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March 2014 posts

Fleecing Seniors

By Jonathan B. Wight

A number of pundits, including my dear friend Jim Bacon at Bacon’s Rebellion, are fulminating against the Fed for keeping interest rates low. 

The reason is not inflation, whose wicked head might rise any day, but rather a more pressing issue: low interest rates consign the elderly to low returns on their savings.  Hence, the Fed is starving retirees.

Indeed, interest rates are certainly low, with the average yield for one-year Treasury bills at 0.13 percent.  But two points need to be made. 

First, while nominal interest rates are low, so are inflation rates.  Seniors are  not being hit with huge increases in consumer prices.  The real measure of what seniors  earn on their savings is the “real” interest rate—the nominal rate minus the inflation rate. Real interest rate

The average real interest rate on 10-year treasuries has been about 2.5% since mid-1950, but that’s fairly misleading.  The rate has bounced all over the place (see figure).  The real interest rate spiked in the early 1980s as the Fed fought inflation and caused a major world recession.  The U.S. (and indeed, the world) financial system nearly collapsed! 

So high real interest rates are not a panacea for the rest of us, even if they would help seniors.

More importantly, there has been a secular decline in the real interest rate since the 1980s.  The reason for this has less to do with the Fed, and more to do with the growing imbalance globally between saving and spending. 

According to Ben Bernanke, who has devoted a lot of his staff time to this issue, we are in the midst of a “global savings glut.”  That is, billions of people around the world want to save in U.S. markets.  Trillions of foreign savings have flooded into U.S. markets.

Real interest rates are low because of supply and demand.  Supply of capital has increased relative to  demand. That has lowered the reward for saving.  That is the market speaking.

There is no magic “normal” real rate of interest that seniors are entitled to.

Bernanke also notes that this situation will likely not last.  Long run adjustment may take several “decades”—for the Chinese to switch to domestic consumption, for example.  The Fed can certainly affect relative interest rates; but absolute real rates are also determined by market choices. So don't blame the Fed: blame the Germans and others with current account surpluses.  

Athletes’ Union on the Horizon

By Jonathan B. Wight

The National Labor Relations Board has ruled that student-athletes at Northwestern can form a union

Student athletes probably spend more time per week (40-50 hours) on football than on their academics during the season.  That is equivalent to a full-time job.  Why not recognize it as such? Football

In “The Shame of College Athletics” Taylor Branch in The Atlantic (October 2011) argues that:

"College athletes are not slaves. Yet to survey the scene—corporations and universities enriching themselves on the backs of uncompensated young men, whose status as “student-athletes” deprives them of the right to due process guaranteed by the Constitution—is to catch an unmistakable whiff of the plantation.

"Perhaps a more apt metaphor is colonialism: college sports, as overseen by the NCAA, is a system imposed by well-meaning paternalists and rationalized with hoary sentiments about caring for the well-being of the colonized. But it is, nonetheless, unjust.

"The NCAA, in its zealous defense of bogus principles, sometimes destroys the dreams of innocent young athletes."

Several of my student-athletes have written term papers on this subject.  Their conclusions have generally supported the view that major changes are needed in the NCAA.

Yet to others the ruling is absurd.  Lamar Alexander stated that: “Imagine a university's basketball players striking before a Sweet 16 game demanding shorter practices, bigger dorm rooms, better food and no classes before 11 a.m. This is an absurd decision that will destroy intercollegiate athletics as we know it.”

I would say… sweet!  Let the competition begin.  The NCAA is a cartel and its monopoly practices need to be exposed and diminished. 

One solution (can’t remember where I heard this) is to let the major revenue sports be outsourced to the private sector who would pay market wages to attract talented college age youth.  Schools would sponsor teams that use their colors and play their fight song, but the players would not be required to actually be students, although they could if they meet regular admission standards.  Academic students would play club sports to develop leadership and teamwork skills.  

How would this affect disadvantaged students (who now get scholarships to attend college)?  It's hard to say.  But hopefully it would direct colleges back to their prime missions, and out of the provision of pro-level sports.

Health Insurance Surge

By Jonathan B. Wight

According to the Los Angeles Times, analysis of enrollments show that 9.5 million previously uninsured Americans now have health insurance under the new law.

Health care

About 5 million of these previously uninsured are receiving private health care coverage (3 million are young people now covered by their parents, and 2 million new accounts from exchanges).  About 4.5 million are poor people signing up for Medicaid.

