cling to their preconceptions. It is far more effective to create small fractures in their perspective by convincing them that it is reasonable to accept minor refutations without rejecting their principal beliefs.

12. Somewhat paradoxically, the best way to improve the accuracy of your beliefs is to postpone arriving at any particular belief for as long as is practical. This lowers the eventual costs in (10) and compliments the application of (2).

Brilliant & Provocative

But what else do you expect from Sowell:

Conservatives, as well as liberals, would undoubtedly be happier living in the kind of world envisioned by the left.

Very few people have either a vested interest or an ideological preference for a world in which there are many inequalities.

Even fewer would prefer a world in which vast sums of money have to be devoted to military defense, when so much benefit could be produced if those resources were directed into medical research instead.

It is hardly surprising that young people prefer the political left. The only reason for rejecting the left's vision is that the real world in which we live is very different from the world that the left perceives today or envisions for tomorrow.

The No Plan Plan

The current Obama-Biden talking point is, essentially, that McCain-Palin is not presenting detailed policy perscriptions--that the Republicans are not running on issues. The observation the Democrats are making is, more or less, correct. And it highlights the fundamental difference between the two parties. Relative to Democrats, the Republican platform is a closer approximation to classically liberal philosophy. Republicans stray from this philosophy on some issues* but, on balance, they embrace a Hayakian understanding of the complexity of economic and political policy. In doing so, Republicans generally reject the temptation to develop untenable plans for systems for which top down management is ineffective at best. The alternative to developing detailed plans is to empower individuals and encourage emergent order and efficiency. What can be described as the lack of a plan is, in fact, a "plan" which seeks the market (in the broadest possible sense of the word) benefits of greater individual freedom and less government intrusion.

To those of us who subscribe to this philosophy, the concept of a "community organizer" is an ideological oxymoron with a dangerous and destructive mission. A country (and an economy) is not a company. "It" is not a household. "It" is not softball team. "It" is not a Thanksgiving dinner. A country and the economy are, in fact, abstract concepts--they are composed of millions of individuals with unique interests which cannot be aggregated and uncountably many pieces of unknowable information about the interactions between those individuals and available resources. To attempt to manage "it" is to assume capabilities which simply do not exist and to put power in the hands of individuals who are not only unqualified, but also dangerously confused about what can be accomplished with a plan.

Being the smart guy he is and coming from U Chicago, I assume Obama understands, but rejects, this notion. True, the hope embodied in policy plans is quite inspiring and attractive. And surely there is a human tendency to attempt to control your destiny. However, I find the implicit admission of the limitations of government plans in favor of the pursuit of individual freedom and choice considerably more attractive--even ethically superior. This is why, despite my growing distaste for politics generally, I still have the stomach to support the Republican party.

*Some social issues are, of course, the great exception.

Political Dis-Disillusion

I think if you were to put the volume of Palin's and Obama's experience on a scale they would essentially balance out. In this sense, I agree with the doubters.

The difference is in the substance of their experience. Obama's most unattractive quality is that he is a politician's politicians. He is a career academic and politician. Despite his many attractive features, his professional background and rhetoric embodies everything that repulses me about politics. This is the deal-breaker.

Palin is the most un-politician politician. She ran a small business. She raised a family (including having to make some very tough decisions). She obviously isn't afraid to get some dirt on her boots. She is unabashedly religious (I don't necessarily share her beliefs) in a way that appears sincere and down-to-earth (rather than the opportunistic faith that is so common in politics). In sum, I am not aware of a more authentic public figure. True, she may not have the most political experience. But I put infinitely more value in the non-political experience she has than the experience of someone like Joe Biden, or even John McCain, and *especially* Barack Obama.

I would also split some pretty thick hairs on substantive differences in political experience between her and Obama. Obama has no executive experience. Palin does...she's the only one on either ticket who does. Obama's biggest Senate accomplishment is co-sponsoring an uncontroversial ethics bill. Palin took on a state known for it's corruption. Obama's considered an expert in constitutional law, in all it's esoteric glory. Palin is considered an expert on energy, arguably the most important current domestic policy debate.

Will I agree with everything she says and does? No. Do I have a serious crush on her? Yes.

Taking Sides

From the UK's Telegraph, George Bridges:

"The choice is straightforward: whose side are you on - Malthus's or Monsanto's?"

What If Climate Change

Ignore for a minute everything you know or have heard about climate change.

Now, suppose its 1992 and an overwhelming scientific consensus has emerged that the Earth is on the brink of a drastic global temperature shift. We are about to enter a significant ice age brought on by totally natural, NON-anthropogenic forces. Experts are in agreement that, if unabated, this trend will have devastating consequences for the global economy and human welfare, as well as for biodiversity and ecological health.

What is the optimal response in terms of public policy and social responsibility?

Do we have a moral obligation to not interfere with natural climate change? Would it be permissible (or rational) to protect the current environment and existing species from the harshness of…the environment? Isn’t that an oxymoron?

Or, alternatively, is our moral obligation to preserve human welfare?

How skeptical should we be of the ability of science to predict and effectively respond to a totally natural phenomenon?