In total, about 6 million people signed up using exchanges, of which 4 million previously had other kinds of insurance. 

As previously discussed, health insurance is a good thing, and greater participation in health insurance is therefore desirable if it means fewer negative externalities (e.g., an insured person needing emergency room treatment paid for by government). 

One other important aspect is pricing.  The new health care exchanges have allowed millions of people who were paying very high premiums to pool themselves into larger groups and dramatically lower their monthly premiums.*  Some of this is simply redistribution, from those without pre-existing conditions to those with them.  But some of the drop is possibly due to the more competitive market with deeper pools of people that create lower risk for the insurance provider. 

(*Some really cheap policies are slated for elimination.  But these cases appear to be quite small in number.  Someone buying a cheap policy may really just be passing along the true cost to others, as noted above.)

The Uninsured

By Jonathan B. Wight

NPR reports that Texas has the highest rate of uninsured citizens, at one-quarter.  And 1-in-3 young people of working age (19-64) are uninsured in that state, compared to 1-in-5 nationally. 

Many GOP conservatives have been ardently fighting Obamacare and waging a PR campaign to dissuade young people from signing up.

That seems exactly backwards. 

Insurance is a good thing for oneself and society as a whole.  Buying insurance is virtuous in the sense of being prudent—taking appropriate responsibility for one’s future self.  No one can predict when an auto accident or cancer will strike. 

Those who fail to buy insurance are essentially relying on government to bail them out when they end up in an emergency room.  Encouraging people to rely on others for this backup leads to… dependency not self-responsibility!

I can understand why conservatives might fight the idea that insurance should be mandatory.  But it is baffling that conservatives would undermine the idea that young people should buy insurance from private health care providers. 

“The Stone Age didn’t end because we ran out of stones.”

By Jonathan B. Wight

Thomas Friedman at the New York Times can be irritating and boring, writing his books on the tarmac as he jets about the world.  The level of critical analysis, once deep and enriching, has disappointed in recent years as his fame has grown. 

Occasionally he makes good points.  Yesterday’s column points out an important truth: Putin’s economic power rests on oil and gas, both hydrocarbons that are so 20th century.  The 21st century will likely and hopefully make the transition to alternative forms of solar power.

Friedman notes: “The former Saudi oil minister, Sheik Ahmed Zaki Yamani, once warned his OPEC colleagues something Putin should remember: ‘The Stone Age didn’t end because we ran out of stones.’ It ended because we invented bronze tools, which were more productive.” Stone-Age-Man-4230

Whether it takes 20 years or 40 years, Russia’s long term future is not in doubt: it has to diversify or continue down the path of a dying state, admittedly with lots of weapons.  To change its course will be difficult if not impossible because one does not build a 21st century economy by restricting people’s freedoms. 

Call for papers on Adam Smith for special issue of Filosofia de la Economia

Mark D. White

From the invaluable Heterodox Economics Newsletter comes this call for papers:

Special Issue of the Journal Filosofia de la Economia on “Adam Smith in the history of economic thought and the philosophy of economics”

The Center of Research on Epistemology of Economics (CIECE, School of Economics, University of Buenos Aires) announces a call for papers on the theme “Adam Smith in the history of economic thought and the philosophy of economics” for a special issue of its journal Filosofia de la Economia (Philosophy of Economics). All papers exploring the vast work of Adam Smith on economics, philosophy and other branches of the social sciences are welcome.

Filosofia de la Economia is a trilingual (English, Spanish, Portuguese), peer-reviewed, biannual journal aimed at reaching a broad audience interested in philosophy of economics, methodology and the history of economic thought. The Journal, launched in 2013 and with two issues already published, holds a broad pluralistic view about the discipline and welcomes contributions drawing on the wide range of the different schools of thought. Filosofia de la Economia (ISSN 2314-3592, print; ISSN 2314-3606, online) is available in printed version and electronically.

Contributions to the special issue on Adam Smith must be submitted no later than May 20, 2014.

Guest editors for this issue are Manuel Calderón ([email protected]) and Andrés Lazzarini ([email protected]). Papers must be submitted through its Open Access platform at this website. The special issue will be published in volume 2, no.1, next July 2014.

For more details please contact the guest editors.

When the Scientist Is Also a Philosopher

By Jonathan B. Wight

Greg Mankiw in yesterday’s New York Times argues that there’s a “dirty little secret” we need to know: economists who give policy advice are dispensing ethics!

This statement is unfortunate for two reasons.

First, it is lamentable that so obvious a statement has to made.  How many economists out there believe that public policy is simply a matter of mechanistic model tinkering?  The answer is probably too many.

Second, it is lamentable because Mankiw never uses the word “ethics,” only the term “political philosophy.”  That, as I take it, sanitizes the concept.  Political philosophy, to my view, has to do with the establishment and legitimacy of governments, property rights, freedom, and justice.  It certainly includes a discernment of normative ethics, but includes much more than that of a positive nature.  Why not clearly speak of normative values?

Mankiw’s examples continue the practice of linking economists to utilitarian philosophy.  That is only partly correct:  Utilitarians would give equal weight to each person’s moral standing in assessing happiness; the standard efficiency model weights more heavily the outcomes of people will money to spend in the market.  This is no small difference. 

Mankiw’s conclusion is a good one: “At the very least, a large dose of humility is in order.”

Zywicki and Smith examine the effect of behavioral law-and-economics on consumer financial protection

Mark D. White

Courtesy of the Mercatus Center at George Mason University, Todd Zywicki and Adam C. Smith have a new paper titled "Behavior, Paternalism, and Policy: Evaluating Consumer Finance Protection," in which they critique the impact of behavioral law-and-economics on the creation and operation of the Consumer Financial Protection Bureau:

This paper examines the relationship between behavioral law and economics (BLE) as a policy
prescription platform and its influence on the regulations emerging from the Consumer Financial Protection Bureau (CFPB). We show how these regulations are inconsistent with the intent and purpose of improving consumer choices. We further demonstrate that the selective modeling of behavioral bias in the BLE framework causes an overestimation of the ability of regulators, who in actuality use inefficient, heavy-handed rules based on little if any real empirical findings of “consumer irrationality.” Accordingly, the broader lesson on the misapplication of behavioral economics goes beyond the ill-considered policies emerging from the CFPB.

Near the end of the introduction (on p. 7), they detail their issues with this approach to consumer protection:

1. Political realities belie the attempts of behavioral theorists to construct policy corrections.
2. Actual political decision-making is susceptible to a number of distorting influences, most importantly bureaucratic overreach, behavioral bias on the part of the policymaker, and lack of appropriate information regarding consumer choices.
3. Bureaucrats do not hold the same preferences about political outcomes as behavioral theorists do. They are affected by self-interest like anyone else, which can cause deviations from prescribed policy measures.
4. Regulations based on behavioral findings tend to lean toward heavier forms of intervention that eliminate viable, alternative forms of exchange, thus impeding innovation and creativity in the marketplace. This in turn limits the overall amount of market activity (in this case consumer credit).
5. Policymakers are unlikely to incorporate evidence-based analysis into their decisionmaking in a manner consistent with the scientific method. Instead, policymakers are susceptible to “confirmation bias” in evaluating evidence.

I emphasize #2 and #5 and the CFPB itself in The Manipulation of Choice—in particular the last point in #2 about information—but Zywicki and Smith delve much more deeply and broadly into problems with the CFPB itself, contributing a much needed public choice perspective to the issue and concluding with recommendations to improve the operation of the CFPB. This is an essential read for anyone interested in behavioral law-and-economics or "nudges," regulation, or paternalism in general, as well as the CFPB in particular.

Special issue of Journal of Bioeconomics: In Memorium of Elinor Ostrom

Mark D. White

OstromThe latest issue of Journal of Bioeconomics (16/1, April 2014) is dedicated to the work of Nobel laureate Elinor Ostrom, and features her last paper as the target article, to which a multidisciplinary assortment of scholars respond. The articles and abstracts (when provided) follow.

Elinor Ostrom, "Do institutions for collective action evolve?"

In this paper I will provide an overview of our findings from studying irrigation systems in the field so that readers who are not familiar with our prior research gain at least an initial sense of these findings. I will provide a second short overview —this time of the institutional analysis and development (IAD) framework offering a general method for doing institutional analysis. I will then introduce the possibility of looking at the change of rules as an evolutionary process. The method for studying the evolution of rules will be based on the IAD framework and on our long-term study of rules related to irrigation systems. In the conclusion, I return to the question as to why it is important to authorize resource users’ relative autonomy in the development of their own rules and to learn from the resulting institutional diversity.