I’m not trying to make any particular point here. I’m just curious what the response would be. How much of the current response to climate change is due to the self-loathing of modernity and a general disgust for industrialization rather than environmentalism or good economics per se. In other words, how much of the political and societal response hinges on “anthropogenic” climate change?

Prompted by this article from Reuters:

"We know abrupt climate change happens," said Jim White, a paleoclimatologist at the University of Colorado at Boulder.

"We don't know why it happens and we don't know what to look for as a first early warning."

Marginal Inflight Service

At dinner last night there was discussion of the quality of (or lack there of) airline service. One individual complained about the consumer injustice of some airlines now charging for checking an additional piece of luggage. I made the observation that most of us at dinner were business travelers or light packers so, on average, we benefit from the policy through lower ticket prices. “But that’s ridiculous, ticket prices haven’t gone down,” everyone at the table scoffed. I tried, rather unsuccessfully, to explain:

A piece of luggage is additional weight and so adds to the cost of the flight. Absent pricing, the cost is distributed across all ticketed flyers. Unless you carry more than the average amount of luggage, you benefit from the policy by no longer splitting the bill with heavy packers. In fact, flyers will respond to the price signal, begin to pack lighter, on average, and the entire flight will become more efficient, so the cost should go down marginally for everyone, but more for lighter packers.

The same is true for airline food. Unless you really like airline meals, the policy of charging for snacks instead of serving free meals is a net benefit to you.

Of course, given the variability in airline prices and myriad other costs, it would be IMPOSSIBLE for a customer to observe this effect. But unless you think airline prices are set collusively, it HAS to be true.

The logic is glaringly obvious. And yet it amazes me how difficult it is for otherwise exceptional bright people to grasp the concept. How has a species which appears to have selected for a general aversion to or incapacity for economic thinking achieved such prosperity?

Empowering Consumers

I sent the following letter to the NYT this morning in response to this article.

To the Editor:

Paul Krugman indicts poor regulation for recent food scares that have consumers worried about their groceries and have devastated some export markets (“Bad Cow Disease,” June 13). He’s right.

Where Krugman misleads is implying that more regulation is inevitably good regulation. It is the extent of the current regulatory regime that has entrenched big farm and food interests and hamstrung competition. The result? Companies have no incentive to self-regulate knowing USDA and FDA bureaucrats will ultimately be held responsible. And, it is nearly impossible for new companies to enter the market and feed consumers the products we want.

Not only do consumers have less choice, we also have less motivation to be informed buyers. A misguided willingness to trust fallible and poorly incentivized regulators helped create this situation.

If you want a safe food supply, then ease regulation, induce greater competition, and watch the power of reputation takeover.

That’s the guardian of free-market capitalism Milton Friedman espoused, not lawyers.

Kevin L. Richards

More Everyday Progressivity

Suppose you walk into your favorite restaurant and you suddenly discover all of the menu prices have been cut by 10%. Sweet! Then you turn the menu over and notice that the senior citizen prices have been cut by 20%. How nice, this price cut was progressive in favor of seniors. What a great restaurant policy.

But wait! You look closer and notice that 20% of the cheaper senior price is smaller in absolute value than 10% of the more expensive regular price. So, the menu change actually reduced the amount of the “senior discount”—the difference between the regular price and the senior citizen price. What the *&%$? Does that mean that this restaurant policy was regressive toward seniors? It must be that regular customers are gaining more at the expense of seniors! How unfair!

Of course, this is obviously ridiculous. Everyone benefitted from the price cuts. Seniors received the largest percentage reduction in their prices, but because they already paid a lower price, their prices are cut by a smaller amount. In the extreme, suppose seniors ate for free. Then if we cut prices, seniors wouldn’t be affected at all. Would anyone possibly suggest that policy was harmful toward seniors?

And yet, this is exactly the argument that is used to suggest tax cuts, even when they make the tax code more progressive, are unfairly benefitting the rich. When someone poses the argument it is hard to tell if they are completely confused or if they actually know what they are talking about and are intentionally demagoguing the issue to advance an agenda of bigger government and egalitarianism. If you prefer more government and less inequality then, by all means, argue that on its own merits. But don’t pretend a tax cut takes money from the pockets of the poor and gives it to the rich. The truth is quite, quite different.

I can’t decide which is misunderstood more by the public and mischaracterized more by populist political pandering: trade policy or tax policy?

Oh, What Do Economists Know

Hillary Clinton’s sit-down with George Stephanopoulos on ABC’s “This Week” quickly delved into her plan to suspend the federal gas tax during the peak summer driving season.

Stephanopoulos played a clip of Sen. Barack Obama criticizing the plan. Obama quoted New York Times columnist and Princeton economist Paul Krugman’s assessment that the idea is “pointless and disappointing,” and asked the New York Senator to name “a credible economist who supports the suspension.” Krugman has previously been favorable of Clinton’s economic proposals.

“Well I’ll tell you what, I’m not going to put my lot in with economists,” Clinton said, a response in line with some of the populist notes she’s been hitting in recent stump speeches on the gas tax.

Just when my misgivings on Obama are about to peak, Hillary finds a may to outshine him. Memo to Hillary: consider NOT trying to defend this ridiculous policy/pander.