David Sloan Wilson, "Cultural species and their ecosystems"

The target article was written for a workshop that I organized with Lin Ostrom titled “Rules as Genotypes in Cultural Evolution”. In my commentary, I describe the background for the workshop and target article in addition to commenting on the article itself. A compelling case can be made for functionally organized human groups as like species that adapt to their local environments. A cultural inheritance mechanism is required for this to happen, which functions analogously to genetic inheritance, although the mechanistic details need not be analogous. Indeed, a diversity of cultural inheritance mechanisms are possible that need not be mechanistically analogous to each other. In addition, most modern human populations consist of a diversity of functionally organized groups, or cultural ecosystems. The distinction between “species” and “ecosystem” is important because the concept of an inheritance system applies primarily to the former. Finally, positive cultural evolution in modern large-scale society must be engineered and an explicitly evolutionary perspective will add value to the enterprise.

R. Costanza, "A theory of socio-ecological system change"

Thráinn Eggertsson, "Governing the commons: Future directions for the Ostrom Project"

Now, when longitudinal data are available or soon will be, it is important to carefully consider research strategies for the second phase of the Ostrom Project. I recommend a problem oriented approach aimed at answering questions and solving puzzles that have emerged in the last 25–30 years and a focus on the political dimensions of the commons. Reading Lin’s paper in this issue, I found her proposal valuable but too narrow. I suggest that the longitudinal phase of the Project should deal explicitly with institutions and mechanisms for solving conflicts among local participants over how to divide the costs and benefits of using common resources. I offer, as an illustration, a number of research questions that emphasize institutions in the policy and constitutional spheres rather than in the operational one.

Avner Grief, "Do institutions evolve?"

Chris Hann, "Evolution, institutions, and human well-being: Perspectives from a critical social anthropology"

The work of Elinor Ostrom is important for those who deplore the fact that the rise of ethnographic methods has led mainstream socio-cultural anthropologists to lose interest in evolution. This trend in anthropology is illustrated with reference to research on property, where Ostrom herself made notable contributions. However, it is argued that her mature work on the evolution of rules and her privileging of low-level institutions do not pay sufficient attention to local cultural notions and reflect the bias of a powerful Western ideology.

Siegwart Lindenberg, "Sustainable cooperation needs tinkering with both rules and social motivation"

Claude Ménard, "The diversity of institutional rules as engine of change"

The target paper by Elinor Ostrom in this Special Issue carries a clear message about her research agenda: be attentive to institutional diversity, be aware of the danger of ‘monoculture’ and ‘monocropping’ of rules. Although Ostrom was fully aware of the necessity to focus on relevant and simplified variables in order to build general explanations, she deliberately adopted a bottom-up research strategy that opposes the top-down approach dominating social sciences. Her framework, developed through extensive field studies, shows the central role of “clusters” of rules in defining institutions and understanding how they change. My discussion is organized around this privilege conferred to rules. Section 2 posits her contribution, particularly her IAD model, in relation to New Institutional Economics. Section 3 focuses on what I consider her main contribution: her analysis of rules as the strategic point through which changes happen. Section 4 discusses some methodological issues, and Sect. 5 concludes.

Amy R. Poteete, "How far does evolution take us? Comment on Elinor Ostrom’s: do institutions for collective action evolve?"

Elinor Ostrom’s article in this issue suggests that institutions for collective action evolve, highlights parallels between biological and institutional evolution, and describes an hypothetical example of institutional evolution related to an irrigation system. The article is provocative but not definitive in that it does not demonstrate that evolution is more than a metaphor for institutional change and that institutions actually evolve. This commentary unpacks the concept of evolutionary change and evaluates how well various aspects of institutional change fit within this model of change. The analysis supports Ostrom’s contention that evolution is not just a metaphor for institutional change, but also suggests that not all institutional change can be classified as evolutionary. The commentary highlights the need for further conceptual and theoretical development to delineate various forms and processes of institutional change, distinguish between evolutionary and non-evolutionary change, and draw out the consequences of various forms of change.

Viktor J. Vanberg, "Collective action, institutional design and evolutionary 'blindness'

Special issue of Economics and Philosophy on the work of Amartya Sen

Mark D. White

SenThe first issue of Economics and Philosophy in 2014 (30/1) is a special issue on "Themes from the Work of Amartya Sen: Identity, Rationality, and Justice." For the time being the symposium articles are open access. The symposium articles and abstracts follow:

Amartya Sen, "Justice and Identity"

This paper discusses the relationship between justice and identity. While it is widely agreed that justice requires us to go beyond loyalty to our simplest identity – being just oneself – there is less common ground on how far we must go beyond self-centredness. How relevant are group identities to the requirements of justice, or must we transcend those too? The author draws attention to the trap of confinement to nationality and citizenship in determining the requirements of justice, particularly under the social-contract approach, and also to the danger of exclusive concentration on some other identity such as religion and race. He concludes that it is critically important to pay attention to every human being's multiple identities related to the different groups to which a person belongs; the priorities have to be chosen by reason, rather than any single identity being imposed on a person on grounds of some extrinsic precedence. Justice is closely linked with the pursuit of impartiality, but that pursuit has to be open rather than closed, resisting closure through nationality or ethnicity or any other allegedly all-conquering single identity.

Mozaffar Qizilbash, "Identity, Reason and Choice"

In criticizing communitarian views of justice, Amartya Sen argues that identity is not merely a matter of discovery but an object of reasoned choice subject to constraints. Distinguishing three notions of identity – self-perception, perceived identity and social affiliation – I claim that the relevant constraints implied by this argument are minimal. Some of Sen's arguments about perceived identity and social context do not establish any further constraints. Sen also argues that a model of multiculturalism and some forms of education can restrict, or fail to promote, reasoned and informed identity choice. This argument is better understood in the light of Sen's work on capability and justice, notably his concern with ways in which underdogs can adapt and his emphasis on public reasoning. It highlights limitations on information and opportunities for reasoning. I suggest that these lead to genuine constraints on (reasoned and informed) identity choice. The paper focuses on Sen's work, though its claims are also relevant to George Akerlof and Rachel Kranton's analysis of identity.

Ann E. Cudd, "Commitment as Motivation: Amartya Sen's Theory of Agency and the Explanation of Behavior"

This paper presents Sen's theory of agency, focusing on the role of commitment in this theory as both problematic and potentially illuminating. His account of some commitments as goal-displacing gives rise to a dilemma given the standard philosophical theory of agency. Either commitment-motivated actions are externally motivated, in which case they are not expressions of agency, or such actions are internally motivated, in which case the commitment is not goal-displacing. I resolve this dilemma and accommodate his view of commitment as motivation by developing a broader descriptive theory of agency, which recognizes both agent goal-directed and goal-displacing commitments. I propose a type of goal-displacing commitment, which I call ‘tacit commitment’, that can be seen to fit between the horns. Tacit commitments regulate behaviour without being made conscious and explicit. This resolution suggests a means of bridging the normative/descriptive gap in social-scientific explanation.

Rutger Claassen, "Capability Paternalism"

A capability approach prescribes paternalist government actions to the extent that it requires the promotion of specific functionings, instead of the corresponding capabilities. Capability theorists have argued that their theories do not have much of these paternalist implications, since promoting capabilities will be the rule, promoting functionings the exception. This paper critically surveys that claim. From a close investigation of Nussbaum's statements about these exceptions, it derives a framework of five categories of functionings promotion that are more or less unavoidable in a capability theory. It argues that some of these categories may have an expansionary dynamic; they may give rise to widespread functionings promotion, which would defeat the capabilitarian promise that paternalist interventions will be exceptions to the rule of a focus on capabilities. Finally, the paper discusses three further theoretical issues that will be decisive in holding this paternalist tendency in check: how high one sets threshold levels of capability protection, how lengthy one's list of basic capabilities is, and how one deals with individual responsibility for choices resulting in a loss of one's capabilities.

Ian Carter, "Is the Capabilities Approach Paternalist?"

Capability theorists have suggested different, sometimes incompatible, ways in which their approach takes account of the value of freedom, each of which implies a different kind of normative relation between functionings and capabilities. This paper examines three possible accounts of the normative relation between functionings and capabilities, and the implications of each of these accounts in terms of degrees of paternalism. The way in which capability theorists apparently oscillate between these different accounts is shown to rest on an apparent tension between anti-paternalism (which favours an emphasis on capabilities) and anti-fetishism (which favours an emphasis on functionings). The paper then advances a fourth account, which incorporates a concern with the content-independent or ‘non-specific’ value of freedom. Only the fourth account would remove all traces of paternalism from the capability approach. Whatever reasons advocates of the capability approach might have had for rejecting this fourth account, those reasons are not internal to the capability approach itself.